AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 27, 2019.

REGISTRATION NO. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM F-10

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

PROFOUND MEDICAL CORP.

(Exact name of Registrant as specified in its charter)

 

 

 

Ontario, Canada

(Province or other Jurisdiction of Incorporation or Organization)

 

3841

(Primary Standard Industrial Classification Code Number (if applicable))

 

NOT APPLICABLE

(I.R.S. Employer Identification Number (if applicable))

 

2400 Skymark Avenue, Unit 6

Mississauga, Ontario L4W 5K5

(647) 476-1350

(Address and telephone number of Registrant’s principal executive offices)

 

 

 

Corporation Services Company

251 Little Falls Drive

Wilmington, DE 19808

(866) 403-5272

(Name, address (including zip code) and telephone number (including area code) of agent for service in the United States)

 

 

 

Copies to:

 

TORYS LLP

1114 AVENUE OF THE AMERICAS

NEW YORK, NY 10036

ATTENTION:

CHERYL V. REICIN, ESQ.

ANDREW J. BECK, ESQ.

CHRISTOPHER R. BORNHORST, ESQ.

(212) 880-6000

 

Approximate date of commencement of proposed sale of the securities to the public:

From time to time after the effective date of this Registration Statement.

 

Province of Ontario, Canada

(Principal jurisdiction regulating this offering)

 

 

 

It is proposed that this filing shall become effective (check appropriate box):

 

A.   ¨       upon filing with the Commission, pursuant to Rule 467(a) (if in connection with an offering being made contemporaneously in the United States and Canada).
       
B.   x       at some future date (check the appropriate box below)
       
    1.   ¨   pursuant to Rule 467(b) on (                    ) at (                    ) (designate a time not sooner than 7 calendar days after filing).
       
    2.   ¨   pursuant to Rule 467(b) on (                    ) at (                    ) (designate a time 7 calendar days or sooner after filing) because the securities regulatory authority in the review jurisdiction has issued a receipt or notification of clearance on (                    ).
       
    3.   ¨   pursuant to Rule 467(b) as soon as practicable after notification of the Commission by the Registrant or the Canadian securities regulatory authority of the review jurisdiction that a receipt or notification of clearance has been issued with respect hereto.
       
    4.   x   after the filing of the next amendment to this Form (if preliminary material is being filed).

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to the home jurisdiction’s shelf prospectus offering procedures, check the following box.  x

 

 

 

 

 

 

 

 

 

CALCULATION OF REGISTRATION FEE  

       
Title of Each Class of
Securities to be Registered
Amount to
be Registered(1)
Proposed Maximum
Aggregate Offering
Price(2)
Amount of
Registration Fee(2)
Common Shares
Warrants
Units
     
Total US$100,000,000 US$100,000,000 US$12,120

(1) There are being registered under this Registration Statement such indeterminate number of Common Shares, Warrants and Units to be sold by Profound Medical Corp. (the “Registrant”) and Common Shares to be sold by the selling shareholders named in the prospectus (collectively, the “Selling Shareholders”) as shall have an aggregate initial offering price not to exceed US$100,000,000. The proposed maximum initial offering price per security will be determined, from time to time, by the Registrant and/or the Selling Shareholders in connection with the sale of the securities under this Registration Statement.

(2) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the U.S. Securities Act of 1933, as amended (the “Securities Act”).

 

 

 

The Registrant hereby amends the Registration Statement on such date or dates as may be necessary to delay its effective date until the registration statement shall become effective as provided in Rule 467 under the Securities Act of 1933 or on such date as the U.S. Securities and Exchange Commission, acting pursuant to Section 8(a) of the Act, may determine.

 

 

 

 

 

 

PART I – INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS

 

A registration statement relating to these securities has been filed with the U.S. Securities and Exchange Commission, and the prospectus contained herein is not complete and may be changed. These securities may not be offered or sold prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell in any U.S. state where the offer or sale is not permitted.

 

PRELIMINARY SHORT FORM BASE SHELF PROSPECTUS

 

A copy of this preliminary short form base shelf prospectus has been filed with the securities regulatory authorities in each of the provinces of Canada, other than Québec, but has not yet become final for the purpose of the sale of securities. Information contained in this preliminary short form base shelf prospectus may not be complete and may have to be amended. The securities may not be sold until a receipt for the short form base shelf prospectus is obtained from the securities regulatory authorities.

 

This short form prospectus is a base shelf prospectus. This preliminary short form base shelf prospectus has been filed under legislation in each of the provinces of Canada, other than Québec, that permits certain information about these securities to be determined after this prospectus has become final and that permits the omission from this prospectus of that information. The legislation requires the delivery to purchasers of a prospectus supplement containing the omitted information within a specified period of time after agreeing to purchase any of these securities, except in cases where an exemption from such delivery requirement has been obtained.

 

No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. This preliminary short form base shelf prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sell such securities.

 

Information has been incorporated by reference in this short form base shelf prospectus from documents filed with securities commissions or similar authorities in Canada. Copies of the documents incorporated herein by reference may be obtained on request without charge from the Vice President, Finance of Profound Medical Corp. at 2400 Skymark Avenue, Unit 6, Mississauga, Ontario, L4W 5K5, Telephone: (647) 476-1350, and are also available electronically through the system for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com.

 

PRELIMINARY SHORT FORM BASE SHELF PROSPECTUS

 

New Issue and Secondary Offering September 27, 2019

  

 

 

PROFOUND MEDICAL CORP.

 

Common Shares

Warrants

Units


US$100,000,000

 

 

 

 

Profound Medical Corp. (the “Corporation” or “Profound”) may offer and issue from time to time common shares of the Corporation (“Common Shares”), warrants to purchase Common Shares (“Warrants”) or units (“Units”) comprised of one or more of the other securities described in this preliminary short form base shelf prospectus (the “Prospectus”) (all of the foregoing collectively, the “Securities”) or any combination thereof for up to an aggregate initial offering price of US$100,000,000 (or the equivalent thereof in other currencies) during the 25-month period that the final short form base shelf prospectus, including any amendments thereto, remains effective. Securities may be offered separately or together, in amounts, at prices and on terms to be determined based on market conditions at the time of sale and set forth in an accompanying prospectus supplement (a “Prospectus Supplement”). One or more holders of Common Shares (each, a “Selling Shareholder”) may also offer and sell Common Shares under this Prospectus. See “Selling Shareholders”. The Corporation is filing this Prospectus in connection with the concurrent filing of a U.S. registration statement on Form F-10, of which this Prospectus forms a part (the “Registration Statement”), pursuant to the United States Securities Act of 1933, as amended (the “U.S. Securities Act”). See “Available Information”.

 

The specific terms of the Securities with respect to a particular offering will be set out in the applicable Prospectus Supplement and may include, where applicable: (i) in the case of Common Shares, the number of Common Shares offered, the offering price, whether the Common Shares are being offered for cash, the persons offering the Common Shares and any other terms specific to the Common Shares being offered; (ii) in the case of Warrants, the offering price, whether the Warrants are being offered for cash, the designation, the number and the terms of the Common Shares purchasable upon exercise of the Warrants, any procedures that will result in the adjustment of these numbers, the exercise price, the dates and periods of exercise, and any other terms specific to the Warrants being offered; and (iii) in the case of Units, the designation and terms of the Units and of the securities comprising the Units and any other specific terms. Where required by statute, regulation or policy, and where Securities are offered in currencies other than Canadian dollars, appropriate disclosure of foreign exchange rates applicable to the Securities will be included in the Prospectus Supplement describing the Securities.

 

All information permitted under applicable law to be omitted from this Prospectus will be contained in one or more Prospectus Supplements that will be delivered to purchasers together with this Prospectus to the extent required under applicable securities laws, except in cases where an exemption from such delivery requirement has been obtained. Each Prospectus Supplement will be incorporated by reference into this Prospectus for the purposes of securities legislation as of the date of the Prospectus Supplement and only for the purposes of the distribution of the Securities to which the Prospectus Supplement pertains.

 

The Corporation and the Selling Shareholder(s) may offer and sell the Securities to or through underwriters or dealers purchasing as principals and may also sell directly to one or more purchasers or through agents or pursuant to applicable statutory exemptions. See “Plan of Distribution”. The Prospectus Supplement relating to a particular offering of Securities will identify, if applicable, each underwriter, dealer or agent, as the case may be, engaged by the Corporation or the Selling Shareholder(s) in connection with the offering and sale of the Securities, and will set forth the terms of the offering of such Securities, including, to the extent applicable, any fees, discounts or any other compensation payable to underwriters, dealers or agents in connection with the offering, the method of distribution of the Securities, the identity of the Selling Shareholder(s), if any, the initial issue price (in the event that the offering is a fixed price distribution), the proceeds that the Corporation or the Selling Shareholder(s) will, or expects to receive and any other material terms of the plan of distribution.

 

The Securities may be sold from time to time in one or more transactions at a fixed price or prices or at non-fixed prices, including sales in transactions that are deemed to be “at-the-market distributions” as defined in National Instrument 44-102 - Shelf Distributions, including sales made directly on the Toronto Stock Exchange (the “TSX”) or other existing trading markets for the Common Shares.

 

 

 

 

If offered on a non-fixed price basis, the Securities may be offered at market prices prevailing at the time of sale, at prices determined by reference to the prevailing price of a specified Security in a specified market or at prices to be negotiated with purchasers. If offered on a non-fixed price basis, the compensation payable to an underwriter, dealer or agent in connection, if applicable, with any such sale will be decreased by the amount, if any, by which the aggregate price paid for Securities by the purchasers is less than the gross proceeds paid by the underwriter, dealer or agent to the Corporation. The price at which the Securities will be offered and sold may vary from purchaser to purchaser and during the period of distribution.

 

In connection with any offering of Securities, other than an “at-the-market distribution”, unless otherwise specified in a Prospectus Supplement, the underwriters, dealers or agents, as the case may be, may over-allot or effect transactions which stabilize, maintain or otherwise affect the market price of the Securities at a level other than those which otherwise might prevail on the open market. Such transactions may be commenced, interrupted or discontinued at any time. A purchaser who acquires Securities forming part of the underwriters’, dealers’ or agents’ over-allocation position acquires those Securities under this Prospectus and the Prospectus Supplement relating to the particular offering of Securities, regardless of whether the over-allocation position is ultimately filled through the exercise of the over-allotment option or secondary market purchases. See “Plan of Distribution”. No underwriter or dealer involved in an “at-the-market distribution” under this Prospectus, no affiliate of such an underwriter or dealer and no person or company acting jointly or in concert with such underwriter or dealer will over-allot Securities in connection with such distribution or effect any other transactions that are intended to stabilize or maintain the market price of the Securities.

 

The outstanding Common Shares are listed on the TSX under the symbol “PRN”. The Corporation has also applied to list the Common Shares on The Nasdaq Stock Market LLC (“Nasdaq”) under the symbol “PRN”. The listing of the Common Shares on Nasdaq is dependent upon satisfaction of all necessary listing requirements. Unless otherwise specified in the applicable Prospectus Supplement, no Securities, other than Common Shares, will be listed on any securities exchange.

 

The head and registered office of the Corporation is located at 2400 Skymark Avenue, Unit 6, Mississauga, Ontario, L4W 5K5.

 

The Corporation is permitted, under a multijurisdictional disclosure system adopted by the securities regulatory authorities in Canada and the United States (“MJDS”), to prepare this Prospectus in accordance with the disclosure requirements of Canada. Prospective purchasers in the United States should be aware that such requirements are different from those of the United States. The financial statements included or incorporated by reference herein have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) and may not be comparable to financial statements of United States companies. The audit of such financial statements are subject to Canadian generally accepted auditing standards and auditor independence standards.

 

The enforcement by purchasers of civil liabilities under the United States federal securities laws may be affected adversely by the fact that the Corporation is governed by the laws of Ontario, Canada, that some or all of its officers and directors are residents of a foreign country, that some or all of the experts named in this Prospectus are, and the underwriters, dealers or agents named in any Prospectus Supplement may be, residents of a foreign country, and a substantial portion of the assets of the Corporation and said persons may be located outside of the United States.

 

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE “SEC”) NOR ANY STATE OR CANADIAN SECURITIES COMMISSION OR REGULATORY AUTHORITY NOR HAS THE SEC OR ANY STATE OR CANADIAN SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.

 

 

 

 

Prospective purchasers should be aware that the acquisition of the Securities may have tax consequences in Canada and the United States. Such consequences for purchasers who are resident in, or citizens of, the United States may not be described fully herein or in any applicable Prospectus Supplement. Prospective purchasers should read the tax discussion contained in this Prospectus under the heading “Certain Income Tax Considerations” as well as the tax discussion, if any, contained in the applicable Prospectus Supplement with respect to a particular offering of Securities.

 

All dollar amounts in this Prospectus are expressed in Canadian dollars, except as otherwise indicated.

 

No underwriter has been involved in the preparation of this Prospectus nor has any underwriter performed any review of the contents of this Prospectus.

 

Investing in the Securities involves certain risks. Prospective purchasers of the Securities should carefully consider all the information in this Prospectus and in the documents incorporated by reference in this Prospectus.

 

 

 

 

TABLE OF CONTENTS

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION 1
   
FINANCIAL INFORMATION 3
   
DOCUMENTS INCORPORATED BY REFERENCE 3
   
DOCUMENTS FILED AS PART OF THE REGISTRATION STATEMENT 5
   
AVAILABLE INFORMATION 5
   
PROFOUND MEDICAL CORP. 6
   
CONSOLIDATED CAPITALIZATION 7
   
USE OF PROCEEDS 8
   
DESCRIPTION OF SECURITIES 10
   
TRADING PRICE AND VOLUME 11
   
PRIOR SALES 11
   
CERTAIN INCOME TAX CONSIDERATIONS 12
   
RISK FACTORS 12
   
LEGAL MATTERS 12
   
INTEREST OF EXPERTS 13
   
AUDITORS, TRANSFER AGENT AND REGISTRAR 13
   
AGENT FOR SERVICE OF PROCESS 14
   
SCHEDULE “A” AUDIT REPORT  

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION

 

This Prospectus includes or incorporates by reference certain statements that are “forward-looking information” within the meaning of applicable securities legislation. The forward-looking information in this Prospectus is presented for the purpose of providing disclosure of the current expectations of the Corporation’s future events or results, having regard to current plans, objectives and proposals, and such information may not be appropriate for other purposes. Forward-looking information may also include information regarding the Corporation’s future plans or objectives and other information that is not comprised of historical fact. Forward-looking information is predictive in nature and depends upon or refers to future events or conditions; as such, this Prospectus uses words such as “may”, “would”, “could”, “should”, “will” “likely”, “expect”, “anticipate”, “believe”, “intend”, “plan”, “forecast”, “project”, “estimate” and similar expressions (including negative and grammatical variations thereof) suggesting future outcomes or events to identify forward-looking information.

 

Any such forward-looking information is based on information currently available to the Corporation, and is based on assumptions and analyses made by it in light of the Corporation’s experiences and perception of historical trends, current conditions and expected future developments, as well as other factors the Corporation believes are appropriate in the circumstances, including but not limited to:

 

· the Corporation’s expectations regarding its proposed listing of the Common Shares on Nasdaq;

 

· the Corporation’s expectations regarding commercializing its approved products (particularly the TULSA-PRO (as defined herein) system following United States Food and Drug Administration (“FDA”) clearance) and the Corporation’s ability to generate revenues and achieve profitability;

 

· the Corporation’s expectations regarding the safety, efficacy and advantages of its products over its competitors and alternative treatment options;

 

· the Corporation’s expectations regarding its products fulfilling unmet clinical needs and achieving market acceptance among patients, physicians and clinicians;

 

· the Corporation’s expectations regarding reimbursement for its approved products from third-party payers;

 

· the Corporation’s expectations regarding its relationships with Koninklijke Philips N.V. (“Philips”) and Siemens Healthcare GmbH (“Siemens”), and the Corporation’s ability to achieve compatibility of its systems with magnetic resonance imaging (“MRI”) scanners produced by other manufacturers;

 

· the Corporation’s ability to attract, develop and maintain relationships with other suppliers, manufacturers, distributors and strategic partners;

 

· the Corporation’s expectations regarding its pipeline of product development, including expanding the clinical application of the Corporation’s products to cover additional indications;

 

· the Corporation’s expectations regarding current and future clinical trials, including the timing and results thereof;

 

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· the Corporation’s expectations regarding receipt of additional regulatory approvals for its products and future product candidates;

 

· the Corporation’s mission and future growth plans;

 

· the Corporation’s ability to attract and retain personnel;

 

· the Corporation’s expectations regarding its competitive position for each of its products in the jurisdictions where they are approved;

 

· the Corporation’s ability to raise debt and equity capital to fund future product development, pursue regulatory approvals and commercialize its approved products; and

 

· anticipated trends and challenges in the Corporation’s business and the markets in which it operates.

 

Whether actual results and developments will conform with the expectations and predictions contained in the forward-looking information is subject to a number of risks and uncertainties, many of which are beyond the Corporation’s control, and the effects of which can be difficult to predict. Factors that could cause actual results or events to differ materially from those described in the forward-looking information include, but are not limited to, those that are described under the heading “Risk Factors” and elsewhere in this Prospectus and the documents incorporated by reference herein, such as:

 

· risks related to the Corporation’s limited operating history and history of net losses;

 

· risks related to the Corporation’s ability to commercialize its approved products, including expanding the Corporation’s sales and marketing capabilities, increasing the Corporation’s manufacturing and distribution capacity, increasing reimbursement coverage for the Corporation’s approved products and achieving and maintaining market acceptance for its products;

 

· risks related to the regulation of the Corporation’s products, including in connection with obtaining regulatory approvals as well as post-marketing regulation;

 

· risks related to the Corporation’s successful completion of clinical trials with respect to its products and future product candidates;

 

· risks related to managing growth, including in respect of obtaining additional funding and establishing and maintaining collaborative partnerships, to achieve the Corporation’s goals;

 

· risks related to competition that may impact market acceptance of the Corporation’s products and limit its growth;

 

· risks relating to fluctuating input prices and currency exchange rates;

 

· risks related to the reimbursement models in relevant jurisdictions that may not be advantageous;

 

· risks related to reliance on third parties, including the Corporation’s collaborative partners, manufacturers, distributors and suppliers, and increasing the compatibility of its systems with MRI scanners;

 

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· risks related to intellectual property, including license rights that are key to the Corporation’s business; and

 

· risks related to the loss of key personnel.

 

In evaluating any forward-looking information contained in this Prospectus and the documents incorporated by reference herein, the Corporation cautions readers not to place undue reliance on any such forward-looking information. Unless otherwise required by applicable securities laws, the Corporation does not intend, nor does it undertake any obligation, to update or revise any forward-looking information contained, or incorporated by reference, in this Prospectus to reflect subsequent information, events, results, circumstances or otherwise. Additional information about these assumptions and risks and uncertainties is contained in the Corporation’s filings with securities regulators, which are available on SEDAR at www.sedar.com.

 

FINANCIAL INFORMATION

 

All dollar amounts set forth in this Prospectus and in the documents incorporated by reference herein are in Canadian dollars unless otherwise indicated, references to “dollars”, or “$” are to Canadian dollars and all references to “US$” are to United States dollars. All financial information in this Prospectus and in the documents incorporated by reference herein has, unless stated otherwise, been derived from the financial statements presented in accordance with IFRS, which differs from United States generally accepted accounting principles.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Information has been incorporated by reference in this Prospectus from documents filed with securities commissions or similar authorities in each of the provinces of Canada. Copies of the documents incorporated herein by reference may be obtained on request without charge from the Vice President, Finance of the Corporation at 2400 Skymark Avenue, Unit 6, Mississauga, Ontario, L4W 5K5, Telephone: (647) 476-1350. In addition, copies of the documents incorporated herein by reference may be obtained from the securities commissions or similar authorities in Canada through SEDAR at www.sedar.com. Documents filed with, or furnished to, the SEC are available through the SEC’s Electronic Data Gathering and Retrieval System (“EDGAR”) at www.sec.gov.

 

The following documents of the Corporation, which have been filed with Canadian securities commissions or similar authorities in Canada, and filed as exhibits to the Registration Statement, are specifically incorporated by reference in, and form an integral part of, this Prospectus:

 

(a) the sections entitled “Item 3: Key Information”, “Item 4: Information on the Company”, “Item 6: Directors, Senior Management and Employees”, “Item 7: Major Shareholders and Related Party Transactions” and “Item 10: Additional Information” (Sections A, B, and C only) from the U.S. registration statement on Form 20-F of the Corporation dated August 29, 2019, withdrawn by the Corporation on September 23, 2019 (the “Withdrawn 20-F”);

 

(b) the annual information form of the Corporation for the year ended December 31, 2018 dated March 7, 2019;

 

(c) the audited consolidated financial statements of the Corporation as at December 31, 2018 and 2017 and for each of the three years in the period ended December 31, 2018, together with the notes thereto, as contained on pages F-2 to F-41 of the Withdrawn 20-F (the “Annual Financial Statements”), other than the auditor’s report thereon;

 

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(d) the management’s discussion and analysis of financial condition and results of operations of the Corporation for the financial year ended December 31, 2018, as contained in “Item 5: Operating and Financial Review and Prospectus” (Sections A, B, C and F only) of the Withdrawn 20-F (the “20-F MD&A”);

 

(e) the unaudited interim condensed consolidated financial statements of the Corporation as at and for the three and six months ended June 30, 2019 and 2018, together with the notes thereto, as contained on pages F-42 to F-62 of the Withdrawn 20-F (the “Interim Financial Statements”);

 

(f) the management’s discussion and analysis of financial condition and results of operations of the Corporation for the three and six months ended June 30, 2019, included in the 20-F MD&A (the “Interim MD&A”);

 

(g) the management information circular of the Corporation dated May 6, 2019 in connection with the Corporation’s annual meeting of shareholders held on June 13, 2019;

 

(h) the material change report of the Corporation dated September 3, 2019 in respect of the Corporation receiving 510(k) clearance from the FDA to market the TULSA-PRO system for ablation of prostate tissue; and

 

(i) the material change report of the Corporation dated September 19, 2019 in respect of the public offering of units of the Corporation that closed on September 20, 2019 (the “2019 Offering”).

 

An auditor’s report to the Annual Financial Statements dated August 14, 2019 in the form specified by Canadian GAAS is attached hereto as Schedule “A”.

 

Any document of the type referred to in section 11.1 of Form 44-101F1 of National Instrument 44-101 – Short Form Prospectus Distributions (other than confidential material change reports, if any) filed by the Corporation with the securities commissions or similar regulatory authorities in Canada after the date of this Prospectus and all Prospectus Supplements, disclosing additional or updated information filed pursuant to the requirements of applicable securities legislation in Canada and during the period that this Prospectus is effective, shall be deemed to be incorporated by reference in this Prospectus. In addition, any “template version” of “marketing materials” (as defined in National Instrument 41-101 – General Prospectus Requirements) filed after the date of a Prospectus Supplement and prior to the termination of the offering of Securities to which such Prospectus Supplement relates, shall be deemed to be incorporated by reference into such Prospectus Supplement. The documents incorporated or deemed to be incorporated herein by reference contain meaningful and material information relating to the Corporation and prospective purchasers of Securities should review all information contained in this Prospectus and the documents incorporated or deemed to be incorporated herein by reference.

 

Upon a new annual information form and related annual consolidated financial statements being filed by the Corporation with the applicable securities regulatory authorities during the duration that this Prospectus is effective, the previous annual information form, the previous annual consolidated financial statements and all interim consolidated financial statements, and in each case the accompanying management’s discussion and analysis, any information circular (other than relating to an annual meeting of shareholders of the Corporation) filed prior to the commencement of the financial year of the Corporation in which the new annual information form is filed and material change reports filed prior to the commencement of the financial year of the Corporation in which the new annual information form is filed shall be deemed no longer to be incorporated into this Prospectus for purposes of future offers and sales of Securities under this Prospectus. Upon interim consolidated financial statements and the accompanying management’s discussion and analysis being filed by the Corporation with the applicable securities regulatory authorities during the duration that this Prospectus is effective, all interim consolidated financial statements and the accompanying management’s discussion and analysis filed prior to the new interim consolidated financial statements shall be deemed no longer to be incorporated by reference into this Prospectus for purposes of future offers and sales of Securities under this Prospectus. Upon a new information circular relating to an annual meeting of shareholders of the Corporation being filed by the Corporation with the applicable securities regulatory authorities during the duration that this Prospectus is effective, the information circular for the previous annual meeting of shareholders of the Corporation shall be deemed no longer to be incorporated by reference into this Prospectus for purposes of future offers and sales of Securities under this Prospectus.

 

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In addition, any document or information included in any report on Form 6-K or Form 40-F (or any respective successor form) that is filed with or furnished to the SEC, as applicable, pursuant to the the U.S. Securities Exchange Act of 1934, as amended (the “U.S. Exchange Act”) after the date of this Prospectus, shall be deemed to be incorporated by reference the Registration Statement (in the case of Form 6-K, if and to the extent such incorporation by reference is expressly set forth therein).

 

A Prospectus Supplement containing the specific terms of an offering of Securities and other information relating to the Securities will be delivered to prospective purchasers of such Securities together with this Prospectus to the extent required under applicable securities laws, except in cases where an exemption from such delivery has been obtained. Each Prospectus Supplement will be incorporated by reference into this Prospectus for the purposes of securities legislation as of the date of the Prospectus Supplement and only for the purposes of the distribution of the Securities to which the Prospectus Supplement pertains.

 

Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for the purposes of this Prospectus to the extent that a statement contained herein, or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any statement so modified or superseded shall not constitute a part of this Prospectus, except as so modified or superseded. The modifying or superseding statement need not state that it has modified or superseded a prior statement or include any other information set forth in the document that it modifies or supersedes. The making of such a modifying or superseding statement shall not be deemed an admission for any purpose that the modified or superseded statement, when made, constituted a misrepresentation, an untrue statement of a material fact or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made.

 

DOCUMENTS FILED AS PART OF THE REGISTRATION STATEMENT

 

The following documents have been, or will be, filed with the SEC as part of the Registration Statement: (1) the documents listed under “Documents Incorporated by Reference”; (2) the consents of PricewaterhouseCoopers LLP and Torys LLP; and (3) powers of attorney from certain of the Corporation’s directors and officers. A copy of the form of warrant indenture for any Warrant offerings under this Prospectus will be filed by post-effective amendment or by incorporation by reference to documents filed or furnished with the SEC under the U.S. Exchange Act.

 

AVAILABLE INFORMATION

 

The Corporation has concurrently filed with the SEC the Registration Statement with respect to the Securities offered pursuant to this Prospectus. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information contained in the Registration Statement, certain items of which are contained in the exhibits to the Registration Statement as permitted by the rules and regulations of the SEC. Statements included or incorporated by reference in this Prospectus about the contents of any contract, agreement or other documents referred to are not necessarily complete, and in each instance the prospective purchasers should refer to the exhibits for a more complete description of the matter involved.

 

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The Corporation is subject to the information requirements of applicable Canadian securities legislation and, in accordance therewith, files reports and other information with the applicable securities regulators in Canada. Upon effectiveness of the Registration Statement, the Corporation will be subject to the information requirements of the U.S. Exchange Act and will file reports and information with the SEC. Under the MJDS adopted by the United States and Canada, documents and other information that the Corporation files with the SEC may be prepared in accordance with the disclosure requirements of Canada, which are different from those of the United States. As a foreign private issuer within the meaning of rules made under the U.S. Exchange Act, the Corporation will be exempt from the rules under the U.S. Exchange Act prescribing the furnishing and content of proxy statements, and the Corporation’s officers, directors and principal shareholders are exempt from the reporting and short swing profit recovery provisions contained in Section 16 of the U.S. Exchange Act. In addition, the Corporation will not be required to publish financial statements as promptly as United States companies.

 

The SEC maintains an Internet site at www.sec.gov that makes available reports and other information that the Corporation files or furnishes electronically with it. A prospective purchaser may also read and download any public document that the Corporation has filed with the Canadian securities regulatory authorities under the Corporation’s profile on the SEDAR at www.sedar.com. The Corporation’s Internet site can be found at http://www.profoundmedical.com. The information on the Corporation’s website is not incorporated by reference into this Prospectus and should not be considered a part of this Prospectus, and the reference to the Corporation’s website in this Prospectus is an inactive textual reference only.

 

Prospective purchasers should rely only on information contained or incorporated by reference in this Prospectus and any applicable Prospectus Supplement. The Corporation has not authorized anyone to provide prospective purchasers with different information. The Corporation is not making an offer of the Securities in any jurisdiction where the offer is not permitted. Prospective purchasers should not assume that the information contained in this Prospectus is accurate as of any date other than the date on the front of this Prospectus, unless otherwise noted herein or as required by law. It should be assumed that the information appearing in this Prospectus and the documents incorporated herein by reference are accurate only as of their respective dates. The business, financial condition, results of operations and prospects of the Corporation may have changed since those dates.

 

PROFOUND MEDICAL CORP.

 

Profound is an early commercial-stage medical device company focused on the development and marketing of customizable, incision-free therapeutic systems for the ablation of diseased tissue using its platform technology. The Corporation’s leading approved product (the “TULSA-PRO system”) combines real-time MRI, robotically-driven transurethral sweeping action/thermal ultrasound and closed-loop temperature feedback control and is comprised of two categories of components: disposables and the capital equipment used in conjunction with a customer’s MRI scanner. The TULSA-PRO system, which in August 2019 received FDA clearance as a Class II device in the United States for thermal ablation of prescribed prostate tissue, benign and malignant, using transurethral ultrasound ablation (“TULSA”) based on the Corporation’s TULSA-PRO whole gland ablation clinical trial, and is also CE marked in the European Union (“EU”) for ablation of targeted prostate tissue (benign or malignant). In addition, the Corporation’s Sonalleve system is CE marked in the EU for the treatment of uterine fibroids and palliative pain relief associated with metastases in bone and is also approved in China for the treatment of non-invasive treatment of uterine fibroids. the Corporation’s systems are designed to be used with MRI scanners and are currently compatible with MRI scanners manufactured by Philips and Siemens. To date, the Corporation has primarily generated revenues from its limited commercialization of its systems in the EU (principally in Germany) and Asia. Profound intends to commence commercialization of the TULSA-PRO system in the United States in the near term following the Corporation’s recent FDA clearance. The Corporation also continues to pursue additional regulatory approvals, research and development, clinical studies, procedure reimbursement and acquisitions in order to expand the applications of its platform technology and expand its commercial footprint.

 

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Recent Developments

 

On August 29, 2019, the Corporation filed the Withdrawn 20-F with the SEC for its proposed registration of its Common Shares under Section 12(b) of the U.S. Exchange Act, and concurrently filed an application to list its Common Shares on Nasdaq. On September 23, 2019, the Corporation withdrew the Withdrawn 20-F because the Corporation determined that it has since become eligible to register its Common Shares under the MJDS. The listing of the Common Shares on Nasdaq is dependent upon satisfaction of all necessary listing requirements.

 

CONSOLIDATED CAPITALIZATION

 

The following table sets forth the unaudited consolidated capitalization of the Corporation as at September 27, 2019. This table should be read in conjunction with the Interim Financial Statements and Interim MD&A incorporated by reference in this Prospectus.

 

Designation of Security   As at September 27, 2019
Share Capital    
Common Shares   $130,439,738
(118,527,485 Common Shares)
2017 Warrants   $1,936,247 (1)
(5,000,000 2017 Warrants)
2018 Warrants   $9,767,750 (2)
(17,250,000 2018 Warrants)
CIBC Warrants  

$231,048 (3) 

(321,714 CIBC Warrants) 

2019 Warrants   $1,151,881 (4)
5,227,273 2019 Warrants
Options (5)  

10,277,429 

Indebtedness    
2018 Loan Agreement (6)  

$12,151,412

 

 

Notes:

(1) The fair value of the common share purchase warrants issued pursuant to the public offering of units of the Corporation that closed on August 24, 2017 (the “2017 Warrants”) has been calculated using the Black-Scholes option pricing model using 77% volatility, an expected life of 3 years, 1.56% risk-free interest rate, no dividend yield, a share price of $0.95 and an exercise price of $1.40.

(2) The fair value of the common share purchase warrants issued pursuant to the public offering of units of the Corporation that closed on March 20, 2018 (the “2018 Warrants”) has been calculated using the Black-Scholes option pricing model using 71% volatility, an expected life of 5 years, 2.0% risk-free interest rate, no dividend yield, a share price of $1.06 and an exercise price of $1.40.

(3) The fair value of the common share purchase warrants issued pursuant to the 2018 Loan Agreement (defined below) (the “CIBC Warrants”) has been calculated using the Black-Scholes option pricing model using 88% volatility, an expected life of 3.8 years, 1.43% risk-free interest rate, no dividend yield, a share price of $1.11 and an exercise price of $0.97.

(4) The fair value of the common share purchase warrants issued pursuant to the 2019 Offering has been calculated using the Black-Scholes option pricing model using 58% volatility, an expected life of 2 years, 1.61% risk-free interest rate, no dividend yield, a share price of $1.06 and an exercise price of $1.55.

(5) Options (“Options”) are granted pursuant to the Amended and Restated Share Option Plan of the Corporation, as it may be amended from time to time.

(6) Pursuant to a loan agreement dated July 30, 2018 (the “2018 Loan Agreement”), a Canadian chartered bank (the “Lender”) provided a secured loan for total initial gross proceeds of $12,500,000 maturing on July 29, 2022 with an interest rate based on prime plus 2.5%. The Corporation is required to make interest only payments until October 31, 2019 and monthly repayments of the principal of $378,788 plus accrued interest will commence on October 31, 2019. In connection with the 2018 Loan Agreement, the Corporation also issued 321,714 CIBC warrants to the Lender.

 

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USE OF PROCEEDS

 

The use of the net proceeds from the sale of Securities will be described in a Prospectus Supplement relating to the specific issuance of such Securities.

 

SELLING SECURITYHOLDERS

 

This Prospectus may also, from time to time, relate to the offering of the Common Shares by way of a secondary offering (each, a “Secondary Offering”) by one or more Selling Shareholders. The terms under which Common Shares may be offered by Selling Shareholders will be described in the applicable Prospectus Supplement. The Prospectus Supplement for or including any Secondary Offering will include, without limitation, where applicable: (i) the names of the Selling Shareholders; (ii) the number and type of Common Shares owned, controlled or directed by each Selling Shareholder; (iii) the number of Common Shares being distributed for the accounts of each Selling Shareholder; (iv) the number of Common Shares to be owned, controlled or directed by each Selling Shareholder after the distribution and the percentage that number or amount represents out of the total number of outstanding Common Share; (v) whether the Common Shares are owned by the Selling Shareholders, both of record and beneficially, of record only or beneficially only; (vi) if a Selling Shareholder purchased any of the Common Shares held by him, her or it in the 12 months preceding the date of the Prospectus Supplement, the date or dates the Selling Shareholder acquired the Common Shares; and (vii) if a Selling Shareholder acquired the Common Shares held by him, her or it in the 12 months preceding the date of the Prospectus Supplement, the cost thereof to the Selling Shareholder in the aggregate and on a per Common Share basis.

 

PLAN OF DISTRIBUTION

 

The Corporation may from time to time during the 25-month period that the final short form base shelf prospectus, including any amendments thereto, remains valid, offer for sale and issue up to an aggregate of US$100,000,000 in Securities hereunder. To the extent there are any Secondary Offerings, the aggregate amount of Securities that may be offered and sold by the Corporation hereunder shall be reduced by the aggregate amount of such Secondary Offerings.

 

The Corporation may offer and sell the Securities to or through underwriters or dealers purchasing as principals and may also sell directly to one or more purchasers or through agents or pursuant to applicable statutory exemptions. The Prospectus Supplement relating to a particular offering of Securities will identify each underwriter, dealer or agent, as the case may be, engaged by the Corporation in connection with the offering and sale of the Securities, the Selling Shareholders, if any, and will set forth the terms of the offering of such Securities, including, to the extent applicable, any fees, discounts or any other compensation payable to underwriters, dealers or agents in connection with the offering, the method of distribution of the Securities, the initial issue price, the proceeds that the Corporation will receive and any other material terms of the plan of distribution. Any initial offering price and discounts, concessions or commissions allowed or reallowed or paid to dealers may be changed from time to time.

 

- 9 -

 

Similarly, one or more Selling Shareholders may sell Common Shares to or through underwriters or dealers purchasing as principals and may also sell the Common Shares to one or more purchasers directly, through statutory exemptions, or through agents designated from time to time. See “Selling Shareholders”.

 

In addition, Securities may be offered and issued in consideration for the acquisition of other businesses, assets or securities by the Corporation or one of its subsidiaries. The consideration for any such acquisition may consist of the Securities separately, a combination of Securities or any combination of, among other things, Securities, cash and assumption of liabilities.

 

Securities may be sold from time to time in one or more transactions at a fixed price or prices or at prices which may be changed or at market prices prevailing at the time of sale, at prices related to such prevailing prices or at negotiated prices, including sales in transactions that are deemed to be “at-the-market distributions” as defined in National Instrument 44-102 - Shelf Distributions, including sales made directly on the TSX or other existing trading markets for the Common Shares. The price at which the Securities will be offered and sold may vary from purchaser to purchaser and during the period of distribution.

 

In connection with the sale of the Securities, underwriters, dealers or agents may receive compensation from the Corporation or from other parties, including in the form of underwriters’, dealers’ or agents’ fees, commissions or concessions. Underwriters, dealers and agents that participate in the distribution of the Securities may be deemed to be underwriters for the purposes of applicable Canadian securities legislation and any such compensation received by them from the Corporation and any profit on the resale of the Securities by them may be deemed to be underwriting commissions.

 

In connection with any offering of Securities, except as otherwise set out in a Prospectus Supplement relating to a particular offering of Securities and other than in relation to an “at-the-market” distribution, the underwriters, dealers or agents, as the case may be, may over-allot or effect transactions intended to fix, stabilize, maintain or otherwise affect the market price of the Securities at a level other than those which otherwise might prevail on the open market. Such transactions may be commenced, interrupted or discontinued at any time.

 

Underwriters, dealers or agents who participate in the distribution of the Securities may be entitled, under agreements to be entered into with the Corporation, to indemnification by the Corporation against certain liabilities, including liabilities under Canadian securities legislation and the U.S. Securities Act, or to contribution with respect to payments which such underwriters, dealers or agents may be required to make in respect thereof. Such underwriters, dealers and agents may be customers of, engage in transactions with, or perform services for, the Corporation in the ordinary course of business.

 

Unless otherwise specified in the applicable Prospectus Supplement, each series or issue of Securities (other than Common Shares) will be a new issue of Securities with no established trading market. Accordingly, there is currently no market through which the Securities (other than Common Shares) may be sold and purchasers may not be able to resell such Securities purchased under this Prospectus. This may affect the pricing of such Securities in the secondary market, the transparency and availability of trading prices, the liquidity of such Securities and the extent of issuer regulation. See “Risk Factors”.

 

This Prospectus constitutes a public offering of these Securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sell such Securities.

 

- 10 -

 

DESCRIPTION OF SECURITIES

 

Description of Common Shares

 

Profound is authorized to issue an unlimited number of Common Shares. As at the date of this Prospectus, there were 118,527,485 Common Shares issued and outstanding. The holders of Common Shares are entitled to: (i) one vote for each Common Share held at all meetings of shareholders of Profound; (ii) the right to receive any dividend declared by Profound; and (iii) the right to receive the remaining property and assets of Profound upon dissolution. The Common Shares are listed and posted for trading on the TSX under the symbol “PRN”. The Corporation has also applied to list the Common Shares on the Nasdaq under the symbol “PRN”. The listing of the Common Shares on Nasdaq is dependent upon satisfaction of all necessary listing requirements.

 

Description of Warrants

 

The Corporation may issue Warrants. Unless the applicable Prospectus Supplement otherwise indicates, each series of Warrants will be issued under a separate warrant indenture to be entered into between the Corporation and one or more banks or trust companies acting as Warrant agent. The applicable Prospectus Supplement will describe the terms of the Warrants. The description will include, where applicable:

 

· the designation of the Warrants;

 

· the aggregate number of Warrants offered;

 

· the price at which the Warrants will be offered;

 

· the currency or currencies in which the Warrants will be offered;

 

· the date on which the right to exercise the Warrants will commence and the date on which the right will expire;

 

· the number of the Common Shares that may be purchased upon exercise of the Warrants, and the procedures that will result in the adjustment of those numbers;

 

· the exercise price of the Warrants;

 

· whether the Warrants are to be issued in registered form, “book-entry only” form, non-certificated inventory system form, bearer form or in the form of temporary or permanent global securities and the basis of exchange, transfer and ownership thereof; and

 

· any other material terms or conditions of the Warrants.

 

Description of Units

 

The Corporation may issue Units comprised of one or more of the other Securities described in this Prospectus in any combination. Each Unit will be issued so that the holder of the Unit is also the holder of each Security included in the Unit. Thus, the holder of a Unit will have the rights and obligations of a holder of each included Security. A unit agreement, if any, under which a Unit is issued may provide that the Securities included in the Unit may not be held or transferred separately, at any time or at any time before a specified date. The applicable Prospectus Supplement will describe the terms of the Units. The description will include, where applicable:

 

- 11 -

 

· the designation of the Units and of the Securities comprising the Units;

 

· the aggregated number of Units offered;

 

· the price at which the Units will be offered;

 

· the currency or currencies in which the Units will be offered;

 

· any provisions for the issuance, payment, settlement, transfer or exchange of the Units or of the Securities comprising the Units;

 

· whether the Units and the securities comprising the Units are to be issued in registered form, “book-entry only” form, non-certificated inventory system form, bearer form or in the form of temporary or permanent global securities and the basis of exchange, transfer and ownership thereof; and

 

· any other material terms or conditions of the Units.

 

TRADING PRICE AND VOLUME

 

The Common Shares are listed for trading under the symbol “PRN” on the TSX. The following table sets forth the price range and trading volumes of the Common Shares as reported by the TSX for the periods indicated.

 

Period     High
($)
    Low
($)
    Volume  
2018                    
September       0.91       0.70       1,353,023  
October       0.66       0.59       3,068,582  
November       0.74       0.56       2,045,337  
December       0.69       0.47       1,852,493  
2019                          
January       0.86       0.65       1,027,014  
February       0.82       0.75       733,439  
March       0.82       0.79       1,095,076  
April       0.94       0.79       4,011,348  
May       0.95       0.82       1,996,630  
June       0.86       0.78       365,150  
July       0.84       0.64       1,452,069  
August       0.97       0.75       2,607,116  
September 1 to 26       1.59       0.91       5,963,863  

 

PRIOR SALES

 

The following table sets forth the details regarding all issuances of Common Shares and securities convertible into Common Shares for the 12-month period prior to the date of this Prospectus.

 

Warrants

 

Date of Grant     Number of Warrants     Exercise Price  
September 20, 2019       5,227,273     $ 1.55  

 

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Options

 

Date of Grant     Number of Options     Exercise Price  
November 19, 2018       33,000     $ 0.60  
May 15, 2019       133,000     $ 0.91  
May 16, 2019       4,849,400     $ 0.92  

 

Common Shares

 

Date of Issuance     Number of Common Shares     Price per Common Share  
September 24, 2018       11,000     $ 0.30 (1)
May 28, 2019       18,000     $ 0.30 (1)
September 20, 2019       10,454,546     $ 1.04  

 

 

 

Note:

(1) Acquired on exercise of Options.

 

CERTAIN INCOME TAX CONSIDERATIONS

 

The applicable Prospectus Supplement will describe certain material Canadian federal income tax consequences to an investor of the acquisition, ownership and disposition of any Securities offered thereunder. The applicable Prospectus Supplement may also describe certain United States federal income tax considerations generally applicable to the acquisition, ownership and disposition of any Securities offered thereunder by an investor who is a United States person.

 

RISK FACTORS

 

Before deciding to invest in any Securities, prospective purchasers in the Securities should consider carefully the risk factors and the other information contained and incorporated by reference in this Prospectus and the applicable Prospectus Supplement relating to a specific offering of Securities before purchasing the Securities. An investment in the Securities offered hereunder is speculative and involves a high degree of risk. Information regarding the risks affecting the Corporation and its business is provided in the documents incorporated by reference in this Prospectus. Additional risks and uncertainties not known to the Corporation or that management currently deems immaterial may also impair the Corporation’s business, financial condition, results of operations or prospects. See “Documents Incorporated by Reference”.

 

LEGAL MATTERS

 

There are no legal proceedings that the Corporation is or was a party to, or that any of its property is or was a subject of, that were or are material to the Corporation, nor are any such legal proceedings known to the Corporation to be contemplated which could be deemed material to the Corporation.

 

- 13 -

 

To the knowledge of management of the Corporation, there have not been any penalties or sanctions imposed against the Corporation by a court relating to securities legislation or by a securities regulatory authority, nor have there been any other penalties or sanctions imposed by a court or regulatory body against the Corporation that would likely be considered important to a reasonable investor in making an investment decision, and the Corporation has not entered into any settlement agreement before a court relating to securities legislation or with a securities regulatory authority.

 

INTEREST OF EXPERTS

 

Certain legal matters relating to the offering of the Securities hereunder will be passed upon by Torys LLP on behalf of the Corporation. As at the date hereof, the partners and associates of Torys LLP and its designated professionals, as a group, beneficially own, directly or indirectly, less than 1% of the outstanding Common Shares.

 

AUDITORS, TRANSFER AGENT AND REGISTRAR

 

The auditor of the Corporation is PricewaterhouseCoopers LLP, Chartered Professional Accountants. TSX Trust Company is the registrar and transfer agent for the Common Shares, at its principal office in Toronto, Ontario.

 

ENFORCEABILITY OF CIVIL LIABILITIES

 

The Corporation is governed by the laws of Ontario and its principal place of business is outside the United States. The majority of the directors and officers of the Corporation and the experts named herein are resident outside of the United States and a substantial portion of the Corporation’s assets and the assets of such persons are located outside of the United States. Consequently, it may be difficult for United States purchasers to effect service of process within the United States on the Corporation, its directors or officers or such experts, or to realize in the United States on judgments of courts of the United States predicated on civil liabilities under the U.S. Securities Act. Purchasers should not assume that Canadian courts would enforce judgments of United States courts obtained in actions against the Corporation or such persons predicated on the civil liability provisions of the United States federal securities laws or the securities or “blue sky” laws of any state within the United States or would enforce, in original actions, liabilities against the Corporation or such persons predicated on the United States federal securities or any such state securities or “blue sky” laws.

 

The Corporation filed with the SEC, concurrently with the Registration Statement, an appointment of agent for service of process on Form F-X. Under the Form F-X, the Corporation appointed Corporation Services Company as its agent for service of process in the United States in connection with any investigation or administrative proceeding conducted by the SEC, and any civil suit or action brought against or involving the Corporation in a United States court, arising out of or related to or concerning the offering of Securities under the Registration Statement.

 

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AGENT FOR SERVICE OF PROCESS

 

Messrs. Arthur Rosenthal and Brian Ellacott, directors of the Corporation, reside outside of Canada. Messrs. Rosenthal and Ellacott have appointed the Corporation as their agent for service of process in Ontario. Purchasers are advised that it may not be possible for prospective purchasers to enforce judgements obtained in Canada against a person that resides outside of Canada, even if such person has appointed an agent for service of process. The Corporation’s head office is located at 2400 Skymark Avenue, Unit 6, Mississauga, Ontario, L4W 5K5.

 

 

 

 

 

 

 

Schedule “A”

 

 

 

 

 

 

 

Independent auditor’s report

 

To the Shareholders of Profound Medical Corp.

 

Our opinion

 

In our opinion, the consolidated financial statements included in the registration statement on Form 20-F present fairly, in all material respects, the financial position of Profound Medical Corp. and its subsidiaries (together, the Company) as at December 31, 2018 and 2017, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2018 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).

 

What we have audited

 

The Company’s consolidated financial statements comprise:

 

· the consolidated balance sheets as at December 31, 2018 and 2017;
     
· the consolidated statements of loss and comprehensive loss for each of the three years in the period ended December 31, 2018;
     
· the consolidated statements of changes in shareholders’ equity for each of the three years in the period ended December 31, 2018;
     
· the consolidated statements of cash flows for each of the three years in the period ended December 31, 2018; and
     
· the notes to the consolidated financial statements, which include a summary of significant accounting policies.

 

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 Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.

 

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

 

Independence

 

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

 

 

PricewaterhouseCoopers LLP

PwC Centre, 354 Davis Road, Suite 600, Oakville, Ontario, Canada L6J 0C5

T: +1 905 815 6300, F: +1 905 815 6499

 

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

 

 

 

 

 

 

Other information

 

Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis.

 

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

 

In connection with our audit of the consolidated 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 consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

 

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard

 

Responsibilities of management and those charged with governance for the consolidated financial statements

 

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

 

In preparing the consolidated 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.

 

Auditor’s responsibilities for the audit of the consolidated financial statements

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s 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 these consolidated 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. We also:

 

· Identify and assess the risks of material misstatement of the consolidated 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 auditor’s report to the related disclosures in the consolidated 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 auditor’s 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 consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
     
· Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

 

We 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.

 

 

 

 

 

 

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

 

The engagement partner on the audit resulting in this independent auditor’s report is Neil Rostant.

 

(Signed) “PricewaterhouseCoopers LLP”

 

Chartered Professional Accountants, Licensed Public Accountants

 

Oakville, Ontario, Canada
August 14, 2019

 

 

 

 

PART II

 

INFORMATION NOT REQUIRED TO BE DELIVERED TO

OFFEREES OR PURCHASERS

 

INDEMNIFICATION OF DIRECTORS OR OFFICERS.

 

Section 136 of the Business Corporations Act (Ontario) as amended, provides, in part, as follows:

 

Indemnification

 

(1) A corporation may indemnify a director or officer of the corporation, a former director or officer of the corporation or another individual who acts or acted at the corporation's request as a director or officer, or an individual acting in a similar capacity, of another entity, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the corporation or other entity.

 

Advance of costs

 

(2) A corporation may advance money to a director, officer or other individual for the costs, charges and expenses of a proceeding referred to in subsection (1), but the individual shall repay the money if the individual does not fulfil the conditions set out in subsection (3).

 

Limitation

 

(3) A corporation shall not indemnify an individual under subsection (1) unless the individual acted honestly and in good faith with a view to the best interests of the corporation or, as the case may be, to the best interests of the other entity for which the individual acted as a director or officer or in a similar capacity at the corporation's request.

 

Same

 

(4) In addition to the conditions set out in subsection (3), if the matter is a criminal or administrative action or proceeding that is enforced by a monetary penalty, the corporation shall not indemnify an individual under subsection (1) unless the individual had reasonable grounds for believing that the individual's conduct was lawful.

 

Derivative Actions

 

(4.1) A corporation may, with the approval of a court, indemnify an individual referred to in subsection (1), or advance moneys under subsection (2), in respect of an action by or on behalf of the corporation or other entity to obtain a judgment in its favor, to which the individual is made a party because of the individual's association with the corporation or other entity as described in subsection (1), against all costs, charges and expenses reasonably incurred by the individual in connection with such action, if the individual fulfils the conditions set out in subsection (3).

 

Right to indemnity

 

(4.2) Despite subsection (1), an individual referred to in that subsection is entitled to indemnity from the corporation in respect of all costs, charges and expenses reasonably incurred by the individual in connection with the defence of any civil, criminal, administrative, investigative or other proceeding to which the individual is subject because of the individual's association with the corporation or other entity as described in subsection (1), if the individual seeking an indemnity,

 

(a) was not judged by a court or other competent authority to have committed any fault or omitted to do anything that the individual ought to have done; and

 

(b) fulfils the conditions set out in subsections (3) and (4).

 

 

 

 

Insurance

 

(4.3) A corporation may purchase and maintain insurance for the benefit of an individual referred to in subsection (1) against any liability incurred by the individual,

 

(a) in the individual's capacity as a director or officer of the corporation; or

 

(b) in the individual's capacity as a director or officer, or a similar capacity, of another entity, if the individual acts or acted in that capacity at the corporation's request.

 

Application to court

 

(5) A corporation or a person referred to in subsection (1) may apply to the court for an order approving an indemnity under this section and the court may so order and make any further order it thinks fit.

 

Idem

 

(6) Upon an application under subsection (5), the court may order notice to be given to any interested person and such person is entitled to appear and be heard in person or by counsel.

 

The Registrant maintains directors’ and officers’ liability insurance which insures directors and officers for losses as a result of claims against the directors and officers of the Registrant in their capacity as directors and officers and also reimburses the Registrant for payments made pursuant to the indemnity provisions under the by-laws of the Registrant and the Securities Act.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the U.S. Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

 

 

 

EXHIBITS

 

The following exhibits have been filed as part of this Registration Statement:

 

EXHIBIT
NUMBER
  DESCRIPTION
     
4.1   The annual information form of the Registrant for the year ended December 31, 2018 dated March 7, 2019.
     
4.2   The audited consolidated financial statements of the Registrant as at December 31, 2018 and 2017 and for each of the three years in the period ended December 31, 2018, together with the notes thereto.
     
4.3   The management’s discussion and analysis of financial condition and results of operations of the Registrant for the financial year ended December 31, 2018.
     
4.4   The management information circular of the Registrant dated May 6, 2019 in connection with the Registrant’s annual meeting of shareholders held on June 13, 2019.
     
4.5   The unaudited interim condensed consolidated financial statements of the Registrant as at and for the three and six months ended June 30, 2019 and 2018, together with the notes thereto.
     
4.6   The management’s discussion and analysis of financial condition and results of operations of the Registrant for the three and six months ended June 30, 2019 (included in Exhibit 4.3).
     
4.7   The sections entitled “Item 3: Key Information”, “Item 4: Information on the Registrant”, “Item 6: Directors, Senior Management and Employees”, “Item 7: Major Shareholders and Related Party Transactions” and “Item 10: Additional Information” (Section A, B, and C only) from the U.S. registration statement on Form 20-F of the Registrant dated August 29, 2019, withdrawn by the Registrant on September 23, 2019.
     
4.8   The material change report of the Registrant dated September 3, 2019.
     
4.9   The material change report of the Registrant dated September 19, 2019.
     
5.1   Consent of PricewaterhouseCoopers LLP.
     
5.2   Consent of Torys LLP.
     
6.1   Powers of Attorney (included on the signature pages of this Registration Statement).

 

 

 

 

PART III

 

UNDERTAKING AND CONSENT TO SERVICE OF PROCESS

 

ITEM 1. UNDERTAKING.

 

The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to the securities registered pursuant to this Form F-10 or to transactions in said securities.

 

ITEM 2. CONSENT TO SERVICE OF PROCESS.

 

Concurrently with the filing of this Registration Statement on Form F-10, the Registrant will file with the Commission a written irrevocable consent and power of attorney on Form F-X.

 

Any change to the name or address of the agent for service of the Registrant shall be communicated promptly to the Commission by amendment of the Form F-X referencing the file number of this Registration Statement.

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933 the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-10 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Mississauga, Province of Ontario, Country of Canada, on September 27, 2019.

 

  PROFOUND MEDICAL CORP.
   
  By:   /s/ Aaron Davidson
    Name:   Aaron Davidson
    Title:   Chief Financial Officer

 

Each person whose signature appears below constitutes and appoints each of Arun Menawat, Aaron Davidson and Rashed Dewan his/her true and lawful attorney-in-fact and agent, each acting alone, with full power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign any or all amendments, including post-effective amendments and supplements to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his/her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Act of 1933 this Registration Statement has been signed by the following persons in the following capacities on September 27, 2019.

 

SIGNATURE   TITLE
     
/s/ Arun Menawat    
Arun Menawat   Chief Executive Officer and Director (Principal Executive Officer)
     
     
/s/ Aaron Davidson    
Aaron Davidson   Chief Financial Officer (Principal Financial Officer)
     
/s/ Rashed Dewan    
Rashed Dewan   Vice President of Finance, Manufacturing and Service (Principal Accounting Officer)
     
/s/ Jean-François Pariseau    
Jean-François Pariseau   Director

 

 

 

 

SIGNATURE   TITLE
     
/s/ Kenneth Galbraith    
Kenneth Galbraith   Director
     
/s/ Arthur Rosenthal    
Arthur Rosenthal   Director
     
/s/ Brian Ellacott    
Brian Ellacott   Director
     
/s/ Linda Maxwell    
Linda Maxwell   Director
     
/s/ Steve Forte    
Steve Forte   Director

 

 

 

 

AUTHORIZED REPRESENTATIVE

 

Pursuant to the requirements of Section 6(a) of the Securities Act of 1933, as amended, the undersigned has signed this Registration Statement, solely in the capacity of the duly authorized representative of the Registrant in the United States, on September 27, 2019.

 

  PROFOUND MEDICAL (U.S.) INC.
   
  By:   /s/ Arun Menawat
    Name:   Arun Menawat
    Title:   CEO

 

 

 

Exhibit 4.1 

 

 

 

PROFOUND MEDICAL CORP.

 

 

 

ANNUAL INFORMATION FORM

 

FOR THE YEAR ENDED DECEMBER 31, 2018

 

 

 

 

 

March 7, 2019

 

 

 

 

TABLE OF CONTENTS

 

      Page
   
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 1
   
MARKET AND INDUSTRY DATA 2
   
TRADEMARKS AND TRADE NAMES 2
   
GLOSSARY 2
   
ITEM 1. CORPORATE STRUCTURE 6

 

  1.1 Name, Address and Incorporation 6
  1.2 Inter-Corporate Relationships 6

 

       
ITEM 2. GENERAL DEVELOPMENT OF THE BUSINESS 7

 

  2.1 Overview 7
  2.2 Three-Year History 8

 

       
ITEM 3. NARRATIVE DESCRIPTION OF THE BUSINESS 11

 

  3.1 General 11
  3.2 Products 11
  3.3 Business Strategy 13
  3.4 Manufacturing Operations 14
  3.5 Competition 15
  3.6 Alliances and Partnerships 19
  3.7 Regulatory 20
  3.8 Reimbursement 23

 

ITEM 4. RISK FACTORS 24
       
ITEM 5. ACQUISITIONS 52
       
ITEM 6. INTELLECTUAL PROPERTY 53
       
ITEM 7. HUMAN RESOURCES 54
       
ITEM 8. DIVIDENDS 54
       
ITEM 9. DESCRIPTION OF CAPITAL STRUCTURE 54
       
ITEM 10. MARKET FOR SECURITIES 55

 

  10.1 Trading Prices and Volume 55
  10.2 Prior Sales 55
  10.3 Escrowed Securities and Securities subject to Contractual Restriction or Transfer 57

 

       
ITEM 11. DIRECTOR AND OFFICERS 58

 

  11.1 Directors and Executive Officers 58
  11.2 Director Biographies 59
  11.3 Corporate Cease Trade Orders or Bankruptcies 62

 

ITEM 12. PROMOTER 62
       
ITEM 13. LEGAL PROCEEDINGS AND REGULATORY ACTIONS 63

 

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TABLE OF CONTENTS
(continued)
     
    Page
     
ITEM 14. INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS 63
     
ITEM 15. TRANSFER AGENT AND REGISTRAR 63
     
ITEM 16. MATERIAL CONTRACTS 63
     
ITEM 17. AUDIT COMMITTEE INFORMATION 65
     
ITEM 18. INTEREST OF EXPERTS 67
     
ITEM 19. ADDITIONAL INFORMATION 67
     
SCHEDULE “A” PROFOUND MEDICAL CORP. AUDIT COMMITTEE CHARTER A-1

 

- ii -

 

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

In this annual information form (the “AIF”), unless otherwise noted or the context indicates otherwise, the “Company”, “Profound”, “we”, “us” and “our” refer to Profound Medical Corp. and, as the context requires, our principal subsidiaries Profound Medical Inc., Profound Medical (U.S.) Inc., Profound Medical Oy and Profound Medical GmbH. All financial information in this AIF is prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) and is presented in Canadian dollars unless otherwise noted. Unless otherwise stated, all references to “$” are to Canadian dollars and references to “US$” are to United States dollars. The information contained herein is dated as of December 31, 2018 (the last day of Profound’s most recently completed financial year), unless otherwise stated.

 

Certain statements in this AIF may contain “forward-looking statements” within the meaning of applicable securities laws, including the “safe harbour provisions” of the Securities Act (Ontario), with respect to Profound. Such statements include all statements other than statements of historical fact contained in this AIF, such as statements that relate to the Company’s current expectations and views of future events. Often, but not always, forward-looking statements can be identified by the use of words such as “may”, “will”, “expect”, “anticipate”, “predict”, “aim”, “estimate”, “intend”, “plan”, “seek”, “believe”, “potential”, “continue”, “is/are likely to”, “is/are projected to” or the negative of these terms, or other similar expressions, as well as future or conditional verbs such as “will”, “should”, “would”, and “could” intended to identify forward-looking statements. These forward-looking statements include, among other things, statements relating to expectations regarding future clinical trials, expectations regarding regulatory approvals, expectations regarding the safety and efficacy of its product, expectations regarding the use of its product and its revenue, expenses and operations, plans for and timing of expansion of its product and service offerings, future growth plans, ability to attract and develop and maintain relationships with suppliers, physicians/clinicians, etc., ability to attract and retain personnel, expectations regarding growth in its product markets, competitive position and its expectations regarding competition, ability to raise debt and equity capital to fund future product development, and anticipated trends and challenges in Profound’s business and the markets in which it operates.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The results, performance and achievements of the Company will be affected by, among other things, the risks and uncertainties discussed in the “Risk Factors” section and elsewhere in this AIF, such as successful completion of clinical trial phases with respect to Profound’s device, obtaining regulatory approvals in relevant jurisdictions to market Profound’s device, risks related to the regulation of Profound (including the healthcare markets, lack of funding may limit the ability to commercialize and market Profound’s product, fluctuating input prices, international trade and political uncertainty, healthcare regulatory regime in relevant jurisdictions may affect the Company’s financial viability, reimbursement models in relevant jurisdictions may not be advantageous), competition may limit the growth of Profound, if the Company breaches any of the agreements under which it licenses rights from third parties, Profound could lose license rights that are key to its business, loss of key personnel may significantly harm Profound’s business and past performance is not indicative of future performance, and such other risks detailed from time to time in the publicly filed disclosure documents of the Company which are available at www.sedar.com. The Company’s forward-looking statements are made only as of the date of this AIF and, except as required by applicable law, Profound disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or results or otherwise, unless required by applicable law. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, and because of the above-noted risks, uncertainties and assumptions, readers should not place undue reliance on forward-looking statements due to the inherent uncertainty in them.

 

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MARKET AND INDUSTRY DATA

 

This AIF includes market and industry data obtained from third party sources, industry publications, scientific journals and publicly available information, including data from the American Cancer Society, International Agency for Research on Cancer and the Agency for Health Care Research and Quality. Profound believes that this market and industry data is accurate and that its estimates and assumptions are reasonable, but there can be no assurance as to the accuracy or completeness thereof. The accuracy and completeness of the market and industry data used throughout this AIF are not guaranteed and Profound does not make any representation as to the accuracy of such information. Although Profound believes it to be reliable, Profound has not independently verified any of the data from third party sources referred to in this AIF, nor analyzed or verified the underlying studies or surveys relied upon or referred to by such sources, or ascertained the underlying economic and other assumptions relied upon by such sources.

 

TRADEMARKS AND TRADE NAMES

 

This AIF includes references to certain trademarks, such as “TULSA-PRO” and “SONALLEVE”, which are protected under applicable intellectual property laws in Canada and are Profound’s property. Solely for convenience, Profound’s trademarks and trade names may appear in this AIF without the ® or TM symbol, but such references are not intended to indicate, in any way, that Profound will not assert, to the fullest extent under applicable law, its rights to these trademarks and trade names.

 

GLOSSARY

 

The following terms have the meanings set out below.

 

 

2018 Bought Deal Offering    has the meaning given under the heading “General Development of the Business – Three-Year History – Recent Highlights”.
     
3D   means three-dimensional.
     
ablation   means to remove or destroy tissue.
     
ACA   means the 2010 Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010.
     
ADT   means androgen deprivation therapy.
     
AIF   means this annual information form.
     
Audit Committee   has the meaning given under the heading “Audit Committee Information”.
     
BDC   means BDC Capital Inc.
     
BPH   means benign prostatic hyperplasia, a condition where the prostate gland is enlarged and not cancerous.
     
brachytherapy   means the precise placement of short-range radiation-sources (radioisotopes) directly at the site of the cancerous tumour.
     
CE Mark   means “Conformité Européenne” and is affixed to a medical device in the European Union by its manufacturer to declare that the medical device complies with applicable EU regulatory requirements and that the appropriate related conformity assessment procedure has been conducted.
     
CIBC   means Canadian Imperial Bank of Commerce.
     
CIBC Loan Agreement   means the loan agreement entered into on July 30, 2018 between PMI, as borrower; Profound, Profound Medical (U.S.) Inc and Profound Medical GmbH, as guarantors; and CIBC, as lender.

 

- 3 -

 

     
Common Shares   means the common shares in the capital of Profound.
     
Company   means Profound Medical Corp. and, as the context requires, its principal subsidiaries Profound Medical Inc., Profound Medical Oy and Profound Medical GmbH.
     
Confidentiality Agreement   has the meaning given under the heading “Material Contracts”.
     
cryoablation   means a therapy that uses extreme cold temperature to destroy benign and malignant tissue by crystallizing it.
     
DC&P   means disclosure controls and procedures.
     
de novo classification   means the submission of a petition to the FDA to reclassify a novel non-predicated Class III device as a Class I or II device pursuant to Section 513(f)(2) of the United States Federal Food, Drug and Cosmetic Act.
     
DTC   means a Depository Trust Company.
     
EBRT   means external beam radiation therapy.
     
Essential Requirements   has the meaning given under the heading “Narrative Description of the Business – Regulatory – Overview – European Union Regulation”.
     
European Union or EU   means an organization created in 1993 with the aim of achieving closer economic and political union between the member states of Europe and currently comprising Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.
     
FCPA   means the Foreign Corrupt Practices Act of 1977.
     
FDA   means the United States Food and Drug Administration, the regulatory authority in the United States that regulates companies that manufacture, repackage, relabel, distribute and/or import food, drugs and/or devices sold in the United States.
     
FFDCA   means the Federal Food, Drug and Cosmetic Act.
     
FSCAs   means Field Safety Corrective Actions.
     
Genesys   means Genesys Ventures II LP.
     
Gleason Score   means the histological assessment of prostate tissue using a tumour grading system which describes how aggressive a prostate cancer is on a scale from 1 (least aggressive) to 5 (most aggressive). The Gleason score is a combination of the two most common growth patterns observed in a biopsy specimen.
     
Gn-RH   means gonadotrophin-releasing hormone.
     
HDR   means high dose radiation.
     
HIFU   means high intensity focus ultrasound.
     
HIPAA   means Health Insurance Portability and Accountability Act of 1996.
     
ICFR   means internal control over financial reporting.

 

- 4 -

 

IDE   means investigational device exemption; an approved IDE means that the Institutional Review Board of a clinical site and the FDA have approved the sponsor’s clinical study application.
     
IFRS   means the International Financial Reporting Standards issued by the International Accounting Standards Board.
     
IP Assignment   has the meaning given under the heading “Material Contracts.
     
IRB   means an institutional review board.
     
Knight   means Knight Therapeutics Inc.
     
Knight Loan Agreement   means the loan agreement entered into on April 30, 2015 between PMI and Knight pursuant to which Knight agreed to provide Profound a four-year secured loan bearing interest at an effective annual rate of 15.0% and in connection with which PMI granted to Knight a 0.5% royalty on net sales of PMI for the duration of such loan.
     
License Agreement   has the meaning given under the heading “Material Contracts”.
     
Laborie   has the meaning given under the heading “Director Biographies”.
     
MDB   means Medical Devices Bureau.
     
MDR   means the Medical Devices Regulations.
     
Medical Device Directive   means the Council Directive 93/42/EEC concerning medical devices.
     
Medical Device License   means the license for marketing approval of a medical device in Canada.
     
Mira   means Mira IV Acquisition Corp., a corporation incorporated under the OBCA.
     
Mira Subco   means Mira IV Subco Inc., a wholly-owned subsidiary of Mira incorporated under the OBCA.
     
MR   means magnetic resonance.
     
MR-HIFU   means magnetic resonance guided high intensity focused ultrasound.
     
MRI   means magnetic resonance imaging.
     
New Agreement   has the meaning given under the heading “Alliances and Partnerships – Siemens.”
     
New MDR   has the meaning given under the heading “Narrative Description of the Business – Regulatory – Overview – European Union Regulation.
     
NI 52-109   means National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings.
     
OBCA   means the Business Corporations Act (Ontario), as amended, together with all regulations promulgated pursuant thereto.
     
Options   means options issued under the Share Option Plan.
     
Philips   means Koninklijke Philips N.V.
     
Philips Agreement   has the meaning given under the heading “Narrative Description of the Business – Alliances and Partnerships – Philips.
     
Philips Medical   has the meaning given under the heading “Material Contracts.

 

- 5 -

 

Pivotal Trial   means a clinical trial or study intended to provide evidence and reasonable assurance of safety and efficacy for marketing approval of a device.
     
PMA   means the Pre-Market Approval application process for marketing approval in the United States.
     
PMI   means Profound Medical Inc.
     
Profound   means Profound Medical Corp. and, as the context requires, our principal subsidiaries Profound Medical Inc., Profound Medical Oy and Profound Medical GmbH.
     
Promoter   means a promoter as prescribed by applicable Securities Laws.
     
PSA   means prostate specific antigen.
     
QMS   means a registered quality management system.
     
QSR   means Quality System Regulations.
     
Qualifying Transaction   has the meaning given under the heading “Corporate Structure – Name, Address and Incorporation.
     
radical prostatectomy   means a surgical procedure that involves the removal of the whole prostate gland.
     
Resale Purchasing Agreement   has the meaning given under the heading “Material Contracts.
     
Securities Laws   means securities legislation, securities regulation and securities rules, as amended, and the policies, notices, instruments and blanket orders in force from time to time that are applicable to an issuer.
     
Share Acquisition Agreement   has the meaning given under the heading “Material Contracts.
     
Share Option Plan   means the share option plan of Profound dated June 4, 2015, as amended and restated on December 8, 2016 and as further amended.
     
Siemens   means Siemens Healthcare GmbH.
     
SONALLEVE MR- HIFU Transaction   has the meaning given under the heading “Narrative Description of the Business – Alliances and Partnership – Philips.”
     
Sunnybrook   means the Sunnybrook Health Sciences Centre.
     
Sunnybrook License   has the meaning given under the heading “Material Contracts.
     
Supply Agreement   has the meaning given under the heading “Material Contracts.
     
TACT   means the TULSA-PRO Ablation Clinical Trial.
     
TPD   means Health Canada’s Therapeutic Products Directorate.
     
Transitional Services Agreement   has the meaning given under the heading “Material Contracts.
     
TSX   means Toronto Stock Exchange.
     
TSX-V   means the TSX Venture Exchange.
     
TULSA   means Transurethral ULtraSound Ablation.
     
TULSA-PRO   means the Transurethral ULtraSound Ablation device.

 

- 6 -

 

TURP   means a transurethral resection of the prostate, a surgical procedure that removes portions of the prostate gland via the urethra.
     
UA   means ultrasound applicator.
     
urinary rectal fistula   means an abnormal channel between the bladder and rectum resulting in the potential for leakage of urine from the urinary tract into surrounding tissues.
     
USPTO   means the United States Patent and Trademark Office.

 

  ITEM 1. CORPORATE STRUCTURE

 

1.1       Name, Address and Incorporation

 

Profound Medical Corp. is the company resulting from a “three-cornered” amalgamation involving Mira, Mira Subco and PMI. PMI was formed by articles of incorporation under the OBCA on June 13, 2008, under the name “Profound Medical Inc.” Mira was formed by articles of incorporation under the OBCA on July 16, 2014, under the name Mira IV Acquisition Corp., and following its initial public offering, was a “capital pool company” listed on the TSX-V. As a capital pool company, Mira had no assets other than cash and did not carry on any operations. On June 3, 2015, the Company changed its name to Profound Medical Corp. and completed a consolidation of its share capital on the basis of one post-consolidation common share for every 13.6363 pre-consolidation common shares. PMI completed its qualifying transaction pursuant to the policies of the TSX-V by way of a reverse takeover of Mira by the shareholders of PMI on June 4, 2015 (the “Qualifying Transaction”). On July 13, 2018, the Company graduated from the TSX-V and commenced trading on the TSX.

 

The Company’s head and registered office is located at 2400 Skymark Avenue, Unit 6, Mississauga, Ontario, L4W 5K5.

 

1.2       Inter-Corporate Relationships

 

Profound operates its business through its wholly-owned principal subsidiaries, Profound Medical Inc., Profound Medical Oy, Profound Medical GmbH and Profound Medical (U.S.) Inc.

 

Profound Medical Inc. was incorporated under the OBCA on June 13, 2008, and amalgamated with Mira Subco on June 4, 2015, as part of the Qualifying Transaction. Profound Medical GmbH was established in Germany on January 12, 2016, as a wholly-owned direct subsidiary of PMI. Profound Medical Oy was established in Finland on July 31, 2017, as a wholly-owned direct subsidiary of PMI. Profound Medical (U.S.) Inc. was established under the laws of the state of Delaware on January 4, 2016 as a wholly-owned direct subsidiary of PMI.

 

The following diagram illustrates the organizational structure of Profound and its principal subsidiaries, their respective jurisdictions of incorporation and the percentage of voting and non-voting securities owned by Profound as of the date of this AIF.

 

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  ITEM 2. GENERAL DEVELOPMENT OF THE BUSINESS

 

2.1       Overview

 

Profound (TSX: PRN; OTCQX: PRFMF) develops, manufactures and markets a therapeutic platform that provides the precision of real-time MR imaging combined with the safety and accuracy of directional and focused ultrasound technology for incision and radiation free ablation of diseased tissue. Profound’s TULSA-PRO is a robotically controlled catheter based transurethral thermal ultrasound system that combines real time temperature monitoring by way of a continuous closed feedback loop via MRI guidance and the Company’s process control software for customizable inside-out ablation of diseased prostate tissue; minimizing healthy tissue damage and the occurrence of disabling side effects. Additionally, the Company acquired the SONALLEVE focused ultrasound system in 2017 from Philips to create a MR-guided therapeutic ultrasound platform that can offer ablative therapies for use in the treatment of other multiple disease conditions, broadening the scope of the Company’s long-term product offerings.

 

The Company’s TULSA-PRO technology is designed to provide a minimally invasive and precise ablation of the prostate while simultaneously reducing the risk of harming the critical surrounding anatomy from potential side effects. TULSA-PRO provides physicians with the flexibility to customize the treatment to the patient’s specific anatomy and pathology thus enabling prostate ablation for patients with localized prostate cancer in a whole gland to targeted (focal) approach, as well as ablative therapies for the treatment of BPH. In the Phase I clinical trial results published in 2016, TULSA-PRO demonstrated accurate and precise ablation of targeted prostate tissue, while providing a well-tolerated favourable safety profile with minor impact on urinary, erectile and bowel function at 12 months. TACT, Profound’s Pivotal Trial, is a prospective, open-label, single-arm pivotal clinical study, of 115 prostate cancer patients across 13 research sites in the United States, Canada and Europe. The TACT Pivotal Trial completed patient enrolment in February 2018, and if successful, it is expected to support Profound’s application to the FDA for clearance to market this technology in the United States. TULSA-PRO is CE marked for ablation of targeted benign and malignant prostate tissue. The TULSA-PRO system received CE Certificate of Conformity from its notified body in the European Union in April 2016 and the Company initiated a limited commercial launch within the jurisdiction in Q4 2016.

 

- 8 -

 

The Company continues to invest in additional research and development, clinical studies, and potentially acquisitions in order to expand the applications of its platform technologies and sales.

 

In 2017, Profound acquired SONALLEVE from Philips. SONALLEVE is a therapeutic platform that combines real-time MR imaging and thermometry with thermal ultrasound to enable precise and incision-free ablation of diseased tissue. There are approximately 200 publications detailing the clinical value of SONALLEVE in more than five disease conditions. The latest version of SONALLEVE received CE Mark certification for the treatment of uterine fibroids and palliative pain relief associated with metastases in bone in March 2014. Profound markets SONALLEVE in countries that accept the CE Mark regulatory certification and is in the early stages of exploring additional potential markets where the technology has been shown to have clinical value. On May 9, 2018, the Company received regulatory approval in China from the China Food and Drug Administration for the use of SONALLEVE to treat uterine fibroids and initiated a limited launch in September 2018.

 

Profound is focused on commercialization of its products in jurisdictions with regulatory approval. The Company also continues to invest in additional research and development, clinical studies, and potential acquisitions in order to expand the applications of its platform technologies and sales.

 

2.2       Three-Year History

 

Fiscal 2018 Highlights

 

On December 14, 2018, Profound announces changes to the commercial organization; Ian Heynen resigned from his position as Senior Vice-President of Sales and Marketing.

 

On September 19, 2018, Profound filed a final base shelf prospectus with the securities commissions in each of the province of Canada, other than Quebec.

 

On September 18, 2018, Profound press released 3-year clinical outcomes in prostate patients and a BPH subgroup analysis of Profound’s Phase I Clinical Trial which was included in a presentation at the Deutschen Gesellschaft für Urologie (DGU) 2018 conference.

 

On July 30, 2018, Profound entered into the CIBC Loan Agreement, which provides up to $18.75 million of available borrowing capacity. The first tranche of $12.5 million was funded upon execution of the agreement, with the option of a second tranche of up to an additional $6.25 million available through December 31, 2019, subject to the satisfaction of certain financing and product development milestones.

 

On July 11, 2018, Profound received final approval for listing of its Common Shares on the TSX. The Common Shares continue to trade under the symbol “PRN”.

 

On June 14, 2018, Profound disclosed at the annual meeting of their shareholders, voting results and welcomed two industry veterans, Dr. Arthur Rosenthal and Brian Ellacott, as independent directors to its board of directors.

 

On May 21, 2018, Profound presented the initial data from the TACT Clinical Trial at the American Urological Association 2018 conference.

 

On May 9, 2018, Profound obtained Chinese Food and Drug Administration approval for Sonalleve® for the non-invasive treatment of uterine fibroids.

 

On May 1, 2018, Profound further strengthened the management team with the appointment of Aaron Davidson as Chief Financial Officer and Senior Vice-President of Corporate Development.

 

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On April 23, 2018, Profound hired Ian Heynen, Senior Vice-President Sales & Marketing, to lead Profound Medical’s sales and marketing function.

 

On March 20, 2018, Profound completed a bought deal financing pursuant to a short form prospectus, for total gross proceeds of $34.5 million (“2018 Bought Deal Offering”). The offering was conducted by a syndicate of underwriters led by Canaccord Genuity Corp. and including Paradigm Capital Inc., CIBC World Markets Inc., Beacon Securities Ltd., Echelon Wealth Partners Inc., and Mackie Research Capital Corporation.

 

On February 28, 2018, Profound announced the upsizing of the $20,000,000 bought deal offering to $30,000,000. The Company agreed to grant the Underwriters an over-allotment option to purchase up to an additional $4.5 million units at the offering price, exercisable in whole or in part, at any time and from time to time on or prior to the date that was 30 days following the closing of the offering.

 

On January 31, 2018, Profound announced the completion of patient enrollment in the TACT Pivotal Trial designed to further evaluate the safety and efficacy of TULSA-PRO to ablate prostate tissue in patients with localized, organ-confined prostate cancer.

 

Fiscal 2017 Highlights

 

On November 6, 2017, Profound announced the expanded clinical use of TULSA-PRO in prostate care to include BPH. BPH is a common non-cancerous enlargement of the prostate gland due to an overgrowth of prostate cells and treatments for this condition were now being conducted in Germany utilizing TULSA-PRO.

 

On September 20, 2017, Profound closed a bought deal financing pursuant to a short form prospectus, for total gross proceeds of $10 million. The offering was completed through a syndicate of underwriters led by Echelon Wealth Partners Inc. and including CIBC World Markets Inc.

 

On July 31, 2017, Profound completed the acquisition of Philips’ SONALLEVE MR-HIFU business. SONALLEVE MR-HIFU is a therapeutic platform that combines real-time MR imaging and thermometry with high intensity focused ultrasound to enable precise and incision-free ablation of diseased tissue. SONALLEVE is CE marked for the treatment of uterine fibroids and palliative pain relief associated with metastases in bone. Philips continues to distribute Profound’s TULSA-PRO system. In addition, Philips and Profound announced that they expanded this non-exclusive strategic sales relationship to include distribution of SONALLEVE MR-HIFU.

 

On April 18, 2017, Profound announced that it had secured Depository Trust Company (“DTC”) eligibility for its common shares listed on the OTCQX. Securities that are eligible to be electronically cleared and settled through the DTC are considered “DTC eligible”.

 

On March 27, 2017, Profound announced that the first TULSA-PRO patient paid procedure was conducted at the ALTA Klinik in Bielefeld, Germany under the supervision of Dr. Agron Lumiani.

 

On March 24, 2017, Profound announced the resignation of Steven Plymale as President and Chief Operating Officer.

 

On March 20, 2017, Profound completed the first sale of a TULSA-PRO system in Finland to Turku University Hospital. The deal was completed in collaboration with Philips, who is working in partnership with Profound to commercialize TULSA-PRO.

 

On March 9, 2017, Profound announced that its Common Shares were eligible for trading on the OTCQX Best Market under the ticker symbol “PRFMF” as of March 13, 2017.

 

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On March 3, 2017, Profound announced the resignation of Jonathan Goodman and the appointment of Samira Sakhia, to the board of directors of Profound.

 

On January 26, 2017, Profound announced the approval at a special meeting of the shareholders of Profound, of the Share Option Plan and an option grant to Arun Menawat of options to purchase 1,417,583 Common Shares for an exercise price of $1.10 per share.

 

On January 17, 2017, Profound announced the appointment of Kenneth Galbraith to the board of directors of Profound and the resignation as director of Steven Plymale. Steven Plymale remained as President and Chief Operating Officer.

 

Fiscal 2016 Highlights

 

On October 17, 2016, Profound announced that it had entered into an agreement with a syndicate of underwriters led by GMP Securities L.P., pursuant to which the underwriters agreed to purchase, on a bought deal basis, 15,820,000 Common Shares of Profound at a price of $1.10 per Common Share for aggregate gross proceeds to Profound of $17,402,000.

 

On October 5, 2016, the Company announced that it had received Frost & Sullivan’s 2016 European Prostate Ablation System New Product Innovation Award for its TULSA-PRO system.

 

On September 22, 2016, the Company announced that the first patient had been treated in TACT, designed to further evaluate the safety and efficacy of TULSA-PRO to ablate prostate tissue in patients with localized, organ-confined prostate cancer, at Vanderbilt University Medical Center in Nashville, TN.

 

On August 15, 2016, Profound announced the appointment of Arun Menawat, Ph.D. as its new Chief Executive Officer, the transition of its former Chief Executive Officer, Steven Plymale, to President and Chief Operating Officer of Profound and the promotion of Rashed Dewan from Corporate Controller to Vice President, Finance.

 

On June 21, 2016, Profound announced the first sale of the TULSA-PRO system in Germany to University Hospital of Cologne, in collaboration with Philips.

 

On June 20, 2016, Profound announced the first sale of the TULSA-PRO system in the United Kingdom to University College London and University College London Hospitals NHS Foundation Trust. This marked the first sale under the Company’s collaboration with Philips.

 

On May 19, 2016, Profound announced that the FDA granted IDE approval for their multicenter Pivotal Trial. The objective of the trial is to evaluate the efficacy of the TULSA-PRO system in ablating tissue in patients with localized prostate cancer.

 

On May 11, 2016, Profound announced the signing of a sales and marketing agreement with Philips. Under the terms of the agreement, Profound and Philips will collaborate in the commercialization of the TULSA-PRO system in Europe, Canada, the United States and other markets, subject to regulatory clearance in those jurisdictions.

 

On April 28, 2016, Profound announced a sale of its TULSA-PRO system to ResoFus Alomar, a medical clinic in Barcelona, Spain, first commercial sale of the Company.

 

On April 11, 2016, Profound announced that it has affixed the CE Mark to the TULSA-PRO system following receipt of a CE Certificate of Conformity from its notified body in the European Union. The CE Mark affixed to the medical device enables Profound to market the TULSA-PRO system in the European Union and in other jurisdictions accepting CE marked medical devices such as Norway, Iceland, Liechtenstein and Switzerland.

 

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On February 29, 2016, Profound announced that it had entered into a strategic collaboration agreement with Siemens Healthcare GmbH (“Siemens”), aimed at advancing the commercial launch of Profound’s TULSA-PRO system. Profound and Siemens will each invest approximately US$2,000,000 on marketing and sales resources in support of the marketing and sale of TULSA-PRO system.

 

On January 12, 2016, Profound established Profound Medical GmbH in Germany, as a wholly-owned subsidiary of PMI. The purpose of Profound Medical GmbH is to conduct marketing and sales activity in the European Union.

 

  ITEM 3. NARRATIVE DESCRIPTION OF THE BUSINESS

 

3.1       General

 

Profound develops, manufactures and markets therapeutic platforms that combine real-time MR imaging with directional (inside-out) and focused (outside-in) ultrasound technology for incision-free ablation of diseased tissue. These platforms offer clinicians and patients incision-free alternatives to current standards of care which could include traditional surgery or radiation therapy.

 

3.2       Products

 

TULSA-PRO

 

Profound’s novel technology TULSA-PRO combines MRI guidance and ultrasound energy to provide thermal ablative therapy to the prostate gland delivered through the urethra.

 

Prostate cancer is one of the most common types of cancer affecting men, with an annual incidence of newly diagnosed cases reaching 343,000 in the European Union1 and 175,000 in the United States2. It is estimated that there are currently 5.8 million men living with prostate cancer in these two geographies. Although ten-year survival outcomes for prostate cancer remain favourable, it is still one of most common causes of cancer deaths among men.

 

Currently men with localized prostate cancer are risk classified into low-risk, intermediate-risk, and high-risk categories, based on prostate specific antigen (“PSA”) levels, clinical stage and Gleason Score. There are a number of available treatments for localized prostate cancer with the most commonly utilized approaches being active surveillance, radical prostatectomy, and radiation therapy.

 

Active surveillance, utilized primarily for low-risk patients does not involve active patient treatment, as it is rather a postponement of treatment with regular patient assessment and testing. The rationale for active surveillance is that delayed treatment will also delay the high risk of side-effects associated with current treatment options. For intermediate-risk and high-risk patients, surgical radical prostatectomy and radiation therapy are most commonly utilized treatment options. Even though these treatments offer high survival rates, they can result in negative quality of life outcomes in a significant number of treatment cases. Potential negative outcomes can include urinary incontinence, erectile dysfunction and bowel complications.

 

The current treatment paradigm consist mostly of either delaying therapy through Active Survillence, removing the whole gland or radiation which requires several sessions. These options have created an unmet need for a treatment option that could better enable the Clinician with a flexible and customizable treatment option of whole gland or disease targeted ablation that takes into account the need of each patient including consideration of the stage of the disease, aggressiveness and spacial spread of the disease and the need to minimize side effects.

 

 

 

  1 Source: International Agency for Research on Cancer (2018, April 18). Retrieved from http://eco.iarc.fr/eucan/CancerOne.aspx?Cancer=29&Gender=1.

 

  2 Source: American Cancer Society (2019, January 8). Retrieved from https://www.cancer.org/cancer/prostate-cancer/about/key-statistics.html.

 

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The TULSA-PRO system is comprised of two categories of components: disposables and the capital equipment used in conjunction with a customer’s MRI scanner. Profound has designed the TULSA-PRO system to be capable of integration with many major MRI scanners currently deployed in hospitals and treatment facilities. That integration allows the TULSA-PRO system to display high resolution images of the prostate and surrounding anatomy. The integrated MRI is used for treatment planning but, more importantly, to provide real-time measurement of temperature in the prostate as the treatment is occurring to enable the physician/clinician to control and monitor tissue ablation. Profound has optimized its technology to work with particular MRI scanners sold by Siemens and Philips and intends to increase compatibility of the TULSA-PRO system with models from other MRI vendors over time.

 

The ultrasound applicator (the “UA”) is a sterile, single use, disposable component of the TULSA-PRO system. The UA produces directional thermal ultrasound beams, through a linear array of 10 independent ultrasound transducers, each of which is independently computer controlled using real-time MRI feedback to deliver heat out to the prescribed treatment boundary. The UA is introduced into the patient via the urethra and is precisely located within the prostate using the system’s robotic positioning, which is controlled by the system’s software together with MRI feedback for guidance. The real time measurement of the temperature from the MR and the precision of transurethral ultrasound is intended to enable the TULSA-PRO system to sculpt the ablated tissue volume to the shape of the patient’s prostate, which may assist in avoiding damage to sensitive structures, including the bladder neck and urethral sphincter.

 

There are a number of expected clinical advantages of TULSA procedure. The technology has demonstrated accurate and precise ablation of targeted prostate tissue, while providing a well-tolerated favourable safety profile with minor impact on urinary, erectile and bowel function at 12 months. TACT, Profound’s Pivotal Trial conducted by Profound, is a prospective whole gland ablation, open-label, single-arm pivotal clinical study, of 115 prostate cancer patients across 13 research sites in the United States, Canada and Europe. Profound believes its clinical trial may demonstrate that the use of the TULSA-PRO system in a prostate cancer patient population will have a well-tolerated safety profile with lower rates of procedure-related complications. TACT completed patient enrolment in January 2018 with an additional 5 year patient follow up period to be completed, and if successful it is expected to support Profound’s application to the FDA for clearance to market the technology in the United States.

 

SONALLEVE

 

In 2017, Profound acquired SONALLEVE from Philips. SONALLEVE is a therapeutic platform that combines real-time MR imaging and thermometry with thermal ultrasound to enable precise and incision-free ablation of diseased tissue. SONALLEVE is CE marked for the treatment of uterine fibroids and palliative pain relief associated with matastases in bone. The Company is also in the early stages of exploring additional markets for SONALLEVE, where the technology has been shown to have clinical application.

 

The SONALLEVE uterine fibroid application is indicated for the ablation of symptomatic uterine fibroids or adenomyotic tissue in pre- or peri-menopausal women who desire a uterine sparing treatment. Uterine fibroids are the most common non-cancerous tumors in women of childbearing age. It is estimated that they occur in 70-80% of the female population, but only approximately one third of these cases will require treatment. In the United States, an estimated 26 million women between the ages of 15 and 50 have uterine fibroids. More than 15 million of them will experience associated symptoms or health concerns3. Uterine fibroids cause a variety of symptoms that can significantly reduce the quality of life for a woman, which can include bleeding, pain, pressure and reproductive challenges including infertility, multiple miscarriages, and premature labor. Treatment options differ in fundamental aspects such as cost, invasiveness, recovery time, risks, likelihood of long-term resolution of symptoms, need for future care for fibroids, and influence on future childbearing potential.

 

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The SONALLEVE procedure consists of imaging the uterus in an MR scanner and heating the fibroid or adenomyosis with high-intensity focussed ultrasound energy until the tissue reaches the temperature that causes necrosis. The MR scanner monitors the progress of the treatment. For the patient, the technique can be much more convenient and comfortable than traditional surgical procedures, such as hysterectomy or myomectomy. These require hospital admission on an in-patient basis and sometimes weeks of recovery. In contrast, with SONALLEVE fibroid therapy, patients can be treated on an outpatient basis without the need for anesthesia, discharged the same day and almost fully recovered within a few days.

 

The SONALLEVE bone pain relief application is indicated for palliative treatments to relieve pain associated with bone metastasis. In the later stages of their disease, many cancer patients develop bone metastases. Bone changes and malformations irritate nerve endings, which can cause severe and debilitating pain and become unbearable for many patients. Conventional treatment with strong medication or radiation therapy can result in unpleasant side effects. SONALLEVE provides an alternative option to alleviate this pain. Pain relief can be expected in as quickly as 2-3 days as compared to radiation therapy which could take up to three weeks.

 

The ultrasound energy utilized in the SONALLEVE system is High Intensity Focused Ultrasound (“HIFU”) or MR-HIFU. MR-HIFU therapy uses a focused transducer to bundle ultrasound energy into a small volume at the target locations inside the body under MR imaging and visualization. During treatment, the ultrasound energy beam passes through the intact skin and soft tissue, causing localized high temperatures in the focus area. The skin and intermediate tissue are left unharmed. Within a few seconds this produces a well-defined region of coagulative necrosis.

 

The SONALLEVE system is capable of integration with Philips MRI scanners and the Company intends to expand this compatibility to additional MRI scanner brands in time. MRI can measure temperature changes within the human body non-invasively. 3D MR images provide the anatomical reference data for treatment planning, while real-time temperature sensitive images are acquired during ablation to provide real-time information about treatment progress and monitor critical anatomical structures.

 

There are over 200 publications from leading institutions globally on SONALLEVE technology. There are also over 60 luminary institutions from around the globe that make up the installed base of the SONALLEVE system.

 

3.3       Business Strategy

 

Historically treatment of conditions such as localized prostate cancer and uterine fibroids have included surgical intervention. Over time, surgery has evolved from an ‘open’ to a ‘laparoscopic’ technique to laparoscopic robotic surgery. The surgeon’s motivation behind this evolution has been to create procedures that reduce invasiveness, with improved clinical outcomes, while reducing recovering times. Profound is now taking this concept to the next level by enabling incision-free, precise and customized procedures that are real-time MR-guided ultrasound ablations performed with the TULSA-PRO and SONALLEVE systems. These incision-free flexible procedures offer physicians the option of providing precise and customized procedures that further reduce invasiveness, offer the potential to improve clinical outcomes and further reduce hospital stays and patient recovery times.

 

 

 

  3 Source: Agency for Healthcare Research and Quality. Management of Uterine Fibroids Evidence Summary. AHRQ Pub. No. 17(18)-EHC028-1-EF. December 2017.

 

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TULSA-PRO revenue may include the sale of the capital equipment, procedure related sales of disposable single use components of the system, and service revenue for ongoing maintenance of the systems. Profound is currently pursuing a limited commercial launch of TULSA-PRO in CE marked jurisdictions. The key customer segments targeted by Profound include academic/university/clinical leadership hospitals as well as private clinics with access to MRI scanners. Profound collaborates with its strategic partners Philips and Siemens for lead generation and distribution of the capital equipment. Profound is establishing its own direct sales and marketing teams for sales of the capital and disposable components of TULSA-PRO and SONALLEVE systems. The primary focus of the direct sales team is to cultivate adoption of the TULSA-PRO technology, support clinical customers with the TULSA-PRO procedures and increase the utilization of the systems and disposable components. Recurring revenues are expected to be generated from the sale of disposables and service.

 

Sales of SONALLEVE currently are primarily a one-time capital sale with limited recurring service revenue. Given that it is currently only compatible with Philips MRI scanners, Profound relies primarily on its strategic partnership with Philips for lead generation and sale of the capital units. With regulatory approval for sale in certain jurisdictions, the 2019 focus will be primarily on Asia. In May 2018, the Chinese Food and Drug Administration approved SONALLEVE for the non-invasive treatment of uterine fibroids.

 

Profound continues to focus on further demonstrating the clinical and economic value of its products.

 

3.4       Manufacturing Operations

 

The Company operates from leased premises in three different locations. Profound does not own any real estate property.

 

Location

 

Area Premise Use Expiry Date

2400 Skymark Ave, Unit 6,
Mississauga, ON, Canada

 

38,148 ft2 Corporate offices and administration, Manufacturing, Research and Development September 30, 2026

Äyritie 4B, 01510 Vantaa,
Finland

 

6,372 ft2 Manufacturing, Research and Development December 31, 2021

Kehrwieder 9, 20457
Hamburg, Germany

 

162 ft2 Sales and Marketing month to month

 

 

Profound manufactures TULSA-PRO and SONALLEVE systems at dedicated manufacturing facilities located in Canada and Finland which are ISO 13485 certified. The Profound manufacturing model consists primarily of outsourcing sub-assemblies where it is most cost effective to do so, while assembling and quality testing the final products in-house. Additionally, single use products are assembled entirely in the Mississauga facility within a class 300 clean room which became operational in August 2017. Profound’s manufacturing facilities have sufficient capacity to meet its manufacturing needs through the foreseeable future.

 

Profound has in place supply agreements with manufacturers of key technologies and components. Profound and strategically located service partners handle equipment installation and field service globally.

 

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3.5       Competition

 

TULSA-PRO

 

The most widely used treatment options for prostate cancer currently are: (1) watchful waiting/active surveillance; (2) radical prostatectomy (includes open, laparoscopic and robotic procedures); (3) radiation therapies including, external beam radiation therapy (“EBRT”), brachytherapy and high dose radiation (“HDR”); (4) cryoablation and (5) trans-rectal HIFU. In addition to these widely used treatment options, certain adjunct or less common treatments are used or are under development, such as androgen deprivation therapy (“ADT”) and proton beam therapy.

 

Active surveillance is generally recommended for patients who have been diagnosed with earlier stage, lower risk, disease where the possibility of side effects from intervention may outweigh the expected benefit of the chosen procedure. For clinicians and patients, the gap between active surveillance and the most commonly utilized treatment options of surgery or radiation therapy impose the possibility of substantial side effects, create an unmet need for treatment options that address treatment of the cancer with a more favourable side-effect profile.

 

Profound believes that its TULSA-PRO system could become a compelling option for clinicians in treating prostate cancer with a favorable side-effect profile, fulfilling the unmet clinical need. Profound believes that the flexibility of the TULSA-PRO system may allow Profound to demonstrate its use as a tool to treat either the whole prostate gland or a customized partial gland option with greater speed, accuracy, less side effects and greater precision than current treatment options. Profound believes that it may be able to generate clinical data to demonstrate a clear safety advantage without compromising efficacy.

 

Profound believes that the TULSA-PRO system may provide a treatment option that could fulfill an unmet clinical need by providing an ablation tool for prostate cancer while minimizing potential side effects. Profound believes that the TULSA-PRO system may overcome certain limitations of HIFU, such as complications associated with trans-rectal delivery and limitations relating to prostate size. As noted above, Profound believes that a transurethral (inside out) ablation approach with millimetre accuracy has advantages over HIFU in treating the whole or partial gland safely.

 

Watchful Waiting; Active Surveillance

 

Watchful waiting means no treatment until there is an indication that the cancer has spread. Active surveillance is monitoring of the prostate cancer closely with PSA tests and digital rectal exams. Prostate biopsies may also be done to see if the cancer is becoming more aggressive. Test results will indicate whether a more aggressive treatment option should be considered.

 

Radical Prostatectomy

 

Radical prostatectomy, an open surgical removal of the entire prostate gland and some surrounding tissues, represents a current standard of care, practiced by urologists in North America and Europe, which procedure involves the removal of the localized cancerous tissue. However, the conventional open surgical technique has high post-surgery incidences of impotence and incontinence and long recovery time. Relatively recently, robotic surgery systems have become more common in the market. Cited benefits of the robotic technique include improved precision and range of motion. Risks specific to the robotic technique include longer operation time, the possible need to convert the procedure to a non-robotic approach, and the need for additional or larger incision sites. Converting the procedure could mean a longer operation time, resulting in a longer time under anesthesia.

 

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External Beam Radiation Therapy

 

EBRT requires multiple weekly clinic visits over a period of six to eight weeks. The procedure directs a beam of radiation from outside the body to cancerous tissue inside the body. Although such procedures are relatively costly with studies showing significant risk of collateral damage and lengthy recovery times, it is non-invasive. It can also be used to irradiate cancer that has spread to other areas.

 

Brachytherapy and High Dose Radiation

 

With brachytherapy, radioactive seeds are implanted in the prostate to irradiate the cancerous tissue. The seeds irradiate the prostate over time and decay in place to background levels; they remain implanted and inert afterwards. Side effects of brachytherapy are similar to those of EBRT in terms of urinary, bowel and erectile function. An alternative is HDR, in which highly radioactive seeds are temporarily inserted, then removed during the same procedure, leaving nothing implanted afterward. HDR has the ability to target tissue, but requires hospital stays and usually is accompanied by adjunct EBRT over several weeks.

 

Cryoablation

 

Cryoablation freezes cells to death by introducing cooled liquids and gases to an area of cancerous tissue. Studies show cyroablation offers poor precision and has delivered impotence rates that are almost as high as those for conventional radical prostatectomy. The procedure also carries a risk of potential damage to the tissue between the urethra and rectum, potentially resulting in a urinary rectal fistulas.

 

Trans-rectal High Intensity Focused Ultrasound

 

Trans-rectal HIFU is used increasingly in the European Union, United States and Canada. This technique utilizes focused ultrasound that is delivered through the rectal wall to treat the prostate. Image guidance is generally provided by ultrasound. At an FDA urology panel meeting in 2014, the panel indicated that HIFU can lead to complications such as rectal fistulae and rectal incontinence. Due to the focused treatment zone, this treatment requires approximately three hours to complete. One limitation of HIFU is prostate size; the procedure is limited to patients with prostate volume smaller than 40 cubic centimetres. Patients with larger prostates need a separate surgical procedure, such as transurethral resection of the prostate (“TURP”) or ADT, both described below, to de-bulk or reduce the size of the prostate prior to HIFU. This additional procedure increases costs and the risk of complications. Recent studies have indicated positive survival outcomes and thermal ultrasound appears to be gaining traction in certain settings.

 

Adjunct and Emerging Therapies

 

  · ADT uses hormones to suppress testosterone production and alleviate symptoms, but with the primary side-effect of reduced sexual interest and activity. Although historically used as a last line of defence for the disease (and typically in a palliative setting), it is increasingly used as a first line treatment or in combination with other treatments.

 

  · TURP is a surgical procedure that removes portions of the prostate gland through the penis. This procedure is used to relieve moderate to severe urinary symptoms caused by an enlarged prostate, a condition known as BPH. This procedure is also used in adjunct to a HIFU procedure when a prostate gland is larger than 40 cubic centimetres.

 

  · Proton beam therapy is a way to deliver radiation to tumors using tiny, sub-atomic particles (protons) instead of the photons used in conventional radiation treatment. Proton beam therapy uses new technology to accelerate atoms to approximately 93,000 miles per second, separating the protons from the atom. While moving at this high speed, the particles are “fired” at the patient’s tumor. These charged particles deliver a very high dose of radiation to the cancer but release very little radiation to the normal tissue in their path. In theory, this approach minimizes damage to healthy organs and structures surrounding the cancer. The radiation beams must pass through the skin, the bladder and the rectum on the way to the prostate gland, and once they reach the gland, they encounter normal prostate cells and the nerves that control penile erections. Damage to these tissues can lead to complications, including bladder problems, rectal leakage or bleeding, and erectile dysfunction.

 

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The following chart briefly summarizes the advantages and limitations/risks of each of the above-summarized treatments.

 

Procedure Advantages Limitations / Risks
Radical Prostatectomy (includes robot-assist) Certainty of removing whole gland Good outcomes data Invasive Hospital stay required Potential for post-surgical complications High cost
EBRT Non-invasive Collateral tissue damage Multiple visits required Recurrence High cost
Brachytherapy and High Dose Radiation Minimally invasive Image-guided Seed migration Collateral damage Potential for complications Recurrence
Cryoablation Minimally invasive Image-guided High rates of collateral tissue damage Potential for complications
HIFU Minimally invasive Image-guided Good outcomes data Trans-rectal delivery can result in complications Prostate volume must be less than 40 cubic centimetres Significant capital equipment cost Potential for issues arising out of overheating of tissue
Watchful Waiting (includes active surveillance) Non-invasive Multiple visits required Treatment delay
Proton Beam Therapy

Adjustable energy deposition

depth

Very costly equipment Limited data to support claims

 

Profound believes that use of the TULSA-PRO system as a tool to ablate prostate tissue can provides clinician and their patients with the following clinical advantages:

 

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  · Clinically shown to have millimeter accuracy designed to ablate prostate tissue while sparing nearby critical structures. Real time MR thermometry also ensures precision in ablation temperature, minimizing side effects that can occur from overheating;
     
  · Enables clinician to define the boundaries of the tissue to be ablated, whether the whole prostate or any of its subsections, to ensure customization of the needs of each patient;
     
  · Transurethral approach allows for ablation of even the largest prostates that may be 120 cubic centimetres or larger in size;
     
  · Potential to be a single treatment outpatient procedure with a rapid recovery time; and
     
  · Designed to be compatible with leading MRI platforms and could become part of a continuum of care from MR imaging diagnosis, MR guided biopsy to MR guided treatment.

 

Profound believes that the TULSA-PRO system may provide a treatment option that could fulfill an unmet clinical need by providing an ablation tool for prostate cancer while minimizing potential side effects. Profound believes that the TULSA-PRO system may overcome certain limitations of HIFU, such as complications associated with trans-rectal delivery and limitations relating to prostate size. As noted above, Profound believes that a transurethral (inside out) ablation approach with millimetre accuracy has advantages over HIFU in treating the whole gland safely.

 

SONALLEVE

 

The treatment choices for uterine fibroids usually depend on the symptoms of the patient, size of the fibroid, desire for future pregnancy, and preference of the treating gynecologist. Most common treatment options for uterine fibroids include: (1) hormonal medications including gonadotrophin-releasing hormone agonists (“Gn-RH”); (2) progesterone releasing intra-uterine devices; (3) surgical procedures such as hysterectomy and myomectomy; and (4) uterine artery embolization.

 

Profound believes that the SONALLEVE system may provide a treatment option that is more convenient and comfortable with less side effects than surgical procedures, such as hysterectomy or myomectomy.

 

Hormonal Medications

 

Fibroids can be treated with hormonal drugs, such as Gn-RH agonists. Gn-RH agonists can treat fibroids by blocking the production of estrogen and progesterone, putting women into a temporary postmenopausal state. As a result, menstruation stops, fibroids shrink and anemia is often alleviated. Other hormonal medications can also be utilized in patients with uterine fibroids. In many cases, however, medication may provide only temporary relief from the symptoms caused by fibroids. The symptoms often return when the patient stops taking the medication. Moreover, the side effects of some drugs may cause them to be unsuitable for some patients. Gn-RH agonists typically are used for no more than three to six months because long-term use can cause loss of bone.

 

Progesterone Releasing Intra-Uterine Devices

 

Progesterone releasing intra-uterine devices can relieve heavy bleeding caused by fibroids. However, these devices can only provide symptom relief and do not impact the fibroid itself.

 

 

 

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Uterine Artery Embolization

 

Uterine artery embolization involves injection of embolic agents into the arteries that supply the uterus, thereby cutting off the blood supply to the fibroids. Many women require at least one day of hospitalization and heavy pain medication. The prolonged pain may slow down the recovery period. Complications may occur if the blood supply to the ovaries or other organs is compromised.

 

Surgery

 

Surgical options for the treatment of uterine fibroids include hysterectomy and myomectomy. Hysterectomy is a surgical procedure which involves the complete removal of uterus with or without removal of the cervix, ovaries and fallopian tubes. Hysterectomy can be performed abdominally in an open, laparoscopic, robotic-assisted or vaginal method. Surgical options are associated with blood loss, hospital stays, long recovery times, pain and scarring. Post-operative complications can include infections, urinary incontinence, vaginal prolapse, fistula formation and chronic pain. After a hysterectomy, a woman will enter menopause and is infertile. Myomectomy is a surgical procedure to remove uterine fibroids from the wall of the uterus. The procedure can be performed with an abdominal incision, laparoscopic, or hysteroscopic.

 

Profound believes that use of the SONALLEVE system as a tool to ablate uterine fibroids can provide a clinician and his or her patients with the following clinical advantages:

 

  · Millimetre accuracy designed to ablate uterine fibroid while sparing nearby critical structures;

 

  · Outpatient procedure with rapid recovery time, not requiring general anesthesia; and

 

  · Non-invasive approach using thermal ablation designed to heat the uterine fibroid; and guided by real-time MRI with temperature (thermometry) feedback.

 

Profound believes that the SONALLEVE system may provide a treatment option that is more convenient and comfortable with less side effects than surgical procedures, such as hysterectomy or myomectomy.

 

3.6       Alliances and Partnerships

 

Philips

 

On July 31, 2017, Profound closed an asset and share purchase agreement (the “Philips Agreement”) with Philips in order to expand the existing collaboration and acquire Philip’s SONALLEVE MR-HIFU business (the “SONALLEVE MR-HIFU Transaction”).

 

Under the terms of the Philips Agreement, Philips transferred its SONALLEVE MR-HIFU assets to Profound for upfront consideration of 7,400,000 Common Shares. The Philips Agreement includes earn-out provisions that require Profound to pay additional consideration of: (i) 5% of Net Sales occurring after July 31, 2017 for the calendar year 2017; (ii) 6% of Net Sales occurring in the calendar year 2018; and (iii) 7% of Net Sales occurring in the calendar years 2019 and 2020. To the extent that the cumulative Net Sales for the full calendar years 2017 through 2020 exceeds €45,300,000, Profound will be required to pay an additional earn-out equal to 7% of Net Sales for the period beginning after July 31, 2017 through December 31, 2019.

 

“Net Sales” include the revenues (less any royalties) received by Profound or its affiliates or others on their behalf in respect of the sale or transfer of the SONALLEVE MR-HIFU, any subsequent, successor or next-generation treatment technology of which is primarily based on SONALLEVE MR-HIFU and which utilizes intellectual property rights acquired under the Philips Agreement or any future product that combines the technologies of SONALLEVE MR-HIFU and TULSA-PRO and any amounts received by Profound with respect to service agreements, but does not include any revenues with respect to consumables.

 

 

 

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As part of the SONALLEVE MR-HIFU Transaction, Philips and Profound expanded their non-exclusive strategic sales relationship for Profound’s TULSA-PRO system to include distribution of SONALLEVE MR-HIFU.

 

Siemens

 

On February 29, 2016, Profound entered into a strategic collaboration agreement with Siemens, aimed at advancing the commercial launch of Profound’s TULSA-PRO system. As of April 1, 2018, the TULSA-PRO is marketed by Siemens through its electronic catalog. Effective as of January 21, 2019, Profound entered into and replaced the original co-marketing and co-selling agreement with Siemens (the “New Agreement”). Under the New Agreement, all prior financial commitments and obligations owed to Siemens are released and replaced with a one-time fixed license fee of US$100,000 and a per annum payment per device interfaced to Siemens MRI scanner.

 

3.7       Regulatory

 

Profound has identified primary regulatory pathways to market its products in the United States, and European Union. The Company’s long-term goal is to expand its regulatory indications in Asia and other parts of the world where potential profitable business development opportunities warrant such investments.

 

Overview – United States Regulation

 

The FDA strictly regulates medical devices under the authority of the Federal Food, Drug and Cosmetic Act, or FFDCA, and the regulations promulgated under the FFDCA. The FFDCA and the implementing regulations govern, among other things, the following activities related to our products: preclinical and clinical testing, design, manufacture, safety, efficacy, labeling, storage, record keeping, sales and distribution, post-market adverse event reporting, recalls, and advertising and promotion.

 

The TULSA-PRO system, and any future medical devices that Profound may develop, will be classified by the FDA under the statutory framework described in the FFDCA. Medical devices are classified into three classes from lowest risk (Class I) to highest risk (Class III) and require FDA clearance or approval prior to commercial sale depending on the assigned risk class. In general, Class I devices are subject to only general controls and in some cases, to the 510(k) premarket clearance requirements. Class II devices generally require 510(k) premarket notification clearance. Class III devices require FDA approval of a premarket application, or PMA, prior to commercial distribution. Class III devices are those deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device. Rather than requiring PMA approval for novel, low-risk devices, FDA may allow de novo classification to Class II. 510(k) premarket notifications, de novo classification requests, and PMA applications are subject to the payment of user fees paid at the time of submission for FDA review.

 

Clinical trials are generally required to support a PMA application and are sometimes required for 510(k) clearance or de novo classification requests. Such trials, if conducted in the United States, generally require an investigational device exemption application, or IDE, approved in advance by the FDA for a specified number of patients and study sites, unless the product is deemed a non-significant risk device eligible for more abbreviated IDE requirements or an exemption applies. Clinical trials are subject to extensive monitoring, recordkeeping and reporting requirements as well as a requirement to submit information regarding certain clinical trials to a public database maintained by the National Institutes of Health. Clinical trials must be conducted under the oversight of an institutional review board, or IRB, for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices. Profound, the FDA or the IRB could suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance or approval to market the product in the United States. Following completion of a study, Profound would need to collect, analyze and present the data in an appropriate submission to the FDA, i.e., a 510(k) premarket notification, de novo classification request or a PMA. Even if a study is completed and submitted to the FDA, the results of Profound’s clinical testing may not demonstrate the safety and efficacy of the device, or may be equivocal or otherwise not be sufficient to obtain market clearance or approval of Profound’s product.

 

 

 

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After a device is placed on the market, numerous regulatory requirements apply. These include: product listing and establishment registration, Quality System Regulation, or QSR, labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indications, medical device reporting regulations, post-approval restrictions or conditions, post-market surveillance regulations, recall regulations and corrections or removals regulations.

 

Overview – European Union Regulation

 

In the European Union, legal manufacturers of medical devices, such as the TULSA-PRO system, are required to comply with the Essential Requirements (the “Essential Requirements”) laid down in Annex I to the Council Directive 93/42/EEC concerning medical devices, known as the Medical Devices Directive. Compliance with these requirements entitles us to affix the CE Mark to our medical devices, without which they cannot be commercialized in the European Union. To demonstrate compliance with the Essential Requirements and obtain the right to affix the CE Mark to our medical devices, we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low risk medical devices (Class I with no measuring function and which are not sterile), in relation to which the manufacturer may prepare an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the Essential Requirements, a conformity assessment procedure requires the intervention of a notified body. A notified body is an organization designated by the competent authorities of a European Union Member State to conduct conformity assessments. The notified body typically audits and examines products’ technical file and the quality system for the manufacture, design and final inspection of our devices before issuing a CE Certificate of Conformity demonstrating compliance with the relevant Essential Requirements. On the basis of these notified body CE Certificates of Conformity, the manufacturer is able to draw up an EC Declaration of Conformity and affix the CE Mark to the relevant device. The CE mark allows the device to be placed on the market throughout the EU.

 

Additionally, as part of the conformity assessment process, medical device manufacturers must carry out a clinical evaluation of their medical devices to verify that they comply with the relevant Essential Requirements covering safety and performance. A clinical evaluation is defined as a “methodologically sound ongoing procedure to collect, appraise and analyze clinical data pertaining to a medical device and to evaluate whether there is sufficient clinical evidence to confirm compliance with relevant essential requirements for safety and performance when using the device according to the manufacturer’s Instructions for Use”.

 

A clinical evaluation must address the intended purpose of the device, clinical performance, benefits that outweighs associated risks and the usability of the device.

 

This assessment must be based on clinical data, which can be obtained from (i) clinical studies conducted on the devices being assessed; (ii) scientific literature from similar devices whose equivalence with the assessed device can be demonstrated; or (iii) both clinical studies and scientific literature. As part of the conformity assessment procedure, depending on the type of devices, the notified body will review the manufacturer’s clinical evaluation for the medical device.

 

 

 

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In the European Union, Profound must establish a medical device vigilance system, including post-marketing surveillance and adverse event reporting procedures. Under this system, incidents occurring in the EU that might lead to or might have led to the death of a patient or user or of other persons or to a serious deterioration in their state of health must be reported to the relevant authorities of the European Union Member States. Manufacturers are required to take Field Safety Corrective Actions (“FSCAs”), including product recalls and withdrawals, to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. For class I devices and certain other devices, the manufacturer of the device or its authorized representative in the EU, must also register with the competent authority before placing the product on the market in the EU.

 

The advertising and promotion of Profound’s products in the European Union is subject to the provisions of the Medical Devices Directive, Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other national legislation in the individual European Union Member States governing the advertising and promotion of medical devices. These laws may limit or restrict the advertising and promotion of Profound’s products to the public and may impose limitations on Profound’s promotional activities with healthcare professionals.

 

In May 2017, the EU adopted a new Medical Devices Regulation (EU) 2017/745 (the “New MDR”), which will repeal and replace the Medical Device Directive effective May 26, 2020. The New MDR does not set out a substantially different regulatory system, but clearly envisages, among other things, stricter controls of medical devices, including strengthening of the conformity assessment procedures, increased expectations as regards clinical data for devices and pre-market regulatory review of high-risk devices. The New MDR also envisages greater control over notified bodies and their standards, increased transparency, more robust device vigilance requirements and clarification of the rules for clinical investigations. Under transitional provisions, medical devices with notified body certificates issued under the Medical Devices Directive prior to 26 May 2020 may continue to be placed on the market for the remaining validity of the certificate, until 27 May 2024 at the latest. After the expiry of any applicable transitional period, only devices that have been CE marked under the New MDR may be placed on the market in the EU.

 

Overview – Canadian Regulation

 

Health Canada’s Therapeutic Products Directorate (“TPD”) is the Canadian authority that regulates medical devices. In general, prior to being given market authorization to sell a medical device in Canada, a manufacturer must present substantive scientific evidence of a product’s safety, efficacy and quality as required by the Food and Drugs Act and the Medical Devices Regulations (“MDR”).

 

The Medical Devices Bureau (“MDB”) of the TPD applies the MDR through a combination of pre-market review, post-approval surveillance and quality systems in the manufacturing process. Medical devices are classified into one of four classes, where Class I represents the lowest risk and Class IV represents the highest risk. In order to perform investigational testing in Canada for a Class II, III or IV medical device, authorization for the testing must be granted by the MDB. A Medical Device License is a pre-market requirement for a Class II, III and IV medical device previously authorized for sale for investigational testing now to be offered for general/commercial sale. A Medical Device License is issued to the device manufacturer, provided the requirements of the MDR are met.

 

The Canadian Medical Device Conformity Assessment System is a system designed to implement the MDR requirements that medical devices be designed and manufactured under a registered quality management system (“QMS”). The MDR requires that medical devices be manufactured under a certified QMS that meets the criteria of the international standard, ISO 13485 Medical devices – Quality management systems – Requirements for regulatory purposes. Profound is manufacturing the TULSA-PRO system under a certified ISO 13485 Quality Management System.

 

 

 

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Regulatory Update

 

The TULSA-PRO system received CE Mark in April 2016 in the European Union; however, it is still an investigational device in the United States. Outside of the European Union, the device will require country-specific pre-market clearance or approval prior to launch.

 

In March 2014, Profound completed enrollment and treatment of 30 patients in the Phase I TULSA multi-jurisdictional safety and feasibility study. The procedure was delivered using our TULSA-PRO system, with the objective of determining its clinical safety and feasibility for prostate ablation in the primary treatment setting of patients with localized prostate cancer.

 

In October 2015, the results of Profound’s safety and feasibility study were accepted for publication in European Urology, the official journal of the European Association of Urology. Profound presented the successful 12-month Phase I clinical trial outcomes at the European Symposium on Focused Ultrasound Therapy. Upon completion of the study, the clinical data was also submitted to European regulatory authorities for regulatory clearance in Europe. On April 11, 2016, Profound announced that it was granted CE Mark approval for the commercial sale of the TULSA-PRO system in Europe and in other CE Mark jurisdictions. Profound completed its first commercial sale of the TULSA-PRO system in the same month.

 

In August 2016, Profound initiated the FDA approved IDE TACT Pivotal Trial. The TACT Pivotal Trial is designed to support a 510(k) premarket notification submission in the United States. This submission will seek clearance of the TULSA-PRO system for use in the ablation of prostate tissue.

 

Approval of an IDE by the FDA and completion of the TACT Pivotal Trial does not guarantee that the FDA will clear a 510(k) premarket notification, even if the study is successful. Profound will maintain ongoing communication with the FDA to mitigate risks related to the data collection during the TACT Pivotal Trial, working to ensure that the data will support a successful regulatory outcome based upon a successful trial.

 

The SONALLEVE system is available for sale in several jurisdictions. The SONALLEVE applications to treat uterine fibroids and bone metastasis are CE marked and available in the European Union and its member states. The uterine fibroids application is also available for sale in Canada. Philips Oy had registered SONALLEVE in several Middle East, North African, and South Asian countries. Profound is in a process of transferring existing regulatory registrations of SONALLEVE from Philips Oy to Profound. Profound is also in a process of assessing current clinical research network activities and the investigator lead studies in the United States to form regulatory strategies for several potential indications.

 

On October 26, 2017, Health Canada refused Medical Device License approval of TULSA-PRO requiring further clinical evidence beyond the Phase I data. Profound management is in the process of evaluating the additional requirements with Health Canada. From a commercialization strategy perspective, the Canadian market is not considered a priority in light of the relatively small size of the Canadian market.

 

3.8       Reimbursement

 

The Company’s ability to successfully commercialize products depends in large part on the extent to which coverage and reimbursement for such products and related treatments or procedures will be available from government health administration authorities, government and private health insurers, and other organizations or third-party payers. Pricing and reimbursement procedures and decisions vary from country to country. Many government health authorities and private payers condition payment on the cost-effectiveness of the product. Even if a device is CE marked or has received regulatory approval, there is no guarantee that third party payers will reimburse providers or patients for the cost of the device and related procedures. The availability of adequate coverage and reimbursement to hospitals and clinicians using our products therefore is critical to our ability to generate revenue.

 

 

 

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In 2017, Profound made reimbursement progress in Germany for TULSA-PRO. TULSA received a dedicated procedure code in Germany, securing an initial Diagnosis-Related Group payment of €3,963 starting in January 1, 2018. The Company believes that this reimbursement will help to offset approximately 40%-60% of the cost of the procedure and is working closely with clinicians and reimbursement consultant experts to enhance the reimbursement levels.

 

SONALLEVE currently does not have significant reimbursement in the European markets.

 

The Company is also pursuing reimbursement activities for the United States market and other key European markets.

 

ITEM 4. RISK FACTORS

 

The following sets forth certain risks and uncertainties that could have a material adverse effect on the Company’s business, financial condition and/or results of operations. Additional risks and uncertainties that the Company is not presently aware of, or that the Company currently deems immaterial, may also impair Profound’s business operations. The risks described below address the material factors that may affect Profound’s future operating results and financial performance.

 

Risk factors relating to Profound include, but are not limited to, the following:

 

Risk Factors Relating to Profound’s Business

 

Profound’s business is capital intensive and requires significant investment to conduct research and development, and to fund clinical and regulatory activities necessary to bring its products to market, which capital may not be available in amounts or on terms acceptable to us, if at all.

 

Profound’s business requires substantial capital investment in order to conduct the research and development and to fund the clinical and regulatory activities necessary to bring Profound’s products to market and to establish commercial manufacturing, marketing and sales capabilities. As of December 31, 2018, Profound had a cash balance of $30.8 million. Profound will need additional capital to fund its current business activities and expectations and to fund any significant expansion of operations. In order to secure financing, if available, it is likely that Profound would need to sell additional Common Shares or financial instruments that are exchangeable for or convertible into Common Shares and/or enter into development, distribution and/or licensing relationships, to fund all or a part of particular programs. Any future equity financing may also be dilutive to existing shareholders. Any future debt financing arrangements Profound enters into would likely contain restrictive covenants that would impose significant operating and, if any, financial restrictions on it. The availability of equity or debt financing will be affected by, among other things, the results of its research and development, its ability to obtain regulatory approvals, the market acceptance of Profound’s products, the state of the capital markets generally, strategic alliance agreements, and other relevant commercial considerations.

 

Any additional financing may not be obtained on favourable terms, if at all. If Profound cannot obtain adequate funding on reasonable terms, it may terminate or delay clinical trials, curtail significant regulatory initiatives, and/or sell or assign rights to its technologies, products or product candidates.

 

Profound’s cash outflows are expected to consist primarily of internal and external research and development expenditures to advance Profound’s product pipeline in addition to selling, cost of sales, general and administrative expenditures to support its corporate infrastructure. If Profound does not obtain additional capital, there may be substantial doubt about its ability to continue as a going concern and realize assets and pay liabilities as they become due. Depending upon the results of Profound’s research and development programs and the availability of financial resources, Profound could decide to accelerate, terminate or reduce certain projects, or commence new ones. Any failure on Profound’s part to raise additional funds on terms favourable to it or at all, may require it to significantly change or curtail current or planned operations in order to conserve cash until such time, if ever, that sufficient proceeds from operations are generated, and could result in Profound not taking advantage of business opportunities, in the termination or delay of clinical trials for one or more of its product candidates, in curtailment of its product development programs designed to identify new product candidates, in the sale or assignment of rights to Profound’s technologies, products or product candidates, and/or Profound’s inability to file an application for market clearance in the United States at all or in time to competitively market Profound’s products.

 

 

 

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Profound has a limited operating history.

 

Profound was formed in June 2008. Profound had no operations prior to then. As Profound continues the development of its products, Profound will continue to incur further losses. There can be no assurance that Profound will ever be able to achieve or sustain profitability or positive cash flow. Its ultimate success will depend on whether its products receives approval in the United States by the FDA and/or other applicable regulatory agencies of large markets and whether Profound is able to successfully market approved products. Profound cannot be certain that it will be able to receive approvals for any of its current or future products or that Profound will reach the level of sales and revenues necessary to achieve and sustain profitability. There is no assurance that Profound will be successful and the likelihood of success must be considered in light of its relatively early stage of operations.

 

Profound has limited experience in assembling and testing the TULSA-PRO and SONALLEVE systems and no experience in doing so on a commercial scale. To become profitable, Profound must assemble and test the TULSA-PRO and SONALLEVE systems in commercial quantities in compliance with regulatory requirements and at an acceptable cost. Increasing its capacity to assemble and test its products on a commercial scale will require Profound to improve internal efficiencies. Profound may encounter a number of difficulties in increasing its assembly and testing capacity, including:

 

  · managing production yields;

 

  · maintaining quality control and assurance;

 

  · providing component and service availability;

 

  · maintaining adequate control policies and procedures;

 

  · hiring and retaining qualified personnel; and

 

  · complying with state, provincial, federal and foreign regulations.

 

If Profound is unable to satisfy commercial demand for its products due to its inability to assemble and test the device, its ability to generate revenue would be impaired, market acceptance of its products could be adversely affected and customers may instead purchase or use its competitors’ products.

 

Profound has a history of losses and it may never achieve or maintain profitability.

 

Profound has a history of losses and it may never achieve or maintain profitability. Since inception, Profound has incurred significant losses each year and expects to incur significant operating losses as Profound continues product research and development and clinical trials and pursues regulatory approvals. There is no assurance that Profound will ever successfully commercialize its devices, or that profitability will ever be achieved or maintained. Even if profitability is achieved, Profound may not be able to sustain or increase profitability.

 

 

 

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Profound is a development-stage company that operates in an uncertain industry.

 

Profound is in the mid-stage of development. Clinical trial work and remaining validation work must still be completed before Profound’s devices are ready for use within all of the markets Profound has identified. Profound may fail to obtain regulatory approvals or clearance, enter clinical trials or commercialize the products. Profound does not know whether any of its potential product development efforts will prove to be effective, meet applicable regulatory standards, obtain the requisite regulatory approvals or be capable of being manufactured at a reasonable cost. If Profound’s devices are approved for sale, there can be no assurance that the devices will gain market acceptance among patients, physicians/clinicians and others in the medical community. A failure to gain market acceptance may adversely affect Profound’s revenues.

 

Profound has several loan agreements with financial and non-financial covenants. Failure to comply with any of the covenants could have a material adverse effect on its business.

 

Profound’s CIBC Loan Agreement contains financial and non-financial covenants, such as requirements that Profound comply with one or more financial ratios and change of control provisions. Complying with such covenants may at times necessitate that Profound must forego other favourable business opportunities, such as acquisitions. Moreover, Profound’s failure to comply with any of these covenants would likely constitute a default under such facilities and agreements and could give rise to an acceleration of some, if not all, of Profound’s then outstanding indebtedness, which would have a material adverse effect on its business. Profound’s indebtedness may grow as Profound’s business grows and/or Profound makes new acquisitions. If Profound’s income from operations underperforms, Profound may have to utilize cash flow or capital resources to fund its debt service payments. If Profound’s cash flow and capital resources are insufficient to service amounts owed under Profound’s current or any future indebtedness, as applicable, Profound may be forced to reduce or delay capital expenditures, dispose of assets, issue equity or incur additional debt to obtain necessary funds, or restructure its debt, any or all of which could have a material adverse effect on Profound’s business, financial condition and results of operations. In addition, Profound cannot guarantee that it would be able to take any of these actions on terms acceptable to it, or at all; that these actions would enable Profound to continue to satisfy its capital requirements; or that these actions would be permitted under the terms of Profound’s debt agreement. In particular, the CIBC Loan Agreement contains covenants with respect to capital expenditures and other indebtedness, maintaining minimum cash balances at all times and certain financial covenants. Profound has granted a security interest over all assets (including the shares owned by Profound). Events of default under the CIBC Loan Agreement include any covenant breach, failure to maintain minimum required net assets at all times, cross defaults to other agreements, a failure to comply with certain financial tests as to, a change of control of Profound. The enforcement by CIBC of its rights and remedies pursuant to the terms of the CIBC Loan Agreement and associated documentation could result in CIBC, its agent or any third party purchaser thereof owning all assets of Profound, including all share capital of Profound.

 

Clinical trials may not demonstrate a clinical benefit of Profound’s devices, may not support its product candidate claims or may result in the discovery of adverse side effects.

 

Before obtaining regulatory clearances or approvals for the commercial sale of the systems, Profound must demonstrate through clinical trials that the device is safe and effective for its intended use or, to receive 510(k) clearance in the United States, that the devices are substantially equivalent to an existing predicate device for its intended use. Obtaining product clearance or approval and conducting the requisite clinical trials is a long, expensive and uncertain process and is subject to delays and failures at any stage. There can be no assurance that clinical trials will be completed successfully within any specified period of time, if at all. Profound will be required to demonstrate through well-controlled clinical trials that its devices are sufficiently safe and effective for its intended use in the intended patient population before it can seek regulatory clearances or approvals for commercial sale. Data obtained from a clinical trial can be insufficient to demonstrate to the regulatory authority that the systems are sufficiently safe and effective for its intended use or that it is substantially equivalent to a predicate device. The data from a clinical trial may be inadequate to support clearance or approval of an application to the regulatory authorities for numerous reasons including, but not limited to:

 

 

 

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  · prevalence and severity of adverse events and other unforeseen safety issues;

 

  · governmental and regulatory delays or changes in regulatory requirements, policies or guidelines;

 

  · the interim or final results are insufficient, inconclusive or unfavourable as to the safety or efficacy of the device; and

 

  · the FDA or other regulatory authorities concluding that a clinical trial design is inadequate to demonstrate safety and efficacy.

 

In addition, a regulatory authority may disagree with Profound’s interpretation of the data from its clinical trials, or may find the clinical trial design, conduct or results inadequate to prove safety and efficacy for a particular use, or to demonstrate substantial equivalence to a predicate device, and may require it to pursue additional clinical trials, which would increase costs and could further delay clearance of the Profound device. The data Profound collects from its current trials and other trials may not be sufficient to support clearance or approval by the regulatory authorities of the systems. Regulatory authorities may refuse to grant exemptions to pursue additional clinical trials. Profound, the FDA or other regulatory authorities may suspend or terminate clinical trials at any time if it is determined at any time that patients may be or are being exposed to unacceptable health risks, including the risk of death, or that Profound’s devices are not manufactured under acceptable conditions or with acceptable quality. Further, success in preclinical studies and early clinical trials does not mean that future clinical trials will be successful because medical devices and/or treatment options in later stage clinical trials may fail to demonstrate sufficient safety and efficacy to the satisfaction of the FDA and other regulatory authorities despite having progressed through initial clinical trials. Profound cannot be sure that the later trials will replicate the results of prior trials.

 

Even if Profound’s clinical trials are completed as planned, there can be no certainty that trial results will support Profound’s product candidate claims or that the FDA or foreign authorities will agree with Profound’s conclusions regarding them or agree that they are adequate to support approval. The clinical trial process may fail to demonstrate that Profound’s product candidates are safe and effective for the proposed indicated uses, which could cause Profound to abandon a product candidate and may delay development of others. Any delay or termination of Profound’s clinical trials will delay the filing of its product submissions and, ultimately, its ability to commercialize the TULSA-PRO system and generate revenues. In addition, Profound’s clinical trials for the TULSA-PRO system involve a relatively small patient population. Because of the small sample size, their results may not be indicative of future results.

 

If the TULSA-PRO system does not prove to be safe and effective, or substantially equivalent to a predicate device, in clinical trials to the satisfaction of the relevant regulatory authorities, if the clinical studies do not support Profound’s product candidate claims or if they result in the discovery of adverse side effects, Profound’s business, financial condition and results of operation could be materially adversely affected.

 

If clinical trials are conducted in a manner that fails to meet all FDA regulations and requirements, the FDA may delay approval or the deficiencies may be so great that the FDA could refuse to accept all or part of Profound’s data or trigger enforcement action.

 

Clinical trials are generally required to support PMA approval and de novo classification and are sometimes required to support 510(k) clearance. Such trials, if conducted in the United States, generally require an IDE application to be approved in advance by the FDA for a specified number of patients and study sites, unless the product is deemed a non-significant risk device eligible for more abbreviated IDE requirements or the trials are exempted. As noted above, the FDA has granted IDE approval with respect to the Pivotal Trial. Clinical trials are subject to extensive monitoring, recordkeeping and reporting requirements. Clinical trials must be conducted under the oversight of an IRB for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices. To conduct a clinical trial, Profound must also obtain the patients’ informed consent that complies with FDA requirements, state and federal privacy regulations and human subject protection regulations. Profound, the FDA or the IRB could suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Additionally, Profound may decide at any time, for business or other reasons, to terminate a study. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device for its intended use or may otherwise not be sufficient to obtain FDA clearance or approval to market the product in the United States. Following completion of a study, Profound would need to collect, analyze and present the data in an appropriate submission to the FDA. Even if a study is completed and submitted to the FDA, the results of clinical testing may not demonstrate the safety and efficacy of the device for its intended use, or may be equivocal or otherwise not be sufficient to obtain clearance or approval of Profound’s product. In addition, the FDA may perform a bioresearch monitoring inspection of a study and if it finds deficiencies, Profound will need to expend resources to correct those deficiencies, which may delay clearance or approval or the deficiencies may be so great that the FDA could refuse to accept all or part of the data or could trigger enforcement action.

 

 

 

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If Profound is unable to obtain, or experiences significant delays in obtaining, FDA clearances or approvals or equivalent third country approvals for the TULSA-PRO and SONALLEVE systems or future products or product enhancements, Profound’s ability to commercially distribute and market its products will suffer.

 

Profound’s products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities and notified bodies. Profound’s devices have not received regulatory clearance or approval for commercial sale in the United States or any other markets other than the European Union. The process of obtaining FDA clearances or approvals, or equivalent third country approvals to market a medical device can be costly and time consuming, and Profound may not be able to obtain these clearances or approvals on a timely basis, if at all. Profound expects to eventually generate a significant portion of its revenues from sales of the systems, but may be unable to do so if the systems do not prove to be safe and effective for its intended use in clinical trials to the satisfaction of the relevant regulatory authorities in the United States, Asia or other countries. No assurance can be given that Profound’s devices will prove to be safe and effective in clinical trials or that it will receive regulatory approval. Furthermore, no assurance can be given that current regulations relating to regulatory approval will not change or become more stringent.

 

Profound believes, based on non-binding discussions with the FDA, that there are suitable predicate devices for the TULSA-PRO system for use in the ablation of prostate tissue. As such, Profound intends to follow a 510(k) path for regulatory clearance of its device. Based on its discussions with the FDA, Profound has determined it will need to submit clinical data with its 510(k) premarket notification to support this indication. Profound will collect data from the 115 patient TACT Pivotal Trial designed to demonstrate substantial equivalence for the intended use of device. There is no guarantee that the FDA will clear a submission for 510(k) clearance for the device. Profound is also in discussion with the FDA regarding SONALLEVE and has submitted an application requesting designation of a regulatory pathway.

 

Profound may not obtain the necessary regulatory clearances, approvals, or equivalent third country approvals to market the systems or future products in the United States, the European Union, Canada or elsewhere. Any delay in, or failure to receive or maintain, regulatory clearance, approval or other products under development would adversely affect Profound’s ability to utilize its technology, thereby adversely affecting operations and could prevent the Company from generating revenue from these products or achieving profitability. Any failure to obtain regulatory approval would materially adversely affect Profound’s business, financial condition and results of operations.

 

Even after regulatory approvals or clearance is obtained, successful commercialization will depend largely upon the cost of the device and the availability of coverage and reimbursement for the procedure and medical costs associated with the use of the device.

 

 

 

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Even after regulatory approvals or clearances are obtained, successful commercialization of a device depends largely upon the cost of the device and the availability of coverage and reimbursement for the device and medical procedure associated with its use from third-party payers, such as government healthcare programs, private health insurers and other organizations, such as health maintenance organizations and managed care organizations. Profound expects that its devices will be purchased by health-care providers, including clinics and hospitals, and that these providers will subsequently bill various third-party payers or will be responsible for covering the costs of the device through the provider’s operating budget.

 

Third-party payers carefully review and increasingly challenge the prices charged for medical devices, procedures and services. Government healthcare programs in the United States and the European Union may reimburse certain providers at a pre-determined all-inclusive amount for all the costs associated with a particular procedure performed or course of treatment, based on such factors as the patient’s principal diagnosis, age and severity or complexity. Similarly, the surgeon or physician may be reimbursed at a pre-determined amount based on the procedure performed, and without taking into consideration the actual costs incurred, including the actual cost of the specific devices used.

 

New products are being increasingly scrutinized with respect to whether or not they will be covered at all by the various health plans and at what level of reimbursement. In some instances, economic research studies are and will be required to demonstrate whether Profound’s products and approach are superior from a long term cost containment standpoint. Third-party payers may determine that Profound’s products are not medically necessary, not cost-effective, experimental, or primarily intended for non-approved indications. Such determinations could have a material adverse effect on Profound’s business, results of operations and financial condition.

 

Further, healthcare reform measures may be adopted in the future that may impose more rigorous coverage and reimbursement standards. Profound is unable to predict what, if any, additional legislation or regulation impacting the healthcare industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on Profound’s business.

 

Profound relies on certain distributors for the sale and distribution of its products. If the distributors are unable or unwilling to promote and deliver the products to Profound’s customers, the Company’s financial condition and operating results could be materially impacted.

 

Profound distributes its products through distribution partnerships with multiple distributors, including Philips, Knight and Siemens. In the future, Profound expects to enter into distribution partnerships with additional distributors world-wide for the sale and distribution of its products. If the distributors are unable or unwilling to promote and deliver the products to Profound’s customers, the Company’s business, financial condition and operating results could be materially impacted. Additionally, if Profound decides to terminate any of its existing distribution partnership, there can be no assurance that the Company will be able to generate alternative distribution channels rapidly enough to prevent disruptions in sales generated in those markets or will be successful in managing the nuances of those markets to ensure the success of the Company’s products in those markets.

 

Profound’s devices may not achieve or maintain expected levels of market acceptance.

 

Even if Profound is able to obtain regulatory approvals or clearances for its devices, the success of those products is dependent upon achieving and maintaining market acceptance. New medical devices that appear promising in development may fail to reach the market or may have only limited or no commercial success. Levels of market acceptance for Profound’s products could be impacted by several factors, many of which are not within Profound’s control, including but not limited to:

 

 

 

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  · safety, efficacy, convenience and cost-effectiveness of Profound’s devices as a method of ablation of prostate tissue, uterine fibroids, bone metastases or ultimately (pending the relevant approvals) treatment for localized prostate cancer, uterine fibroids and bone metastases, compared to products of Profound’s competitors or other forms of treatment;
     
  · scope of approved uses and marketing approval or clearance;
     
  · timing of market approvals and market entry;
     
  · difficulty in, or excessive costs to, manufacture;
     
  · infringement or alleged infringement of the patents or intellectual property rights of others;
     
  · availability of alternative products from Profound’s competitors;
     
  · acceptance of the price of Profound’s products relative to those of its competitors;
     
  · acceptance and adoption of its products by physicians/clinicians and the medical community;
     
  · the availability of training necessary for proficient use of Profound’s products, as well as willingness of physicians to participate in such training;
     
  · the ability of Profound’s sales force to sell enough units at the prices required to meet its revenue targets;
     
  · the perceived risks generally associated with the use of new products and procedures;
     
  · the placement of Profound’s products in treatment guidelines published by leading medical organizations;
     
  · the size and growth rate of the market for Profound’s products in the major geographies in which it operates or intends to operate;
     
  · ability to market Profound’s products effectively at the patient, physician/clinician and medical community level; and
     
  · acceptance of Profound’s products by government and third-party payers for adequate coverage and reimbursement.

 

In addition, the success of any new product will depend on Profound’s ability to either successfully build Profound’s in-house sales capabilities or to secure new, or to realize the benefits of future arrangements with, third-party marketing or distribution partners. Seeking out, evaluating and negotiating marketing or distribution agreements may involve the commitment of substantial time and effort and may not ultimately result in an agreement. In addition, the third-party marketing or distribution partner may not be as successful in promoting Profound’s products as anticipated. If Profound is unable to commercialize new products successfully, whether through a failure to achieve market acceptance, a failure to build Profound’s own in-house sales capabilities, a failure to secure new marketing partners or to realize the benefits of Profound’s arrangements with existing marketing partners, there may be a material adverse effect on Profound’s business, financial condition and results of operations and it could cause the market value of the Common Shares to decline.

 

In addition, by the time any products are ready to be commercialized, the proposed market for these products may have changed. Profound’s estimates of the number of patients who have received or might have been candidates to use a specific product may not accurately reflect the true market or market prices for such products or the extent to which such products, if successfully developed, will actually be used by patients. Profound’s failure to successfully introduce and market Profound’s products that are under development would have a material adverse effect on Profound’s business, financial condition, and results of operations.

 

Even if Profound’s products are approved by regulatory authorities, if Profound or its suppliers fail to comply with ongoing FDA or other foreign regulatory authority requirements or if Profound experiences unanticipated problems with its products, it could be subject to restrictions or withdrawal from the market.

 

 

 

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Any product for which Profound obtains clearance or approval, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and other domestic and foreign regulatory bodies. In particular, Profound and its suppliers are required to comply with the FDA’s QSR and International Standards Organization regulations for the manufacture of products and other regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any product for which Profound obtains clearance or approval. Regulatory bodies, such as the FDA, enforce the QSR and other regulations through periodic inspections. Profound and its contract manufacturers have been, and anticipate in the future being, subject to such inspections.

 

The failure by Profound or one of its suppliers to comply with applicable statutes and regulations administered by the FDA and other regulatory bodies, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things, any of the following enforcement actions:

 

  · untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
     
  · unanticipated expenditures to address or defend such actions;
     
  · customer notifications for repair, replacement or refunds;
     
  · recall, withdrawal, detention or seizure of Profound’s products;
     
  · operating restrictions or partial suspension or total shutdown of production;
     
  · refusing or delaying Profound’s requests for 510(k) clearance or premarket approval of new products or modified products;
     
  · operating restrictions;
     
  · withdrawing 510(k) clearances or PMA approvals that have already been granted;
     
  · suspension, variation, or withdrawal of Profound’s CE Certificates of Conformity;
     
  · refusals to allow imports and/or to issue documentation necessary to facilitate exports;
     
  · refusal to grant export approval for Profound’s product; or
     
  · imposition of civil, administrative or criminal penalties.

 

If any of these actions were to occur, it would harm Profound’s reputation and cause product sales and profitability to suffer and may prevent Profound from generating revenue. Furthermore, key component suppliers may not currently be, or may not continue to be, in compliance with all applicable regulatory requirements, which could result in Profound’s failure to produce its products on a timely basis and in the required quantities, if at all.

 

Even if regulatory clearance or approval of a product is granted, such clearance or approval may be subject to limitations on the intended uses for which the product may be marketed and reduce Profound’s potential to successfully commercialize the product and generate revenue from the product. If the FDA determines that Profound’s promotional materials, labeling, training or other marketing or educational activities constitute promotion of an uncleared or unapproved use, it could request that Profound cease or modify training or promotional materials or subject Profound to regulatory enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider Profound’s training or other promotional materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.

 

In addition, Profound may be required to conduct costly post-market testing and surveillance to monitor the safety or effectiveness of its products, and Profound must comply with medical device reporting requirements, including the reporting of certain adverse events and malfunctions related to its products. Later discovery of previously unknown problems with its products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as QSR, may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device Profound manufactures or distributes, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties which would have a material adverse effect on Profound’s business, financial condition, and results of operations.

 

 

 

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Profound may not be able to achieve the benefits of the SONALLEVE MR-HIFU Transaction.

 

On July 31, 2017, the Company closed the SONALLEVE MR-HIFU Transaction. Achieving the benefits of the SONALLEVE MR-HIFU Transaction depends in part on successfully consolidating functions and integrating operations and procedures of the business acquired pursuant to the SONALLEVE MR-HIFU Transaction with those of the Company in a timely and efficient manner, as well as the Company’s ability to realize the anticipated growth opportunities and synergies from combining the acquired business and operations with those of Profound. The integration of the acquired business and transition of manufacturing and installation services will require substantial management effort, time and resources and may divert management’s focus from other strategic opportunities and operational matters.

 

Profound relies on third parties to manufacture components of its system and Profound cannot be certain that manufacturing sources will continue to be available or that Profound can continue to outsource the manufacturing of Profound’s devices on reasonable or acceptable terms.

 

The TULSA-PRO and SONALLEVE systems consists of common electronic components, proprietary capital equipment and proprietary disposables. Profound purchases standard electronic components from a number of third party vendors. The capital equipment consists of custom system electronics, treatment delivery console, fluid circuits and an MRI compatible robotic positioning system. Printed circuit boards and assemblies and custom mechanical parts are outsourced to approved suppliers. Capital equipment is assembled and tested in-house.

 

TULSA-PRO disposables consist of the UA, an endo-rectal cooling device and associated accessories. Due to sterility requirements used in connection with the TULSA-PRO system, the UA must be manufactured under clean conditions. Profound has developed proprietary automated manufacturing test equipment to improve quality and provide scalability as demand grows and is assembled and tested in-house. The endo-rectal cooling device, which does not require sterilization, is assembled and tested in-house.

 

Profound cannot be certain that manufacturing sources will continue to be available or that Profound can continue to outsource the manufacturing of Profound’s devices on reasonable or acceptable terms. Any loss of a manufacturer or any difficulties that could arise in the manufacturing process could significantly affect Profound’s supply of devices. If Profound is unable to supply sufficient amounts of its products to its customers on a timely basis, Profound’s market share could decrease and, correspondingly, Profound’s revenues would decrease.

 

If Profound does not negotiate long-term contracts, its suppliers will likely not be required to provide Profound with any guaranteed minimum production levels. As a result, there can be no assurance that Profound will be able to obtain sufficient quantities of product in the future. In addition, Profound’s reliance on third-party manufacturers and suppliers involves a number of risks, including, among other things:

 

 

 

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  · contract manufacturers or suppliers may fail to comply with regulatory requirements or make errors in manufacturing that could negatively affect the efficacy or safety of Profound’s products or cause delays in shipments of products;
     
  · Profound or its contract manufacturers and suppliers may not be able to respond to unanticipated changes in customer orders, and if orders do not match forecasts, Profound’s suppliers may have excess or inadequate inventory of materials and components;
     
  · Profound or its contract manufacturers and suppliers may be subject to price fluctuations due to a lack of long-term supply arrangements for key components;
     
  · Profound or its contract manufacturers and suppliers may lose access to critical services and components, resulting in an interruption in the manufacture, assembly and shipment of Profound’s products;
     
  · Profound may experience delays in delivery by its contract manufacturers and suppliers due to changes in demand from Profound or their other customers;
     
  · fluctuations in demand for products that Profound’s contract manufacturers and suppliers manufacture for others may affect their ability or willingness to deliver components in a timely manner;
     
  · suppliers or contract manufacturers may wish to discontinue supplying components or services for risk management reasons;
     
  · Profound may not be able to find new or alternative components or reconfigure its system and manufacturing processes in a timely manner if the necessary components become unavailable; and
     
  · contract manufacturers and suppliers may encounter financial hardships unrelated to Profound’s demand, which could inhibit their ability to fulfill orders and meet Profound’s requirements.

 

If any of these risks materialize, it could significantly increase costs and impact Profound’s ability to meet demand for its products. If Profound is unable to satisfy commercial demand for the TULSA-PRO and SONALLEVE systems in a timely manner, its ability to generate revenue would be impaired, market acceptance of its products could be adversely affected, and customers may instead purchase or use competitors’ products.

 

Profound’s contract manufacturers must comply with applicable FDA, EU, Health Canada and other applicable foreign regulations, which include quality control and quality assurance requirements, as well as the corresponding maintenance of records and documentation and manufacture of devices according to the specifications contained in the applicable regulatory file. If Profound’s contract manufacturers do not or cannot comply with these requirements, the availability of devices could be reduced.

 

If Profound encounters delays or difficulties with contract manufacturers, delivery of Profound’s products could be delayed. In addition, Profound could be forced to secure new or alternative contract manufacturers or suppliers. Securing a replacement contract manufacturer or supplier could be difficult. The introduction of new or alternative manufacturers or suppliers also may require design changes to Profound’s products that are subject to FDA and other regulatory clearances or approvals. Similarly, in the European Union, the introduction of new or alternative manufacturers or suppliers could be considered to constitute a substantial change to Profound’s quality system or result in design changes to Profound’s products which could affect compliance with the Essential Requirements. These changes must be notified to Profound’s notified body before implementation. The notified body will then assess the changes and verify whether they affect the products’ conformity with the Essential Requirements. If the assessment is favourable the notified body will issue a new CE Certificate of Conformity or an addendum to the existing certificates attesting compliance with the Essential Requirements. Profound may also be required to assess the new manufacturer’s compliance with all applicable regulations and guidelines, which could further impede Profound’s ability to manufacture its products in a timely manner. As a result, Profound could incur increased production costs, experience delays in deliveries of Profound’s products, suffer damage to our reputation, and experience a material adverse effect on Profound’s business, financial condition, and results of operations.

 

 

 

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Profound depends on single-source suppliers for some of the components in its products. The loss of these suppliers could prevent or delay shipments of Profound’s products or delay its clinical trials or otherwise adversely affect Profound’s business.

 

Profound intends to, at least initially, rely on a single source for the manufacture of the UA associated accessories and its TULSA-PRO device. Establishing additional or replacement suppliers for these components will take a substantial amount of time and could result in increased costs and impair Profound’s ability to produce its products, which would adversely impact Profound’s business, operating results and prospects. In addition, some of Profound’s products, which are acquired from third parties, are highly technical and are required to meet exacting specifications, and any quality control problems that Profound experiences with respect to the products supplied by third-party vendors could adversely and materially affect Profound’s reputation, its attempts to complete its clinical trials or commercialization of its products and adversely and materially affect Profound’s business, operating results and prospects. Profound may also have difficulty obtaining similar components from other suppliers that are acceptable to the FDA or foreign regulatory authorities and the failure of Profound’s suppliers to comply with strictly enforced regulatory requirements could expose us to regulatory action including, warning letters, product recalls, termination of distribution, product seizures, or civil penalties.

 

Profound’s reliance on third-party manufacturers and other third parties in other aspects of its business may reduce any profits earned from Profound’s products and may negatively affect future product development.

 

Profound currently intends to partner with one or more companies to commercialize products manufactured by QSR compliant and FDA registered contract manufacturers and, in connection therewith, Profound will likely be required to enter into manufacturing, licensing and distribution arrangements with third parties. These arrangements will likely reduce Profound’s product profit margins. In addition, the identification of new product candidates for development may require the entering into licensing or other collaborative agreements with others, including medical device and pharmaceutical companies and research institutions. These collaborative agreements may require the payment of license fees, milestone payments or royalties or granting rights, including marketing rights, to one or more parties. Any such arrangement will reduce Profound’s profits. Moreover, these arrangements may contain covenants restricting product development or business efforts in the future.

 

Profound has designed the TULSA-PRO system to be capable of integration with some of the MRI scanners from two of the major MRI manufacturers and the SONALLEVE system with one MRI manufacturer. As not all hospital and treatment facilities utilize MRIs that are compatible with the TULSA-PRO and SONALLEVE, such facilities would be required to acquire compatible MRI technology, which may involve additional capital expenditure and which could restrict or delay utilization of the systems by such facilities. Accordingly, Profound intends to expand compatibility of the systems with other MRIs in the future.

 

Profound may experience scaling issues due to growth.

 

As Profound expands its manufacturing capabilities in order to meet its growth objectives, it may not be able to produce sufficient quantities of products or maintain consistency between differing lots of consumables. If Profound encounters difficulties in scaling its manufacturing operations as a result of, among other things, quality control and quality assurance issues and availability of components and raw material supplies, it will likely experience reduced sales of its products, increased repair or re-engineering costs due to product returns, defects and increased expenses due to switching to alternate suppliers, and reputational damage, any of which would reduce revenues and gross margins. In addition, Profound’s ability to operate such facilities successfully will greatly depend on its ability to hire, train and retain an adequate number of employees, in particular employees with the appropriate level of knowledge, background and skills. Profound will compete with several other medical device companies to hire these skilled employees. Should Profound be unable to hire such employees, and an adequate number of them, its business and financial results could be negatively impacted.

 

 

 

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Profound’s reliance on its suppliers and contract manufacturers could harm its ability to meet demand for its product in a timely and cost effective manner. Profound’s reliance on suppliers and contract manufacturers exposes it to risks including, among other things:

 

  · the possibility that one or more suppliers or assemblers that do not have supply agreements with Profound could terminate their services at any time without penalty;
     
  · natural disasters that impact suppliers;
     
  · the potential obsolescence of, and/or inability of suppliers to obtain, required components;
     
  · the potential delays and expenses of seeking alternate sources of supply or manufacturing services;
     
  · the inability to qualify alternate sources without impacting performance claims of products;
     
  · reduced control over pricing, quality and timely delivery due to the difficulties in switching to alternate suppliers or assemblers; and
     
  · increases in prices of raw materials and key components.

 

If any of these risks materialize, it could significantly increase Profound’s costs and impact Profound’s ability to meet demand for its products. If Profound is unable to satisfy commercial demand for the systems, Profound’s ability to generate revenue would be impaired, market acceptance of Profound’s products could be adversely affected, commercialization could be delayed, and customers may instead purchase or use its competitors’ products. In addition, Profound could be forced to secure new or alternative contract manufacturers or suppliers. Securing a replacement contract manufacturer or supplier could be difficult. The introduction of new or alternative manufacturers or suppliers also may require design changes to the systems that are subject to FDA and other regulatory clearances or approvals. Profound may also be required to assess the new manufacturer’s compliance with all applicable regulations and guidelines, which could further impede Profound’s ability to manufacture its products in a timely manner. As a result, Profound could incur increased production costs, experience delays in deliveries of its products, suffer damage to its reputation, and experience a material adverse effect on Profound’s business, financial condition, and results of operations.

 

If Profound’s facilities are damaged or destroyed, it may experience delays that could negatively impact its revenues.

 

Profound’s facilities may be affected by natural or man-made disasters. If Profound’s facilities were affected by a disaster, it would be forced to rely on third party manufacturers or to set up production at another manufacturing facility. In such an event, Profound might not be able to find a suitable alternate manufacturer or might face significant delays in manufacturing which would prevent it from being able to sell its products. In addition, Profound’s insurance may not be sufficient to cover all of the potential losses and may not continue to be available to it on acceptable terms, or at all.

 

Profound may rely on third parties to perform clinical trial planning and execution, regulatory and sales and marketing services for its device.

 

Profound may rely on third parties to provide clinical trial planning and execution, regulatory and sales and marketing services for its device in certain geographic regions. Profound may be unable to find suitable partners, external consultants or service providers to provide such services outside of Canada or such arrangements may not be available on commercially reasonable terms. There can be no assurances that Profound will be able to enter into manufacturing or other collaborative arrangements with third parties on acceptable terms, if at all. Further, Profound may engage third parties that may cease to be able to provide these services, or may not provide these services in a timely or professional manner. Accordingly, Profound may not be able to successfully manage such services, execute clinical trials or generate revenues from its devices in such regions, which may result in decreases in sales. If Profound fails to establish such arrangements when, and as necessary, it could be required to undertake these activities at its own expense, which would significantly increase capital requirements and may delay the development, manufacturing and commercialization of Profound’s product. If Profound is unable to address these capital requirements, it would likely be forced to sell or abandon its business. Additionally, any delay or interruption in the process or in payment could result in a delay delivering product to its customers, which could have a material adverse effect on Profound’s business, financial condition and operating results.

 

 

 

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These arrangements will likely reduce Profound’s product profit margins. In addition, the identification of new product candidates for development may require that Profound enter into licensing or other collaborative agreements with others, including medical device and pharmaceutical companies and research institutions. These collaborative agreements may require that Profound pay license fees, make milestone payments or pay royalties or grant rights, including marketing rights, to one or more parties. Any such arrangement will reduce Profound’s profits. Moreover, these arrangements may contain covenants restricting Profound’s product development or business efforts in the future.

 

Profound’s products may in the future be subject to product recalls that could harm its reputation, business and financial results.

 

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious adverse health consequences or death. For voluntary recalls, the FDA requires that manufacturers report to FDA within 10 working days after the recall is initiated if the recall was initiated to reduce a risk to health posed by the device or to remedy a violation of the FFDCA caused by the device which may present a risk to health. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. Profound may initiate voluntary recalls involving its products in the future that it determines do not require notification of the FDA. If the FDA disagrees with Profound’s determinations, they could require Profound to report those actions as recalls. A future recall announcement could harm Profound’s reputation with customers and negatively affect its sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.

 

In the European Union, incidents must be reported to the relevant authorities of the European Union Member States, and manufacturers are required to take FSCAs, to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. An incident is defined as any malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or might have led to the death of a patient or user or of other persons or to a serious deterioration in their state of health. An FSCA may include the recall, modification, exchange, destruction or retrofitting of the device. In addition, other foreign governmental bodies have the authority to require the recall of products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by Profound or one of its distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of the TULSA-PRO system, SONALLEVE system or any future products would divert managerial and financial resources and have an adverse effect on its financial condition and results of operations.

 

If Profound’s products cause or contribute to a death or a serious injury, or malfunction in certain ways, they will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.

 

 

 

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Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that reasonably suggests that one of their marketed devices may have caused or contributed to a death or serious injury or has malfunctioned and that the device or a similar device marketed by the manufacturer would likely cause or contribute to death or serious injury if the malfunction were to recur. If Profound fails to report these events to the FDA within the required timeframes, or at all, FDA could take enforcement action against it. Similar enforcement action could be taken by the competent authorities in the European Union if Profound does not comply with its medical devices vigilance obligations. In addition, Profound’s notified body could decide to suspend or withdraw Profound’s CE Certificates of Conformity. Any such adverse event involving the TULSA-PRO or SONALLEVE systems also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection, audit or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of personnel time and capital, distract management from operating the business and may harm the Profound’s reputation and could have a material adverse effect on Profound’s business, financial condition and operating results.

 

Profound may be subject to fines, penalties or injunctions if it is determined to be promoting the use of its products for unapproved or “off-label” uses and use of product in unapproved circumstances could expose Profound to liabilities.

 

If the FDA determines Profound is promoting the use of its products for uncleared or unapproved, or “off-label” uses, the FDA could require Profound to stop promoting its products for such uses until Profound obtains FDA clearance or approval for them. In addition, if the FDA determines that Profound’s promotional materials or training constitutes promotion of an uncleared or unapproved use, it could request that Profound modify its training or promotional materials or subject Profound to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider Profound’s promotional or training materials to constitute promotion of an uncleared or unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, Profound’s reputation could be damaged and adoption of the products would be impaired.

 

Physicians/clinicians, however, in most jurisdictions, can use these products in ways or circumstances other than those strictly within the scope of the regulatory clearance or approval. Although the product training Profound will provide to physicians and other health care professionals will be limited to cleared/approved uses or for clinical trials, no assurance can be given that claims might not be asserted against Profound if its products are used in ways or for procedures that are not approved.

 

The markets in which Profound proposes to operate are highly competitive and subject to rapid and significant technological change.

 

Profound’s devices will face competition from existing and new prostate ablation, uterine fibroids ablation, palliative pain treatment of bone metastases and prostate cancer treatment options. Many of Profound’s competitors have greater financial resources and development and selling and marketing capabilities. Profound may face further competition from medical equipment/supply companies that focus their efforts on developing and marketing products that are similar in nature to its products, but that in some instances offer improvements of Profound’s devices. Profound’s competitors may succeed in developing technologies and products that are more effective or less expensive to use than Profound’s devices. These developments could render Profound’s medical devices uncompetitive, which would have a material adverse effect on Profound’s business, financial condition and operating results. In addition, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products. They may also establish exclusive collaborative or licensing relationships with Profound’s competitors.

 

 

 

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Further, this industry is also subject to changing industry standards, market trends and customer preferences and to competitive pressures which can, among other things, necessitate revisions in pricing strategies, price reductions and reduced profit margins. The success of Profound will depend, in part, on its ability to secure technological superiority in its product and operations and maintain such superiority in the face of new technologies. No assurance can be given that further modification of product offerings of Profound will not be required in order to meet demands or to make changes necessitated by developments made by competitors that might render services and operations of Profound less competitive. The future success of Profound will be influenced by its ability to continue to adapt its device. Although Profound has committed resources to research and develop its device, there can be no assurance that these efforts will be successful.

 

Market may not accept Profound’s products and may continue to use the incumbent products.

 

The market may not accept Profound’s products and may continue to use the incumbent products. The TULSA-PRO and SONALLEVE systems may not be adopted as Profound expects and its treatment may not be considered an advantage by some or all physicians/clinicians, adversely affecting Profound’s ability to see its products become profitable. Many of Profound’s competitors have more resources and will be more effective at commercializing current and future products that compete with the TULSA-PRO and SONALLEVE systems.

 

Profound depends on key managerial personnel for its continued success.

 

Profound is highly dependent upon its small team of managerial personnel, particularly that of its Chief Executive Officer, Arun Menawat. Profound’s anticipated growth will require additional expertise and the addition of new qualified personnel. There is intense competition for qualified personnel in the medical device field. Therefore, Profound may not be able to attract and retain the qualified personnel necessary for the development of Profound’s business. Profound must continue to retain, motivate and recruit executives and other key employees. The loss of the services of existing personnel, as well as the failure to recruit additional key managerial personnel in a timely manner, would harm Profound’s business development programs, and Profound’s ability to manage day-to-day operations, attract collaboration partners, attract and retain other employees, generate revenues, and could have a material adverse impact on Profound’s business, financial condition and results of operations.

 

Profound’s good labour relations may not continue.

 

14 of Profound’s employees in Vantaa, Finland are unionized. Currently, labour relations are good; however, the maintenance of a productive and efficient labour environment cannot be assured. If any of Profound’s employees at its other manufacturing facilities unionize in the future, or if protracted and extensive work stoppages occur, labour disruptions such as strikes or lockouts could have a material adverse effect on Profound’s business and financial results.

 

The continuing development of Profound’s devices depends upon Profound maintaining strong relationships with physicians/clinicians.

 

If Profound fails to maintain positive working relationships with physicians/clinicians, Profound’s devices may not be developed and marketed in line with the needs and expectations of the professionals who Profound expects will use and support the devices, which could cause a decline in earnings and profitability. The research, development, marketing and sales of the devices are dependent upon Profound maintaining working relationships with physicians/clinicians. Profound relies on these professionals to provide considerable knowledge and experience regarding the development, marketing and sale of the devices. Physicians/clinicians assist Profound as researchers, marketing and product consultants, inventors and public speakers. If Profound is unable to maintain strong relationships with these professionals and continues to receive their advice and input, the development and marketing of the device could suffer, which could have a material adverse effect on Profound’s business, financial condition and operating results.

 

 

 

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Research and development of products carries substantial technical risk and Profound may not be able to successfully commercialize its current and future products.

 

Future growth will depend on, among other factors, Profound’s ability to successfully develop new products and make product improvements to meet evolving market needs. Profound may not be able to successfully commercialize future products and as a consequence, its ability to expand the product portfolio to generate new revenue opportunities may be severely limited. Although Profound believes it has the scientific and technical resources available to improve its products and develop new products, future products will nevertheless be subject to the risks of failure inherent in the development of products based on innovative technologies. There can be no assurance that Profound will be able to successfully develop future products and tests, which would prevent Profound from introducing new products in the marketplace and negatively impact its ability to grow revenues and become profitable.

 

Profound may not achieve its development goals in time frames announced and expected.

 

Profound sets goals for and makes public statements regarding the timing of the accomplishment of objectives material to its success, such as the commencement and completion of clinical trials and anticipated regulatory submission and approval dates and time of product launches. The actual timing of these events can vary dramatically due to factors such as delays or failures in Profound’s clinical trials or the uncertainties inherent in the arrangements sufficient to commercialize its products. There can be no assurance that Profound will make regulatory submissions or receive regulatory approvals or reimbursement codes and other approvals as planned. Failure to achieve one or more of these milestones would have a material adverse effect on Profound’s business, financial conditions and results of operations.

 

Profound’s business is subject to limitations imposed by government regulations.

 

The preclinical and clinical trials of any products developed by Profound and the manufacturing, labeling, sale, distribution, export or import, marketing, advertising and promotion of any of those products are subject to rigorous regulation by federal, provincial, state and local governmental authorities. Profound’s medical devices are principally regulated in the United States by the FDA, in the European Union by the competent authorities of the EU member states, in Canada by Health Canada (particularly, the Therapeutic Products Directorate), and by other similar regulatory authorities in other jurisdictions. Government regulation substantially increases the cost and risk of researching, developing, manufacturing and selling products. Following several widely publicized issues in recent years, the FDA and similar regulatory authorities in other jurisdictions have become increasingly focused on product safety. This development has led to requests for more clinical trial data, for the inclusion of a significantly higher number of patients in clinical trials and for more detailed analysis of trial results. Consequently, the process of obtaining regulatory approvals/clearance, particularly from the FDA, has become more costly, time consuming and challenging than in the past. Any product developed by Profound or its future collaborative partners, if any, must receive all relevant regulatory approvals or clearances from the applicable regulatory authorities before it may be marketed and sold in a particular country.

 

Any of Profound’s products that receive regulatory approval could be subject to extensive post-market regulation that could affect sales, marketing and profitability.

 

With respect to any products for which Profound obtains regulatory clearance or approval, it will be subject to post-marketing regulatory obligations, including requirements by the FDA, EU competent authorities, Health Canada and similar agencies in other jurisdictions to maintain records regarding product safety and to report to regulatory authorities serious or unexpected adverse events. The occurrence of unanticipated serious adverse events or other safety problems could cause the governing agencies to impose significant restrictions on the indicated uses for which the product may be marketed, impose other restrictions on the distribution or sale of the product or require potentially costly post-approval studies. In addition, post-market discovery of previously unknown safety problems or increased severity or significance of a pre-existing safety signal could result in withdrawal of the product from the market and product recalls. Compliance with extensive post-marketing record keeping and reporting requirements requires a significant commitment of time and funds, which may limit Profound’s ability to successfully commercialize approved products.

 

 

 

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Legislative or regulatory reform of the healthcare systems in which Profound intends to operate may affect Profound’s ability to sell its devices profitably and could adversely affect its business.

 

The government and regulatory authorities in the United States, the European Union, Canada and other markets in which Profound expects to sell its devices may propose and adopt new legislation and regulatory requirements relating to medical product approval criteria, manufacturing and marketing requirements. In addition, FDA, EU and other regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect Profound’s business and products. It is impossible to predict whether legislative changes will be enacted or regulations, guidance or interpretations changed and what the impact of such changes, if any, may be. Such legislation or regulatory requirements, or the failure to comply with such, could adversely impact Profound’s operations and could have a material adverse effect on Profound’s business, financial condition and results of operations.

 

In addition, as part of the Food and Drug Administration Safety and Innovation Act of 2012, Congress enacted several reforms entitled the Medical Device Regulatory Improvements and additional miscellaneous provisions which will further affect medical device regulation both pre- and post-approval. In 2016, Congress enacted the 21st Century Cures Act, which included a number of modifications to the medical device provisions of the FFDCA, including a new priority review program for “breakthrough devices”. Further, the FDA Reauthorization Act of 2017, amended certain pre- and post-market requirements for medical devices. For example, the legislation imposed a new user fee for de novo classification requests. The FDA has implemented, and continues to implement, these reforms, which could impose additional regulatory requirements upon Profound and delay Profound’s ability to obtain new 510(k) clearances or PMA approvals or increase the costs of compliance. Any change in the laws or regulations that govern the clearance and approval processes relating to Profound’s products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute products. Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for Profound’s products would have a material adverse effect on Profound’s business, financial condition and operating results.

 

Another example can be found in the European Union. In May 2017, the EU adopted a new Regulation on medical devices and a new Regulation on in vitro diagnostic medical devices, which will take effect on May 26, 2020 and May 26, 2022, respectively. The Regulations do not set out a substantially different regulatory system, but clearly envisage, among other things, stricter controls of medical devices, including strengthening of the conformity assessment procedures, increased expectations as regards clinical data for devices and pre-market regulatory review of high-risk devices. The new legislation may prevent or delay the CE marking of our products under development or impact our ability to modify our currently CE marked products on a timely basis.

 

The growth of overall healthcare costs as a percentage of gross domestic product in many countries means that governments and payers are under intense pressure to control healthcare spending even more tightly. As a result, Profound’s businesses and the healthcare industry in general are operating in an ever more challenging environment with very significant pricing pressures. In recent years, national, federal, provincial, state and local officials and legislators have proposed, or are reportedly considering proposing, a variety of price-based reforms to the healthcare systems in the United States, the European Union and other countries. Some proposals include measures that would limit or eliminate payments for certain medical procedures and treatments or subject pricing to government control. Furthermore, in certain foreign markets, the pricing or profitability of healthcare products is subject to government controls and other measures that have been prepared by legislators and government officials. While Profound cannot predict whether any such legislative or regulatory proposals or reforms will be adopted, the adoption of any such proposals or reforms could adversely affect the commercial viability of Profound’s existing and potential products.

 

 

 

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The 2010 Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010 (collectively, the “ACA”) was intended to expand healthcare coverage within the United States, primarily through the imposition of health insurance mandates on employers and individuals and expansion of the Medicaid program. The legislation imposes a number of changes to the U.S. healthcare market that are designed to reduce the number of uninsured individuals through, among other things, expansion of certain federal and state healthcare programs such as Medicaid, and establishment of health insurance exchanges. In addition, the legislation imposes changes directly affecting the device industry, specifically taxes on medical device makers in the form of a 2.3% excise tax on all medical device sales in the United States. President Obama signed into law a bill that included a two-year suspension of the medical device tax beginning in January 2016. Although that suspension expired on December 31, 2017, on January 22, 2018, President Trump signed legislation delaying implementation of the medical device excise tax for an additional two years. The tax will now go into effect on January 1, 2020, if the delay is not further extended or the medical tax is not permanently repealed. It is uncertain whether future legislation will suspend, modify or repeal this tax. The tax could materially and adversely affect Profound’s business, cash flows and results of operations.

 

The ACA also focuses on a number of Medicare provisions aimed at improving quality and decreasing costs. The Medicare provisions include value-based payment programs, increased funding of comparative effectiveness research, reduced hospital payments for avoidable readmissions and hospital acquired conditions, and pilot programs to evaluate alternative payment methodologies that promote care coordination (such as bundled physician and hospital payments). Additionally, the law includes a productivity adjustment, or reduction in the annual rate of inflation for Medicare payments to a number of providers, including hospitals, that began in 2011. The United States President and certain members of the U.S. Congress have indicated their desire to repeal and replace all or portions of the ACA and to decrease fiscal burdens. Recent legislation has been passed addressing certain ACA measures and effectively repealing the individual mandate insurance requirement. In addition, in December 2018, a federal district court judge in Texas found the ACA to be unconstitutional, although the ruling was stayed while the case is appealed. It is unclear whether, when and how a repeal of, or a court order enjoining, the ACA repeal would be effectuated and what the effect on the healthcare sector would be.

 

Other measures by the current administration that address ACA provisions include regulatory changes to healthcare insurance exchange parameters. According to the administration’s statements describing the changes, they are intended to increase flexibility, improve affordability, promote stability, and reduce unnecessary burdens. Profound cannot predict the full effect of these new measures, what other health care laws, and regulations and programs will be ultimately implemented at the federal or state level, or the effect of any future legislation, regulation or court order. However, any changes that lower reimbursement for Profound’s products or reduce medical procedure volumes could adversely affect Profound’s business and results of operations. Changes in the law or regulatory framework that reduce Profound’s revenues or increase Profound’s costs could also have a material adverse effect on its business, financial condition and results of operations and cash flows.

 

Other legislation or regulatory proposals may adversely affect Profound’s revenues and profitability.

 

Existing and proposed changes in the laws and regulations affecting public companies may cause Profound to incur increased costs as it evaluates the implications of new rules and responds to new requirements. Failure to comply with the new rules and regulations could result in enforcement actions or the assessment of other penalties. The new laws and regulations could make it more difficult to obtain certain types of insurance, including directors’ and officers’ liability insurance, and Profound may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.

 

 

 

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The impact of these events could also make it more difficult for Profound to attract and retain qualified persons to serve on Profound’s board of directors, or as executive officers. Profound may be required to hire additional personnel and utilize additional outside legal, accounting and advisory services, all of which could cause Profound’s general and administrative costs to increase beyond what it currently has planned. Profound is presently evaluating and monitoring developments with respect to these rules, and it cannot predict or estimate the amount of the additional costs it may incur or the timing of such costs.

 

Rising insurance costs could negatively impact Profound’s profitability.

 

The cost of insurance, including director and officer, worker’s compensation, property, product liability and general liability insurance, has risen significantly in recent years and is expected to continue to increase. In response, Profound may increase deductibles and/or decrease certain coverages to mitigate these costs. These increases, and Profound’s increased risk due to increased deductibles and reduced coverages, could have a negative impact on Profound’s business, financial condition and results of operations.

 

Profound may be subject to product liability claims, which can be expensive, difficult to defend and may result in large judgments or settlements.

 

The use of medical devices for treatment of humans, whether in clinical trials or after marketing clearance approval is obtained, can result in product liability claims. Product liability claims can be expensive, difficult to defend and may result in large judgments or settlements against Profound. In addition, third party collaborators and licensees may not protect Profound from product liability claims.

 

Profound currently maintains product liability insurance in connection with the use of Profound’s devices in clinical trials. Profound may not be able to obtain or maintain adequate protection against potential liabilities arising from such use. If Profound is unable to obtain sufficient levels of insurance at acceptable cost or otherwise protect against potential product liability claims, Profound will be exposed to product liability claims. A successful product liability claim in excess of Profound’s insurance coverage could harm Profound’s financial condition, results of operations and prevent or interfere with Profound’s product commercialization efforts. In addition, any successful claim may prevent Profound from obtaining adequate product liability insurance in the future on commercially desirable terms. Even if a claim is not successful, defending such a claim may be time-consuming and expensive.

 

Unexpected product safety or efficacy concerns may arise leading to product recalls, withdrawals or declining sales, as well as product liability, consumer fraud and/or other claims.

 

Unexpected safety or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales, as well as product liability, consumer fraud and/or other claims. This could have a material adverse effect on Profound’s business, financial condition and results of operations.

 

Physicians/clinicians misuse could result in negative publications, negative sentiment or adverse events, thereby limiting future sales of the products.

 

There is a risk that physicians/clinicians may misuse the products, such as not following the instructions for use, not using it on the intended patient population, using it with unapproved MRI machines, using it with unapproved or modified hardware or software, or misuse by inadequately trained staff. Physicians/clinicians may also initiate their own clinical studies which may be poorly designed or controlled. This may result in negative publications, negative sentiment or adverse events, thereby limiting future sales of the products.

 

 

 

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Even after Profound’s products receive regulatory approval, modifications to Profound’s products may require new regulatory clearances or approvals or may require Profound to recall or cease marketing its products until clearances or approvals are obtained.

 

Modifications to Profound’s products may require the submission of new 510(k) notifications, PMA applications, or other regulatory agency approval applications or documents. If a modification is implemented to address a safety concern, Profound may also need to initiate a recall or cease distribution of the affected device. In addition, if the modified devices require the submission of a 510(k) or PMA and Profound distributes such modified devices without a new 510(k) clearance or PMA approval, Profound may be required to recall or cease distributing the devices. The FDA can review a manufacturer’s decision not to submit a modification and may disagree. The FDA may also on its own initiative determine that clearance of a new 510(k) or approval of a new PMA submission is required. Profound may make additional modifications to its products in the future that it believes do not or will not require clearance of a new 510(k) or approval of a new PMA. If Profound begins manufacture and distribution of the modified devices and the FDA later disagrees with its determination and requires the submission of a new 510(k) or PMA for the modifications, it may also be required to recall the distributed modified devices and to stop distribution of the modified devices, which could have an adverse effect on its business. If the FDA does not clear or approve the modified devices, Profound may need to redesign the devices, which could also harm its business. When a device is marketed without a required clearance or approval, the FDA has the authority to bring an enforcement action, including injunction, seizure and criminal prosecution. The FDA considers such additional actions generally when there is a serious risk to public health or safety and the company’s corrective and preventive actions are inadequate to address the FDA’s concerns.

 

Where Profound determines that modifications to its products require clearance of a new 510(k) or approval of a new PMA or PMA supplement, Profound may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. For those products sold in the European Economic Area, Profound must notify a notified body, if significant changes are made to the products or if there are substantial changes to its quality assurance systems affecting those products. Delays in obtaining required future clearances or approvals would adversely affect Profound’s ability to introduce new or enhanced products in a timely manner, which in turn would harm its future growth.

 

Profound is subject to “fraud and abuse” laws, anti-bribery laws, environmental laws and privacy and security regulations. Any violation by Profound’s employees or other agents could expose Profound to severe penalties and other consequences that may have a material adverse effect on its business, financial condition and results of operations.

 

Profound’s business is subject to the Foreign Corrupt Practices Act of 1977 (“FCPA”) in the United States, which generally prohibits companies and company employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. The FCPA also requires companies to maintain accurate books and records and internal controls. In addition, Profound is subject to other anti-bribery laws of the nations in which Profound conducts business that apply similar prohibitions as the FCPA (e.g., The Bribery Act 2010 in the United Kingdom, the Corruption of Foreign Public Officials Act in Canada and the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions of the Organisation for Economic Co-operation and Development). Profound’s employees or other agents may, without Profound’s knowledge and despite Profound’s efforts, engage in prohibited conduct under Profound’s policies and procedures and the FCPA or other anti-bribery laws to which Profound may be subject. If Profound’s employees or other agents are found to have engaged in such practices, Profound could suffer severe penalties and other consequences that may have a material adverse effect on its business, financial condition and results of operations.

 

Profound’s operations may be directly or indirectly affected by various broad United States or foreign healthcare fraud and abuse laws. In particular, the United States federal healthcare program Anti-Kickback Statute prohibits any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, in return for or to induce the referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of an item or service, for which payment may be made under United States federal healthcare programs, such as the Medicare and Medicaid programs. This statute has been interpreted to apply to arrangements between device manufacturers on one hand and prescribers and purchasers on the other. For example, the United States government has sought to apply the Anti-Kickback Statute to device manufacturers’ financial relationships with physician consultants. Among other theories, the United States government has alleged that such relationships are payments to induce the consultants to arrange for or recommend the ordering, purchasing or leasing of the manufacturers’ products by the hospitals, medical institutions and other entities with whom they are affiliated. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and arrangements that involve remuneration that could induce prescribing, purchases, or recommendations may be subject to government scrutiny if they do not qualify for an exemption or a safe harbor.

 

 

 

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Also, the U.S. False Claims Act prohibits persons from knowingly submitting, or causing to be submitted, a false claim to, or the knowing use of false statements to obtain payment from the federal government. Suits filed under the False Claims Act can be brought by the United States government or they can be brought by an individual on behalf of the United States government, as “qui tam” actions, and such individuals, commonly known as “whistleblowers,” may share in any damages paid by the entity to the United States government in fines or settlement. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the United States government, plus civil penalties of up to $11,000 for each separate false claim. Various states have also enacted laws modeled after the False Claims Act.

 

Profound is also subject to various privacy and security regulations, including but not limited to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) in the United States. HIPAA mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common health care transactions (e.g., health care claims information and plan eligibility, referral certification and authorization, claims status, plan enrolment, coordination of benefits and related information), as well as standards relating to the privacy and security of individually identifiable health information, which govern the use and disclosure of such information and require the adoption of administrative, physical and technical safeguards to protect such information. In addition, many states, provinces and other countries have enacted comparable laws addressing the privacy and security of health information, some of which are more stringent than HIPAA. Failure to comply with these laws could result in the imposition of significant civil and criminal penalties. The costs of compliance with these laws and the potential liability associated with the failure to comply with these laws could have a material adverse effect on Profound’s business, financial condition and operating results.

 

Compliance with environmental laws and regulations could be expensive, and failure to comply with these laws and regulations could subject Profound to significant liability.

 

Profound may use hazardous materials in its research and development and manufacturing processes. Profound is subject to various regulations governing use, storage, handling and disposal of these materials and associated waste products. Profound will need one or more licenses to handle such materials, but there can be no assurance that it will be able to retain these licenses in the future or obtain licenses under new regulations if and when they are required by governing authorities. Profound cannot completely eliminate the risk of contamination or injury resulting from hazardous materials, and it may incur liability as a result of any such contamination or injury. In the event of an accident, Profound could be held liable for damages or penalized with fines, and the liability could exceed our resources and any applicable insurance. Profound will also incur expenses related to compliance with environmental laws. Such future expenses or liability could have a significant negative impact on its business, financial condition and results of operations. Further, Profound cannot assure that the cost of compliance with these laws and regulations will not materially increase in the future. Profound may also incur expenses related to ensuring that its operations comply with environmental laws related to its operations, and those of prior owners or operators of any properties it may own, at manufacturing sites where operations have previously resulted in spills, discharges or other releases of hazardous substances into the environment. Profound could be held strictly liable under environmental laws for contamination of property that it occupies without regard to fault or whether its actions were in compliance with law at the time. Profound’s liability could also increase if other responsible parties, including prior owners or operators of its facilities, fail to complete their clean-up obligations or satisfy indemnification obligations to Profound. Similarly, if Profound fails to ensure compliance with applicable environmental laws in foreign jurisdictions in which it operates, Profound may not be able to offer its products and may be subject to civil or criminal liabilities.

 

 

 

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Profound is exposed to foreign currency risk and currently Profound has not hedged against risk associated with foreign exchange rate exposure.

 

A significant portion of Profound’s revenues, expenses, current assets and current liabilities will be denominated in Euros, United States dollars and other foreign currencies but its financial statements are expressed in Canadian dollars. A decrease in the value of such foreign currencies relative to the Canadian dollar could result in decreases in revenues from currency exchange rate fluctuations. To date, Profound has not hedged against risk associated with foreign exchange rate exposure.

 

Also, the price of Common Shares may be independently impacted by the exchange rate alone as the market price of Profound’s securities will be denominated in Canadian dollars while some of the financial results of Profound’s operations will be denominated in foreign currency. Consequently, the market price of Profound’s securities may be negatively affected by adverse changes in exchange rates.

 

General national and worldwide economic conditions may materially and adversely affect Profound’s financial performance and results of operations.

 

Profound’s operations and performance depend significantly on national and worldwide economic conditions and the resulting impact on purchasing decisions and the level of spending on its products by customers in the geographic markets in which Profound’s products will be sold or distributed. These economic conditions remain challenging in many countries and regions, including without limitation the United States, Europe and Asia. If Profound’s customers do not obtain or do not have access to the necessary capital to operate their businesses, or are otherwise adversely affected by a deterioration in national or worldwide economic conditions, this could result in reductions in the sales of Profound’s products, longer sales cycles and slower adoption of new technologies by its customers, which would materially and adversely affect Profound’s business. In addition, Profound’s customers’, and suppliers’ liquidity, capital resources and credit may be adversely affected by their relative ability or inability to obtain capital and credit, which could adversely affect Profound’s ability to collect on its outstanding invoices or lengthen its collection cycles, distribute its products or limit its timely access to important sources of raw materials and components necessary for the manufacture of its products.

 

Profound’s reported or future financial results could be adversely affected by the application of existing or future accounting standards.

 

Generally accepted accounting principles and related implementation guidelines and interpretations can be highly complex and involve subjective judgments. Profound’s ability to properly interpret these principles and implement internal controls may result in errors in its reported financial results. As well, changes in these rules or their interpretation, the adoption of new guidance or the application of existing guidance to changes in Profound’s business could have a significant adverse effect on its financial results. Profound cannot predict if or when any such change could be made, and any such change could have an adverse impact on its reported or future financial results, and the results that such change would have on its access to capital.

 

 

 

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Profound is increasingly dependent on sophisticated information technology systems to operate its business and if Profound fails to properly maintain the integrity of its data, if its products do not operate as intended or it experiences a cyber-attack or other breach of these systems, Profound’s business could be adversely affected.

 

Profound is increasingly dependent on sophisticated information technology for its development activities, products and infrastructure. Profound relies on information technology systems to process, transmit and store electronic information in its day-to-day operations. The complexity of Profound’s information technology systems makes the Company vulnerable to increasingly sophisticated cyber-attacks, malicious intrusion, breakdown, destruction, loss of data privacy, or other significant disruption. Profound’s products and its information systems require an ongoing commitment of resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards, the increasing need to protect patient and customer information, and changing customer patterns.

 

In addition, third parties may attempt to hack into Profound’s products or systems and may obtain data relating to patients, its products or the Company’s proprietary information. If Profound fails to maintain or protect its information systems and data integrity effectively, it could lose existing customers, have difficulty attracting new customers, have problems in determining product cost estimates and establishing appropriate pricing, have difficulty preventing, detecting, and controlling fraud, have disputes with customers, physicians, and other health care professionals, become subject to litigation, have regulatory sanctions or penalties imposed, experience increases in operating expenses, incur expenses or lose revenues as a result of a data privacy breach, or suffer other adverse consequences.

 

Risk Factors Relating to Intellectual Property

 

If Profound breaches any of the agreements under which Profound licenses rights to its technology from third parties, Profound could lose license rights that are important to its business. Certain of Profound’s license agreements may not provide an adequate remedy for their breach by the licensor.

 

Profound licenses certain development and commercialization rights for certain offerings, and expects to enter into similar licenses in the future. For instance, Profound licenses exclusive rights from Sunnybrook that enable it to use, manufacture, distribute and sell the TULSA-PRO device. Under this license, Profound is subject to various obligations, including a milestone payment of $250,000 upon obtaining FDA clearance, and legal costs associated with patent application preparation, filing and maintenance. If Profound breaches any of the agreements under which Profound licenses rights to its technology from third parties, Profound could lose license rights that are important to its business. Certain of Profound’s license agreements may not provide an adequate remedy for their breach by the licensor.

 

Profound’s proprietary rights may not adequately protect Profound’s technologies.

 

Profound’s commercial success will depend on its ability to obtain patents (or exclusive rights thereto) and/or regulatory exclusivity and to maintain adequate protection for Profound’s technologies in the United States, Europe, Canada and other countries. As of the date hereof, Profound owns or has exclusive rights to multiple issued United States patents and several pending United States patent applications. Profound or its licensors will be able to protect such proprietary rights from unauthorized use by third parties only to the extent that Profound’s proprietary technologies and future products are covered by valid and enforceable patents or are effectively maintained as trade secrets.

 

Profound applies for patents covering its technologies as Profound deems appropriate. However, Profound may fail to apply for patents on important technologies in a timely fashion, or at all. Profound’s existing patent applications and any future patents Profound may obtain may not be sufficiently broad to prevent others from utilizing Profound’s technologies or from developing competing products and technologies. In addition, Profound cannot guarantee that:

 

 

 

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  · Profound or its licensors were the first to make the inventions covered by each of Profound’s licensed or issued patents and pending patent applications;
     
  · Profound or its licensors were the first to file patent applications for these inventions;
     
  · others will not independently develop similar or alternative technologies or duplicate any of Profound’s or its licensors’ technologies;
     
  · any of Profound’s or its licensors’ pending patent applications will result in issued patents;
     
  · any of Profound’s or its licensors’ patents will be valid or enforceable;
     
  · any patents issued to Profound or its licensors and collaboration partners will provide Profound with any competitive advantages, or will not be challenged by third parties;
     
  · Profound will develop or in-license additional proprietary technologies that are patentable; or
     
  · the patents of others will not have an adverse effect on Profound’s business.

 

The actual protection afforded by a patent varies on an offering-by-offering basis, from country to country and depends upon many factors, including the type of patent, the scope of Profound’s or its licensors’ coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patents. Profound’s or its licensors’ ability to maintain and solidify Profound’s or its licensors’ proprietary position for Profound’s products will depend on Profound’s or its licensors’ success in obtaining effective patent claims and enforcing those claims once granted. Profound’s or its licensors’ issued patents and those that may be issued in the future may be challenged, invalidated or circumvented, and the rights granted under any such issued patents may not provide Profound with proprietary protection or competitive advantages against competitors with similar products or offerings. Due to the extensive amount of time required for the development, testing and regulatory review of a medical device, it is possible that, before Profound’s devices can be commercialized, any relevant patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.

 

Protection afforded by patents may be adversely affected by recent or future changes to patent related statutes and administrative procedures, for example, such as in the laws of the United States or to USPTO rules. Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of Profound’s patent applications and the enforcement or defense of Profound’s issued patents. For example, on September 16, 2011, the Leahy-Smith Act was signed into law in the United States. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and may also affect patent litigation. However, it is not fully clear what, if any, impact the Leahy-Smith Act will have on the operation of Profound’s business. As such, the Leahy-Smith Act and its implementation, as well as any future changes to patent law in the United States or elsewhere, could increase the uncertainties and costs surrounding the prosecution of Profound’s or its licensors’ patent applications and the enforcement or defense of Profound’s or its licensors’ issued patents, all of which could have a material adverse effect on Profound’s business, financial condition and operating results.

 

Moreover, Profound or its licensors may be subject to a third party preissuance submission of prior art to the USPTO and other patent offices, or become involved in opposition, derivation, re-examination, inter parties review or interference proceedings, or other preissuance or post-grant proceedings in the United States or other jurisdictions, challenging Profound’s or its licensors’ patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, Profound’s or its licensors’ patent rights, allow third parties to commercialize Profound’s technology or product and compete directly with Profound, without payment to Profound, or result in Profound’s inability to manufacture or commercialize product without infringing third party patent rights. In addition, if the breadth or strength of protection provided by Profound’s or its licensors’ patents and patent applications is threatened, it could dissuade companies from collaborating with Profound to license, develop or commercialize current or future products. Changes to the current patent statutes may adversely affect the protection afforded by Profound’s patents and/or open Profound’s patents up to third party attack in non-litigation settings. The costs of patent enforcement or invalidity proceedings could be substantial, result in adverse determinations, and divert management attention from Profound’s business.

 

 

 

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Profound also relies on trade secrets to protect some of its technology, especially where it does not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to maintain. While Profound uses reasonable efforts to protect its trade secrets, Profound or Profound’s collaboration partners’ employees, consultants, contractors or scientific and other advisors may unintentionally or wilfully disclose Profound’s proprietary information to competitors. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain, and may divert Profound’s efforts and attention from other aspects of Profound’s business. In addition, non-U.S. courts are sometimes less willing than courts in the United States to protect trade secrets. If Profound’s competitors independently develop equivalent knowledge, methods and know-how, Profound would not be able to assert Profound’s trade secrets against them and Profound’s business could be harmed.

 

Profound may not be able to protect its intellectual property rights throughout the world.

 

Filing, prosecuting and defending patents on all of Profound’s product candidates, and products and services, when and if Profound has any, in every jurisdiction would be prohibitively expensive. Competitors may use Profound’s technologies in jurisdictions where Profound or Profound’s licensors have not obtained patent protection to develop competing products. These products may compete with Profound’s products, when and if Profound has any, and may not be covered by any of Profound’s or its licensors’ patent claims or other intellectual property rights.

 

The laws of some countries do not protect intellectual property rights to the same extent as the laws of the United States and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, may not favour the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology and/or pharmaceuticals, which could make it difficult for Profound to stop the infringement of Profound’s patents. Proceedings to enforce Profound’s or its licensors’ patent rights in foreign jurisdictions could result in substantial cost and divert Profound’s efforts and attention from other aspects of Profound’s business.

 

The patent protection for Profound’s technologies may expire before Profound is able to maximize their commercial value which may subject Profound to increased competition and reduce or eliminate Profound’s opportunity to generate product revenue.

 

The patents for Profound’s technologies have varying expiration dates and, when these patents expire, Profound may be subject to increased competition and may not be able to recover its development costs. In some of the larger economic territories, such as the United States and the European Union, patent term extension/restoration may be available to compensate for time taken during aspects of a product candidate’s regulatory review. However, Profound cannot be certain that any extension will be granted or, if granted, what the applicable time period or the scope of patent protection afforded during any extended period will be. If Profound or its licensors are unable to obtain patent term extension/restoration or some other exclusivity, Profound could be subject to increased competition and Profound’s opportunity to establish or maintain product revenue could be substantially reduced or eliminated. Furthermore, Profound may not have sufficient time to recover Profound’s development costs prior to the expiration of Profound’s or its licensors’ patents in the United States or elsewhere.

 

 

 

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Profound may incur substantial costs as a result of litigation or other proceedings relating to enforcement of Profound’s or its licensors’ patent and other intellectual property rights and Profound may be unable to protect Profound’s rights to, or use of, Profound’s technology.

 

If Profound chooses to go to court to try to stop or prevent a third party from using the inventions claimed in Profound’s or its licensors’ patents, that third party has the right to ask the court to rule that these patents are invalid and/or should not be enforced against that third party. Even if Profound were successful in stopping the infringement of these patents, these lawsuits are expensive and would consume time and other resources, and divert attention from other aspects of Profound’s business. In addition, there is a risk that the court will decide that these patents are invalid or unenforceable and that Profound does not have the right to prevent the other party from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to prevent the other party’s activities on the ground that such other party’s activities do not infringe Profound’s rights.

 

Profound may be subject to lawsuits from, liable for damages to, or be required to enter into license agreements with, a third party that claims Profound infringed its patents or otherwise misused its proprietary information.

 

If Profound wishes to use the technology in issued and unexpired patents owned by others, Profound will need to obtain a license from the owner, enter into litigation to challenge the validity or enforceability of these patents or incur the risk of litigation in the event that the owner asserts that Profound infringed these patents. The failure to obtain a license to technology or the failure to challenge an issued patent owned by others that Profound may require to develop or commercialize Profound’s product candidates may have a material adverse impact on Profound.

 

In addition, if a third party asserts that Profound infringed its patents or other proprietary rights, Profound could face a number of risks that could seriously harm Profound’s results of operations, financial condition and competitive position, including:

 

  · patent infringement and other intellectual property claims, which would be costly and time consuming to defend, whether or not the claims have merit, and which could delay the regulatory approval process and divert management’s attention from Profound’s business;
     
  · substantial damages for past infringement, including possible treble damages in some jurisdictions, which Profound may have to pay if a court determines that Profound’s product candidates, offerings or technologies infringe a competitor’s patent or other proprietary rights;
     
  · a court prohibiting Profound from selling or licensing Profound’s technologies unless the third party licenses Profound’s patents or other proprietary rights to Profound on commercially reasonable terms, which it is not required to do; and
     
  · if a license is available from a third party, Profound may have to pay substantial royalties or lump sum payments or grant cross licenses to Profound’s patents or other proprietary rights to obtain that license.

 

The coverage of patents is subject to interpretation by the courts and the interpretation is not always uniform. If Profound is sued for patent infringement, Profound would need to demonstrate that its products or methods of use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and Profound may not be able to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.

 

Patent laws in the United States as well as the laws of certain other jurisdictions provide for provisional rights in published patent applications beginning on the date of publication, including the right to obtain reasonable royalties, if a patent is subsequently issued and certain other conditions are met. While Profound believes that there may be multiple grounds on which to challenge the validity of United States patents and the counterparts filed in other jurisdictions possibly relevant to Profound’s business, Profound cannot predict the outcome of any invalidity challenge. Alternatively, it is possible that Profound may determine it is prudent to seek a license from a patent holder to avoid potential litigation and other potential disputes. Profound cannot be sure that a license would be available to it on acceptable terms, or at all.

 

 

 

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Because some patent applications in certain jurisdictions may be maintained in secrecy until the patents are issued, because patent applications in the United States and many other jurisdictions are typically not published until 18 months after filing and because publications in the scientific literature often lag behind actual discoveries, Profound cannot be certain that others have not filed patent applications for technology covered by Profound’s or its licensors’ issued patents or Profound’s pending applications or Profound’s licensors’ pending applications, or that Profound or its licensors were the first to invent the technology.

 

Patent applications filed by third parties that cover technology similar to Profound’s may have priority over Profound’s or its licensors’ patent applications and could further require Profound to obtain rights to issued patents covering such technologies. If another party files a United States patent application on an invention similar to Profound’s, Profound may elect to participate in or be drawn into an interference or other proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that such efforts would be unsuccessful, resulting in a loss of Profound’s United States patent position with respect to such inventions.

 

Profound may also be subject to damages resulting from claims that Profound or its employees or consultants have wrongfully used or disclosed alleged trade secrets of third parties. Many of Profound’s employees were previously employed, and certain of Profound’s consultants are currently employed, at universities or medical device companies, including Profound’s competitors or potential competitors. Although Profound has not received any claim to date, Profound may be subject to claims that Profound, or these employees or consultants, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of these current or former employers. Litigation may be necessary to defend against these claims. If Profound fails in defending such claims, in addition to paying monetary damages, Profound may lose valuable intellectual property rights or personnel. Profound may be subject to claims that employees of Profound’s partners or licensors of technology licensed by Profound have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Profound may become involved in litigation to defend against these claims. If Profound fails in defending such claims, in addition to paying monetary damages, Profound may lose valuable intellectual property rights or personnel; and even if Profound is successful in defending such claims, they can be expensive and would consume time and other resources, and divert attention from other aspects of Profound’s business.

 

Some of Profound’s competitors may be able to sustain the costs of complex patent and other intellectual property litigation more effectively than Profound can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on Profound’s ability to raise the funds necessary to continue Profound’s operations. Profound cannot predict whether third parties will assert these claims against Profound or against its licensors, or whether those claims will harm Profound’s business. If Profound or its licensors are forced to defend against these claims, whether they are with or without any merit, whether they are resolved in favour of or against Profound or its licensors, Profound may face costly litigation and diversion of management’s attention and resources. As a result of these disputes, Profound may have to develop costly non-infringing technology, or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable to Profound, if at all, which could have a material adverse effect on Profound’s business, financial conditions and results of operations.

 

 

 

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Risk Factors Relating to Ownership of Profound’s Common Shares

 

Future sales or the issuances of Profound’s securities may cause the market price of Profound’s equity securities to decline.

 

The market price of Profound’s equity securities could decline as a result of issuances of securities by Profound or sales by its existing shareholders of Common Shares in the market, or the perception that these sales could occur, during the currency of this AIF. Sales of Common Shares by shareholders may make it more difficult for Profound to sell equity securities at a time and price that Profound deems appropriate. Sales or issuances of substantial numbers of Common Shares, or the perception that such sales could occur, may adversely affect prevailing market prices of the Common Shares. With any additional sale or issuance of Common Shares, investors will suffer dilution to their voting power and Profound may experience dilution in its earnings per share.

 

Profound expects that Profound’s share price may fluctuate significantly.

 

The market price of securities of many companies, particularly development stage medical device companies, experience wide fluctuations in price that are not necessarily related to the operating performance, underlying asset values or prospects of such companies.

 

The market price of Profound’s Common Shares could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond Profound’s control, including:

 

  · Adverse results or delays in TACT;
     
  · Unanticipated efficacy, safety or tolerability concerns related to the use of TULSA-PRO and SONALLEVE;
     
  · Regulatory actions with respect to TULSA-PRO and SONALLEVE;
     
  · Changes in laws or regulations applicable to TULSA-PRO or SONALLEVE or any future product candidates, including but not limited to clinical trial requirements for approvals;
     
  · Profound’s inability to effectively promote and market TULSA-PRO and SONALLEVE or other product candidates in desired jurisdictions;
     
  · Actual or anticipated fluctuations in Profound’s financial condition and operating results;
     
  · Actual or anticipated changes in Profound’s growth rate relative to Profound’s competitors;
     
  · Competition from existing products or new products that may emerge;
     
  · Announcements by Profound, Profound’s collaborators or Profound’s competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;
     
  · Failure to meet or exceed financial estimates and projections of the investment community or that Profound provides to the public;
     
  · Issuance of new or updated research or reports by securities analysts;
     
  · Fluctuations in the valuation of companies perceived by investors to be comparable to Profound;
     
  · Share price and volume fluctuations attributable to inconsistent trading volume levels of Profound’s shares;
     
  · Additions or departures of key management or scientific personnel;
     
  · Disputes or other developments related to proprietary rights, including patents, litigation matters and Profound’s ability to obtain patent protection for its products;
     
  · Announcement or expectation of additional debt or equity financing efforts;
     
  · Sales of Profound’s Common Shares by Profound, Profound’s insiders or Profound’s other shareholders; and
     
  · General economic and market conditions.

 

These and other market and industry factors may cause the market price and demand for Profound’s Common Shares to fluctuate substantially, regardless of Profound’s actual operating performance, which may limit or prevent investors from readily selling their Common Shares and may otherwise negatively affect the liquidity of Profound’s Common Shares. In addition, the stock market in general, and the TSX-V and the share prices of biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.

 

 

 

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Profound may be subject to securities litigation, which is expensive and could divert management attention.

 

The market price of Profound’s Common Shares may be volatile, and in the past companies that have experienced volatility in the market price of their shares have been subject to securities class action litigation. Profound may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could adversely impact Profound’s business. Any adverse determination in litigation could also subject Profound to significant liabilities.

 

Profound has never paid dividends on Profound’s Common Shares and Profound does not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in Profound’s Common Shares will likely depend on whether the price of Profound’s Common Shares increases.

 

Profound has not paid dividends on Profound’s Common Shares to date and Profound currently intends to retain Profound’s future earnings, if any, to fund the development and growth of Profound’s business. As a result, capital appreciation, if any, of Profound’s Common Shares will be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from your investment in Profound’s Common Shares if the price of Profound’s Common Shares increases.

 

If equity research analysts do not publish research or reports about Profound’s business or if they issue unfavorable commentary or downgrade Profound’s Common Shares, the price of Profound’s Common Shares could decline.

 

The trading market for Profound’s Common Shares will rely in part on the research and reports that equity research analysts publish about Profound and Profound’s business. Profound does not control these analysts. The price of Profound’s Common Shares could decline if one or more equity analysts downgrade Profound’s Common Shares or if analysts issue other unfavorable commentary or cease publishing reports about Profound or Profound’s business.

 

ITEM 5. ACQUISITIONS

 

On July 31, 2017, Profound entered into the Philips Agreement with Philips in order to seek to expand the existing collaboration and acquire Philip’s SONALLEVE MR-HIFU business.

 

Under terms of the Philips Agreement, Philips transferred its SONALLEVE assets to Profound for upfront consideration of 7,400,000 Common Shares. Under the Agreement, the earn-out provisions include a requirement that Profound pay additional consideration of: (i) 5% of Net Sales occurring after July 31, 2017 for the calendar year 2017; (ii) 6% of Net Sales occurring in the calendar year 2018; and (iii) 7% of Net Sales occurring in the calendar years 2019 and 2020. To the extent that the cumulative Net Sales for the full calendar years 2017 through 2020 exceeds €45,300,000, Profound will be required to pay an additional earn-out equal to 7% of Net Sales for the period beginning after July 31, 2017 through December 31, 2019.

 

“Net Sales” include the revenues (less any royalties) received by Profound or its affiliates or others on their behalf in respect of the sale or transfer of the SONALLEVE, any subsequent, successor or next-generation product the treatment technology of which is primarily based on SONALLEVE and which utilizes intellectual property rights acquired under the Agreement or any future product that combines the technologies of SONALLEVE and TULSA-PRO and any amounts received by Profound with respect to service agreements, but does not include any revenues with respect to consumables.

 

 

 

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As part of the SONALLEVE Transaction, Philips and Profound expanded their non-exclusive strategic sales relationship for Profound’s TULSA-PRO system to include distribution of SONALLEVE.

 

The SONALLEVE Transaction has expanded Profound’s core competency in MR-ultrasound ablation therapy. Management believes that Profound is now the only company to provide a therapeutics platform that provides the precision of real-time MR imaging combined with the safety and ablation power of directional (inside-out) and focused (outside-in) ultrasound technology for the incision-free ablation of diseased tissue.

 

The Company continues to pursue growth opportunities both organically, increasing its existing business by gaining new customers, increasing product and service penetration with existing clients, as well as through transactions in which the Company acquires new operating entities. Over the past year, the Company has enhanced its corporate development capabilities to execute transactions, through significant investments in people, technology and other organizational resources, and has developed techniques, processes and other intellectual capital, all with the objective of creating a powerful combination of real-time MR-guidance imaging platforms and ultrasound for delivering non-invasive ablative tools to clinicians.

 

The Company will consider acquisitions ranging in size and structure, but all share the characteristic of having a strong underlying strategic rationale, which include enhancing the Company’s position in existing markets or providing entry into new markets, expanding the Company’s administrative and technological capabilities, providing new supplier relationships and enhancing the breadth and depth of the Company’s product and service offering.

 

ITEM 6. INTELLECTUAL PROPERTY

 

The Company’s intellectual property is comprised of a broad and world-wide portfolio of patents, patent applications, trademarks, copyrights, trade secrets and other proprietary assets. The Company’s intellectual property portfolio is both growing and dynamic and includes approximately 35 patent families representing about 107 granted or allowed patents and about 60 patent applications in various stages of review and prosecution around the world.

 

Many of the Company’s patents and patent applications claim electronic and mechanical aspects of hardware, software and methods related to ultrasonic ablation of tissue. The intellectual property assets are largely directed to (i) using real time MRI imaging as a tool to plan, monitor or control said ultrasonic ablation; (ii) MRI thermometry methods, especially in respect of the Company’s ultrasound therapy processes and devices; (iii) the phasing, beam-forming, and control of acoustic arrays and similar energy sources; (iv) computational method to improve filtering, imaging and analyzing the results of MRI-guided thermal therapy processes; and (v) secondary and support systems such as active cooling of near-target tissues. The portfolio covers both the “TULSA” and the “SONALLEVE” families of products, as well as generic technologies and applications and extensions of the Company’s products.

 

The Company believes that the protection of its intellectual property is an essential element of its business and the Company intends to continue its investment in the development of its intellectual property portfolio. The Company has worked over the past year to pursue, maintain and expand on the intellectual property portfolio acquired from Philips in 2017. This intellectual property has been strengthened and extended to many jurisdictions around the globe in support of the sales, development and marketing efforts of the Company.

 

The Company pursues a global intellectual property strategy, registering for patent protection in all jurisdictions where it intends to carry on business, including the United States, Canada, Japan, major European markets (e.g., Germany, France, U.K., Italy, Spain and Turkey) and the emerging markets (e.g., Brazil, Russia, India, and China).

 

 

 

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The Company also relies upon trade secrets, know-how and other proprietary, confidential information for the protection of its technology. The Company requires all employees, consultants, scientific advisors and other contractors to enter into confidentiality agreements to protect against the disclosure of such proprietary information. Each inventor is required to execute a formal assignment specific to each invention that he or she is listed, and which is officially recorded in the proper patent office.

 

In addition to developing its own intellectual property portfolio, the Company has licensed and acquired intellectual property rights from third parties through exclusive licenses, collaborative research and asset purchase agreements. Material license agreements include an exclusive license to granted and pending patents owned by Sunnybrook, directed to MR-guided ultrasound ablation systems and methods.

 

ITEM 7. HUMAN RESOURCES

 

As of the date of this AIF, Profound has 64 full-time employees, 13 of whom are unionized. Profound believes that its relations with its employees are positive. The Company will be adding staff and consulting resources in order to support product development, market access, field support and additional clinical trials.

 

ITEM 8. DIVIDENDS

 

Profound has not declared or paid any dividends since incorporation and has no present intention to declare or pay any dividends in the foreseeable future. Any decision to declare or pay dividends on the Common Shares will be made by the board of directors based upon Profound’s earnings, financial requirements and other conditions existing at such future time.

 

ITEM 9. DESCRIPTION OF CAPITAL STRUCTURE

 

The authorized capital of Profound consists of an unlimited number of Common Shares.

 

Common Shares

 

As at December 31, 2018, there were a total of 108,054,939 Common Shares issued and outstanding. The holders of the Common Shares are entitled to receive notice of and to attend all annual and special meetings of the shareholders of the Company and to one vote in respect of each common share held at such meetings.

 

On March 20, 2018, the Company closed a bought deal financing, resulting in the issuance of 34,500,000 units at a price of $1.00 per unit for gross proceeds of $34,500,000 ($32,027,502, net of cash transaction costs). Each unit consisted of one Common Share of the Company and one-half of one Common Share purchase warrant, resulting in the issuance of 34,500,000 Common Shares and 17,250,000 warrants. Each whole warrant has a five-year term and entitles the holder thereof to acquire one Common Share at an exercise price of $1.40 per Common Share.

 

On September 20, 2017, the Company closed a bought deal financing, resulting in the issuance of 10,000,000 units at a price of $1.00 per unit for gross proceeds of $10,000,000 ($8,913,868, net of cash transaction costs). Each unit consisted of one Common Share of the Company and one-half of one Common Share purchase warrant, resulting in the issuance of 10,000,000 Common Shares and 5,000,000 warrants. Each whole warrant has a three-year term and entitles the holder thereof to acquire one Common Share at a price of $1.40 per Common Share.

 

 

 

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Share Options and Warrants

 

As at December 31, 2018, a total of 6,244,779 share options were outstanding under the Company’s Share Option Plan and 22,571,714 warrants were outstanding.

 

ITEM 10. MARKET FOR SECURITIES

 

10.1       Trading Prices and Volume

 

Profound’s Common Shares are listed and posted for trading on the TSX under the trading symbol “PRN”. The following table sets forth the price range per Common Share and trading volume for the Common Shares on the TSX-V and TSX, for the period indicated:

 

Month   High     Low     Volume  
January 2018   $ 1.08     $ 0.78       1,869,733  
February 2018   $ 1.19     $ 0.95       2,521,973  
March 2018   $ 1.17     $ 0.91       2,112,264  
April 2018   $ 1.06     $ 0.88       1,057,666  
May 2018   $ 1.25     $ 0.91       4,190,932  
June 2018   $ 1.10     $ 0.96       486,890  
July 2018   $ 1.03     $ 0.90       566,938  
August 2018   $ 1.07     $ 0.80       1,164,485  
September 2018   $ 0.92     $ 0.69       1,353,023  
October 2018   $ 0.73     $ 0.54       3,068,582  
November 2018   $ 0.75     $ 0.56       2,045,337  
December 2018   $ 0.69     $ 0.46       1,852,493  

 

10.2       Prior Sales

 

Stock Options

 

The following table summarizes the issuances of Options under Profound’s Share Option Plan for the most recently completed financial year.

 

          Number of  
    Exercise Price     Options  
Date of Issuance   ($)     Granted  
March 28, 2018   $ 0.99       33,000  
May 22, 2018   $ 1.19       918,000  
June 15, 2018   $ 1.02       115,500  
August 23, 2018   $ 0.93       900,000  
November 19, 2018   $ 0.60       33,000  

 

 

 

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Common Shares

 

The following table summarizes the issuance of Common Shares for the most recently completed financial year.

 

    Price per        
    Common     Number of  
    Share     Common Shares  
Date of Issuance   ($)     Issued  
March 20, 2018   $ 1.00       34,500,000  
May 7, 2018   $ 0.24       100,000  
June 11, 2018   $ 0.24       226,562  
June 27, 2018   $ 0.24       100,000  
September 24, 2018   $ 0.30       11,000  

 

Warrants

 

The following table summarizes the issuances of Warrants for the most recently completed financial year.

 

          Number of  
    Exercise Price     Options  
Date of Issuance   ($)     Granted  
March 20, 2018   $ 1.40       17,250,000  
July 31, 2018   $ 0.97       321,714  

 

Share Option Plan

 

The Share Option Plan is administered by the board of directors of the Company which may, from time to time, delegate to a committee of the board of directors, all or any of the powers conferred to the board of directors under the Share Option Plan. The Share Option Plan was originally adopted by the board of directors of the Company on June 4, 2015, and then amended and restated on December 8, 2016 and again on July 13, 2018.

 

The Share Option Plan provides that the board of directors of the Company may from time to time, in its discretion, grant to directors, officers, employees, consultants and any other person or entity engaged to provide ongoing services to the Company non-transferable options to purchase Common Shares, provided that the maximum number of Common Shares reserved for issuance under the Share Option Plan shall be equal to a number that is 13% of the issued and outstanding shares in the capital of the Company at the time of any Option grant.

 

The exercise price of Options shall not be less than the Market Price of the Common Shares on the date the Option is granted. For the purposes of the Share Option Plan, “Market Price” means the volume-weighted average price of the Common Shares on the stock exchange where the majority of trading volume and value of the Common Shares occurs, for the five trading days immediately preceding the relevant date on which the Market Price is to be determined.

 

 

 

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The aggregate number of Common Shares that may be (i) issued to insiders of the Company within any one-year period, or (ii) issuable to insiders of the Company at any time, in each case, under the Share Option Plan alone or when combined with all other security-based compensation arrangements of the Company cannot exceed 10% of the outstanding Common Shares.

 

The Share Option Plan also provides that:

 

1. Common Shares that were the subject of options granted under the Share Option Plan that have been exercised, cancelled, expired, surrendered or otherwise terminated will once again be available for purchase pursuant to an option granted under the Share Option Plan;

 

2. the expiry date for an Option shall not be later than the 10th anniversary of the date an Option is granted, subject to the expiry date falling with a corporate blackout period or within 5 business days following the expiry of such a blackout period, in which case the expiry date will be extended to the 10th business day following the expiry of the blackout period; and

 

3. unless otherwise specified by the board of directors, each Option generally vests and becomes exercisable as to 1/4 of the optionee’s Common Shares on the first anniversary of the date of grant and as to 1/36 of the optionee’s Common Shares on the first day of each calendar month thereafter.

 

Subject to the limitations set out in the Share Option Plan, and any further shareholder approvals required by the TSX, the board of directors of the Company may amend the Share Option Plan from time to time.

 

As of the date of this AIF, there are Options for 5,409,779 Common Shares under the Share Option Plan with a weighted-average exercise price of $1.15 and a weighted-average contractual life of 7.81 years.

 

10.3       Escrowed Securities and Securities subject to Contractual Restriction or Transfer

 

The following table sets forth, as of the date of this AIF, the number of securities of each class of securities of the Company held, to the knowledge of the Company, in escrow or that is subject to a contractual restriction on transfer, and the percentage that number represents of the outstanding securities of that class.

 

    Number of Securities held in        
Designation   Escrow or that are Subject to a     Percentage  
of Class   Contractual Restriction on Transfer     of Class(1)  
Common Shares     -       - %
Options     4,554,779       84.0 %
Warrants     -       - %

 

Notes:                                                                                        

(1)       Together this represents an approximate 3.3% interest in the Company.

 

 

 

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ITEM 11. DIRECTOR AND OFFICERS

 

11.1       Directors and Executive Officers

 

Set out below is information with respect to the directors and officers of the Company as of December 31, 2018:

 

 

    Positions with the Company  
Name and Age and Date First Appointed to Principal Occupation for the Past 5
Place of Residence   the Board (if applicable) years

DAMIAN LAMB(1)(9)

Toronto, Ontario, Canada

47

Director

June 4, 2015

Co-Founder of Genesys Capital (since April 2000)

JEAN-FRANÇOIS PARISEAU(2)(5)(6)

Montréal, Québec, Canada

49

Director

June 4, 2015

Partner, BDC Capital Healthcare Fund (since July 2001).

WILLIAM CURRAN(5)(6)(7)

Rye, New York, USA

70

Director

June 4, 2015

Director, Chairman of Audit Committee and member of Compensation Committee of 3D Systems Corporation (since 2008); previously non-Executive Chairman and Director of Resonant Medical Inc.

ARUN MENAWAT(6)

Oakville, Ontario, Canada

64

Chief Executive Office

August 15, 2016

Director

June 4, 2015

President and Chief Executive Officer of Novadaq Technologies Inc. (from April 2003 to July 2016).

SAMIRA SAKHIA(3)(6)

Montreal, Quebec, Canada

50

Director

March 3, 2017

President of Knight (since August 2016); Chief Financial Officer of Knight (since October 2017); Interim Chief Financial Officer of Antibe Therapeutics Inc. (from August 2015 to December 2015); Chief Financial Officer of Paladin Labs Inc. (from 2001 to 2015).

KENNETH GALBRAITH(4)(6)(8)

White Rock, British Columbia,

Canada

56

Director

January 17, 2017

Founder and Managing Director of Five Corners Capital (since September 2013); General Partner for Venture West Capital (from February 2007 to September 2013).

BRIAN ELLACOTT(4)(6)

Sanibel Island, Florida, USA

61

Director

June 14, 2018

Chief Executive Officer Belmont Instrument (since December 2017); Chief Executive Officer Laborie Medical Technology (July 2013 to September 2017)

ARTHUR L. ROSENTHAL(6)

Oro Valley, Arizona, USA

72

Director

June 14, 2018

Co-Founder and Chief Executive officer of gEyeCue, Ltd. (since December 2011); Professor of Practice in the Biomedical Engineering Department at Boston University (since June 2010).

LINDA MAXWELL(6)

Toronto, Ontario, Canada

44

Director

October 9, 2018

Surgeon (since 2005); Executive Director Biomedical Zone Ryerson University (since June 2015); Technology Transfer Manager University of Oxford (June 2013 to July 2014).

AARON DAVIDSON

Caledon, Ontario, Canada

50

Chief Financial Officer and

Senior Vice President of

Corporate Development

May 3, 2018

Chief Financial Officer and SVP of Corporate Development, Profound Medical Inc. (since May 3, 2018); Co-Head and Managing Director of H.I.G. (from January 2004 to May 2, 2018).

RASHED DEWAN

Toronto, Ontario, Canada

51

Vice President of Finance

Interim Chief Financial Officer

November 17, 2015

Vice President of Finance, Profound Medical Inc. (since November 17, 2015); Corporate Controller of Profound Medical Inc. (since July 6, 2015).

 

 

 

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Notes:

(1)       The Common Shares are controlled and held by Genesys.

(2)       The Common Shares are controlled and held by BDC.

(3)       The Common Shares are controlled and held by Knight.

(4)       Member of the Audit Committee.

(5)       Member of the Human Resource and Corporate Governance Committee.

(6)       Member of the Board of Directors.

(7)       Chair of the Audit Committee.

(8)       Chair of the Human Resource and Corporate Governance Committee.

(9)       Chair of the Board of Directors.

 

The term of each director of Profound will expire on the date of the next annual meeting of shareholders of Profound.

 

As of December 31, 2018, the directors and executive officers of Profound as a group beneficially own, directly or indirectly, or exercise control or direction, 28,186,536 of the issued and outstanding Common Shares, representing approximately 24.8% of the total votes attaching to all of the then outstanding voting securities of Profound before giving effect to the exercise of options and warrants held by such directors and executive officers (and assuming exercise of all options and warrants held by such individuals, 33,778,815 Common Shares representing approximately 24.7% of the total outstanding voting securities of Profound).

 

11.2       Director Biographies

 

Arun Menawat – Chief Executive Officer and Director – Dr. Menawat has an accomplished history of executive leadership success in the healthcare industry. Prior to joining Profound, he served as the Chairman, President and CEO of Novadaq Technologies Inc., a TSX and NASDAQ listed company that marketed medical imaging and therapeutic devices for use in the operating room, since April 2003. Previously, he was President and Chief Operating Officer and Director of another publicly listed medical imaging software company, Cedara Software. His educational background includes a Bachelor of Science in Biology, University of District of Columbia, Washington, District of Columbia, and Ph.D. in Chemical Engineering, from the University of Maryland, College Park, MD, including graduate research in Biomedical Engineering from the National Institute of Health, Bethesda, MD. He also earned an Executive MBA from the J.L. Kellogg School of Management, Northwestern University, Evanston, Illinois.

 

Damian Lamb – Director – Mr. Lamb is co-Founder and Managing Director of Genesys Capital, a Canadian-based venture capital firm exclusively focused on the life sciences industry. He brings a unique experience base, blending skills in both the commercial and technical side of biotechnology. Since co-founding Genesys Capital in 2000, Mr. Lamb has been instrumental in raising over CDN$225 million in venture capital funds and has been involved in deploying over CDN$140 million across 28 investments. Other than Profound, he currently serves on the board of directors of Affinium Pharmaceuticals Inc. and the Centre for Probe Development and Commercialization at McMaster University. He has served on the board of directors of Ionalytics Corporation (acquired by Thermo Electron Corp.), Millenium Biologix (acquired by Medtronic) and was Chairman of the board of directors of DELEX Therapeutics Inc. when it was sold to YM BioSciences. Mr. Lamb works closely with Genesys Capital investee companies to strategically position the companies to build value for shareholders. Prior to co-founding Genesys Capital, Mr. Lamb was an investment manager with MDS Capital Corp. He is a frequently invited speaker at biotechnology industry conferences. Mr. Lamb graduated from McMaster University, Faculty of Health Sciences, with an M.S. in Molecular Neurobiology and also holds a Master of Business Administration from Queen’s University.

 

 

 

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Jean-François Pariseau – Director – Mr. Pariseau is Partner in the BDC Healthcare Fund. He joined BDC Venture Capital in 2001 and has over 20 years of investment and entrepreneurial experience in the healthcare sector. Prior to joining BDC, Jean-François was an investment manager with CDP Capital Technology Ventures, a $2 billion global fund investing in healthcare, information technology and advanced technologies, where he was responsible for healthcare investments in Canada and the United States. He has invested and managed more than $200 million in biopharmaceutical and medical device companies in North America. His experience includes transactions in private and in public companies, IPOs, M&A and fund investments. Prior to this, he was CEO of a consulting company specializing in regulatory affairs, and was VP, R&D for a pharmaceutical-product distribution company, both of which he founded. Jean-François also sits on the board of directors of AngioChem, Clementia Pharmaceutical, Imagia Cybernetics, MedDev Commercialization Centre for medical devices and is an advisor to Hacking Health. Jean-François holds a Bachelor of Science in Biotechnology from Université de Sherbrooke, a Master of Science in Biomedical Sciences from Université de Montréal, and an MBA from HEC Montréal.

 

William Curran – Director – Mr. Curran has extensive experience in operations, finance and executive management. He was formerly President and Chief Executive Officer of Philips Electronics North America. He served in diverse functional and senior management positions during his career with Philips, including as Chief Financial Officer of Philips Medical Systems North America. Mr. Curran currently serves on the board of directors of 3D Systems, Inc., a provider of three-dimensional (“3D”) content-to-print solutions including 3D printers, print materials and on-demand custom parts services for professionals and consumers, and is Chairman of that company’s Audit Committee and a member of the Executive Committee. He was non-executive Chairman and a director of Resonant Medical before it was sold to Elekta A.B. in 2010. He has previously served as a director for companies in the medical, electronics, and software industries. Mr. Curran holds a Master of Business Administration from the Wharton School of the University of Pennsylvania.

 

Samira Sakhia – Director – Prior to Knight, Ms. Sakhia served as the CFO at Paladin from 2001 to 2015. At Paladin, Ms. Sakhia was responsible for the finance, operations, human resources and investor relations functions. During her employment with Paladin, Ms. Sakhia was instrumental in executing in-licensing and acquisition transactions of Canadian and international pharmaceutical products and businesses. In addition, Ms. Sakhia led several M&A and strategic lending transactions as well as equity rounds on the TSX and completed the sale of Paladin to Endo International for over $3 billion. Ms. Sakhia holds an MBA and a Bachelors of Commerce degree from McGill University and is also a Chartered Professional Accountant.

 

Kenneth Galbraith – Director – Mr. Galbraith is an accomplished life sciences industry veteran with over 25 years of experience acting as an executive, director, investor and advisor to companies in the biotechnology, medical device, pharmaceutical and healthcare sectors. Mr. Galbraith joined Ventures West as a General Partner in 2007 and led the firm’s biotechnology practice prior to founding Five Corners Capital in 2013 to continue management of the Ventures West investment portfolio. Previously, he served as the Chairman and Interim CEO of AnorMED until its sale to Genzyme Corp. in a cash transaction worth almost US$600 million. Starting his career in the life sciences sector in 1987, Mr. Galbraith spent 13 years in senior management with QLT Inc., retiring in 2000 from his position as Executive VP and CFO when QLT Inc.’s market capitalization exceeded US$5 billion. He has served on the board of directors of several public and private companies, including Angiotech Pharmaceuticals, Arbutus Biopharma and Cardiome Pharma. Mr. Galbraith currently serves on the board of directors of Macrogenics and Prometic Life Sciences. Mr. Galbraith earned a Bachelor of Commerce (Honors) degree from the University of British Columbia in 1985 and was appointed a Fellow of the Chartered Accountants of British Columbia in 2013.

 

 

 

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Arthur L. Rosenthal – Director – Dr. Rosenthal is director and Chair of Compensation Committee for LivaNova PLC, a UK global medical technology company. Prior, Dr. Rosenthal served on the Cyberonics board of directors as a non-executive director and Chair of the Compensation Committee from January 2007 to October 2015. Since June 2010, Dr. Rosenthal has served as Professor of Practice in the Biomedical Engineering Department at Boston University. Since December 2011, Dr. Rosenthal has also served as CEO of gEyeCue, Ltd., which he co-founded, a development stage medical device company working on a guided biopsy for lower and upper gastrointestinal cancer screening. From June 2011 until July 2012, Dr. Rosenthal served as executive vice chairman of Cappella Medical Devices Ltd. (now ArraVasc Ltd.), a development-stage company focused on novel device solutions for coronary artery disease. From June 2009 until June 2011, Dr. Rosenthal served as President and CEO of Cappella, Inc. Dr. Rosenthal served as chairman, from January 2002, and CEO, commencing in January 2005, of Labcoat, Ltd. until its acquisition by Boston Scientific Corporation in December 2008. From January 1994 to May 2000, Dr. Rosenthal was a Senior Vice President, Corporate Officer, and Chief Development Officer of Boston Scientific, and from May 2000 until his retirement in January 2005, he was a Senior Vice President, Chief Scientific Officer, and Executive Committee Member of Boston Scientific. From 2000 until 2010, Dr. Rosenthal served as a non-executive director, and from 2006 through 2009, as chairman of the Remuneration Committee, of Renovo, Ltd., a U.K. based pharmaceutical company that became publicly traded in 2006. In July 2009, Dr. Rosenthal joined the board of Interface Biologics, Inc., a Toronto-based development stage company focused on drug delivery devices, as a non-executive director. In April 2011, Dr. Rosenthal was elected Chairman at Interface Biologics, Inc. From April 2013 to May 2015, Dr. Rosenthal served as non-executive director and Member of the Compensation Committee of Arch Technologies, Inc. and is currently and member of Arch’s Clinical Advisory Board. In 2015, Dr. Rosenthal was appointed to the Industrial Advisory Committee, CURAM (National University in Galway, Ireland). Dr. Rosenthal is a Fellow of the American Institute of Medical and Biological Engineering since 2003.

 

Brian Ellacott – Director – Mr. Ellacott is an experienced global medical device executive. Mr. Ellacott joined Belmont Instrument as Chief Executive Officer in December 2017. Belmont Instrument is a Boston based private equity owned medical device company with a leading global position in fluid warming and infusion systems. Prior to Belmont Instrument, Mr. Ellacott was the President and CEO of Laborie Medical Technologies (“Laborie”). Laborie is a Urology and Gastroenterology medical device company based in Toronto with manufacturing facilities in Toronto, Montreal, Enschede NL, Attikon Switzerland and Portsmouth New Hampshire. Mr. Ellacott joined private equity owned Laborie as President and CEO in July 2013 and in four years completed 14 global acquisitions tripling Laborie’s revenue and increasing EBITDA eight fold. The company was ranked as one of the fastest growing and most profitable medical device companies in the world. Prior to joining Laborie, Mr. Ellacott served as Executive Vice President and General Manager of Invacare’s (NYSE:IVC) $1 billion North and South American homecare and rehabilitation business. Mr. Ellacott has also held executive positions with Baxter International and American Hospital Supply, with assignments in Canada, Australia and the United States. Mr. Ellacott serves on the board of Belmont and is the past Chairman of the board of the Canadian Assistive Devices Association. Mr. Ellacott holds a Bachelor of Business Administration Degree from Laurier University, Waterloo, Ontario Canada and is a dual United States and Canadian citizen.

 

Linda Maxwell – Director – Dr. Maxwell, a seasoned surgeon and entrepreneur, is the Founding and Executive Director of the Biomedical Zone, a business incubator for emerging health technology companies. It is an innovative strategic partnership between St. Michael’s Hospital and Ryerson University. Under Dr. Maxwell’s stewardship, the Biomedical Zone has gone from concept to creation to going concern, supporting Toronto’s leading health technology businesses and driving disruption and innovation adoption in the clinical setting. Dr. Maxwell’s breadth of experience and scope of expertise is founded on over a decade and a half as an accomplished head and neck/facial plastic surgeon. Her academic medical career is distinguished by university appointments as a clinical instructor, medical school faculty member, and published scientific author. A frequent public speaker and panelist, Dr. Maxwell has addressed national and international communities on scientific research, innovation, and entrepreneurship. Additionally, Dr. Maxwell has worked internationally as a senior tech transfer manager and partnership leader for innovation and commercialization for the National Health Service and University of Oxford. She also worked for Medtronic on business strategy for South America (Brazil) and continues to consult to Medtronic on international clinical trials as an external medical monitor. In addition to her professional endeavors, Dr. Maxwell is a member of the Institute of Corporate Directors. She serves as a director for Profound Medical, MedicAlert Foundation Canada and Economic Club of Canada. She serves as an innovation and health technology subject matter expert for the Federal government, Canadian Space Agency, Canadian Medical Association, Ontario Chief Innovation Strategist. Dr. Maxwell earned a Bachelor’s degree with honors from Harvard University (Biology, cum laude), M.D. from Yale University, and M.B.A. from University of Oxford. She completed six years of residency and fellowship training in surgery at the University of Toronto. Additionally, Dr. Maxwell successfully completed Royal College of Canada, American College of Surgery, and American Board of Facial Plastic Reconstructive Surgery certifications.

 

 

 

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11.3       Corporate Cease Trade Orders or Bankruptcies

 

No director or executive officer of Profound is as at the date of this AIF, or has been, within the 10 years prior to the date hereof, a director, chief executive officer or chief financial officer of any company that:

 

  (a) was the subject of a cease trade or similar order, or an order that denied such company access to any exemptions under applicable securities legislation for a period of more than 30 consecutive days that was issued while the proposed director was acting as director, chief executive officer or chief financial officer; or

 

  (b) was the subject of a cease trade or similar order, or an order that denied such company access to any exemptions under applicable securities legislation for a period of more than 30 consecutive days that was issued after the proposed director ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer.

 

No director or executive officer of Profound and no shareholder holding a sufficient number of securities of Profound to affect materially the control of Profound is as at the date of this AIF, or has been within the 10 years prior to the date of this AIF, a director or executive officer of any company that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of that person.

 

No director or executive officer of Profound and no shareholder holding a sufficient number of securities of Profound to affect materially the control of Profound is as at the date of this AIF, or has been within the 10 years prior to the date of this AIF, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of that person.

 

No director or executive officer of Profound or a shareholder holding a sufficient number of securities of Profound to affect materially the control of Profound has been subject to any penalties or sanctions imposed by a court relating to securities legislation or by any securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority or has been subject to any other penalties or sanctions imposed by a court or regulatory body that would be likely to be considered important to an investor in making an investment decision.

 

 

 

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ITEM 12. PROMOTER

 

There are no Promoters of Profound.

 

ITEM 13. LEGAL PROCEEDINGS AND REGULATORY ACTIONS

 

During the most recently completed fiscal year: (a) there were no legal proceedings to which Profound was a party, or by which any of its property was subject, which would be material to it and are not aware of any such proceedings being contemplated, (b) there were no penalties or sanctions imposed by a court relating to securities legislation, or other penalties or sanctions imposed by a court or regulatory body against it that would likely be considered important to a reasonable investor making an investment decision and (c) Profound has not entered into any settlement agreements before a court relating to securities legislation or with a securities regulatory authority.

 

ITEM 14. INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS

 

To the knowledge of management of the Company, other than in connection with the Qualified Transaction, there are no material interests, direct or indirect, by way of beneficial ownership of securities or otherwise, of any informed persons of the Company, directors, proposed directors or officers of the Company, any shareholder who beneficially owns more than 10% of the Common Shares of the Company, or any associate or affiliate of these persons in any transaction since the commencement of the Company’s last completed fiscal year or in any proposed transaction, which has materially affected or would materially affect the Company other than as disclosed herein or in the financial statements of the Company for the fiscal year ended December 31, 2017. Reference should be made to the notes to the audited financial statements for a more detailed description of any material transaction.

 

ITEM 15. TRANSFER AGENT AND REGISTRAR

 

The Company’s registrar and transfer agent is TSX Trust Company at its principal office located in Toronto, Ontario.

 

ITEM 16. MATERIAL CONTRACTS

 

Except for contracts entered into in the ordinary course of business, the following are the only material agreements of Profound:

 

  · Amended and Restated Technology License Agreement dated May 16, 2011 between PMI and Sunnybrook (the “Sunnybrook License”);
  · Philips Agreement – see “Alliances and Partnerships – Philips” and “Acquisitions”;
  · Knight Loan Agreement;
  · Transitional Services Agreement dated July 31, 2017 between Philips and PMI (the “Transitional Services Agreement”).
  · Supply Agreement dated July 31, 2017 between PMI and Philips Medical Systems Nederland B.V. (“Philips Medical”) (the “Supply Agreement”);
  · Intellectual Property Assignment dated July 31, 2017 between Philips and PMI (the “IP Assignment”);
  · License Agreement dated July 31, 2017 between PMI and Philips (the “License Agreement”);
  · Noncompetition, Nonsolicitation and Confidentiality Agreement dated July 31, 2017 between Philips and PMI (the “Confidentiality Agreement”);
  · Resale Purchasing Agreement dated July 31, 2017 between Philips Medical and PMI (the “Resale Purchasing Agreement”);
  · Share Acquisition Agreement dated July 31, 2017 between Philips and Profound Medical Inc. (the “Share Acquisition Agreement”);
  · CIBC Loan Agreement; and

 

Copies of the foregoing documents are available on SEDAR at www.sedar.com.

 

 

 

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Sunnybrook License

 

PMI entered into the Sunnybrook License with Sunnybrook on May 16, 2011, pursuant to which Sunnybrook granted to Profound an exclusive worldwide and royalty-free right to use certain defined Sunnybrook technology in connection with, among other things, manufacturing, marketing and selling products such as the TULSA-PRO system, in the field of MRI-guided transurethral ultrasound therapy. Under the license, Profound is subject to various obligations, including a milestone payment of $250,000 upon clearance by the FDA of Profound’s first product for sale for human use and payment of legal costs associated with patent application preparation, filing and maintenance. If either party to the Sunnybrook License breaches or fails to perform a material obligation and fails to cure such breach or perform such obligations within a 30 day cure period, the non-breaching party may terminate the agreement. Material obligations include Profound agreeing not to use the technology or intellectual property outside of the license scope, not to use the technology or intellectual property outside the field of MRI-guided transurethral ultrasound therapy (or permitting Profound’s customers to do so) and not to breach confidentiality obligations.

 

CIBC Loan Agreement

 

PMI entered into the CIBC Loan Agreement with CIBC on July 30, 2018, for initial gross proceeds of $12,500,000 with an interest rate based on prime plus 2.5%. PMI is required to make interest only payments for the first 15 months and monthly repayments on the principal plus accrued interest afterwards for 33 months. All obligations of PMI under the CIBC Loan Agreement are guaranteed by the Company and certain of its current and future subsidiaries and include first priority security interests in the assets of the Company and such subsidiaries. PMI has the ability to draw an additional $6,250,000 subject to the achievement of certain financing and product development milestones. In connection with the CIBC Loan Agreement, the Company also issued Common Share purchase warrants to CIBC, with each warrant entitling the holder to acquire one Common Share at a price of $0.97 per Common Share until the date that is 60 months from the closing of the CIBC Loan Agreement, with a cashless exercise feature.

 

Knight Loan Agreement

 

PMI entered into the Knight Loan Agreement with Knight on April 30, 2015, pursuant to which Knight loaned $4,000,000 to PMI. Profound has granted a security interest over all assets (including the shares owned by Profound). The term of the Knight Loan Agreement is initially four years with an interest rate of 15% per annum. Provided that certain conditions are satisfied, PMI has the option to request extensions of the maturity date in one-year increments to a maximum of four times, resulting in a potential eight year term of the Knight Loan Agreement. Following an event of default under the Knight Loan Agreement, an additional 5% interest will be added to the then effective annual rate of interest. Knight was also granted a royalty of 0.5% on net sales resulting from global sales of each of the Company’s products, processes or services under development, developed, manufactured, licensed, distributed, marketed or sold by PMI or similar products or services in which PMI has any proprietary rights or beneficial interests for the duration of the Knight Loan Agreement.

 

Transitional Services Agreement

 

PMI entered into the Transitional Services Agreement with Philips in connection with the SONALLEVE MR-HIFU Transaction. For a limited time following the transition of the SONALLEVE MR-HIFU business to PMI, Philips and its affiliates will provide services including: information technology support, use of certain Philips’ labs and offices and knowledge transfer to Profound personnel. Profound is obliged to use its reasonable endeavours to eliminate its reliance on these transitional services as soon as is reasonably practicable after closing. Payment from Profound to Philips for transitional services provided will be in accordance with the terms listed in Schedule 2 to the Transitional Services Agreement. The Transitional Services Agreement with Philips are all terminated except for the Research and Development scanner use.

 

 

 

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Supply Agreement

 

PMI entered into the Supply Agreement with Philips Medical in connection with the SONALLEVE MR-HIFU Transaction. Under the terms of the Supply Agreement and until such time as the manufacturing of SONALLEVE MR-HIFU is assumed by PMI, Philips Medical agrees to serve as a contract manufacturer to PMI for SONALLEVE MR-HIFU. Both PMI and Philips Medical will work together to ensure that production capacity and delivery times are appropriate to meet PMI’s sales forecasts.

 

IP Assignment

 

PMI entered into the IP Assignment with Philips in connection with the SONALLEVE MR-HIFU Transaction. Under the terms of the IP Assignment, PMI is assigned certain intellectual property assets from Philips, including applications and registrations for patents and trademarks, related to SONALLEVE MR-HIFU.

 

License Agreement

 

PMI entered into the License Agreement with Philips in connection with the SONALLEVE MR-HIFU Transaction. Under the terms of the License Agreement, PMI receives a worldwide license to, among other things, manufacture, sell and lease SONALLEVE MR-HIFU. The license is exclusive to PMI and its affiliates for a period of three years following the date of the License Agreement, after which time the license has a modified exclusivity period of two years and is non-exclusive thereafter.

 

Confidentiality Agreement

 

PMI entered into the Confidentiality Agreement with Philips in connection with the SONALLEVE MR-HIFU Transaction. Under the terms of the Confidentiality Agreement, Philips covenants and obliges, among other things, to: i) not compete in the Line of Business, anywhere in the Territory (as defined in the Confidentiality Agreement) for period of three years after closing; ii) not solicit any employee of PMI or any of its affiliates for so long as agreements related to the SONALLEVE MR-HIFU Transaction are in force, plus an additional two years; and iii) maintain in confidence any confidential information that if disseminated would be detrimental to the business, for a period of ten years after closing.

 

Resale Purchasing Agreement

 

PMI entered into the Resale Purchasing Agreement with Philips Medical in connection with the SONALLEVE MR-HIFU Transaction. Under the terms of the Resale Purchasing Agreement, Philips Medical is permitted to purchase certain products for the purpose of reselling such products to its customers. PMI is permitted to sell additional consumables directly to a customer of Philips Medical, but only after an initial sale of consumables by Philips and subject to certain conditions in the Resale Purchasing Agreement.

 

Share Acquisition Agreement

 

Profound entered into the Share Acquisition Agreement with Philips as part of the payment for the transfer of the SONALLEVE MR-HIFU business to PMI. Under the terms of the Share Acquisition Agreement, Philips acquired 7,400,000 Common Shares, at a price of $1.10 per Common Share.

 

ITEM 17. AUDIT COMMITTEE INFORMATION

 

Set out below is the information with respect to the audit committee of Profound’s board of directors (the “Audit Committee”), including the composition of the Audit Committee, the text of the Audit Committee charter (attached hereto as Schedule “A”), and the fees paid to the external auditor.

 

 

 

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The Audit Committee oversees the accounting and financial reporting practices and procedures of the Company’s financial statements. The principal responsibilities of the Audit Committee include: (i) overseeing the quality and integrity of the internal controls and accounting procedures of the Company, including reviewing the Company’s procedures for internal control with the Company’s auditor and chief financial officer; (ii) reviewing and assessing the quality and integrity of the Company’s annual and quarterly financial statements and related management discussion and analysis, as well as all other material continuous disclosure documents; (iii) monitoring compliance with legal and regulatory requirements related to financial reporting; (iv) reviewing and approving the engagement of the auditor of the Company and independent audit fees; (v) reviewing the qualifications, performance and independence of the auditor of the Company, considering the auditor’s recommendations and managing the relationship with the auditor, including meeting with the auditor as required in connection with the audit services provided to the Company; (vi) assessing the Company’s financial and accounting personnel; (vii) reviewing the Company’s risk management procedures; (viii) reviewing any significant transactions outside of the Company’s ordinary course of business and any pending litigation involving the Company; and (ix) examining improprieties or suspected improprieties with respect to accounting and other matters that affect financial reporting.

 

Composition of the Audit Committee

 

The following are the current members of the Audit Committee:

 

Name Independence Financial Literacy
KENNETH GALBRAITH Independent Financially Literate
WILLIAM CURRAN Independent Financially Literate
BRIAN ELLACOTT Independent Financially Literate

 

Relevant Education and Experience

 

The relevant education and experience of each member of the Audit Committee is provided above, under the heading “Directors and Officers”. All of the Audit Committee members are independent of management of the Company as required by the TSX and each member is financially literate in that each has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Company’s financial statements.

 

Audit Committee Oversight

 

At no time since the commencement of the Company’s most recently completed financial period was a recommendation of the Audit Committee to nominate or compensate an external auditor not adopted by the board of directors.

 

 

 

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External Auditor Service Fees (By Category)

 

The aggregate fees billed (excluding out of pocket expenses) by the Company’s external auditor in the last two fiscal years as follows:

 

Financial Year Ending     Audit Fees(1)     Audit Related Fees(2)     Tax Fees(3)     All Other Fees(4)  
December 31, 2018     $ 365,776     $ 0     $ 61,215     $ 0  
December 31, 2017     $ 313,400     $ 29,700     $ 186,000     $ 0  

 

Notes:

(1)       Audit fees includes annual audit, quarterly reviews and work performed in relation to the bought deals.

(2)       Audit related fees includes work performed on acquisitions.

(3)       Tax fees includes fees related to annual tax returns and scientific research credit return along with tax and transfer pricing advice.

 

ITEM 18. INTEREST OF EXPERTS

 

The Company’s auditors are PricewaterhouseCoopers LLP, Chartered Professional Accountants, who have prepared an independent auditor’s report dated March 7, 2019 in respect of the Company’s consolidated financial statements as at December 31, 2018 and December 31, 2017 and for years then ended. PricewaterhouseCoopers LLP has advised that they are independent with respect to the Company within the meaning of the Chartered Professional Accountants of Ontario CPA Code of Professional Conduct.

 

ITEM 19. ADDITIONAL INFORMATION

 

Additional information relating to the Company may be found on SEDAR at www.sedar.com. Additional financial information is available in the Company’s financial statements and MD&A for its most recently completed financial year.

 

 

 

  

SCHEDULE “A”

 

PROFOUND MEDICAL CORP.

 

AUDIT COMMITTEE CHARTER

 

PURPOSE

 

The Audit Committee (the “Committee”) is a standing committee appointed by the board of directors (the “Board”) of the Profound Medical Corp. (the “Company”). The Committee is established to assist the Board in fulfilling its oversight responsibilities with respect to the financial affairs of the Company, including responsibility to:

 

  · oversee the integrity of the Company’s financial statements and financial reporting process, audit process, internal accounting controls and procedures and compliance with related legal and accounting principles;

 

  · oversee the qualifications and independence of the external auditor;

 

  · oversee the work of the Company’s financial management, internal audit function (if any) and external auditor in these areas; and

 

  · provide an open avenue of communication between the external auditor, the internal auditors (if any), the Board and the Company’s management.

 

In addition, the Committee shall prepare, if required, an audit committee report for inclusion in the proxy circular prepared in connection with the Company’s annual meeting of shareholders, in accordance with applicable rules and regulations.

 

The function of the Committee is oversight. It is not the duty or responsibility of the Committee or its members (i) to plan or conduct audits, (ii) to determine that the Company’s financial statements are complete and accurate and are in accordance with international financial reporting standards (“IFRS”) or (iii) to conduct other types of auditing or accounting reviews or similar procedures or investigations. The Committee members and its Chair are members of the Board, appointed to the Committee to provide broad oversight of the financial, risk and control-related activities of the Company, and are specifically not accountable or responsible for the day-to-day operation or performance of such activities. In particular, the member or members identified as audit committee financial experts, if any, shall not be accountable for giving professional opinions on the internal or external audit of the Company’s financial information.

 

Management is responsible for the preparation, presentation and integrity of the Company’s financial statements. Management is also responsible for ensuring that adequate systems of risk assessment and internal controls and procedures are designed and put in place in accordance with the accounting policies determined by the Committee to provide reasonable assurance that assets are safeguarded and transactions are properly authorized, recorded and reported and to assure the effectiveness and efficiency of operations, the reliability of financial reporting and compliance with accounting standards and with applicable laws and regulations. The internal auditor (if any) is responsible for monitoring and reporting on the adequacy and effectiveness of the system of internal controls. The external auditor is responsible for planning and carrying out an audit of the Company’s annual financial statements in accordance with IFRS to provide reasonable assurance that, among other things, such financial statements are in accordance with IFRS.

 

A-1

 

PROCEDURES

 

1. Composition – The Committee shall be comprised of at least three members. None of the members of the Committee shall be an officer or employee of the Company or any of its subsidiaries and each member of the Committee shall be an “independent” director (as such term is defined from time to time under the requirements or guidelines for audit committee service under applicable securities laws and the rules of any stock exchange on which the Company’s securities are listed for trading) and none of the members shall have participated in the preparation of the financial statements of the Company or any current subsidiaries of the Company at any time over the past three years.

 

  All members of the Committee must be “financially literate” (as that term is defined from time to time under the requirements or guidelines for audit committee service under securities laws and the rules of any stock exchange on which the Company’s securities are listed for trading or, if it is not so defined, then as that term is interpreted by the board of directors in its business judgment) or must become financially literate within a reasonable period of time after their appointment to the Committee.

 

2. Appointment and Replacement of Committee Members – Any member of the Committee may be removed or replaced at any time by the Board and shall automatically cease to be a member of the Committee upon ceasing to be a director. The Board may fill vacancies on the Committee by appointing another director to the Committee. The Board shall fill any vacancy if the membership of the Committee is less than three directors or if the Committee does not have at least one member with accounting or related financial expertise. Whenever there is a vacancy on the Committee, the remaining members may exercise all its power as long as a quorum remains in office. Subject to the foregoing, the members of the Committee shall be appointed by the Board annually and each member of the Committee shall remain on the Committee until the next annual meeting of shareholders after his or her election or until his or her successor shall be duly elected and qualified.

 

3. Committee Chair – Unless a Chair of the Committee is designated by the full Board, the members of the Committee may designate a Chair by majority vote of the full Committee. The Chair of the Committee shall be responsible for leadership of the Committee, including preparing the agenda, presiding over the meetings, making committee assignments and reporting to the Board.

 

4. Conflicts of Interest – If a Committee member faces a potential or actual conflict of interest relating to a matter before the Committee, other than matters relating to the compensation of directors, that member shall be responsible for alerting the Chair of the Committee. If the Chair of the Committee faces a potential or actual conflict of interest, the Chair of the Committee shall advise the Chair of the Board. If the Chair of the Committee, or the Chair of the Board, as the case may be, concurs that a potential or actual conflict of interest exists, then the member faced with such conflict shall disclose to the Committee the member’s interest and shall not participate in consideration of the matter and shall not vote on the matter.

 

5. Compensation of Committee Members – The members of the Committee shall be entitled to receive such remuneration for acting as members of the Committee as the Board may from time to time determine. No member of the Committee shall receive from the Company or any of its affiliates any compensation other than the fees to which he or she is entitled as a director or a member of the Committee of the Board or any of its affiliates.

 

6. Meetings of the Committee –

 

  (a) Procedures for Meetings – Subject to any applicable statutory or regulatory requirements, the articles and by-laws of the Company and the terms of this Charter, the time at which and place where the meetings of the Committee shall be held and the calling of Committee meetings and the procedure in all things at such meetings shall be determined by the Committee, provided that it is understood that the Committee may meet in person and by telephone or electronic means that permit all persons participating in the meeting to communicate simultaneously and instantaneously and that the Committee may act by means of a written resolution signed by all members entitled to vote on the matter.

 

A-2

 

  (b) Calling of Meetings – The Committee shall meet as often as it deems appropriate to discharge its responsibilities. Notice of the time and place of every meeting shall be given in writing, by any means of transmitted or recorded communication, including facsimile, telex, telegram or other electronic means that produces a written copy, to each member of the Committee at least 24 hours prior to the time fixed for such meeting. However, a member may in any manner waive a notice of a meeting. Attendance of a member at a meeting constitutes a waiver of notice of the meeting, except where a member attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called. Whenever practicable, the agenda for the meeting and the meeting materials shall be provided to members before the Committee meeting in sufficient time to provide adequate opportunity for their review.

 

  (c) Quorum – A majority of the members of the Committee constitute a quorum for the transaction of Committee business.

 

  (d) Chair of Meetings – If the Chair of the Committee is not present at any meeting of the Committee, one of the other members of the Committee who is present shall be chosen by the Committee to preside at the meeting.

 

  (e) Secretary of Meeting – The Chair of the Committee shall designate a person who need not be a member of the Committee to act as secretary or, if the Chair of the Committee fails to designate such a person, the secretary of the Company shall be secretary of the Committee. The agenda of each Committee meeting will be prepared by the secretary of the Committee and, whenever reasonably practicable, circulated to each member prior to each meeting.

 

  (f) Separate Executive Meetings – The Committee shall meet at least once every year, and more often as warranted, with the Chief Executive Officer and such other officers of the Company as the Committee may determine to discuss any matters that the Committee or such individuals believes should be discussed privately.

 

  (g) Minutes – Minutes of the proceedings of each Committee meeting shall be kept in minute books provided for that purpose. The minutes of Committee meetings shall accurately record the discussions of and decisions made by the Committee, including all recommendations to be made by the Committee to the Board and shall be distributed to all Committee members.

 

AUDIT RESPONSIBILITIES OF THE COMMITTEE

 

Fundamental Powers

 

7. Subject to any applicable statutory or regulatory requirements, the articles and by-laws of the Company and the terms of this Charter, the Committee shall have the following fundamental powers in addition to any powers set out in this Charter or otherwise specified by the Board from time to time:

 

  (a) Access – The Committee is entitled to full access to all books, records, facilities, and personnel of the Company and its subsidiaries. The Committee may require such officers, directors and employees of the Company and its subsidiaries and others as it may see fit from time to time to provide any information about the Company and its subsidiaries it may deem appropriate and to attend and assist at meetings of the Committee.

 

A-3

 

  (b) Delegation – The Committee may delegate from time to time to any person or committee of persons any of the Committee’s responsibilities that lawfully may be delegated.

 

  (c) Adoption of Policies and Procedures – The Committee may adopt policies and procedures for carrying out its responsibilities.

 

Selection and Oversight of the External Auditor

 

8. The external auditor is ultimately accountable to the Committee and the Board as the representatives of the shareholders of the Company and shall report directly to the Committee and the Committee shall so instruct the external auditor. The Committee shall evaluate the performance of the external auditor and make recommendations to the Board on the appointment, reappointment or replacement of the external auditor of the Company to be proposed in the Company’s proxy circular for shareholder approval and shall have authority to terminate the external auditor. If a change in external auditor is proposed, the Committee shall review the reasons for the change and any other significant issues related to the change, including the response of the incumbent auditors, and enquire as to the qualifications of the proposed auditors before making its recommendation to the Board.

 

9. The Committee shall approve in advance the terms of engagement and the compensation to be paid by the Company to the external auditor with respect to the conduct of the annual audit. The Committee may approve policies and procedures for the pre-approval of services to be rendered by the external auditor, which policies and procedures shall include reasonable detail with respect to the services covered. All non-audit services to be provided to the Company or any of its affiliates by the external auditor or any of its affiliates which are not covered by pre-approval policies and procedures approved by the Committee shall be subject to pre-approval by the Committee.

 

10. The Committee shall review the independence of the external auditor and shall make recommendations to the Board on appropriate actions to be taken which the Committee deems necessary to protect and enhance the independence of the external auditor. In connection with such review, the Committee shall:

 

  (a) actively engage in a dialogue with the external auditor about all relationships or services that may impact the objectivity and independence of the external auditor;

 

  (b) require that the external auditor submit to it on a periodic basis and, at least annually, a formal written statement delineating all relationships between the Company and its subsidiaries, on the one hand, and the external auditor and its affiliates, on the other hand;

 

  (c) consider whether there should be a regular rotation of the audit partners responsible for performing the audit and/or of the external audit firm itself; and

 

  (d) consider the auditor independence standards promulgated by applicable auditing regulatory and professional bodies.

 

11. The Committee shall consider whether to prohibit the external auditor and its affiliates from providing certain non-audit services to the Company and its affiliates.

 

12. The Committee shall establish and monitor clear policies for the hiring by the Company of employees or former employees of the external auditor.

 

13. The Committee shall require the external auditor to provide to the Committee, and the Committee shall review and discuss with the external auditor, all reports which the external auditor is required to provide to the Committee or the Board under rules, policies or practices of professional or regulatory bodies applicable to the external auditor, and any other reports which the Committee may require.

 

A-4

 

14. The Committee is responsible for resolving disagreements between management and the external auditor regarding financial reporting.

 

Appointment and Oversight of Internal Auditors (If Any)

 

15. The appointment, authority, budget, replacement or dismissal of the internal auditors, if any, shall be subject to prior review and approval by the Committee. When any such internal audit function is performed by employees of the Company or its subsidiaries, the Committee may delegate responsibility for approving the employment, term of employment, compensation and termination of employees engaged in such function other than the head of the Company’s internal audit function.

 

16. The Committee shall obtain from the internal auditors (if any), and shall review, summaries of the significant reports to management prepared by any such internal auditors (or the actual reports if requested by the Committee) and management’s responses to such reports.

 

17. The Committee shall, as it deems necessary, communicate with the internal auditors (if any) with respect to their reports and recommendations, the extent to which prior recommendations have been implemented and any other matters that such internal auditors bring to the attention of the Committee. The head of the internal audit function (if one exists) shall have unrestricted access to the Committee.

 

18. The Committee shall, annually or more frequently as it deems necessary, evaluate the internal auditors (if any), including their activities, organizational structure and qualifications and effectiveness.

 

Oversight and Monitoring of Audits

 

19. The Committee shall review with the external auditor, the internal auditors (if any) and management the audit function generally, the objectives, staffing, locations, co-ordination, reliance upon management and internal audit (if any) and general audit approach and scope of proposed audits of the financial statements of the Company and its subsidiaries, the overall audit plans, the responsibilities of management, the internal auditors (if any) and the external auditor, the audit procedures to be used and the timing and estimated budgets of the audits.

 

20. The Committee shall meet periodically as it deems necessary with the internal auditor (if any) to discuss the progress of their activities and any significant findings stemming from internal audits and any difficulties or disputes that arise with management and the adequacy of management’s responses in correcting audit-related deficiencies.

 

21. The Committee shall discuss with the external auditor any difficulties or disputes that arose with management or the internal auditors (if any) during the course of the audit, any restrictions on the scope of activities or access to requested information and the adequacy of management’s responses in correcting audit-related deficiencies.

 

22. The Committee shall review with management the results of internal (if any) and external audits.

 

A-5

 

23. The Committee shall take such other reasonable steps as it may deem necessary to satisfy itself that the audit was conducted in a manner consistent with all applicable legal requirements and auditing standards of applicable professional or regulatory bodies.

 

Oversight and Review of Accounting Principles and Practices

 

24. The Committee shall, as it deems necessary, oversee, review and discuss with management, the external auditor and the internal auditors (if any):

 

  (a) the quality, appropriateness and acceptability of the Company’s accounting principles and practices and that of its subsidiaries used in its financial reporting, changes in the Company’s accounting principles or practices and that of its subsidiaries and the application of particular accounting principles and disclosure practices by management to new transactions or events;

 

  (b) all significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including the effects of alternative methods within IFRS on the financial statements and any “second opinions” sought by management from any other auditor firm or advisor with respect to the accounting treatment of a particular item;

 

  (c) disagreements between management and the external auditor or the internal auditors (if any) regarding the application of any accounting principles or practices;

 

  (d) any material change to the Company’s auditing and accounting principles and practices or that of its subsidiaries as recommended by management, the external auditor or the internal auditors (if any) or which may result from proposed changes to applicable IFRS;

 

  (e) the effect of regulatory and accounting initiatives on the Company’s financial statements and other financial disclosures;

 

  (f) any reserves, accruals, provisions, estimates or management programs and policies, including factors that affect asset and liability carrying values and the timing of revenue and expense recognition, that may have a material effect upon the financial statements of the Company;

 

  (g) the use of special purpose entities and the business purpose and economic effect of off-balance sheet transactions, arrangements, obligations, guarantees and other relationships of the Company or its subsidiaries and their impact on the financial results of the Company;

 

  (h) any legal matter, claim or contingency that could have a significant impact on the financial statements, the Company’s compliance policies and that of its subsidiaries and any material reports, inquiries or other correspondence received from regulators or governmental agencies and the manner in which any such legal matter, claim or contingency has been disclosed in the Company’s financial statements;

 

  (i) the treatment for financial reporting purposes of any significant transactions which are not a normal part of the Company’s operations or those of its subsidiaries;

 

  (j) the use of any “pro forma” or “adjusted” information not in accordance with IFRS; and

 

  (k) management’s determination of goodwill impairment, if any, as required by applicable accounting standards.

 

A-6

 

25. The Committee will review and resolve disagreements between management and the external auditor regarding financial reporting or the application of any accounting principles or practices.

 

Oversight and Monitoring of Internal Controls

 

26. The Committee shall, as it deems necessary, exercise oversight of, review and discuss with management, the external auditor and the internal auditors (if any):

 

  (a) the adequacy and effectiveness of the Company’s internal accounting and financial controls and also of its subsidiaries and the recommendations of management, the external auditor and the internal auditors (if any) for the improvement of accounting practices and internal controls;

 

  (b) any significant deficiencies or material weaknesses in the internal control environment, including with respect to computerized information system controls and security;

 

  (c) any fraud that involves personnel who have a significant role in the Company’s internal control over financial reporting or that of its subsidiaries; and

 

  (d) management’s compliance with the Company’s processes, procedures and internal controls.

 

Communications with Others

 

27. The Committee shall establish and monitor procedures for the receipt and treatment of complaints received by the Company and its subsidiaries regarding accounting, internal accounting controls or audit matters and the anonymous submission by employees of concerns regarding questionable accounting or auditing matters and shall review periodically with management and the internal auditors (if any) these procedures and any significant complaints received.

 

Oversight and Monitoring of the Company’s Financial Disclosures

 

28. The Committee shall:

 

  (a) review with the external auditor and with management and shall recommend to the Board for approval the financial statements and the notes and Management’s Discussion and Analysis (if any) accompanying such financial statements, the Company’s annual report and any financial information of the Company contained in any prospectus or information circular of the Company; and

 

  (b) review, as necessary, with the external auditor and with management each set of interim financial statements and the notes and Management’s Discussion and Analysis (if any) accompanying such financial statements and any other disclosure documents or regulatory filings of the Company containing or accompanying financial information of the Company.

 

Such reviews shall be conducted prior to the release of any summary of the financial results or the filing of such reports with applicable regulators.

 

29. The Committee shall review the disclosure with respect to its pre-approval of audit and non-audit services provided by the external auditor.

 

A-7

 

Oversight of Finance and Financial Risk Matters

 

30. Appointments of the key financial executives involved in the financial reporting process of the Company, including the Chief Financial Officer, shall require the prior review of the Committee.

 

31. The Committee shall receive and review:

 

  (a) periodic reports on compliance with requirements regarding statutory deductions and remittances and, in the event of any non-compliance, the nature and extent of the non-compliance, the reasons therefor and management’s plan and timetable to correct any deficiencies;

 

  (b) material policies and practices of the Company and its subsidiaries respecting cash management and material financing strategies or policies or proposed financing arrangements and objectives of the Company and its subsidiaries; and

 

  (c) material tax policies and tax planning initiatives, tax payments and reporting and any pending tax audits or assessments.

 

32. The Committee shall meet periodically with management to review and discuss the Company’s major financial risk exposures and the policy steps that management has taken to monitor and control such exposures, including the use of financial derivatives and hedging activities and the Company’s insurance programs.

 

33. The Committee shall receive and review the financial statements and other financial information of material subsidiaries of the Company and any auditor recommendations concerning such subsidiaries.

 

34. The Committee shall meet with management to review the process and systems in place for ensuring the reliability of public disclosure documents that contain audited and unaudited financial information and their effectiveness.

 

Additional Responsibilities

 

35. The Committee shall review and make recommendations to the Board concerning the financial structure, condition and strategy of the Company and its subsidiaries, including with respect to annual budgets, long-term financial plans, corporate borrowings, investments, capital expenditures, long term commitments and the issuance and/or repurchase of shares.

 

36. The Committee shall review and/or approve any other matter specifically delegated to the Committee by the Board and undertake on behalf of the Board such other activities as may be necessary or desirable to assist the Board in fulfilling its oversight responsibilities with respect to financial reporting and the Company’s financial obligations.

 

THE CHARTER

 

The Committee shall review and reassess the adequacy of this Charter periodically as it deems appropriate and recommend changes to the Board. The performance of the Committee shall be evaluated with reference to this Charter annually or otherwise periodically as deemed appropriate by the Board.

 

A-8

 

 

 

Exhibit 4.2

 

 

PROFOUND MEDICAL CORP.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEARS ENDED DECEMBER 31, 2018,
2017 AND 2016

 

PRESENTED IN CANADIAN DOLLARS

 

  1  

 

 

 

 

Independent auditor’s report

 

To the Shareholders of Profound Medical Corp.

 

 

 

Our opinion

 

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Profound Medical Corp. and its subsidiaries (together, the Company) as at December 31, 2018 and 2017, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2018 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).

 

What we have audited

The Company’s consolidated financial statements comprise:

 

· the consolidated balance sheets as at December 31, 2018 and 2017;

 

· the consolidated statements of loss and comprehensive loss for each of the three years in the period ended December 31, 2018;

 

· the consolidated statements of changes in shareholders’ equity for each of the three years in the period ended December 31, 2018;

 

· the consolidated statements of cash flows for each of the three years in the period ended December 31, 2018; and

 

· the notes to the consolidated financial statements, which include a summary of significant accounting policies.

 

 

 

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 Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.

 

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

 

Independence

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

 

 

 

PricewaterhouseCoopers LLP

PwC Centre, 354 Davis Road, Suite 600, Oakville, Ontario, Canada L6J 0C5

T: +1 905 815 6300, F: +1 905 815 6499

 

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

 

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Other information

 

Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis.

 

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

 

In connection with our audit of the consolidated 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 consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

 

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard

 

 

 

Responsibilities of management and those charged with governance for the consolidated financial statements

 

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

 

In preparing the consolidated 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.

 

 

 

Auditor’s responsibilities for the audit of the consolidated financial statements

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s 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 these consolidated financial statements.

 

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

 

· Identify and assess the risks of material misstatement of the consolidated 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 auditor’s report to the related disclosures in the consolidated 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 auditor’s 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 consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

· Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

 

We 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.

 

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

 

The engagement partner on the audit resulting in this independent auditor’s report is Neil Rostant.

 

/s/ PricewaterhouseCoopers LLP

 

Chartered Professional Accountants, Licensed Public Accountants

 

Oakville, Ontario, Canada

August 14, 2019

 

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Profound Medical Corp.

Consolidated Balance Sheets

As at December 31, 2018 and 2017

 

    2018     2017  
    $     $  
             
Assets (note 10)                
                 
Current assets                
Cash     30,687,183       11,103,223  
Trade and other receivables (note 5)     2,686,112       4,251,658  
Investment tax credits receivable     480,000       240,000  
Inventory (note 6)     3,631,623       1,431,157  
Prepaid expenses and deposits (note 20)     434,871       576,028  
Total current assets     37,919,789       17,602,066  
                 
Property and equipment (note 7)     1,207,357       1,726,150  
Intangible assets (note 8)     4,013,561       5,141,998  
Goodwill (note 8)     3,409,165       3,409,165  
                 
Total assets     46,549,872       27,879,379  
                 
Liabilities                
                 
Current liabilities                
Accounts payable and accrued liabilities     3,912,350       5,081,704  
Deferred revenue (note 2)     312,558       132,364  
Long-term debt (note 10)     1,339,583       4,701,214  
Provisions (note 9)     1,352,017       93,222  
Other liabilities (notes 10 and 11)     567,296       534,958  
Derivative financial instrument (note 10)     98,203       -  
Income taxes payable     297,353       72,779  
Total current liabilities     7,879,360       10,616,241  
                 
Long-term debt (note 10)     10,615,662       443,875  
Deferred revenue (note 2)     379,044       108,952  
Provisions (note 9)     49,319       988,239  
Other liabilities (notes 10 and 11)     1,000,153       1,580,933  
                 
Total liabilities     19,923,538       13,738,240  
                 
Shareholders’ Equity                
                 
Share capital (note 12)     120,932,404       98,365,770  
Contributed surplus     16,756,294       6,103,970  
Accumulated other comprehensive loss     (28,703 )     (57,929 )
Deficit     (111,033,661 )     (90,270,672 )
                 
Total Shareholders’ Equity     26,626,334       14,141,139  
                 
Total Liabilities and Shareholders’ Equity     46,549,872       27,879,379  
                 
Commitments and contingencies (note 20)                

 

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

 

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Profound Medical Corp.

Consolidated Statements of Loss and Comprehensive Loss

For the years ended December 31, 2018 and 2017 and 2016

 

    2018     2017     2016  
    $     $     $  
                   
Revenue                        
Products     2,421,331       4,663,986       -  
Services     180,947       240,564       -  
      2,602,278       4,904,550       -  
Cost of sales (note 14)     1,778,501       3,032,208       -  
Gross profit     823,777       1,872,342       -  
                         
Operating expenses (note 14)                        
Research and development – net of investment tax credits of $240,000 (2017 – $240,000, 2016 – $240,000)     10,265,388       9,638,190       9,988,693  
General and administrative     6,656,723       5,935,215       4,369,288  
Selling and distribution     4,091,347       3,925,804       1,282,433  
Total operating expenses     21,013,458       19,499,209       15,640,414  
                         
Operating Loss     20,189,681       17,626,867       15,640,414  
                         
Other income and expense                        
Finance costs (note 15)     826,312       1,249,084       829,899  
Finance income     (483,788 )     (127,732 )     (157,598 )
      342,524       1,121,352       672,301  
Loss before taxes     20,532,205       18,748,219       16,312,715  
                         
Income taxes (note 16)     230,784       74,123       14,054  
                         
Net loss for the year     20,762,989       18,822,342       16,326,769  
                         
Other comprehensive loss (income)                        
Item that may be reclassified to profit or loss                        
Foreign currency translation adjustment – net of tax     29,226       (69,245 )     11,316  
                         
Net loss and comprehensive loss for the year     20,792,215       18,753,097       16,338,085  
                         
Loss per share (note 17)                        
Basic and diluted loss per common share     0.21       0.31       0.39  

 

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

 

  7  

 

 

Profound Medical Corp.

Consolidated Statements of Changes in Shareholders’ Equity

For the years ended December 31, 2018 and 2017 and 2016

 

    Number
of shares
    Share
capital
$
    Contributed
surplus
$
    Accumulated
other
comprehensive
income (loss)
$
    Deficit
$
    Total
$
 
                                     
Balance - January 1, 2016     39,473,327       67,082,821       2,002,190       -       (55,121,561 )     13,963,450  
                                                 
Net loss for the year     -       -       -       -       (16,326,769 )     (16,326,769 )
Cumulative translation adjustment – net of tax     -       -       -       11,316       -       11,316  
Exercise of share options     12,250       6,860       (3,185 )     -       -       3,675  
Share-based compensation (note 13)     -       -       1,001,558       -       -       1,001,558  
Issuance of units on bought deal financing (note 12)     15,820,000       16,182,997       -       -       -       16,182,997  
Balance - December 31, 2016     55,305,577       83,272,678       3,000,563       11,316       (71,448,330 )     14,836,227  
                                                 
Net loss for the year     -       -       -       -       (18,822,342 )     (18,822,342 )
Cumulative translation adjustment – net of tax     -       -       -       (69,245 )     -       (69,245 )
Exercise of share options     411,800       271,471       (171,170 )     -       -       100,301  
Share-based compensation (note 13)     -       -       1,338,330       -       -       1,338,330  
Issuance of common shares on acquisition (note 4)     7,400,000       7,844,000       -       -       -       7,844,000  
Issuance of units on bought deal financing (note 12)     10,000,000       6,977,621       1,936,247       -       -       8,913,868  
Balance - December 31, 2017     73,117,377       98,365,770       6,103,970       (57,929 )     (90,270,672 )     14,141,139  
                                                 
Net loss for the year     -       -       -       -       (20,762,989 )     (20,762,989 )
Cumulative translation adjustment – net of tax     -       -       -       29,226       -       29,226  
Exercise of share options     437,562       306,882       (201,625 )     -       -       105,257  
Share-based compensation (note 13)     -       -       1,086,199       -       -       1,086,199  
Issuance of units on bought deal financing (note 12)     34,500,000       22,259,752       9,767,750       -       -       32,027,502  
Balance - December 31, 2018     108,054,939       120,932,404       16,756,294       (28,703 )     (111,033,661 )     26,626,334  

 

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

 

  8  

 

 

Profound Medical Corp.

Consolidated Statements of Cash Flows

For the years ended December 31, 2018 and 2017 and 2016

 

    2018
$
    2017
$
    2016
$
 
                   
Operating activities                        
Net loss for the year     (20,762,989 )     (18,822,342 )     (16,326,769 )
Adjustment to reconcile net loss to net cash flows from operating activities                        
Depreciation of property and equipment     546,001       371,320       167,335  
Amortization of intangible assets     1,128,437       500,518       19,673  
Loss on disposal of property and equipment     -       -       10,248  
Share-based compensation     1,086,199       1,338,330       1,001,558  
Interest and accretion expense (note 15)     1,028,843       1,347,825       829,899  
Change in deferred rent     7,108       123,627       -  
Deferred revenue     450,286       241,316       -  
Change in fair value of derivative financial instrument     (96,619 )     -       -  
Change in fair value of contingent consideration     (325,253 )     82,578       -  
Change in non-cash working capital balances                        
Investment tax credits receivable     (240,000 )     24,000       (91,000 )
Trade and other receivables     1,565,546       (3,985,322 )     (173,857 )
Prepaid expenses and deposits     141,157       120,881       (557,604 )
Inventory     (2,200,466 )     (1,014,334 )     (416,823 )
Accounts payable and accrued liabilities     (1,167,336 )     3,245,048       775,781  
Provisions     319,875       1,041,842       -  
Customer deposits     -       (259,293 )     259,293  
Income taxes payable     224,574       72,779       -  
Total cash used in operating activities     (18,294,637 )     (15,571,227 )     (14,502,266 )
                         
Investing activities                        
Cash acquired in business acquisition (note 4)     -       183,988       -  
Sale of short-term investment     -       -       10,000,000  
Purchase of intangible assets     -       (34,080 )     (223,174 )
Purchase of property and equipment     -       (430,569 )     (863,991 )
Total cash (used in) from investing activities     -       (280,661 )     8,912,835  
                         
Financing activities                        
Issuance of common shares     34,500,000       10,000,000       17,402,000  
Transaction costs paid on issuance of common shares     (2,472,498 )     (1,086,132 )     (1,219,003 )
Proceeds from bank loan     12,500,000       -       -  
Bank loan costs paid     (735,698 )     -       -  
Payment of long-term debt and interest     (5,851,489 )     (2,877,050 )     (286,700 )
Payment of other liabilities     (166,975 )     (15,069 )     -  
Proceeds from share options exercised     105,257       100,301       3,675  
Total cash from financing activities     37,878,597       6,122,050       15,899,972  
                         
Net change in cash during the year     19,583,960       (9,729,838 )     10,310,541  
Cash – Beginning of year     11,103,223       20,833,061       10,522,520  
Cash – End of year     30,687,183       11,103,223       20,833,061  

 

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

 

  9  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

1 Description of business

 

Profound Medical Corp. (Profound) and its subsidiaries (together, the Company) were incorporated under the Ontario Business Corporations Act on July 16, 2014. The Company is a medical technology company developing treatments to ablate the prostate gland, uterine fibroids and nerves for palliative pain relief for patients with metastatic bone disease.

 

The Company’s registered address is 2400 Skymark Avenue, Unit 6, Mississauga, Ontario, L4W 5K5.

 

2 Summary of significant accounting policies and basis of preparation

 

Basis of preparation

 

The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS). The Board of Directors approved these consolidated financial statements on August 14, 2019. These consolidated financial statements comply with IFRS.

 

Adoption of new accounting standards

 

A number of new amended standards became applicable for the current reporting period and the Company had to change its accounting policies as a result. The impact of the adoption of these standards is disclosed below:

 

· IFRS 9, Financial Instruments

 

IFRS 9, Financial Instruments (IFRS 9) replaces the provisions of International Accounting Standard (IAS) 39, Financial Instruments – Recognition and Measurement (IAS 39) that relate to the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting. The adoption of IFRS 9 from January 1, 2018 resulted in changes in the Company’s accounting policies but it did not result in any adjustments.

 

The Company has applied IFRS 9 retrospectively, but has elected not to restate comparative information. As a result, the comparative information provided continues to be accounted for in accordance with the Company’s previous accounting policy.

 

The Company has one type of financial asset that is subject to IFRS 9’s new expected credit loss model, which is trade and other receivables. The Company was required to revise its impairment methodology under IFRS 9 for trade and other receivables and this resulted in no adjustments as at January 1, 2018. The Company applies the IFRS 9 simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance for all trade and other receivables. To measure the expected credit losses, trade and other receivables have been grouped based on shared credit risk characteristics and the days past due. On that basis, the loss allowance as at January 1, 2018 and December 31, 2018 is nominal as the Company only transacts with hospitals and private clinics and has not incurred any credit losses since revenue began.

 

  10  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

Trade and other receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, among others, failure to make contractual payments for an extended period of time.

 

There was no impact on the Company’s financial liabilities as a result of the adoption of IFRS 9 and no material change to the Company’s accounting policies for financial liabilities. All historical changes to the Company’s debt agreements were accounted for as extinguishments under IAS 39, which is consistent with the required treatment under IFRS 9.

 

· IFRS 15, Revenue from Contracts with Customers

 

IFRS 15, Revenue from Contracts with Customers (IFRS 15) amends revenue recognition requirements and establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The adoption of IFRS 15 from January 1, 2018 resulted in changes in the Company’s revenue recognition accounting policy but it did not result in any adjustments. In accordance with the transitional provisions in IFRS 15, the Company has adopted the new rules on a full retrospective basis.

 

The Company sells separately priced extended warranty service contracts that extend maintenance coverage beyond the base warranty for its medical devices. The separately priced service contracts typically range from 12 to 24 months. As at December 31, 2018, the Company had $691,602 (2017 – $241,316) of deferred revenue related to unfulfilled performance obligations associated with these extended warranty service contracts. The Company expects to recognize the revenue associated with the unfulfilled performance obligations over the following annual periods:

 

    December 31,
2018
$
    December 31,
2017
$
 
             
2018     -       132,364  
2019     312,558       96,910  
2020     249,808       12,042  
2021     64,618       -  
2022     64,618       -  
                 
      691,602       241,316  

 

Use of estimates and judgments

 

The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 3.

 

  11  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

Consolidation

 

Subsidiaries are all entities over which the Company has control. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The wholly owned subsidiaries of Profound are consolidated from the date control is obtained. All intercompany transactions, balances, income and expenses on transactions with the subsidiaries are fully eliminated.

 

These consolidated financial statements include the following wholly owned subsidiaries of the Company: Profound Medical Inc., Profound Medical Oy, Profound Medical GmbH and Profound Medical (U.S.) Inc.

 

Business combinations

 

The acquisition method of accounting is used to account for business combinations. The consideration transferred in a business combination is measured at fair value at the date of acquisition. Acquisition-related transaction costs are recognized in the consolidated statements of loss and comprehensive loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are initially recognized at their fair value. Goodwill is measured as the excess of the sum of the consideration transferred and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed. When the consideration transferred by the Company in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition date fair value and is included as part of the consideration transferred in a business combination. Changes in the acquisition date fair values of the identifiable assets, liabilities and contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the measurement period (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.

 

Other than measurement period adjustments, contingent consideration that is classified as a financial liability is remeasured at subsequent reporting dates, with the corresponding gain or loss recognized in the consolidated statements of loss and comprehensive loss.

 

Segment reporting

 

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the chief executive officer.

 

Foreign currency translation

 

The Company has a functional currency of Canadian dollars and the functional currency of each subsidiary is determined based on facts and circumstances relevant for each subsidiary. Where the Company’s presentation currency of Canadian dollars differs from the functional currency of a subsidiary, the assets and liabilities of the subsidiary are translated from the functional currency into the presentation currency at the exchange rates as at the reporting date. The income and expenses of the subsidiaries are translated at rates approximating the exchange rates at the dates of the transactions. Exchange differences arising on the translation of the financial statements of the Company’s subsidiaries are recognized in other comprehensive loss (income).

 

  12  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

Foreign currency transactions are translated into the functional currency of the Company or its subsidiaries, using the exchange rates prevailing at the dates of these transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than an entity’s functional currency are recognized in the consolidated statements of loss and comprehensive loss, within finance costs.

 

Investment tax credits

 

The benefits of refundable investment tax credits (ITCs) for scientific research and experimental development (SR&ED) expenditures are recognized in the year the qualifying expenditure is made providing there is reasonable assurance of recoverability. The refundable ITCs recorded are based on management’s estimates of amounts expected to be recovered and are subject to audit by taxation authorities. The refundable ITCs reduce the research and development expenses to which they relate.

 

Accounting policy applied from January 1, 2018 – financial assets

 

From January 1, 2018, the Company classifies its financial assets in the following measurement categories:

 

· those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss); and

 

· those to be measured at amortized cost.

 

The classification depends on the Company’s business model for managing the financial assets and the contractual terms of the cash flows. The Company does not currently have any assets measured subsequently at fair value.

 

At initial recognition, the Company measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset.

 

Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Company has transferred substantially all the risks and rewards of ownership.

 

The Company assesses on a forward-looking basis the expected credit losses associated with its financial assets carried at amortized cost. For trade and other receivables, the Company applies the simplified approach permitted by IFRS 9, which requires lifetime expected credit losses to be recognized at the time of initial recognition of the receivables.

 

Inventories

 

Inventories are valued at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Cost is determined using the first-in, first-out method for finished goods and weighted average cost for raw materials.

 

  13  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

Property and equipment

 

Property and equipment are stated at cost, less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The carrying amount of a replaced asset is derecognized when replaced. Repairs and maintenance costs are charged to the consolidated statements of loss and comprehensive loss during the year in which they are incurred.

 

The major categories of property and equipment are depreciated on a straight-line basis as follows:

 

Furniture and fittings   20% per year
Research and manufacturing equipment   30% per year
Computer equipment   45% per year
Computer software   100% per year
Leasehold improvements   over the term of the lease

 

Residual values, methods of depreciation and useful lives of the assets are reviewed annually and adjusted if appropriate.

 

Goodwill

 

Goodwill represents the excess fair value of the consideration transferred over the fair value of the underlying net assets in a business combination and is measured at cost less accumulated impairment losses. Goodwill is not amortized but is tested for impairment on an annual basis or more frequently if there are indications the goodwill may be impaired. For the purposes of impairment testing, goodwill is allocated to each of the Company’s cash generating units (CGUs) or group of CGUs that are expected to benefit from the synergies of the acquisition. If the recoverable amount of the CGU or group of CGUs is less than the carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill and then to other assets of the CGU or group of CGUs.

 

Identifiable intangible assets

 

The Company’s intangible assets are stated at cost, less accumulated amortization and are amortized on a straight-line basis in the consolidated statements of loss and comprehensive loss over their estimated useful lives.

 

The major categories of intangible assets are amortized as follows:

 

Exclusive licence agreement   20 years
Software   5 years
Brand   5 years
Proprietary technology   5 years

 

Impairment of non-financial assets

 

Property and equipment and intangible assets are tested for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flow CGUs.

 

  14  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

The recoverable amount is the higher of an asset’s fair value, less costs of disposal and value in use (which is the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized as the amount by which the asset’s carrying amount exceeds its recoverable amount. The Company evaluates impairment losses for potential reversals when events or circumstances warrant such consideration.

 

Accounts payable and accrued liabilities

 

These amounts represent liabilities for goods and services provided to the Company before the end of the financial year, which are unpaid. Accounts payable and accrued liabilities are presented as current liabilities unless payment is not due within 12 months after the reporting period. They are recognized initially at their fair value and subsequently measured at amortized cost using the effective interest method.

 

Long-term debt

 

Long-term debt is initially recognized at fair value, net of transaction costs incurred. Long-term debt is subsequently measured at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognized in the consolidated statements of loss and comprehensive loss over the period of the long-term debt using the effective interest method.

 

Long-term debt is removed from the consolidated balance sheets when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished and the consideration paid is recognized in the consolidated statements of loss and comprehensive loss within finance costs.

 

Financial liabilities and equity instruments

 

· Classification as debt or equity

 

Instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.

 

· Knight Loan

 

The Knight Loan contained a financial liability in accordance with the terms of the contractual arrangements. At the date of issue, the host financial liability was recorded at fair value. The financial liability was measured on an amortized cost basis using the effective interest method over the expected life and was subsequently remeasured at fair value through profit or loss.

 

Provisions

 

A provision is recognized when the Company has a legal or constructive obligation as result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

 

  15  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

Revenue

 

To determine revenue recognition for arrangements the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

 

The Company derives its revenues primarily from the sale of medical devices. Revenue is recognized when a contractual promise to a customer (performance obligation) has been fulfilled by transferring control over the promised goods or services, generally at the point in time of shipment to or receipt of the products by the customer or when the services are performed. When contracts contain customer acceptance provisions, revenue is recognized on the satisfaction of the specific acceptance criteria.

 

The amount of revenue to be recognized is based on the consideration the Company expects to receive in exchange for its goods and services. For contracts that contain multiple performance obligations, the Company allocates the consideration to which it expects to be entitled to each performance obligation based on relative standalone selling prices and recognizes the related revenue when or as control of each individual performance obligation is transferred to customers.

 

Service revenue related to installation and training is recognized over the period in which the services are performed. Service revenue related to extended warranty service is deferred and recognized on a straight-line basis over the extended warranty period covered by the respective customer contract.

 

Under the terms of certain of the Company’s partnership agreements, the Company retains a percentage of all amounts earned with the remaining percentage due to the partner. Accordingly, associated revenue is recognized net of the consideration due to the partner.

 

Cost of sales

 

Cost of sales primarily includes the cost of finished goods, inventory provisions, royalties, warranty expense, freight and direct overhead expenses necessary to acquire or manufacture the finished goods.

 

Income taxes

 

Income taxes are accounted for using the liability method. Deferred tax assets and liabilities are recognized for the differences between the tax basis and carrying amounts of assets and liabilities, for operating losses and for tax credit carry-forwards. Deferred tax assets are recognized to the extent that it is probable that future taxable income will be available against which temporary differences can be utilized. Deferred tax assets and liabilities are measured using enacted or substantively enacted tax rates and laws.

 

  16  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

Share-based compensation

 

The Company grants share options periodically to certain employees, directors, officers and advisers.

 

Options currently outstanding vest over four years and have a contractual life of ten years. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. The fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. Compensation expense is recognized over the tranche’s vesting period using the graded vesting method by increasing contributed surplus based on the number of awards expected to vest.

 

Leases

 

Leases are classified as finance leases when the lease arrangement transfers substantially all of the risks and rewards related to the ownership of the leased asset. All other leases are treated as operating leases. Payments on operating lease agreements are recognized as an expense on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred.

 

Research and development costs

 

Research costs are charged to expense as incurred. Development costs are capitalized and amortized when the criteria for capitalization are met, otherwise they are expensed as incurred. No development costs have been capitalized to date.

 

Clinical trial expenses result from obligations under contracts with vendors, consultants and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to the Company. The appropriate level of clinical trial expenses is reflected in the Company’s consolidated financial statements by matching period expenses with period services and efforts expended. These expenses are recorded according to the progress of the clinical trial as measured by patient progression and the timing of various aspects of the clinical trial. Clinical trial accrual estimates are determined through discussions with internal clinical personnel and outside service providers as to the progress or state of completion of clinical trials, or the services completed. Service provider status is then compared to the contractually obligated fees to be paid for such services. During the course of a clinical trial, the Company may adjust the rate of clinical expense recognized if actual results differ from management’s estimates.

 

Loss per share

 

Basic loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the year. Diluted loss per share is calculated by dividing the applicable net loss by the sum of the weighted average number of shares outstanding during the year and all additional common shares that would have been outstanding if potentially dilutive common shares had been issued during the year. The computation of diluted loss per share is equal to the basic loss per share due to the anti-dilutive effect of the share options and warrants.

 

  17  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

Reclassification

 

Certain prior year figures have been reclassified to conform with the current year presentation.

 

Accounting standards issued but not yet adopted

 

· IFRS 16, Leases (IFRS 16)

 

IFRS 16 sets out the principles for the recognition, measurement and disclosure of leases. IFRS 16 provides revised guidance on identifying a lease and for separating lease and non-lease components of a contract. IFRS 16 introduces a single accounting model for all lessees, thereby removing the distinction between operating and finance leases. IFRS 16 requires a lessee to recognize an asset (right-to-use the leased item) and a financial liability to pay rentals on the interim condensed consolidated balance sheets with terms of more than 12 months, unless the underlying asset is of low value. The standard permits either a full retrospective or a modified retrospective approach for the adoption. IFRS 16 was effective for annual periods beginning on or after January 1, 2019.

 

The Company has adopted IFRS 16 retrospectively from January 1, 2019, but did not restate comparative information, as permitted under the specific transitional provisions in the standard in accordance with the modified retrospective approach for adoption. The reclassifications and the adjustments arising from the new leasing standard were therefore recognized in the opening consolidated balance sheet on January 1, 2019.

 

Adjustments recognized on adoption of IFRS 16

 

On adoption of IFRS 16, the Company recognized lease liabilities in relation to leases, which had previously been classified as operating leases under the principles of IAS 17, Leases (IAS 17). These liabilities were measured at the present value of the remaining lease payments, discounted using the incremental borrowing rate as of January 1, 2019. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on January 1, 2019 was 4%.

 

    $  
       
Operating lease commitments as at December 31, 2018     3,313,292  
Asset retirement obligation     111,100  
Discounted using the Company’s average incremental borrowing rate of 4.0%     (836,665 )
Lease liabilities recognized as at January 1, 2019     2,587,727  

 

The change in accounting policy affected the following items in the consolidated balance sheet on January 1, 2019:

 

  18  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

    Increase
(decrease)
$
 
       
Right-of-use assets     2,616,773  
Lease liabilities     2,587,727  
Prepaid expenses and deposits     (210,000 )
Provisions     (49,319 )
Other liabilities     (292,054 )
Deficit     160,419  

 

Practical expedients applied

 

The Company elected to apply the practical expedient not to recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low value assets. The lease payments associated with these leases are recognized as an expense on a straight-line basis over the lease term.

 

The Company also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the Company has relied on its assessment made applying IAS 17 and IFRIC 4, Determining whether an Arrangement contains a Lease.

 

· IFRIC 23, Uncertainty over Income Tax Treatments (IFRIC 23)

 

In June 2017, the IASB issued IFRIC 23, with a mandatory effective date of January 1, 2019. The interpretations provide guidance on how to value uncertain income tax positions based on the probability of whether the relevant tax authorities will accept the Company’s tax treatments. A Company is to assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so. IFRIC 23 is to be applied by recognizing the cumulative effect of initially applying these guidelines in opening deficit without adjusting comparative information. There was no impact in applying the new standard.

 

3 Critical accounting estimates and judgments

 

Critical accounting judgments

 

· Complex financial instruments and provisions

 

The Company makes various judgments when determining the accounting for certain complex financial instruments and provisions. The Company has concluded that the contingent consideration in a business combination represents a financial liability measured at fair value through profit or loss. The revenue share obligation represents an executory contract and is accounted for as a best estimate provision.

 

  19  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

· Accounting for acquisitions

 

The Company assesses whether an acquisition should be accounted for as an asset acquisition or a business combination under IFRS 3. This assessment requires management to assess whether the assets acquired and liabilities assumed constitute a business as defined in IFRS 3 and if the integrated set of activities, including inputs and processes acquired, is capable of being conducted and managed as a business and the Company obtains control of the business. The Company’s acquisition has been accounted for as a business combination.

 

Critical accounting estimates

 

The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed as follows:

 

· Revenue share obligation

 

The revenue share obligation provision was determined using certain assumptions described in note 9. The Company uses its judgment to select a variety of methods and make assumptions that are mainly based on conditions existing at the end of each reporting period.

 

· Impairment of non-financial assets

 

The Company reviews amortized non-financial assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may be impaired. It also reviews goodwill annually for impairment. If the recoverable amount of the respective non-financial asset is less than its carrying amount, it is considered to be impaired. In the process of measuring the recoverable amount, management makes assumptions about future events and circumstances. The actual results may vary and may cause significant adjustments.

 

· Accounting for acquisitions and contingent consideration

 

Areas of estimation include the determination and fair value measurement of the contingent consideration, which includes the Company developing its best estimate of projected revenue, the probability of the contingency being achieved and the discount rate. Management is also required to make estimates of the fair value of assets acquired and liabilities assumed.

 

· Clinical trial expenses

 

Clinical trial expenses are accrued based on the services received and efforts expended pursuant to agreements with clinical trial sites and other vendors. In the normal course of business, the Company contracts third parties to perform various clinical trial activities. The financial terms of these agreements vary from contract to contract, are subject to negotiation and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients or the completion of certain portions of a clinical trial. The Company determines the accrual by reviewing contracts, vendor agreements and through discussions with internal personnel and external clinical trial sites as to the progress or stage of completion of the clinical trial and the agreed on fees to be paid for such services. Actual costs and timing of the clinical trial are uncertain, subject to risks and may change depending on a number of factors.

 

  20  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

4 Business combination

 

On July 31, 2017, the Company entered into an Asset and Share Purchase Agreement (the agreement) to acquire all of the issued and outstanding shares and certain assets of Royal Philips’ (Philips) Sonalleve MR-HIFU business (Sonalleve). Under the terms of the agreement, Philips transferred its Sonalleve assets to the Company for an upfront consideration of 7,400,000 common shares of the Company. The agreement includes certain contingent consideration payments payable monthly in euro tied to future revenue levels of the Sonalleve business summarized as follows:

 

· 5% of revenue between the date of acquisition and December 31, 2017;

 

· 6% of revenue during the year ending December 31, 2018;

 

· 7% of revenue during the years ending December 31, 2019 and 2020; and

 

if total revenues are in excess of a defined amount from the date of acquisition to December 31, 2020, then the Company will be required to pay 7% of revenue from the date of acquisition to December 31, 2019.

 

As part of closing the agreement, the Company committed to repay all amounts outstanding under the Knight Loan (note 10) on or before December 31, 2018. The Knight Loan was repaid on July 25, 2018.

 

The non-exclusive strategic sales relationship with Philips was expanded to include distribution of Sonalleve. Under the terms of the agreement, Philips will also provide other services, including, but not limited to, manufacturing and installation of Sonalleve MR-HIFU for a certain period of time at market rates.

 

The contingent consideration (note 11) is classified as a Level 3 financial liability within the fair value hierarchy given its fair value is estimated using the discounted value of estimated future payments. The key assumptions in valuing the contingent consideration include: estimated projected net sales; the likelihood of certain levels being reached; and a discount rate of 15%. During the year ended December 31, 2018, the change in fair value of the contingent consideration was a gain of $325,253 (2017 – loss of $82,578, 2016 - $nil).

 

  21  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

The Company accounted for this transaction as a business combination and has applied the acquisition method of accounting. The purchase price allocation of assets acquired and liabilities assumed and the fair value of the total consideration transferred is as follows:

 

    $  
       
Assets acquired and liabilities assumed        
Cash     183,988  
Accounts payable and accrued liabilities     (183,988 )
Property and equipment (note 7)     713,872  
Intangible assets (note 8)     5,372,435  
Goodwill     3,409,165  
      9,495,472  
         
Consideration paid or payable        
Common shares issued     7,844,000  
Fair value of contingent consideration (note 11)     1,651,472  
      9,495,472  

 

Goodwill of $3,409,165 arising from the acquisition is attributable to the acquired workforce and synergies expected from combining the operations of the Company.

 

Had the Sonalleve MR-HIFU business been consolidated from January 1, 2017, the consolidated statements of loss and comprehensive loss would be pro forma revenue of $6,883,850 and a pro forma net loss and comprehensive loss of $21,657,797 for the year ended December 31, 2017.

 

During the period from July 31, 2017 to December 31, 2017, there was revenue of $2,484,804 and a net loss and comprehensive loss of $1,166,582 recorded in the consolidated statements of loss and comprehensive loss related to the former Sonalleve MR-HIFU business.

 

Acquisition related costs of $716,767 have been charged to general and administrative expenses in the consolidated statements of loss and comprehensive loss.

 

5 Trade and other receivables

 

The trade and other receivables balance comprises the following:

 

    2018
$
    2017
$
 
             
Trade receivables     1,791,688       3,971,768  
Interest receivable     55,730       -  
Indirect tax receivables     565,832       279,890  
Other receivables     272,862       -  
                 
Total trade and other receivables     2,686,112       4,251,658  

 

  22  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

Trade receivables include the gross revenue amount billed to customers and certain amounts that are included in deferred revenue. Included in accounts payable and accrued liabilities is an amount of $nil (2017 – $2,534,259) payable to the same counterparty as the corresponding trade receivable balance of $nil (2017 –$3,505,423) as there is no legal right of offset with respect to the receivable and payable balances.

 

An aging of trade receivable balances past due is as follows:

 

    2018
$
    2017
$
 
             
Past due 1 – 30 days     -       16,057  
Past due 31 – 60 days     -       1,553,215  
                 
      -       1,569,272  

 

Amounts past due represent trade receivables past due based on the customer’s contractual terms. The Company applies the simplified approach to providing for expected credit losses prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables (note 18).

 

6 Inventory

 

    2018
$
    2017
$
 
             
Finished goods     2,305,746       715,193  
Raw materials     1,383,572       799,589  
Inventory provision     (57,695 )     (83,625 )
                 
Total inventory     3,631,623       1,431,157  

 

During the year ended December 31, 2018, $1,648,728 (2017 – $2,255,727, 2016 – $nil) of inventory was recognized in cost of sales. The Company decreased its inventory provision by $25,930 during the year ended December 31, 2018 (2017 – $44,603). There were no other inventory writedowns charged to cost of sales during the year ended December 31, 2018.

 

  23  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

7 Property and equipment

 

Property and equipment consist of the following:

 

    Furniture
and
fittings
$
    Research
and
manufact-
uring
equipment
$
    Leasehold
Improve-
ments
$
    Computer
equipment
$
    Computer
software
$
    Total
$
 
                                     
Year ended December 31, 2017                                    
Opening net book value     173,201       180,395       530,148       69,285       -       953,029  
Additions     -       254,378       140,181       19,860       -       414,419  
Acquisition (note 4)     -       713,872       -       -       -       713,872  
Foreign exchange     -       16,150       -       -       -       16,150  
Depreciation     (38,318 )     (217,207 )     (64,540 )     (51,255 )     -       (371,320 )
Closing net book value     134,883       947,588       605,789       37,890       -       1,726,150  
                                                 
At December 31, 2017                                                
Cost     235,169       1,386,692       718,742       212,541       176,462       2,729,606  
Accumulated depreciation     (100,286 )     (439,104 )     (112,953 )     (174,651 )     (176,462 )     (1,003,456 )
Net book value     134,883       947,588       605,789       37,890       -       1,726,150  
                                                 
Year ended December 31, 2018                                                
Opening net book value     134,883       947,588       605,789       37,890       -       1,726,150  
Foreign exchange     -       27,208       -       -       -       27,208  
Depreciation     (38,318 )     (403,554 )     (69,282 )     (34,847 )     -       (546,001 )
Closing net book value     96,565       571,242       536,507       3,043       -       1,207,357  
                                                 
At December 31, 2018                                                
Cost     235,169       1,386,692       718,742       212,541       176,462       2,729,606  
Accumulated depreciation     (138,604 )     (815,450 )     (182,235 )     (209,498 )     (176,462 )     (1,522,249 )
Net book value     96,565       571,242       536,507       3,043       -       1,207,357  

 

  24  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

8 Intangible assets

 

Intangible assets consist of the following:

 

    Exclusive
licence
agreement
$
    Software
$
    Proprietary
technology
$
    Brand
$
    Total
$
 
                               
Year ended December 31, 2017                                        
Opening net book value     30,000       232,685       -       -       262,685  
Additions     -       34,080       -       -       34,080  
Acquisition (note 4)     -       -       4,489,295       883,140       5,372,435  
Disposals     -       (26,684 )     -       -       (26,684 )
Amortization     (2,500 )     (50,315 )     (374,108 )     (73,595 )     (500,518 )
Closing net book value     27,500       189,766       4,115,187       809,545       5,141,998  
                                         
As at December 31, 2017                                        
Cost     50,000       257,254       4,489,295       883,140       5,679,689  
Accumulated amortization     (22,500 )     (67,488 )     (374,108 )     (73,595 )     (537,691 )
Net book value     27,500       189,766       4,115,187       809,545       5,141,998  
                                         
Year ended December 31, 2018                                        
Opening net book value     27,500       189,766       4,115,187       809,545       5,141,998  
Amortization     (2,500 )     (51,450 )     (897,859 )     (176,628 )     (1,128,437 )
Closing net book value     25,000       138,316       3,217,328       632,917       4,013,561  
                                         
As at December 31, 2018                                        
Cost     50,000       257,254       4,489,295       883,140       5,679,689  
Accumulated amortization     (25,000 )     (118,938 )     (1,271,967 )     (250,223 )     (1,666,128 )
Net book value     25,000       138,316       3,217,328       632,917       4,013,561  

 

The Company has a licence agreement (the licence) with Sunnybrook Health Sciences Centre (Sunnybrook), pursuant to which Sunnybrook licenses to the Company certain intellectual property. Pursuant to the licence, the Company has exclusively licenced-in rights that enable the Company to use Sunnybrook’s technology for MRI-guided trans-urethral ultrasound therapy. Under the licence, the Company is subject to various obligations, including milestone payments of up to $250,000 (on FDA approval) and legal costs associated with patent application preparation, filing and maintenance. Subject to certain buyout provisions as defined in the licence, the Company has the option to acquire ownership of the licensed technology and intellectual property. In addition, the Company has a further option to acquire rights to improvements to the relevant technology and intellectual property. If the Company fails to comply with any of its obligations or otherwise breaches this agreement, Sunnybrook may have the right to terminate the licence.

 

  25  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

In accordance with the Company’s accounting policy, the carrying value of goodwill is assessed annually as well as assessed for impairment triggers at each reporting date to determine whether there exists any indicators of impairment. When there is an indicator of impairment of non-current assets within a CGU or group of CGUs containing goodwill, the Company tests the non-current assets for impairment first and recognizes any impairment loss on goodwill before applying any remaining impairment loss against the non-current assets within the CGU.

 

The Company completed its annual goodwill impairment testing on the goodwill related to the Sonalleve MR-HIFU CGU, which comprises all of the goodwill of the Company, on December 31, 2018. The recoverable amount of the Sonalleve MR-HIFU CGU was calculated using fair value less costs of disposal (FVLCD).

 

The calculation of the recoverable amount of the Sonalleve MR-HIFU CGU was determined using discounted cash flow projections based on financial forecasts approved by management covering a four-year period (Level 3 of the fair value hierarchy) and a terminal growth assumption of 4%. The key assumptions and estimates used in determining the FVLCD are related to revenue and EBITDA assumptions, which are based on the financial forecast and assumed growth rates, working capital assumptions, the effective tax rate of 26.5% and the discount rate of 20.3% applied to the cash flow projections. As a result of the impairment testing performed, it was determined that the recoverable amount of the Sonalleve MR-HIFU CGU of $13,864,000 exceeded the carrying value of $7,659,000 and no impairment writedown was required.

 

9 Provisions

 

    Asset
retirement
obligation
$
    Revenue
share
obligation
$
    Warranty
provision
$
    Total
$
 
                         
As at January 1, 2017     39,619       -       -       39,619  
Additions     -       921,906       115,351       1,037,257  
Accretion expense     4,585       -       -       4,585  
As at December 31, 2017     44,204       921,906       115,351       1,081,461  
Additions     -       208,242       65,079       273,321  
Expiry     -       -       (74,582 )     (74,582 )
Foreign exchange     -       111,509       4,512       116,021  
Accretion expense     5,115       -       -       5,115  
As at December 31, 2018     49,319       1,241,657       110,360       1,401,336  
Less: Current portion     -       1,241,657       110,360       1,352,017  
Long-term portion     49,319       -       -       49,319  

 

Asset retirement obligation

 

The asset retirement obligation is related to the Company’s leasehold improvements.

 

  26  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

Revenue share obligation

 

The Company has certain minimum amounts payable under a co-marketing and co-selling agreement with Siemens Healthcare GmbH (Siemens). The provision was determined using the following assumptions:

 

· estimated probability of a new agreement being signed based on the facts and circumstances in place as at December 31, 2018 that eliminated these minimum amounts payable;

 

· future revenue forecasts related to the revenue share agreement; and

 

· a discount rate of 11%.

 

The amount has been included in selling and distribution expenses in the consolidated statements of loss and comprehensive loss.

 

Subsequent to year-end, the Company replaced the original co-marketing and co-selling agreement with Siemens with a new agreement. Under the new agreement, all prior financial commitments and obligations owed to Siemens are released and replaced with a non-exclusive licence resulting in a one-time fixed licence fee and a per annum payment per device interfaced to a Siemens MRI scanner. In exchange for the one-time fixed licence fee and per annum payments, the Company obtained a non-exclusive licence and reasonable support for the term of the agreement.

 

Warranty provision

 

The warranty provision is related to the Company’s estimate of future warranty obligations on product sales, which generally have a term of 12 to 24 months.

 

10 Long-term debt

 

A summary of the long-term debt is as follows:

 

    2018
$
    2017
$
 
             
CIBC loan     11,955,245       -  
FedDev and HTX loans     -       1,607,195  
Knight Loan     -       3,537,894  
Balance – End of year     11,955,245       5,145,089  
Less: Current portion     1,339,583       4,701,214  
Long-term portion     10,615,662       443,875  

 

The Federal Economic Development Agency (FedDev) loan with total proceeds of $867,000 was unsecured and non-interest bearing. The final repayment of $563,550 was made on July 25, 2018.

 

  27  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

During the year ended December 31, 2018, the Company recognized $90,775 of interest and accretion expense on this loan (2017 – $54,024, 2016 – $57,076).

 

The Health Technology Exchange (HTX) loans with total proceeds of $1,500,000 were unsecured and bearing interest at 4.50% per annum. The final repayment of $1,094,698, including accrued interest, was made on March 31, 2018.

 

During the year, the Company recognized $18,078 of interest and accretion expense on this loan (2017 – $111,978, 2016 – $107,046).

 

A reconciliation of the FedDev and HTX loans is as follows:

 

    2018
$
    2017
$
 
             
Balance – Beginning of year     1,607,195       2,027,893  
Repayment     (1,716,048 )     (586,700 )
Interest and accretion expense     108,853       166,002  
Balance – End of year     -       1,607,195  
Less: Current portion     -       1,163,320  
Long-term portion     -       443,875  

 

On April 30, 2015, Profound Medical Inc. signed an agreement with Knight Therapeutics Inc. (Knight) to provide a secured loan of $4,000,000 (the Knight Loan) for an initial period of four years with an interest rate of 15% per annum, with payments of interest and principal deferred until June 30, 2017. As part of the agreement, Knight was also granted a royalty of 0.5% on net sales resulting from global sales of the Company’s products until May 20, 2019 (the royalty). In addition, the Company also entered into a distribution, licence and supply agreement with Knight pursuant to which Knight will act as the exclusive distributor of the Company’s product in Canada for an initial ten-year term, renewable for successive ten-year terms by either party. In connection with these arrangements, the Company issued to Knight 4% of the common shares of the Company (1,717,450 common shares). On July 25, 2018, the full amount of the Knight Loan, including prepayment fees, was repaid for a total payment of $3,188,023.

 

A reconciliation of the Knight Loan balance is as follows:

 

    2018
$
    2017
$
 
             
Balance – Beginning of year     3,537,894       4,609,983  
Repayment     (4,003,797 )     (2,290,350 )
Interest and accretion expense     465,903       1,218,261  
Balance – End of year     -       3,537,894  
Less: Current portion     -       3,537,894  
Long-term portion     -       -  

 

  28  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

The royalty was initially recorded at fair value and was subsequently carried at amortized cost using the effective interest rate method. The initial fair value of the royalty was determined using future revenue forecasts for the term of the loan and a discount rate of 18%. During the year, the Company revised the fair value of the royalty, using future revenue forecasts for the term of the loan and a discount rate of 18%, and recognized an interest accretion recovery of $63,322 (2017 – $36,438, 2016 – $249,413). This liability is included within other liabilities on the consolidated balance sheets.

 

On July 30, 2018, the Company signed a term loan agreement with CIBC Innovation Banking (CIBC) to provide a secured loan for total initial gross proceeds of $12,500,000 maturing on July 29, 2022 with an interest rate based on prime plus 2.5%. The Company is required to make interest only payments until October 31, 2019 and monthly repayments on the principal of $378,788 plus accrued interest commencing on October 31, 2019. All obligations of the Company under the term loan agreement are guaranteed by current and future subsidiaries of the Company and include security of first priority interests in the assets of the Company and its subsidiaries. The Company has the ability to draw an additional $6,250,000 subject to the achievement of certain financing and product development milestones. The Company has a financial covenant in relation to the CIBC loan where unrestricted cash is required to be greater than operating cash expenditures for a trailing three-month period, reported on a monthly basis. The Company is in compliance with this financial covenant as at December 31, 2018.

 

    $  
       
Balance – Beginning of year     -  
Proceeds received     12,500,000  
Transaction costs     (930,520 )
Interest and accretion expense     517,409  
Repayment     (131,644 )
Balance – End of year     11,955,245  
Less: Current portion     1,339,583  
Long-term portion     10,615,662  

 

In connection with this term loan agreement, on July 31, 2018 the Company also issued 321,714 common share purchase warrants to CIBC, with each warrant entitling the holder to acquire one common share at a price of $0.97 per common share until the date that is 60 months from the closing of the term loan agreement, with a cashless exercise feature. The cashless exercise feature causes the conversion ratio to be variable and the warrants are therefore classified as a financial liability. Gains and losses on the warrants are recorded within finance costs on the consolidated statements of loss and comprehensive loss. A pricing model with observable market based inputs was used to estimate the fair value of the warrants issued. The estimated fair value of the warrants as at July 31, 2018 and December 31, 2018 was $194,822 and $98,203, respectively.

 

  29  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

The variables used to determine the fair values are as follows:

 

    December 31,
2018
    July 31,
2018
 
             
Share price   $ 0.55     $ 1.00  
Volatility     86 %     72 %
Expected life of warrants     4.6 years       5 years  
Risk-free interest rate     1.88 %     2.19 %
Dividend yield     -       -  

 

11 Other liabilities

 

    Knight
royalty
payable
$
    Contingent
consideration
(note 4)
$
    Deferred
rent
$
    Total
$
 
                         
As at January 1, 2017     148,401       -       161,320       309,721  
Additions     -       1,651,472       123,627       1,775,099  
Amounts paid     (15,069 )     -       -       (15,069 )
Change in fair value (note 15)     -       82,578       -       82,578  
Accretion recovery (note 15)     (36,438 )     -       -       (36,438 )
As at December 31, 2017     96,894       1,734,050       284,947       2,115,891  
Additions     -       -       7,108       7,108  
Amounts paid     (13,919 )     (153,056 )     -       (166,975 )
Change in fair value (note 15)     -       (325,253 )     -       (325,253 )
Accretion recovery (note 15)     (63,322 )     -       -       (63,322 )
As at December 31, 2018     19,653       1,255,741       292,055       1,567,449  
Less: Current portion     19,653       547,643       -       567,296  
Long-term portion     -       708,098       292,055       1,000,153  

 

Knight royalty payable

 

As part of the Knight Loan, Knight was granted a royalty of 0.5% on net sales resulting from global sales of the Company’s products until May 20, 2019.

 

Deferred rent

 

The deferred rent obligation is related to the Company’s straight-line rent accrual for its current premises.

 

  30  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

12 Share capital

 

Common shares

 

The Company is authorized to issue an unlimited number of common shares.

Issued and outstanding (with no par value)

 

    2018
$
    2017
$
    2016
$
 
                         
108,054,939 (2017 – 73,117,377, 2016 – 55,305,577) common shares     120,932,404       98,365,770       83,272,678  

 

On March 20, 2018, the Company closed a bought deal financing, resulting in the issuance of 34,500,000 units at a price of $1.00 per unit, for gross proceeds of $34,500,000 ($32,027,502, net of cash transaction costs). Each unit consisted of one common share of the Company and one-half of one warrant, with each whole warrant entitling the holder to acquire one common share at a price of $1.40 per common share until the date that is 60 months from the closing of the bought deal financing.

 

On September 20, 2017, the Company closed a bought deal financing, resulting in the issuance of 10,000,000 units at a price of $1.00 per unit for gross proceeds of $10,000,000 ($8,913,868, net of cash transaction costs). Each unit consisted of one common share of the Company and one-half of one warrant, with each whole warrant entitling the holder to acquire one common share at a price of $1.40 per common share until the date that is 36 months from the closing of the bought deal financing.

 

On November 14, 2016, the Company closed a bought deal financing, resulting in the issuance of 15,820,000 common shares at a price of $1.10 per common share for gross proceeds of $17,402,000 ($16,182,997, net of transaction costs).

 

Warrants

 

As a result of the March 20, 2018 bought deal financing, 17,250,000 warrants were issued.

As a result of the July 30, 2018 CIBC loan, 321,714 warrants were issued on July 31, 2018 (note 10).

As a result of the September 20, 2017 bought deal financing, 5,000,000 warrants were issued.

 

A summary of warrants outstanding is shown below:

 

    Number of
warrants
    Weighted
average
exercise price
$
    Weighted
average
remaining
contractual life
(years)
 
                   
Balance January 1, 2017     -       -       -  
Granted     5,000,000       1.40       2.72  
Balance December 31, 2017     5,000,000       1.40       2.72  
Granted     17,571,714       1.39       4.23  
Balance December 31, 2018     22,571,714       1.39       3.67  

 

  31  

 

  

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

The Company estimated the fair value of the warrants issued using the Black-Scholes option pricing model with the following assumptions:

 

    March 20,
2018
   

September 20,

2017

 
             
Share price on date of issuance   $ 1.06     $ 0.95  
Volatility     71 %     77 %
Expected life of warrants     5 years       3 years  
Risk-free interest rate     2.00 %     1.56 %
Dividend yield     -       -  

 

Due to the absence of company specific volatility rates for the expected life of the warrants, the Company chose comparable companies in the medical device industry. The fair value of the warrants issued as part of the March 20, 2018 bought deal financing was $9,767,750, or $0.57 per warrant, and was recorded in contributed surplus.

 

The estimated fair value of the warrants issued as part of the September 20, 2017 bought deal financing was $1,936,247 or $0.39 per warrant and was recorded in contributed surplus.

 

13 Share-based payments

 

Share options

 

Effective January 26, 2017, the Company adopted amendments to the share option plan (the Share Option Plan). The maximum number of common shares reserved for issuance under this plan is 14,047,142 common shares or such other number as may be approved by the holders of the voting shares of the Company. As at December 31, 2018, 6,244,779 (2017 – 5,318,279, 2016 – 4,689,839) options are outstanding. Each option granted allows the holder to purchase one common share, at an exercise price not less than the lesser of the closing trading price of the common shares on the TSX, on the date a share option is granted and the volume-weighted average price of the common shares for the five trading shares immediately preceding the date the share option is granted. Share options granted under the Share Option Plan generally have a maximum term of ten years and vest over a period of up to four years.

 

  32  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

A summary of the share option changes during the years presented and the total number of share options outstanding as at those dates are set forth below:

 

   

Number

of options

   

Weighted

average

exercise

price

$

 
             
Balance January 1, 2016     3,407,283       1.05  
Granted     1,650,696       1.33  
Exercised     (12,250 )     0.30  
Forfeited/expired     (355,890 )     1.44  
Balance December 31, 2016     4,689,839       1.13  
Granted     2,141,583       1.02  
Exercised     (411,800 )     0.24  
Forfeited/expired     (1,101,343 )     1.42  
Balance December 31, 2017     5,318,279       1.09  
Granted     1,999,500       1.05  
Exercised     (436,562 )     0.24  
Forfeited/expired     (636,438 )     1.12  
Balance December 31, 2018     6,244,779       1.13  

 

The following table summarizes information about the share options outstanding as at December 31, 2018:

 

 

Exercise price

$

   

Number of

options

outstanding

   

Weighted

average

remaining

contractual life

(years)

   

Number of

options

exercisable

 
                     
  0.24       213,000       3.69       213,000  
  0.30       18,000       0.41       18,000  
  0.60       33,000       9.89       -  
  0.85       340,000       8.88       92,076  
  0.93       900,000       9.65       -  
  0.97       66,000       8.32       44,000  
  0.99       28,000       9.25       -  
  1.02       115,500       9.47       -  
  1.10       1,971,724       7.97       997,411  
  1.19       918,000       9.40       -  
  1.35       132,500       7.65       101,712  
  1.46       934,055       7.65       544,865  
  1.50       575,000       6.67       470,240  
          6,244,779       8.17       2,481,304  

 

The Company estimated the fair value of the share options granted during the year using the Black-Scholes option pricing model with the weighted average assumptions below. Due to the absence of company specific volatility rates for the expected life of the share options, the Company chose comparable companies in the medical device industry.

 

  33  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

   

May 4,

2016

   

July 19,

2016

   

August 22,

2016

    September 15,
2016
    November 24,
2016
 
                               
Volatility     73 %     73 %     101 %     99 %     99 %
Expected life of share options     6 years       6 years       6 years       6 years       6 years  
Risk-free interest rate     1.18 %     0.89 %     0.86 %     0.82 %     0.94 %
Dividend yield     -       -       -       -       -  
Number of share options issued     30,000       50,000       934,055       82,500       554,141  

 

    January 26,
2017
    April 25,
2017
    November 16,
2017
 
                   
Volatility     99 %     97 %     135 %
Expected life of share options     6 years       6 years       6 years  
Risk-free interest rate     1.35 %     1.37 %     1.90 %
Dividend yield     -       -       -  
Number of share options issued     1,417,538       66,000       658,000  

 

 

   

March 28,

2018

   

May 22,

2018

   

June 15,

2018

    August 23,
2018
    November 19,
2018
 
                               
Volatility     96 %     82 %     83 %     70 %     80 %
Expected life of share options     6 years       6 years       6 years       6 years       6 years  
Risk-free interest rate     2.14 %     2.30 %     2.19 %     2.25 %     2.47 %
Dividend yield     -       -       -       -       -  
Number of share options issued     33,000       918,000       115,500       900,000       33,000  

 

Compensation expense related to share options recorded in the consolidated statements of loss and comprehensive loss for the year was $1,086,199 (2017 – $1,338,330, 2016 – $1,001,558).

 

14 Nature of expenses

 

    2018
$
    2017
$
    2016
$
 
                   
Production and manufacturing costs     1,303,246       2,561,600       -  
Salaries and benefits     9,692,860       7,131,741       5,642,202  
Consulting fees     5,041,562       6,506,457       3,783,832  
Research and development expenses     1,005,843       950,473       3,125,364  
Sales and marketing expenses     1,236,712       1,644,971       129,461  
Amortization and depreciation     1,674,438       871,838       187,008  
Share-based compensation     1,086,199       1,338,330       1,001,558  
Rent     738,198       591,243       555,759  
Other expenses     1,012,901       934,764       1,215,230  
      22,791,959       22,531,417       15,640,414  

 

  34  

 

  

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

15 Finance costs

    2018
$
    2017
$
    2016
$
 
                   
HTX and FedDev loans (note 10)     108,853       166,002       164,122  
Knight Loan (note 10)     465,903       1,218,261       913,080  
CIBC loan (note 10)     517,409       -       -  
Royalty interest recovery (notes 10 and 11)     (63,322 )     (36,438 )     (249,413 )
Change in fair value of contingent consideration (note 11)     (325,253 )     82,578       -  
Change in fair value of derivative financial instrument (note 10)     (96,619 )     -       -  
Provisions (note 9)     5,115       4,585       2,110  
Foreign exchange loss (gain)     214,226       (185,904 )     -  
      826,312       1,249,084       829,899  

 

16 Income taxes

 

Income tax expense differs from the tax recovery amount that would be obtained by applying the statutory income tax rate to the respective year’s loss before income taxes as follows:

 

    2018
$
    2017
$
    2016
$
 
                   
Loss before income taxes     20,532,205       18,748,219       16,312,715  
                         
Recovery based on combined federal and provincial statutory rate of 26.5% (2017 – 26.5%, 2016 – 26.5%)     (5,441,034 )     (4,968,278 )     (4,322,869 )
Permanent differences     (770,593 )     (301,808 )     (802,664 )
Change in deferred tax assets not recognized     6,460,542       5,334,312       5,132,948  
Effect of tax rates in foreign jurisdictions     (18,131 )     9,897       6,639  
Net income tax expense     230,784       74,123       14,054  

 

Deferred tax assets are recognized for tax loss carry-forwards and unused tax credits to the extent that the realization of the related tax benefit through future taxable profits is probable. The Company has not recognized deferred tax assets that can be carried forward against future taxable income.

 

Permanent differences are primarily comprised of non-refundable tax credits and deductible finance fees not recorded in the consolidated statements of loss and comprehensive loss, offset by non-deductible share-based compensation and accretion expense.

 

The Company has non-capital loss carry-forwards of approximately $55,564,000 as at December 31, 2018 that expire in varying amounts from 2028 to 2038.

 

The Company has SR&ED expenditures of approximately $15,806,000 as at December 31, 2018, which can be carried forward indefinitely to reduce future years’ taxable income.

 

  35  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

The Company has approximately $2,890,000 of federal and provincial tax credits that are available to be applied against federal and provincial taxes otherwise payable in future years and that expire in varying amounts from 2028 to 2038.

 

17 Loss per share

 

The following table shows the calculation of basic and diluted loss per share:

 

    2018
$
    2017
$
    2016
$
 
                   
Net loss for the year     20,762,989       18,822,342       16,326,769  
Weighted average number of common shares     100,395,649       61,404,141       41,510,145  
Basic and diluted loss per share     0.21       0.31       0.39  

 

For the years noted above, the computation of diluted loss per share is equal to the basic loss per share due to the anti-dilutive effect on the share options and warrants.

 

Of the 6,244,779 (2017 – 5,318,279, 2016 – 4,689,839) share options and 22,571,714 (2017 – 5,000,000, 2016 – nil) warrants not included in the calculation of diluted loss per share for the year ended December 31, 2018, 25,053,018 (2017 – 7,052,894, 2016 – 2,315,602) were exercisable.

 

18 Financial assets and liabilities

 

Classification of financial instruments

 

On January 1, 2018 (the date of initial application of IFRS 9), the Company assessed which business models to apply to the financial assets held by the Company and has classified its financial instruments into the appropriate IFRS 9 categories. A summary of the classifications under IFRS 9 as at December 31, 2018 and under IAS 39 as at December 31, 2017 is shown below.

 

    2018 – IFRS 9  
    Fair value
through
profit or
loss
$
    Financial
assets at
amortized
cost
$
    Financial
liabilities at
amortized
cost
$
 
                   
Cash     -       30,687,183       -  
Trade and other receivables     -       2,686,112       -  
Accounts payable and accrued liabilities     -       -       3,912,350  
Long-term debt     -       -       11,955,245  
Other liabilities     1,255,741       -       19,653  
Derivative financial instrument     98,203       -       -  
      1,353,944       33,373,295       15,887,248  

 

  36  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

    2017 – IAS 39  
    Fair value
through
profit or loss
$
    Loans and
receivables
$
    Other
financial
liabilities
$
 
                   
Cash     -       11,103,223       -  
Trade and other receivables     -       4,251,658       -  
Accounts payable and accrued liabilities     -       -       5,081,704  
Long-term debt     -       -       5,145,089  
Other liabilities     1,734,050       -       96,894  
      1,734,050       15,354,881       10,323,687  

 

Credit risk

 

Credit risk is the risk of a financial loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligation. The Company is exposed to credit risk on its cash and trade and other receivable balances. The Company’s cash management policies include ensuring cash is deposited in Canadian chartered banks.

 

The Company applies the IFRS 9 simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance for all trade and other receivables. To measure the expected credit losses, trade and other receivables are grouped based on shared credit risk characteristics and the days past due. On that basis, the loss allowance as at January 1, 2018 and December 31, 2018 is nominal as the Company only transacts with hospitals and private clinics and has not incurred any credit losses since revenue began.

 

Trade and other receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, failure to make contractual payments for a period of greater than 120 days past due.

 

Market risk

 

Market risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices, including interest rate risk and foreign currency risk.

 

· Interest rate price risk

 

Interest rate price risk is the risk the cash flows of a financial instrument will fluctuate due to changes in market interest rates. The Company is exposed to such fluctuations relating to the long-term debt, as it bears interest at a floating rate, whose interest rates are based on the prime rate.

 

If interest rates had been 1% higher on the average long-term debt balance, with all other variables held constant, loss before income taxes would have been $52,083 higher for the year ended December 31, 2018.

 

  37  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

· Foreign currency risk

 

Foreign currency risk occurs as a result of foreign exchange rate fluctuations between the time a transaction is recorded and the time it is settled.

 

The Company purchases goods and services denominated in foreign currencies and, accordingly, is subject to foreign currency risk. The Company’s financial instruments denominated in foreign currencies are shown below in Canadian dollars.

 

    2018  
    US
dollars
$
    Euro
$
    Canadian
dollars
$
    Total
$
 
                         
Cash     136,879       1,039,205       29,511,099       30,687,183  
Trade and other receivables     613,890       1,450,661       621,561       2,686,112  
Accounts payable and accrued liabilities     (472,431 )     (2,758,294 )     (681,625 )     (3,912,350 )
Other liabilities (excluding deferred rent)     -       (1,255,741 )     (19,653 )     (1,275,394 )

 

    2017  
    US
dollars
$
    Euro
$
    Canadian
dollars
$
    Total
$
 
                         
Cash     18,479       338,743       10,746,001       11,103,223  
Trade and other receivables     747,180       3,396,317       108,161       4,251,658  
Accounts payable and accrued liabilities     (774,814 )     (2,156,360 )     (2,150,530 )     (5,081,704 )
Other liabilities (excluding deferred rent)     -       (1,734,050 )     (96,894 )     (1,830,944 )

 

As at December 31, 2018, if foreign exchange rates had been 5% higher, with all other variables held constant, loss before income taxes would have been $62,292 (2017 – $8,225) higher, mainly as a result of the translation of foreign currency denominated cash, trade and other receivables, accounts payable and accrued liabilities and other liabilities.

 

The Company does not use derivatives to reduce exposure to foreign currency risk.

 

Liquidity risk

 

Liquidity risk is the risk the Company may encounter difficulties in meeting its financial liability obligations as they come due. The Company has a planning and budgeting process in place to help determine the funds required to support the Company’s normal operating requirements on an ongoing basis.

 

The Company controls liquidity risk through management of working capital, cash flows and the availability and sourcing of financing. The Company’s ability to accomplish all of its future strategic plans is dependent on obtaining additional financing or executing other strategic options; however, there is no assurance the Company will achieve these objectives.

 

  38  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

The following table summarizes the Company’s significant contractual, undiscounted cash flows related to its financial liabilities.

 

    2018  
    Carrying
amount
$
    Future
cash
flows
$
    Less than
1 year
$
    Between
1 year and
5 years
$
    Greater
than 5
years
$
 
                               
Accounts payable and accrued liabilities     3,912,350       3,912,350       3,912,350       -       -  
Long-term debt     11,955,245       14,497,042       1,936,455       12,560,587       -  
Other liabilities (excluding deferred rent)     1,275,394       1,365,217       429,426       935,791       -  
      17,142,989       19,774,609       6,278,231       13,496,378       -  

 

    2017  
    Carrying
amount
$
    Future
cash
flows
$
    Less than
1 year
$
    Between
1 year and
5 years
$
    Greater
than 5
years
$
 
                               
Accounts payable and accrued liabilities     5,081,704       5,081,704       5,081,704       -       -  
Long-term debt     5,145,089       5,802,658       5,268,011       534,647       -  
Other liabilities (excluding deferred rent)     1,830,944       2,161,552       419,121       1,742,431       -  
      12,057,737       13,045,914       10,768,836       2,277,078       -  

 

Fair value

 

The fair values of cash, trade and other receivables and accounts payable and accrued liabilities approximate their carrying values, due to their relatively short periods to maturity. The fair value of long-term debt approximates its carrying amount as it has a floating interest rate.

 

19 Related party transactions

 

Key management includes the Company’s directors and senior management team. The remuneration of directors and the senior management team was as follows during the years ended December 31:

 

    2018
$
    2017
$
    2016
$
 
                   
Salaries and employee benefits     1,746,024       1,021,568       1,247,563  
Termination benefits     114,750       138,125       -  
Directors’ fees     113,132       88,232       63,616  
Share-based compensation     959,234       1,220,655       862,798  
Total related party transactions     2,933,140       2,468,580       2,173,977  

 

  39  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

Executive employment agreements allow for additional payments in the event of a liquidity event, or if the executive is terminated without cause.

 

20 Commitments and contingencies

 

The Company has commitments under operating leases for the rental of office space. On March 28, 2016, the Company signed a lease for office space and took possession of this office space effective July 1, 2016. Included in prepaid expenses and deposits as at December 31, 2018 is an amount of $210,000 (2017 – $330,000) related to prepaid rent for this lease that is drawn down at $10,000 per month starting October 1, 2016. The future minimum obligations, including prepaid rent, are as follows:

 

    $  
       
No later than 1 year     452,574  
Later than 1 year and no later than 5 years     1,775,583  
Later than 5 years     1,085,135  
Total commitments and contingencies     3,313,292  

 

All directors and officers of the Company are indemnified by the Company for various items including, but not limited to, all costs to settle lawsuits or actions due to their association with the Company, subject to certain restrictions. The Company has purchased directors’ and officers’ liability insurance to mitigate the cost of any potential future lawsuits or actions. The term of the indemnification is not explicitly defined, but is limited to events for the period during which the indemnified party served as a director or officer of the Company. The maximum amount of any potential future payment cannot be reasonably estimated but could have a material adverse effect on the Company.

 

The Company has also indemnified certain lenders and underwriters in relation to certain debt and equity offerings and their respective affiliates and directors, officers, employees, shareholders, partners, advisers and agents and each other person, if any, controlling any of the underwriters or lenders or their affiliates against certain liabilities.

 

21 Capital management

 

The Company’s capital management objectives are to safeguard its ability to continue as a going concern and to provide returns for shareholders and benefits for other stakeholders by ensuring it has sufficient cash resources to fund its research and development activities, to pursue its commercialization efforts and to maintain its ongoing operations. The Company includes its share capital, deficit and long-term debt in the definition of capital.

 

  40  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

A summary of the Company’s capital structure is as follows:

 

    2018
$
    2017
$
 
             
Common shares     120,932,404       98,365,770  
Deficit     (111,033,661 )     (90,270,672 )
Long-term debt     11,955,245       5,145,089  
      21,853,988       13,240,187  

 

22 Segment reporting

 

The Company’s operations are categorized into one industry segment, which is medical technology focused on magnetic resonance guided ablation procedures for the treatment of prostate disease, uterine fibroids and palliative pain treatment for patients with metastatic bone disease. The Company is managed geographically in Canada, Germany and Finland.

 

For the year ended December 31, 2018:

 

    Canada
$
    Germany
$
    Finland
$
    Total
$
 
                         
Revenue     1,436,654       1,165,624       -       2,602,278  
Cost of sales     844,015       934,486       -       1,778,501  
Gross profit     592,639       231,138       -       823,777  
                                 
Operating expenses                                
Research and development     7,844,125       -       2,421,263       10,265,388  
General and administrative     6,256,746       -       399,977       6,656,723  
Selling and distribution     2,004,143       1,676,389       410,815       4,091,347  
Total operating expense     16,105,014       1,676,389       3,232,055       21,013,458  
                                 
Operating loss     15,512,375       1,445,251       3,232,055       20,189,681  
Net finance costs                             342,524  
Loss for the year before income taxes                             20,532,205  

 

  41  

 

 

Profound Medical Corp.

Notes to Consolidated Financial Statements

December 31, 2018 and 2017 and 2016

 

For the year ended December 31, 2017:

 

    Canada
$
    Germany
$
    Finland
$
    Total
$
 
                         
Revenue     3,331,606       1,572,944       -       4,904,550  
Cost of sales     1,967,677       1,064,531       -       3,032,208  
Gross profit     1,363,929       508,413       -       1,872,342  
                                 
Operating expenses                                
Research and development     8,952,890       -       685,300       9,638,190  
General and administrative     5,617,214       -       318,001       5,935,215  
Selling and distribution     1,950,204       1,819,814       155,786       3,925,804  
Total operating expense     16,520,308       1,819,814       1,159,087       19,499,209  
                                 
Operating loss     15,156,379       1,311,401       1,159,087       17,626,867  
Net finance costs                             1,121,352  
Loss for the year before income taxes                             18,748,219  

 

Other financial information by segment as at December 31, 2018:

 

    Canada
$
    Germany
$
    Finland
$
    Total
$
 
                         
Total assets     42,437,691       1,093,184       3,018,997       46,549,872  
Goodwill and intangible assets     7,422,726       -       -       7,422,726  
Property and equipment     797,296       266       409,795       1,207,357  
Amortization of intangible assets     1,128,437       -       -       1,128,437  
Depreciation of property and equipment     296,093       3,100       246,808       546,001  

 

Other financial information by segment as at December 31, 2017:

 

    Canada
$
    Germany
$
    Finland
$
    Total
$
 
                         
Total assets     25,546,183       1,227,216       1,105,980       27,879,379  
Goodwill and intangible assets     8,551,163       -       -       8,551,163  
Property and equipment     1,093,389       3,366       629,395       1,726,150  
Amortization of intangible assets     500,518       -       -       500,518  
Depreciation of property and equipment     268,403       2,290       100,627       371,320  
Intangible assets and goodwill additions or acquisition     8,815,680       -       -       8,815,680  
Property and equipment additions or acquisition     409,435       4,984       730,022       1,144,441  

 

  42  

  

 

Exhibit 4.3, Exhibit 4.6

  

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A. Operating Results

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim unaudited financial statements as at and for the three and six months ended June 30, 2019 and 2018 and our audited financial statements as at and for the fiscal years ended December 31, 2018, 2017 and 2016 in each case, together with the notes thereto. The financial information contained in this Registration Statement is derived from the financial statements prepared in accordance with IFRS.

 

1 

 

 

Overview

 

We are an early commercial-stage medical device company focused on the development and marketing of customizable, incision-free therapeutic systems for the ablation of diseased tissue using our platform technology. Our leading approved product is our TULSA-PRO system, which in August 2019 received FDA clearance as a Class II device in the United States for thermal ablation of prescribed prostate tissue, benign and malignant, using transurethral ultrasound ablation (“TULSA”) based on our TACT Pivotal Clinical Trial, and is also CE marked in the European Union for ablation of targeted prostate tissue (benign or malignant). In addition, our Sonalleve system is CE marked in the EU for the treatment of uterine fibroids and palliative pain relief associated with metastases in bone, and is also approved in China for the treatment of non-invasive treatment of uterine fibroids. Our systems are designed to be used with MRI scanners and are currently compatible with MRI scanners manufactured by Philips and Siemens. To date, we have primarily generated revenues from our limited commercialization of our systems in the EU (principally in Germany) and Asia. We intend to commence commercialization of the TULSA-PRO system in the United States in the near term following our recent FDA clearance. We also continue to pursue additional regulatory approvals, research and development, clinical studies and acquisitions in order to expand the applications of our platform technology and expand our commercial footprint.

 

Our financial strategy to date has been to raise sufficient funds through securities offerings and bank financings in order to fund specific programs within a focused budget, and following FDA clearance of our TULSA-PRO system that we received in August 2019, commercialization in the United States. As our commercialization efforts increase and/or further program development costs increase, we may need to raise additional capital. See Item 3.D, “Risk Factors” and Item 5.B, “Liquidity and Capital Resources” for more information.

 

Trend Information and Outlook

 

We believe the following significant trends and uncertainties are likely to influence our results of operations, cash flows and/or financial condition in the future:

 

· We have recently obtained FDA clearance for the TULSA-PRO system in the United States, and expect to commence commercialization in the United States in the near team.

 

· We plan to increase our in-house sales and marketing capabilities to commercialize the TULSA-PRO system in the United States, which we expect will increase our expenses in the near term.

 

· We are pursuing increased compatibility of our systems, including the TULSA-PRO system, with additional MRI scanners, and we may also pursue additional distribution relationships to facilitate our U.S. commercialization efforts; these efforts may require significant management time and could result in increased expenses.

 

· We are also pursuing reimbursement coverage for the TULSA-PRO system by third-party payers, such as private insurance plans offered by medical insurance companies; the amount of such coverage or reimbursement, however, is uncertain, as we may be required to conduct additional research and clinical trials.

 

· We estimate that our general and administrative expenses will increase in the near term, primarily due to the continued expansion of our management team as well as compliance costs associated with becoming subject to reporting and other requirements under applicable U.S. securities laws and Nasdaq rules.

 

2 

 

 

· We also estimate that the costs for further developing our products and future product candidates based on our platform technology may increase in future years.

 

Our ability to achieve our commercialization goals, continue our growth and achieve profitability depends, in part, on the level of market acceptance of our products (in particular, the TULSA-PRO system in the United States), as well as the success of our efforts to increase our U.S. sales and marketing capabilities, increase compatibility of our systems with additional MRI scanners and procure reimbursement coverage, and also depends on changes in trends in the standard of care for the patient populations in which our products are indicated for use. In addition, our results may be adversely affected if, among other things, there is an economic slowdown or future clinical trial results are adverse.

 

While we believe that some of the trends and plans described above will present significant opportunities for us, they also pose significant challenges, uncertainties and risks, including those described under Item 3.D, “Risk Factors” above.

 

Results of Operations

 

The following selected financial information as at and for the three and six month periods ended June 30, 2019 and 2018, and selected financial information as at and for the years ended December 31, 2018, 2017 and 2016, have been derived from the interim unaudited financial statements and from the annual audited financial statements, respectively, included elsewhere in this Registration Statement, and should be read in conjunction with those respective financial statements and the related notes thereto.

 

    Three Months
Ended June 30,
    Six Months
Ended June 30,
    Year Ended
December 31,
 
    2019     2018     2019     2018     2018     2017     2016  
    C$     C$     C$     C$     C$  
Revenue     574,109       213,343       2,049,897       589,678       2,602,278       4,904,550       -  
Cost of sales     224,066       126,259       777,422       357,334       1,778,501       3,032,208       -  
Gross profit     330,043       87,084       1,272,475       232,344       823,777       1,872,342       -  
                                                         
Operating Expenses                                                        
Research and development - net of investment tax credits     3,186,355       2,347,909       5,864,101       4,864,690       10,265,388       9,638,190       9,988,693  
General and administrative     1,586,323       2,236,529       3,100,436       3,539,733       6,656,723       5,935,215       4,369,288  
Selling and distribution     1,154,869       1,113,225       625,524       2,060,127       4,091,347       3,925,804       1,282,433  
Total operating expenses     5,927,547       5,697,663       9,590,061       10,464,550       21,013,458       19,499,209       15,640,414  
                                                         
Finance costs     337,220       313,606       651,905       633,569       826,312       1,249,084       829,899  
Finance income     (110,790 )     (117,357 )     (252,671 )     (157,161 )     (483,788 )     (127,732 )     (157,598 )
Net finance costs     226,430       196,249       399,234       476,408       342,524       1,121,352       672,301  
                                                         
Loss before income taxes     5,823,934       5,806,828       8,716,820       10,708,614       20,532,205       18,748,219       16,312,715  
Income tax expense     20,200       24,200       54,000       60,600       230,784       74,123       14,054  
                                                         
Net loss attributable to shareholders for the period     5,844,134       5,831,028       8,770,820       10,769,214       20,762,989       18,822,342       16,326,769  
                                                         
Other comprehensive loss                                                        
Item that may be reclassified to profit or loss                                                        
Foreign currency translation adjustment - net of tax     (11,843 )     57,943       (58,232 )     14,695       29,226       (69,245 )     11,316  
                                                         
Net loss and comprehensive loss for the period     5,832,291       5,888,971       8,712,588       10,783,909       20,792,215       18,753,097       16,338,085  
                                                         
Basic and diluted net loss per common share     0.05       0.05       0.08       0.12       0.21       0.31       0.39  

 

3 

 

 

Financial Overview

 

Revenue

 

For the TULSA-PRO system, we generate revenue from the sale of the capital equipment, procedure-related sales of disposable single-use components of the system (which are sold on a per patient basis), and service revenue for ongoing maintenance of the systems. Sales of Sonalleve systems are primarily a one-time capital sale with limited recurring service revenue.

 

For the historical financial periods presented herein, we have generated revenues primarily from sales of our systems and disposables through our partnerships with Siemens and Philips in the EU and Asia. In August 2019, we received FDA clearance for our TULSA-PRO system in the United States, and accordingly we anticipate generating future revenues in the U.S. market. As we expand our commercialization efforts, we anticipate generating revenues through our in-house sales and marketing efforts, as well as from our collaborative partnerships.

 

In addition, because we have been in our pilot sales launch phase, our revenues for the historical periods presented herein have fluctuated significantly on a quarter-over-quarter and year-over-year basis. We expect that our revenues will likewise fluctuate from period-to-period in the near term as we pursue our commercialization strategy.

 

Cost of Sales

 

Cost of sales include cost of finished goods, inventory provisions, warranties, freight and direct overhead expenses. We expect cost of sales to increase or decrease corresponding with fluctuations in our revenues.

 

Operating Expenses

 

Our operating expenses consist of three components: research and development (“R&D”), general and administrative (“G&A”) and selling, marketing and distribution expenses. Historically, our R&D expenses have exceeded our selling, marketing and distribution expenses; however, in the future we expect our selling, marketing and distribution expenses to increase as we commercialize the TULSA-PRO system in the United States.

 

R&D Expenses

 

Our R&D expenses are comprised of costs incurred in performing R&D activities, including new product development, continuous product improvement, investment in clinical trials and related clinical manufacturing costs, materials and supplies, salaries and benefits, contract research costs, patent procurement costs, and occupancy costs related to R&D activity.

 

G&A Expenses

 

Our G&A expenses are comprised of management costs, including salaries and benefits, various management and administrative support functions, insurance and other operating and occupancy costs related to G&A activity.

 

4 

 

 

Selling, Marketing and Distribution Expenses

 

Our selling, marketing and distribution expenses are comprised of business development costs related to the market development activities and commercialization of our systems, including salaries and benefits, marketing support functions, marketing-related occupancy costs and other miscellaneous marketing costs.

 

Finance Costs

 

Finance costs are primarily comprised of interest and accretion expenses, among others, historically relating to the following: (i) the Federal Economic Development Agency Loan accreting to the principal amount repayable; (ii) the Health Technology Exchange Loan accreting to the principal amount repayable and its related interest expense; (iii) the Knight Loan accreting to the principal amount repayable and its related interest expense; (iv) the 0.5% royalty liability to Knight accreting to the estimated amount payable; (v) the change in fair value of the contingent consideration payable to Philips under the Philips Share Purchase Agreement; (vi) the CIBC Loan accreting to the principal amount repayable and its related interest expense; (vii) the change in the fair value of the derivative liability warrants; (viii) the lease liability interest expense related to the adoption of IFRS 16 and (ix) foreign exchange gains or losses. We repaid the Health Technology Exchange Loan on March 31, 2019 and each of the Federal Economic Development Agency Loan and the Knight Loan on July 25, 2018, and the Knight royalty terminated on May 20, 2019.

 

Comparison of the Three and Six Months Ended June 30, 2019 to the Three and Six Months Ended June 30, 2018

 

Revenue

 

For the three months ended June 30, 2019, we recorded revenue totaling C$574,109 with C$465,840 from the sale of products and C$108,269 from installation and training services related to the commercial sales of the systems and disposables, primarily in the European Union. For the three months ended June 30, 2018, we recorded revenue totaling C$213,343, with C$170,931 from sale of products and C$42,412 from installation and training services. The increase in revenue in the second quarter of 2019 over the second quarter of 2018 was the result of increased system and disposable sales as well as increased service contracts. However, our revenues in the second quarter of 2019 were lower than in the first quarter of 2019 and the fourth quarter of 2018 because of decreased system and disposable sales due to fluctuating revenues in our early pilot launch phase. See “—Quarterly Results of Operations” below.

 

For the six months ended June 30, 2019, we recorded revenue totaling C$2,049,897, with C$1,813,621 from the sale of products and C$236,276 from installation and training services related to the commercial sales of the systems and disposables, primarily in the European Union. For the six months ended June 30, 2018, we recorded revenue totaling C$589,678, with C$543,425 from the sale of products and C$46,253 from installation and training services. The increase in revenue in the six months ended June 30, 2019 was the result of increased system and disposable sales as well as increased service contracts.

 

Cost of Sales

 

For the three months ended June 30, 2019, we recorded a cost of sales of C$244,066 related to the sale of systems and disposables, which reflects a 58% gross margin. For the three months ended June 30, 2018, we recorded a cost of sales of C$126,259 related to the commercial sale of systems and disposables, which reflects a 41% gross margin. The gross margin was higher in the second quarter of 2019 due to increased disposable and service revenue, which have higher margins.

 

5 

 

 

For the six months ended June 30, 2019, we recorded a cost of sales of C$777,422 related to the commercial sale of the systems and disposables, which reflects a 62% gross margin. For the six months ended June 30, 2018, we recorded a cost of sales of C$357,334 related to the commercial sale of systems and disposables, which reflects a 39% gross margin. The gross margin was higher in the six months ended June 30, 2019 due to increased disposable and service revenue, which have higher margins.

 

Operating Expenses

 

R&D Expenses

 

For the three months ended June 30, 2019, R&D expenses were higher by C$838,446 compared to the three months ended June 30, 2018. Clinical trial costs, materials, share based compensation and salaries and benefits increased period-over-period by C$219,569, C$294,225, C$33,986, and C$244,263, respectively. These increases were due to increased spending and testing for R&D and activity related to pursuing U.S. regulatory approvals, analysis of TACT clinical data, options awarded to employees, increased R&D personnel and investment tax credits decreasing by C$60,000 because of lower eligibility for refundable tax credits. Offsetting these amounts were decreases in rent of C$57,456, due to the adoption of IFRS 16 resulting in the recognition of lower rental costs. Depreciation expenses increased by C$26,762 due to the adoption of IFRS 16 with the depreciation of the right-of-use assets.

 

For the six months ended June 30, 2019, R&D expenses were higher by C$999,411 compared to the six months ended June 30, 2018. Materials, share based compensation, salaries and benefits and other expenses increased by C$777,683, C$51,238, C$214,155 and C$61,277, respectively. These costs were higher compared to the six months ended June 30, 2018, due to increased spending and testing on R&D and US regulatory projects, options awarded to employees, increased R&D personnel and investment tax credits decreasing by C$120,000 because of lower eligibility for refundable tax credits. Offsetting these amounts was a decrease in clinical trial costs, consulting fees and rent by C$107,052, C$67,474 and C$95,486, respectively, resulting from the completion of the TACT Pivotal Clinical Trial enrollment initiatives, insourcing manufacturing and regulatory projects and the adoption of IFRS 16 resulting in the recognition of lower rental costs. Depreciation expenses increased by C$54,929 due to the adoption of IFRS 16 with the depreciation of the right-of-use assets.

 

G&A Expenses

 

G&A expenses for the three months ended June 30, 2019 decreased by C$650,206 compared to the three months ended June 30, 2018. Salaries and benefits, consulting fees and travel decreased by C$386,996, C$386,594 and C$24,337, respectively due to no bonuses awarded to management this quarter, lower legal costs and decreased travel to customer sites. In addition, the second quarter of 2018 was affected by increased management compensation due to the hiring of key management personnel. These costs were offset by an increase in share based compensation of C$111,871 in the second quarter of 2019, due to options awarded to various employees. Depreciation expenses increased by C$59,759 due to the adoption of IFRS 16 with the depreciation of the right-of-use assets.

 

G&A expenses for the six months ended June 30, 2019 were lower by C$439,297 compared to the six months ended June 30, 2018. Salaries and benefits, consulting fees, rent and travel decreased by C$191,845, C$400,874, C$31,289 and C$17,609, respectively, due to no bonuses awarded to management, lower legal costs, adoption of IFRS 16 resulting in the recognition of lower rental costs and decreased travel to customer sites. Depreciation expenses increased by C$121,191 due to the adoption of IFRS 16 with the depreciation of the right-of-use assets.

 

6 

 

 

Selling, Marketing and Distribution Expenses

 

Selling, marketing and distribution expenses for the three months ended June 30, 2019 were higher by C$41,644 compared to the three months ended June 30, 2018. Consulting fees increased by C$247,992 related to the additional consultants hired in various countries to help market and promote our approved products. Marketing and salaries and benefits expenses decreased by C$49,351 and C$128,834, respectively, due to decreased tradeshow attendance, marketing initiatives in the second quarter of 2019 a regional re-alignment of marketing personnel.

 

Selling, marketing and distribution expenses for the six months ended June 30, 2019 were lower by C$1,434,603 compared to the six months ended June 30, 2018. Salaries and benefits, share based compensation, marketing and travel expenses decreased by C$164,123, C$182,320, C$125,469 and C$32,220, respectively, due to a regional re-alignment of marketing personnel, employee forfeiture of options, decreased trade show attendance, product branding development and decreased travel. In addition, in the first quarter of 2019, our revenue share obligation decreased by C$1,209,205 related to the replacement of the Original Siemens Agreement with the New Siemens Agreement whereby all prior financial commitments and obligations owed to Siemens were released, resulting in a recovery of expenses recorded in the six months ended June 30, 2019. These costs were offset by an increase in consulting fees of C$296,803 due to consultants hired in various countries to help market and promote our approved products.

 

Finance Costs

 

Finance costs for the three months ended June 30, 2019 were higher by C$30,181 compared to the three months ended June 30, 2018. During the three months ended June 30, 2019, we recognized C$26,298 of foreign exchange loss and a C$25,072 gain on the change in fair value to the contingent consideration under the Philips Share Purchase Agreement and a C$3,251 gain on the change in fair value of the derivative liability warrants, respectively. We recognized CIBC Loan interest of C$312,050 and lease liability interest expense of C$33,556.

 

Finance costs for the six months ended June 30, 2019 were lower by C$77,174 compared to the six months ended June 30, 2018. During the six months ended June 30, 2019, we recognized C$34,786 of foreign exchange gain, a C$48,787 gain on the change in fair value to the contingent consideration and a C$54,220 loss on the change in fair value of the derivative liability warrants, respectively. We recognized CIBC Loan interest of C$617,559 and lease liability interest expense of C$67,149.

 

Income Tax Expense

 

During the three and six months ended June 30, 2019, we recorded an income tax expense of C$20,200 and C$54,000, respectively, compared to C$24,200 and C$60,600 for the three and six months ended June 30, 2018, which primarily related to taxes in certain foreign jurisdictions.

 

Net Loss

 

Net loss for the three months ended June 30, 2019 was C$5,844,134 or C$0.05 per Common Share, compared to a net loss of C$5,831,028 or C$0.05 per Common Share for the three months ended June 30, 2018. The increase in net loss was primarily attributed to an increase in R&D expenses of C$838,446, an increase in selling and distribution expenses of C$41,644 and an increase in net finance costs of C$30,181. This was offset by a decrease in G&A expenses of C$650,206 and an increase in gross profits of C$242,959. However, our net loss in the second quarter of 2019 was greater than in the first quarter of 2019. See “—Quarterly Results of Operations” below.

 

7 

 

 

Net loss for the six months ended June 30, 2019 was C$8,770,820 or C$0.08 per common share, compared to a net loss of C$10,769,214 or C$0.12 per common share for the six months ended June 30, 2018. The decrease in net loss was primarily attributed to a decrease in G&A expenses of C$439,297, a decrease in selling and distribution expenses of C$1,434,603, a decrease in net finance costs of C$77,174 and an increase in gross profit of C$1,040,131. This was offset by an increase in R&D expenses of C$999,411.

 

Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017

 

Revenue

 

For the year ended December 31, 2018, we recorded revenue totaling C$2,602,278, with C$2,421,331 from the sale of products and C$180,947 from installation and training services, related to the commercial sales of the systems and disposables, primarily in the EU. For the year ended December 31, 2017, we recorded revenue totaling C$4,904,550, with C$4,663,986 from sale of products and C$240,564 from installation and training services. The decrease in revenue was the result of fewer new system and disposable sales in 2018 due to fluctuating revenues in our early pilot launch phase.

 

Cost of Sales

 

For the year ended December 31, 2018, we recorded a cost of sales of C$1,778,501, related to the sale of the systems and disposables, which reflects a 32% gross margin. For the year ended December 31, 2017, we recorded a cost of sales of C$3,032,208, related to the commercial sale of systems and disposables, which reflects a 38% gross margin. The gross margin was lower in 2018 due to changes in the product mix as a result of the Sonalleve Transaction and lower gross margin on disposables compared to the systems based on initial low volumes.

 

Operating Expenses

 

R&D Expenses

 

For the year ended December 31, 2018, R&D expenses were higher by C$627,198 compared to the year ended December 31, 2017. Overall, the increase in R&D spending was attributed to the Sonalleve Transaction, which occurred in the third quarter of 2017. Materials, rent, salaries and benefits and other expenses increased by C$125,035, C$110,756, C$1,224,691 and C$177,625, respectively. These costs were higher compared to the year ended December 31, 2017, due to a higher number of R&D personnel, new initiatives with our Sonalleve system and a new facility in Finland. Offsetting these amounts was a decrease in clinical trial costs, travel and share based compensation by C$1,544,191, C$26,194 and C$67,403, respectively, resulting from the completion of the TACT Pivotal Clinical Trial enrollment initiatives and the forfeiture of certain share options. Amortization of intangible assets increased by C$626,593 due to the Sonalleve Transaction which represented 12 months amortization in 2018 versus 5 months amortization in 2017.

 

G&A Expenses

 

G&A expenses for the year ended December 31, 2018 were higher by C$721,508 compared to the year ended December 31, 2017. Salaries and benefits, travel and office and other increased by C$885,846, C$60,982 and C$28,879, respectively, due to increased number of G&A personnel and board members, bonus payments, salary increases, including as a result of the Sonalleve Transaction, and increased insurance expenses and travel to customer sites. These costs were offset by a decrease in share-based compensation expense and occupancy costs (resulting in lower utility bills and repairs to the facilities) by C$326,501 and C$106,427, respectively. Depreciation expense increased by C$167,970 primarily due to leasehold improvements for the new facility that was constructed in the latter part of 2017.

 

8 

 

 

Selling, Marketing and Distribution Expenses

 

Selling, marketing and distribution expenses for the year ended December 31, 2018 were higher by C$165,543 compared to the year ended December 31, 2017. Salaries and benefits, consulting fees, travel, marketing and share based compensation increased by C$400,470, C$175,152, C$77,295, C$138,644 and C$145,229, respectively, due to additional direct sales force personnel, awards issued to new employees, increased marketing-related efforts, product branding development and conference attendance. These costs were offset by a reduced revenue share obligation expense of C$787,858 related to the Siemens revenue share payments compared to the minimum amounts contractually stipulated.

 

Finance Costs

 

Finance costs for the year ended December 31, 2018 were lower by C$422,772 compared to the year ended December 31, 2017. During the year ended December 31, 2018, we recognized C$214,226 of foreign exchange loss, a C$325,253 and C$96,619 gain on the change in fair value to the contingent consideration under the Philips Share Purchase Agreement and the change in fair value of the derivative liability warrants, respectively. We recognized a decrease in the Health Technology Exchange Loan and Federal Economic Development Agency Loan and Knight Loan interest and accretion expense of C$57,149 and C$752,358, respectively and an increase in CIBC Loan interest and accretion expense of C$517,409.

 

Income Tax Expense

 

During the year ended December 31, 2018, we recorded an income tax expense of C$230,784, compared to C$74,123 for the year ended December 31, 2017 which primarily related to taxes in certain foreign jurisdictions. The increase was a direct result of increased commercial efforts.

 

Net Loss

 

Net loss for the year ended December 31, 2018 was C$20,762,989 or C$0.21 per Common Share, compared to a net loss of C$18,822,342 or C$0.31 per Common Share for the year ended December 31, 2017. The increase in net loss was primarily attributed to an increase in R&D expenses of C$627,198, an increase in G&A expenses of C$721,508, an increase selling and distribution expenses of C$165,543, and a decrease in gross profit of C$1,048,565. These were offset by a decrease in net finance costs of C$778,828.

 

Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016

 

Revenue

 

For the year ended December 31, 2017, we recorded revenues totaling C$4,904,550, with C$4,663,986 from sale of products and C$240,564 from installation and training services, related to the commercial sales of the systems and disposables, primarily in the EU. In 2016, we had no revenues as we were in the pre-commercial stage of our development.

 

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Cost of Sales

 

For the year ended December 31, 2017, we recorded cost of sales of C$3,032,208, related to the sales of the systems and disposables. In 2016, we had no revenues or related cost of sales as we were in the pre-commercial stage of our development.

 

Operating Expenses

 

R&D Expenses

 

For the year ended December 31, 2017, R&D expenses were lower by C$350,503 compared to the year ended December 31, 2016. Overall, the decrease in R&D spending reflected the advanced stages of development of our products and the ramp-up of commercial operations in approved jurisdictions. Materials, contractors and other expenses were lower by C$2,523,608, C$136,386 and C$204,711, respectively due to lower material costs and R&D initiatives associated with our TACT Pivotal Clinical Trials. Offsetting this amount was an increase in clinical trial costs, salaries and benefits, amortization of intangible assets, consulting fees and travel by C$1,311,878, C$562,626, C$458,980, C$80,763 and C$66,248, respectively, resulting from ongoing activities related to the initiation of clinical site visits, enrollment initiatives, patient treatment and workforce costs.

 

G&A Expenses

 

G&A expenses for the year ended December 31, 2017 were higher by C$1,565,927 compared to the year ended December 31, 2016. Salaries and benefit expenses increased by C$88,190, primarily related to a separation payment to a former executive officer and the addition of key executives. In addition, professional and consulting fees increased by C$976,380 due to legal fees associated with the Sonalleve Transaction and the inclusion of Sonalleve-related operations. Share-based compensation and rent increased by C$289,689 and C$20,364, respectively, due to new options issued to executive officers while rent was due to relocation to a larger facility in July 2016. Depreciation expense increased by C$195,218 primarily due to the new property and equipment for the new facility.

 

Selling, Marketing and Distribution Expenses

 

Selling and distribution expenses for the year ended December 31, 2017 were higher by C$2,643,371 compared to the year ended December 31, 2016. The increase is largely attributable to recognizing commissions payable on commercial sales of C$73,046 and a provision of C$953,429 related to the estimated shortfall of revenue share payments compared to the minimum amounts contractually required. In addition, shared based compensation and salaries and benefits increased by C$32,820 and C$650,391, respectively, resulting from additional direct sales force personnel. Professional and consulting fees, marketing, office and other and travel expenses increased by C$353,974, C$257,074, C$90,676 and C$231,961, respectively. These increases relate directly to marketing-related efforts and an increased direct sales force.

 

Finance Costs

 

Finance costs for the year ended December 31, 2017 were higher by C$419,185 compared to the year ended December 31, 2016. During the year ended December 31, 2017, we revised the fair value of the royalty payable to Knight, using future revenue forecasts for the term of the Knight Loan and recognized an interest accretion recovery of C$36,438. As part of the Sonalleve Transaction, we were required to repay the Knight Loan at an accelerated rate and therefore recognized C$333,997 of accelerated accretion expense. During the year, we revised the fair value of the contingent consideration under the Philips Share Purchase Agreement and recognized a change in fair value of C$82,578.

 

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Income Tax Expense

 

During the year ended December 31, 2017, we recorded an income tax expense C$74,123, compared to the year ended December 31, 2016 of C$14,054 with the increase primarily related to the Sonalleve Transaction.

 

Net Loss

 

Net loss for the year ended December 31, 2017 was C$18,822,342 or C$0.31 per common share, compared to a net loss of C$16,326,769 or C$0.39 per Common Share for the year ended December 31, 2016. The increase in net loss was primarily attributed to an increase in selling and distribution expenses of C$2,643,371, G&A expenses of C$1,565,927 and an increase in financing costs of C$419,185. These increases were offset by a gross profit of C$1,872,342.

 

Quarterly Results of Operations

 

The following table summarizes selected unaudited consolidated financial data for each of the last eight quarters. The summary financial information provided below is derived from our interim financial statements for each of the last eight quarters that are prepared under IFRS in Canadian dollars. These quarterly operating results are not necessarily indicative of our operating results for a full year or any future period.

 

    2019     2018     2017  
    Q2     Q1     Q4     Q3     Q2     Q1     Q4    

Q3(1)

 
    C$     C$     C$     C$     C$     C$     C$     C$  
Revenue(3)     574,109       1,475,788       1,708,936       303,664       213,343       376,335       1,890,482       1,465,412  
Cost of Sales     244,066       533,356       1,180,481       240,686       126,259       231,075       1,063,950       1,185,674  
Gross profit     330,043       942,432       528,455       62,978       87,084       145,260       826,532       279,738  
                                                                 
Operating expenses     5,927,547       3,662,514       5,309,931       5,238,977       5,697,663       4,766,887       5,155,423       5,148,434  
Net finance costs(2)     226,430       172,804       (60,151 )     (73,733 )     196,249       280,159       130,632       651,378  
Loss before income taxes     5,823,934       2,892,886       4,721,325       5,102,266       5,806,828       4,901,786       4,459,523       5,520,074  
                                                                 
Income taxes     20,200       33,800       136,884       32,700       24,200       36,400       69,470       -  
                                                                 
Net loss for the period     5,844,134       2,926,686       4,858,809       5,134,966       5,831,028       4,938,186       4,528,993       5,520,074  
                                                                 
Loss per common share                                                                
Basic and diluted     0.05       0.03       0.04       0.05       0.05       0.06       0.06       0.09  

 

(1) The fourth quarter of 2018 was impacted by increased commercial sales of systems primarily in Germany and Asia, resulting in increased revenues.

 

(2) The third and fourth quarters of 2018 net finance costs were lower due to a gain on the change in fair value of contingent consideration under the Philips Share Purchase Agreement and share warrants being recognized.

 

Recently Issued Accounting Pronouncements

 

In conjunction with the transition to the new IFRS 16, Leases and IFRIC 23, Uncertainty over Income Tax Treatments, we have determined that the adoption of these new accounting standards did not have a significant impact on our control environment.

 

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The preparation of financial statements in conformity with IFRS requires management to make estimates and judgements that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates. As additional information becomes available or actual amounts are determinable, the recorded estimates are revised and reflected in operating results in the period in which they are determined.

 

Critical Accounting Policies and Estimates

 

Revenue

 

To determine revenue recognition for arrangements we performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

 

Revenue is recognized when a contractual promise to a customer (performance obligation) has been fulfilled by transferring control over the promised goods or services, generally at the point in time of shipment to or receipt of the products by the customer or when the services are performed. When contracts contain customer acceptance provisions, revenue is recognized on the satisfaction of the specific acceptance criteria.

 

The amount of revenue to be recognized is based on the consideration we expect to receive in exchange for its goods and services. For contracts that contain multiple performance obligations, we allocate the consideration to which we expect to be entitled to each performance obligation based on relative standalone selling prices and we recognize the related revenue when or as control of each individual performance obligation is transferred to customers.

 

Service revenue related to installation and training is recognized over the period in which the services are performed. Service revenue related to extended warranty service is deferred and recognized on a straight-line basis over the extended warranty period covered by the respective customer contract.

 

Under the terms of certain of our partnership agreements with Philips and Siemens, we retain a percentage of all amounts earned with the remaining percentage due to the partner. Accordingly, associated revenue is recognized net of the consideration due to the partner.

 

Complex financial instruments and provisions

 

We make various judgments when determining the accounting for certain complex financial instruments. We have concluded that the contingent consideration in a business combination represents a financial liability measured at fair value through profit or loss.

 

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Accounts receivable and allowance for credit losses

 

Accounts receivable are generally non-interest bearing, unsecured obligations due from customers. We make a provision to allow for potentially uncollectible amounts owed from customers. The allowance is reviewed by management periodically based on an analysis of the age of the outstanding accounts receivable. The balance of accounts receivable after the allowance for credit losses represents management’s estimate of the net realizable value of receivables after discounts and contractual adjustments.

 

Impairment of goodwill and long-lived assets

 

Management tests at least annually whether goodwill suffered any impairment. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. An impairment loss is recognized as the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows.

 

Management makes key assumptions and estimates in determining the recoverable amount of our cash generating units (“CGUs”) or groups of CGUs, including future cash flows based on historical and budgeted operating results, growth rates, tax rates and appropriate after-tax discount rates.

 

We evaluate our long-lived assets (property and equipment) and intangible assets, other than goodwill, for impairment whenever indicators of impairment exist. The accounting standards require that if the sum of the undiscounted expected future cash flows from a long-lived asset or definite-lived intangible asset is less than the carrying value of that asset, an asset impairment charge must be recognized. The amount of the impairment charge is calculated as the excess of the asset’s carrying value over its fair value, which generally represents the discounted future cash flows from that asset.

 

Impairment of non-financial assets

 

We review amortized non-financial assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may be impaired. We also review goodwill annually for impairment. If the recoverable amount of the respective non-financial asset is less than our carrying amount, it is considered to be impaired. In the process of measuring the recoverable amount, management makes assumptions about future events and circumstances. The actual results may vary and may cause significant adjustments.

 

Accounting for acquisitions and contingent consideration

 

Areas of estimation include the determination and fair value measurement of the contingent consideration, which include us developing our best estimate of projected revenue, the probability of the contingency being achieved and the discount rate. Management is also required to make estimates of the fair value of assets acquired and liabilities assumed.

 

Clinical trial expenses

 

Clinical trial expenses are accrued based on the services received and efforts expended pursuant to agreements with clinical trial sites and other vendors. In the normal course of business we contract third parties to perform various clinical trial activities. The financial terms of these agreements vary from contract to contract, are subject to negotiation and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients or the completion of certain portions of a clinical trial. We determine the accrual by reviewing contracts, vendor agreements and through discussions with internal personnel and external clinical trial sites as to the progress or stage of completion of the clinical trial and the agreed-upon fees to be paid for such services. Actual costs and timing of the clinical trial is uncertain, subject to risks and may change depending on a number of factors.

 

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JOBS Act

 

As a company with less than US$1.07 billion in revenue during the last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified exemptions from various requirements that are otherwise applicable generally to public companies in the United States.

 

The JOBS Act also permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We will not take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This election is irrevocable. We will remain an emerging growth company until the earliest of:

 

· the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion;

 

· the last day of our fiscal year following the fifth anniversary of the completion of an initial public offering;

 

· the date on which we have, during the previous three-year period, issued more than US$1 billion in non-convertible debt securities; or

 

· the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of our Common Shares that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter.

 

As a result of our status as an emerging growth company, the information that we provide shareholders may be less comprehensive than what you might receive from other public companies that are not emerging growth companies. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act.

 

B. Liquidity and Capital Resources

 

Overview

 

Our primary sources of capital to date have been from securities offerings and bank financings, including the Bought Deals and CIBC Loan as described below. At June 30, 2019, we had cash of C$20,493,470 compared to C$30,687,183 at December 31, 2018. Following FDA clearance of our TULSA-PRO system in August 2019, we paid a C$250,000 milestone payment to Sunnybrook under the Sunnybrook License. See Item 4.B, “Business Overview—Intellectual Property—Licenses”. As of June 30, 2019, our total borrowings were C$12,500,000, related to the CIBC Loan described below. Our funding and treasury activities are conducted within corporate practices to maximize investment returns while maintaining appropriate liquidity for both our short and long-term needs. Cash is held primarily in Canadian dollars.

 

For the six months ended June 30, 2019 and for the year ended December 31, 2018, we had no capital expenditures, compared to C$430,569 for the year ended December 31, 2017 and C$863,991 for the year ended December 31, 2016, most of which were used for the purchase of production and research and development equipment, office furniture and equipment and computers and self-manufactured equipment.

 

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Our working capital has decreased by C$9,825,322 with a surplus of C$20,215,107 at June 30, 2019 compared to the surplus of C$30,040,429 at December 31, 2018. For a calculation of working capital, see “Working Capital” below. The change in working capital was due to a decrease in current assets of C$10,239,005, which was primarily the result of the decreased cash balance of C$20,493,470 resulting from general working capital payments. We believe that our working capital is sufficient for our present requirements.

 

We may require additional capital to fund our commercialization efforts in the United States and future clinical trials and/or R&D activities. Potential sources of capital could include equity and/or debt financings, development agreements or marketing agreements, the collection of revenue resulting from future commercialization activities and/or new strategic partnership agreements to fund some or all costs of development. There can be no assurance that we will be able to obtain the capital sufficient to meet any or all of our needs. The availability of equity or debt financing will be affected by, among other things, the success of our commercialization efforts, the follow-up results of our clinical trials and our future R&D activity, our ability to obtain additional regulatory approvals, the state of the capital markets generally, strategic alliance agreements and other relevant considerations. See Item 3.D., “Risk Factors” elsewhere in this Registration Statement. In addition, if we raise additional funds by issuing equity securities, existing security holders will likely experience dilution, and any additional incurrence of indebtedness would result in increased debt service obligations and could require us to agree to additional operating and financial covenants that could further restrict our operations. Any failure to raise additional funds on terms favorable to us or at all may require us to significantly change or curtail our current or planned operations in order to conserve cash until such time, if ever, that sufficient proceeds from operations are generated, and could result in us not being in a position to advance our commercialization strategy or take advantage of business opportunities, and may results in the termination or delay of clinical trial results for our products or future clinical trials for other product candidates, in the curtailment of product development programs designed to improve our existing products or identify new product candidates, in the sale or assignment of rights to our intellectual property, and/or cause us to delay or suspend applications for regulatory approvals at all or in time to competitively market our products and future product candidates.

 

Recent Sources and Uses of Financing

 

Bought Deals

 

On March 20, 2018, we closed a bought deal financing, resulting in the issuance of 34,500,000 units at a price of C$1.00 per unit, for gross proceeds of C$34,500,000 (C$32,027,502, net of cash transaction costs) (the “2018 Bought Deal”). Each unit consisted of one Common Share and one-half of one Common Share purchase warrant, resulting in the issuance of 34,500,000 Common Shares and 17,250,000 warrants. Each whole warrant has a five-year term and entitles the holder thereof to acquire one Common Share at an exercise price of C$1.40 per Common Share.

 

We have allocated the net proceeds of the 2018 Bought Deal to (i) support certain costs and expenses of other clinical trial support and the ongoing TACT Pivotal Clinical Trial follow-up and finalization; (ii) ongoing expansion of infrastructure to execute on global sales and marketing plans with respect to the TULSA-PRO system and the Sonalleve system; (iii) support ongoing research and development and continue to invest in additional research and development and acquisitions in order to expand the applications for current and future platforms; (iv) scheduled repayment under the Knight Loan and other indebtedness; and (v) other general corporate purposes.

 

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On September 20, 2017, we closed a bought deal financing, resulting in the issuance of 10,000,000 units at a price of C$1.00 per unit, for gross proceeds of C$10,000,000 (C$8,913,868, net of cash transaction costs) (the “2017 Bought Deal”). Each unit consisted of one Common Share and one-half of one Common Share purchase warrant, resulting in the issuance of 10,000,000 Common Shares and 5,000,000 warrants. Each whole warrant has a three-year term and entitles the holder thereof to acquire one Common Share at a price of C$1.40 per Common Share.

 

On November 14, 2016, we closed a bought deal financing, resulting in the issuance of 15,820,000 Common Shares at a price of C$1.10 per Common Share for gross proceeds of C$17,402,000 (C$16,182,997, net of cash transaction costs) (the “2016 Bought Deal”).

 

CIBC Loan

 

PMI entered into the CIBC Loan Agreement, for initial gross proceeds of C$12,500,000, maturing on July 29, 2022, with an interest rate based on prime plus 2.5% (the “CIBC Loan”). PMI is required to make interest only payments for the first 15 months (until October 31, 2019) and monthly repayments on the principal of C$378,788 plus accrued interest afterwards for 33 months. All obligations of PMI under the CIBC Loan Agreement are guaranteed by Profound and certain of its current and future subsidiaries, and are secured by first priority security interests in the assets of Profound and such subsidiaries. PMI has the ability to draw an additional C$6,250,000 subject to the achievement of certain financing and FDA approval milestones. The CIBC Loan Agreement also contains a financial covenant that requires our unrestricted cash to be greater than operating cash expenditures for a trailing three-month period, reportable to CIBC on a monthly basis. We are currently in compliance with this financial covenant.

 

In connection with the CIBC Loan Agreement, we also issued 321,714 Common Share purchase warrants to CIBC, with each warrant entitling the holder to acquire one Common Share at a price of C$0.97 per Common Share until the date that is 60 months from the closing of the CIBC Loan Agreement, with a cashless exercise feature. The cashless exercise feature causes the conversion ratio to be variable and the warrants are therefore classified as a financial liability. Gains and losses on the warrants are recorded within finance costs on the consolidated statements of loss and comprehensive loss. A pricing model with observable market-based inputs was used to estimate the fair value of the warrants issued. The estimated fair value of the warrants at June 30, 2019 and December 31, 2018 was C$152,423 and C$98,203, respectively. As at June 30, 2019, the principal balance outstanding on the CIBC Loan Agreement was C$12,500,000.

 

Knight Loan

 

In August 2015, Knight provided us with a secured loan of C$4,000,000 bearing interest at 15% per annum (the “Knight Loan”) under the Knight Loan Agreement. On July 25, 2018, the full amount of the Knight Loan, including prepayment fees, was repaid for a total payment of C$3,188,023.

 

We also granted Knight a 0.5% royalty on global net sales of our products until the original maturity date of the Knight Loan on May 20, 2019. The royalty was initially recorded at fair value and subsequently carried at amortized cost using the effective interest rate method. The initial fair value of the royalty was determined using future revenue forecasts for the term of the Knight Loan and a discount rate of 18%. During the three and six months ended June 30, 2019, we revised the fair value of the royalty to reflect that the royalty had expired during the period.

 

In connection with the Knight Loan Agreement, in April 2015 we also entered into a distribution, license and supply agreement with Knight pursuant to which Knight will act as our exclusive distributor in Canada for an initial 10-year term, renewable for successive 10-year terms by either party. In connection with these arrangements in April 2015, we issued Knight a total of 1,717,450 Common Shares.

 

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Federal Economic Development Agency Loan

 

Pursuant to a loan agreement dated December 16, 2011, the Federal Economic Development Agency provided us with an unsecured and non-interest bearing loan of $867,000 (the “Federal Economic Development Agency Loan”) with the final repayment of $563,550 made on July 25, 2018.

 

Health Technology Exchange Loan

 

Pursuant to a loan agreement dated May 25, 2011, as amended April 1, 2012, and a loan agreement dated May 31, 2014, the Health Technology Exchange provided us with an unsecured loan of $1,500,000 bearing interest at 4.5% per annum (the “Health Technology Exchange Loan”). The final payment of $1,094,698 including accrued interest was made on March 31, 2018.

 

Cash Flows

 

We manage liquidity risk by monitoring actual and projected cash flows. A cash flow forecast is performed regularly to ensure that we have sufficient cash to meet operational needs while maintaining sufficient liquidity. We do not use any financial instruments for hedging currencies.

 

Our cash flows for the three and six months ended June 30, 2019 and 2018 are summarized in the table below.

 

    Three months ended     Six months ended  
    June 30,     June 30,     June 30,     June 30,  
    2019     2018     2019     2018  
    C$     C$     C$     C$  
Cash provided by (used in) operating activities     (6,286,215 )     (5,414,430 )     (9,504,257 )     (9,135,773 )
Cash provided by (used in) investing activities                        
Cash provided by (used in) financing activities     (269,152 )     (604,614 )     (689,456 )     30,028,469  
Net increase (decrease) in cash     (6,555,367 )     (6,019,044 )     (10,193,713 )     20,892,696  

 

Net cash provided by (used in) operating activities for the three months ended June 30, 2019 was C$(6,286,215) versus C$(5,414,430) for the three months ended June 30, 2018. The principal use of the operating cash flows during this period related to increased workforce costs and expenses associated with seeking U.S. regulatory approval for the TULSA-PRO system.

 

Net cash provided by (used in) operating activities for the six months ended June 30, 2019 was C$(9,504,257) versus C$(9,135,773) for the six months ended June 30, 2018. The principal uses of the operating cash flows during this period related to additional costs associated with increased workforce and seeking U.S. regulatory approval for the TULSA-PRO system and consultant costs.

 

Net cash provided by (used in) financing activities for the three months ended June 30, 2019 were C$(269,152) versus C$(604,614) for the three months ended June 30, 2018. These cash flows related to the CIBC Loan interest payments in 2019 which had a lower interest rate versus the Health Technology Exchange Loan, and the Knight Loan interest payments in 2018 which had a higher cost of borrowing.

 

Net cash provided by (used in) financing activities for the six months ended June 30, 2019 were C$(689,456) versus C$30,028,469 for the six months ended June 30, 2018. These cash flows related to the CIBC Loan interest payments in 2019 versus the Health Technology Exchange Loan, and the Knight Loan and gross proceeds from the 2018 Bought Deal, less cash transactions costs paid.

 

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Our cash flows for the years ended December 31, 2018, 2017 and 2016 are summarized in the table below.

 

    Year ended  
    December 31,     December 31,     December 31  
    2018     2017     2016  
    C$     C$     C$  
Cash provided by (used in) operating activities     (18,294,637 )     (15,571,227 )     (14,502,266 )
Cash provided by (used in) investing activities     -       (280,661 )     8,912,835  
Cash provided by (used in) financing activities     37,878,597       6,122,050       15,899,972  
Net increase (decrease) in cash     19,583,960       (9,729,838 )     10,310,541  

 

Net cash provided by (used in) operating activities for the year ended December 31, 2018 was C$(18,294,637) versus C$(15,571,227) for the year ended December 31, 2017 and C$(14,502,266) for the year ended December 31, 2016. The principal uses of the operating cash flows during 2018 related to additional costs associated with Sonalleve that were only present for 5 months in 2017, increased TACT expenses and increased workforce costs,. In the year ended December 31, 2016, the principal uses of operating cash flows were related to the preparations for the IDE submission and the TACT Pivotal Trial in 14 clinical sites, designed to support the 510(k) submission in the United States to provide a pathway for Class II classification for the TULSA-PRO system and increased employee headcount.

 

Net cash provided by (used in) investing activities for the year ended December 31, 2018 was C$nil versus C$(280,661) for the year ended December 31, 2017 and C$8,912,835 for the year ended December 31, 2016. The change in the year ended December 31, 2018 compared to the year ended December 31, 2017 related to no purchases of property and equipment and intangible assets during the year ended December 31, 2018 compared to the year ended December 31, 2017. The change in the year ended December 31, 2017 compared to the year ended December 31, 2016 related to the redemption of short term investments, offset by cash outflows related to purchase of enterprise resource planning implementation and leasehold improvements at the new office building.

 

Net cash provided by (used in) financing activities for the year ended December 31, 2018 were C$37,878,597 versus C$6,122,050 for the year ended December 31, 2017 and C$15,899,972 for the year ended December 31, 2016. These cash flows in 2018 related to the CIBC Loan, 2018 Bought Deal proceeds less cash transactions costs paid and debt repayments of the Health Technology Exchange Loan, Federal Economic Development Agency Loan and the Knight Loan. Cash flows provided by financing activities in 2017 related to 2017 Bought Deal proceeds and were offset by the repayment of long term debt. Cash flows provided by financing activities in 2016 related to 2016 Bought Deal proceeds and were offset by the repayment of long term debt.

 

Working Capital

 

Our working capital as at June 30, 2019 and December 31, 2018, with reconciliations to current assets are set forth in the table below.

 

   

As of

June 30,

   

As of

December 31,

 
    2019     2018  
    C$     C$  
Current assets     27,680,784       37,919,789  
Less: Current liabilities     7,465,677       7,879,360  
Working capital     20,215,107       30,040,429  

 

18 

 

 

 

C. Research and Development, Patents and Licenses, etc.

 

Research and Development

 

Our R&D expenses are comprised of costs incurred in performing R&D activities, including new product development, continuous product improvement, investment in clinical trials and related clinical manufacturing costs, materials and supplies, salaries and benefits, contract research costs, patent procurement costs, and R&D-related occupancy costs. Since January 1, 2016, the majority of these expenses have related to the TACT Pivotal Clinical Trial and development costs of our systems, primarily our TULSA-PRO system.

 

For information regarding our intellectual property, see Item 4.B, “Business Overview—Intellectual Property”.

 

F. Tabular Disclosure of Contractual Obligations

 

The following table summarizes our significant contractual obligations as of December 31, 2018:

 

    Total     Less than 1 Year     Between
1 year and
5 years
    Greater than
5 years
 
    C$     C$     C$     C$  
Accounts payables and accrued liabilities     3,912,350       3,912,350       -       -  
Long-term debt(1)     14,497,042       1,936,455       12,560,587       -  
Other liabilities(2)     1,365,217       429,426       935,791       -  
Total(3)     19,774,609       6,278,231       13,496,378       -  

 

(1) Represents the CIBC Loan. Carrying amount: C$11,955,245. See Item 5.B, “Liquidity and Capital Resources—Recent Sources and Uses of Financing—CIBC Loan” and note 10 to our audited annual financial statements included in this Registration Statement.

 

(2) Represents contingent consideration under the Philips Share Purchase Agreement, which is valued based on estimated projected net sales, the likelihood of certain levels being reached and a discount rate of 15%, and warranty liability relating to warrants issued in the 2017 Bought Deal and 2018 Bought Deal, and to CIBC in connection with the CIBC Loan. Carrying amount: C$1,275,394. For information regarding the Philips Share Purchase Agreement and our recorded contingent consideration thereunder, see Item 4.B, “Business Overview—Alliances and Partnerships—Philips” and note 4 to our audited annual financial statements included in this Registration Statement. For information regarding the warrants and warranty liability, see Item 5.B, “Liquidity and Capital Resources—Recent Sources and Uses of Financing” and note 12 to our audited annual financial statements included in this Registration Statement.

 

(3) Carrying amount: C$17,142,989. In addition, following FDA clearance of our TULSA-PRO system in August 2019, we were required to pay a C$250,000 milestone payment to Sunnybrook under the Sunnybrook License, which we have paid as of the date of this Registration Statement. See Item 4.B, “Business Overview—Intellectual Property—Licenses”.

 

19 

 

 

Exhibit 4.4

 

 

 

PROFOUND MEDICAL CORP.

 

 

 

 

NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS TO BE

HELD ON JUNE 13, 2019

 

AND

 

MANAGEMENT INFORMATION CIRCULAR

 

 

 

 

 

 

 

DATED AS OF MAY 6, 2019

 

 

PROFOUND MEDICAL CORP.

 

NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS

 

NOTICE IS HEREBY GIVEN THAT an annual and special meeting (the “Meeting”) of the holders (the “Shareholders”) of common shares (“Common Shares”) in the capital of Profound Medical Corp. (the “Corporation”) will be held at 2400 Skymark Avenue, Unit 6, Mississauga, Ontario, L4W 5K5, on Thursday, June 13, 2019 at 10:00 a.m. (Toronto time) for the following purposes:

 

  1. to receive the audited financial statements of the Corporation for the financial year ended December 31, 2018 and the accompanying report of the auditors thereon;

 

  2. to elect the directors of the Corporation for the ensuing year;

 

  3. to consider and, if deemed fit, approve an ordinary resolution approving all unallocated options under the Corporation’s share option plan;

 

  4. to consider and, if deemed fit, approve a special resolution authorizing the board of directors of the Corporation to amend the articles of the Corporation to effect a consolidation of all of the issued and outstanding Common Shares, such that the trading price of the post consolidation Common Shares is in the range of US$12.00 to US$20.00 per post-consolidation Common Share (or such other consolidation ratio that will permit the Corporation to qualify for a potential secondary listing on the NASDAQ Stock Market LLC);

 

  5. to appoint the auditors of the Corporation for the ensuing year and to authorize the directors of the Corporation to fix the auditors’ remuneration;

 

  6. to transact such other business as may be properly brought before the Meeting or any postponement or adjournment thereof.

 

Shareholders should refer to the accompanying management information circular for more detailed information with respect to the matters to be considered at the Meeting.

 

Only Shareholders of record as of May 7, 2019 are entitled to notice of the Meeting and to vote at the Meeting and at any postponement or adjournment thereof.

 

If you are a registered Shareholder and are unable to attend the Meeting in person, please date and execute the accompanying form of proxy and return it to TSX Trust Company either in person, or by mail or courier, to 100 Adelaide Street West, Suite 301, Toronto, Ontario, M5H 4H1 or via the internet at www.voteproxyonline.com by no later than by 10:00 a.m. on Tuesday, June 11, 2019, or if the Meeting is adjourned or postponed, at least 48 hours, excluding Saturdays, Sundays and holidays, prior to any such adjournment or postponement. If you receive more than one form of proxy because you own Common Shares registered in different names or addresses, each form of proxy should be completed and returned.

 

If you are not a registered Shareholder and receive these materials through your broker or through another intermediary, please complete and return the accompanying voting instruction form in accordance with the instructions provided to you by your broker or by the other intermediary.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

(Signed) “Arun Menawat

 

Arun Menawat

Director and Chief Executive Officer

May 6, 2019

 

i

 

PROFOUND MEDICAL CORP.

 

MANAGEMENT INFORMATION CIRCULAR

 

SOLICITATION OF PROXIES

 

This management information circular (this “Circular”) is provided in connection with the solicitation of proxies by the management of Profound Medical Corp. (the “Corporation” or “Profound”) for use at the annual and special meeting (the “Meeting”) of the holders (the “Shareholders”) of common shares (“Common Shares”) in the capital of the Corporation. The Meeting will be held on Thursday, June 13, 2019 at 10:00 a.m. (Toronto time) at 2400 Skymark Avenue, Unit 6, Mississauga, Ontario, L4W 5K5, or at such other time or place to which the Meeting may be adjourned, for the purposes set forth in the notice of annual and special meeting accompanying this Circular (the “Notice”). Although it is expected that the solicitation of proxies will be primarily by mail, proxies may also be solicited personally or by telephone, facsimile or other means of electronic communication. In accordance with National Instrument 54-101 - Communication with Beneficial Owners of Securities of a Reporting Issuer (“NI 54-101”), arrangements have been made with brokerage houses and other intermediaries, clearing agencies, custodians, nominees and fiduciaries to forward solicitation materials to the beneficial owners of the Common Shares held of record by such persons and the Corporation may reimburse such persons for reasonable fees and disbursements incurred by them in doing so. The costs thereof will be borne by the Corporation.

 

These securityholder materials are being sent to both registered and non-registered (beneficial) owners of the securities. If you are a non-registered owner and the Corporation or its agent has sent these materials directly to you, your name and address and information about your holdings or securities have been obtained in accordance with applicable securities regulatory requirements from the intermediary holding on your behalf.

 

Accompanying this Circular (and filed with applicable securities regulatory authorities) is a form of proxy for use at the Meeting. Each Shareholder who is entitled to attend the Meeting is encouraged to participate in the Meeting and Shareholders are urged to vote on matters to be considered in person or by proxy.

 

Unless otherwise stated, the information contained in this Circular is given as of May 6, 2019. All time references in this Circular are references to Toronto time. All amounts referred to in this Circular are presented in Canadian dollars, unless otherwise stated.

 

APPOINTMENT AND REVOCATION OF PROXIES

 

Registered Shareholders

 

Appointment of Proxies

 

Those Shareholders who wish to be represented at the Meeting by proxy must complete and deliver a proper form of proxy to TSX Trust Company (the “Transfer Agent”) either in person, or by mail or courier, to 100 Adelaide Street West, Suite 301, Toronto, Ontario, M5H 4H1 or via the internet at www.voteproxyonline.com.

 

The persons named as proxyholders in the form of proxy accompanying this Circular are designated by management of the Corporation and are representatives of the Corporation’s management for the Meeting. A Shareholder who wishes to appoint some other person (who need not be a Shareholder) to attend and act for and on such Shareholder’s behalf at the Meeting other than the management nominees designated in the form of proxy may do so by either: (i) crossing out the names of the management nominees AND legibly printing the other person’s name in the blank space provided in the accompanying form of proxy; or (ii) completing another valid form of proxy. In either case, the completed form of proxy must be delivered to the Transfer Agent at the place and within the time specified herein for the deposit of proxies. A Shareholder who appoints a proxy who is someone other than the management representatives named in the form of proxy should notify the nominee of the appointment, obtain the nominee’s consent to act as proxy and provide instructions on how the Common Shares are to be voted. The nominee should bring personal identification to the Meeting. In any case, the form of proxy should be dated and executed by the Shareholder or an attorney authorized in writing, with proof of such authorization attached (where an attorney executed the proxy form).

 

1

 

In order to validly appoint a proxy, the form of proxy must be received by the Transfer Agent (the address is stated above or in the form of proxy) by 10:00 a.m. (Toronto time) on Tuesday, June 11, 2019, or if the Meeting is adjourned or postponed, at least 48 hours, excluding Saturdays, Sundays and holidays, prior to any such adjournment or postponement. After such time, the Chair of the Meeting may accept or reject a form of proxy delivered to him in his discretion but is under no obligation to accept or reject any particular late form of proxy.

 

Revocation of a Proxy

 

A Shareholder who has validly given a proxy may revoke it for any matter upon which a vote has not already been cast by the proxyholder appointed therein. In addition to revocation in any other manner permitted by law, a proxy may be revoked with an instrument in writing signed and delivered to either the registered office of the Corporation or the Transfer Agent, 100 Adelaide Street West, Suite 301, Toronto, Ontario, M5H 4H1, at any time up to and including the last business day preceding the date of the Meeting, or any postponement or adjournment thereof at which the proxy is to be used, or deposited with the Chair of such Meeting on the day of the Meeting, or any adjournment or postponement thereof. The document used to revoke a proxy must be in writing and completed and signed by the Shareholder or his or her attorney authorized in writing or, if the Shareholder is a corporation, under its corporate seal or by an officer or attorney thereof duly authorized.

 

Signature on Proxies

 

The form of proxy must be executed by the Shareholder or his or her duly appointed attorney authorized in writing or, if the Shareholder is a corporation, by a duly authorized officer whose title must be indicated. A form of proxy signed by a person acting as attorney or in some other representative capacity should indicate that person’s capacity (following his or her signature) and should be accompanied by the appropriate instrument evidencing qualification and authority to act (unless such instrument has been previously filed with the Corporation).

 

Voting of Proxies

 

Each Shareholder may instruct his, her or its proxy how to vote his, her or its Common Shares by completing the blanks on the form of proxy.

 

The Common Shares represented by the enclosed form of proxy will be voted or withheld from voting on any motion, by ballot or otherwise, in accordance with any indicated instructions. If a Shareholder specifies a choice with respect to any matter to be acted upon, the Common Shares will be voted accordingly. In the absence of such direction, such Common Shares will be voted FOR the resolutions described in the form of proxy and below.

 

The accompanying form of proxy confers discretionary authority upon the persons named therein to vote on any amendments or variations to matters identified in the Notice and with respect to such other business or matters which may properly come before the Meeting or any adjournment or postponement thereof. As of the date hereof, management of the Corporation knew of no such amendments or variations or other matters to come before the Meeting.

 

Beneficial (Non-Registered) Shareholders

 

The information set forth in this section is of importance to many Shareholders, as a substantial number of Shareholders do not hold Common Shares in their own name. Shareholders who hold their Common Shares through depositories (e.g. CDS & Co., the registration name for CDS Clearing and Depository Services Inc.), brokers, intermediaries, trustees or other persons, or who otherwise do not hold their Common Shares in their own name (referred to in this Circular as “Beneficial Shareholders”) should note that only proxies deposited by Shareholders who are registered Shareholders (that is, shareholders whose names appear on the records maintained by the Transfer Agent as registered holders of Common Shares) will be recognized and acted upon at the Meeting.

 

Without specific instructions, brokers (or their agents and nominees) are prohibited from voting shares for the broker’s clients. Subject to the following discussion in relation to NOBOs (as defined herein), the Corporation does not know for whose benefit the Common Shares registered in the name of CDS & Co., a broker or another nominee, are held.

 

There are two categories of Beneficial Shareholders for the purposes of applicable securities regulatory policy in relation to the mechanism of dissemination to Beneficial Shareholders of proxy-related materials and other securityholder materials and to request voting instructions from such Beneficial Shareholders. Non-objecting beneficial owners (“NOBOs”) are Beneficial Shareholders who have advised their intermediary (such as brokers or other nominees) that they do not object to their intermediary disclosing ownership information to the Corporation, consisting of their name, address, e-mail address, securities holdings and preferred language of communication. Securities legislation restricts the use of that information to matters strictly relating to the affairs of the Corporation. Objecting beneficial owners (“OBOs”) are Beneficial Shareholders who have advised their intermediary that they object to their intermediary disclosing such ownership information to the Corporation.

 

2

 

In accordance with the requirements of NI 54-101, the Corporation is sending the Notice, this Circular and a voting instruction form or a form of proxy, as applicable (collectively, the “Meeting Materials”), directly to NOBOs and indirectly, through intermediaries, to OBOs. NI 54-101 permits the Corporation, in its discretion, to obtain a list of its NOBOs from intermediaries and use such NOBO list for the purpose of distributing the Meeting Materials directly to, and seeking voting instructions directly from, such NOBOs. As a result, the Corporation is entitled to deliver Meeting Materials to Beneficial Shareholders in two manners: (a) directly to NOBOs and indirectly through intermediaries to OBOs; or (b) indirectly to all Beneficial Shareholders through intermediaries. In accordance with the requirements of NI 54-101, the Corporation is sending the Meeting Materials directly to NOBOs and indirectly, through intermediaries, to OBOs. The Corporation will pay the fees and expenses of intermediaries for their services in delivering Meeting Materials to OBOs in accordance with NI 54-101.

 

The Corporation has used a NOBO list to send the Meeting Materials directly to those NOBOs whose names appear on that list. If the Corporation has sent these materials directly to a NOBO, such NOBO’s name and address and information about its holdings of Common Shares have been obtained from the intermediary holding such shares on the NOBO’s behalf in accordance with applicable securities regulatory requirements. As a result, any NOBO of the Corporation can expect to receive a voting instruction form from the Transfer Agent. NOBOs should complete and return the voting instruction form to the Transfer Agent in the envelope provided. The Transfer Agent will tabulate the results of voting instruction forms received from NOBOs and will provide appropriate instructions at the Meeting with respect to the shares represented by such voting instruction forms.

 

Applicable securities regulatory policy requires intermediaries, on receipt of Meeting Materials that seek voting instructions from Beneficial Shareholders indirectly, to seek voting instructions from Beneficial Shareholders in advance of shareholders’ meetings on Form 54-101F7 – Request for Voting Instructions Made by Intermediary (“Form 54-101F7”). Every intermediary has its own mailing procedures and provides its own return instructions, which should be carefully followed by Beneficial Shareholders in order to ensure that their Common Shares are voted at the Meeting or any adjournment or postponement thereof. Often, the form of proxy supplied to a Beneficial Shareholder by its broker is identical to the form of proxy provided to registered Shareholders; however, its purpose is limited to instructing the registered Shareholder how to vote on behalf of the Beneficial Shareholder. Beneficial Shareholders who wish to appear in person and vote at the Meeting should be appointed as their own representatives at the Meeting in accordance with the directions of their intermediaries and Form 54-101F7. Beneficial Shareholders can also write the name of someone else whom they wish to attend at the Meeting and vote on their behalf. Unless prohibited by law, the person whose name is written in the space provided in Form 54-101F7 will have full authority to present matters to the Meeting and vote on all matters that are presented at the Meeting, even if those matters are not set out in Form 54-101F7 or this Circular.

 

The majority of brokers now delegate responsibility for obtaining instructions from clients to Broadridge Financial Solutions, Inc. (“Broadridge”). Broadridge typically mails a voting instruction form in lieu of the form of proxy. Beneficial Shareholders are requested to complete and return the voting instruction form to Broadridge by mail or facsimile. Broadridge will then provide aggregate voting instructions to the Transfer Agent, which tabulates the results and provides appropriate instructions respecting the voting of shares to be represented at the Meeting or any adjournment or postponement thereof. By choosing to send the Meeting Materials to NOBOs directly, the Corporation (and not the intermediary holding Common Shares on your behalf) has assumed responsibility for (i) delivering these materials to you; and (ii) executing your proper voting instructions. Please return your voting instructions as specified in the request for voting instructions.

 

All references to Shareholders in this Circular and the accompanying form of proxy and Notice are to registered Shareholders unless specifically stated otherwise.

 

3

 

VOTING SECURITIES AND PRINCIPAL HOLDERS OF VOTING SECURITIES

 

Shareholders of record as of May 7, 2019 are entitled to receive notice of and to attend and vote at the Meeting. As at the date hereof, the Corporation had 108,054,939 issued and outstanding Common Shares. Each Common Share entitles the holder to one vote in respect of any matter that may come before the Meeting.

 

Pursuant to the by-laws of the Corporation, a quorum is present at the Meeting if two or more voting persons are present in person and authorized to cast in the aggregate not less than 10% of the total number of votes attaching to all Common Shares.

 

To the knowledge of the directors and officers of the Corporation, as at the date hereof, no person or corporation beneficially owns, directly or indirectly, or exercises control or direction over, more than 10% of the issued and outstanding Common Shares other than:

 

Name   Number of Common Shares
Owned or Controlled
    Percent of Outstanding
Common Shares
 
BDC Capital Inc. (“BDC Capital”)     13,441,792       12.4 %
Genesys Ventures II LP (“Genesys”)     13,328,144       12.3 %
Gagnon Securities LLC     11,305,534       10.46 %

 

INDEBTEDNESS OF DIRECTORS AND OFFICERS

 

No directors or officers of the Corporation, nor any proposed nominee for election as a director of the Corporation, nor any associate or affiliate of any one of them, is or was indebted, directly or indirectly, to the Corporation or its subsidiaries at any time since the beginning of the last completed financial year of the Corporation.

 

INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS

 

Except as disclosed in this Circular, no director or officer of the Corporation, nor any proposed nominee for election as a director of the Corporation, nor any other insider of the Corporation, nor any associate or affiliate of any one of them, has or has had, at any time since the beginning of the last completed financial year of the Corporation, any material interest, direct or indirect, in any transaction or proposed transaction that has materially affected or would materially affect the Corporation.

 

On March 20, 2018, Genesys, of which entity Mr. Lamb is an officer, purchased 1,500,000 units (“Units”) of the Corporation at a price of $1.00 per Unit for total consideration of $1,500,000 pursuant to a bought deal financing. Each Unit consisted of one Common Share and one-half of one warrant, with each whole warrant entitling the holder to acquire one Common Share at a price of $1.40 per Common Share until the date that is 60 months from the closing of the bought deal financing. Genesys acquired the Units for investment purposes.

 

MATTERS TO BE CONSIDERED AT THE MEETING

 

Financial Statements

 

The audited financial statements of the Corporation and the auditors’ report thereon as at and for the financial year ended December 31, 2018 (the “Financial Statements”) will be placed before the Shareholders at the Meeting, but no vote by the Shareholders with respect thereto is required or proposed to be taken in respect of the Financial Statements. The Financial Statements were audited by PricewaterhouseCoopers LLP of Toronto, Ontario and are available under the Corporation’s profile on SEDAR, online at www.sedar.com.

 

Election of Directors

 

At the Meeting, Shareholders are required to elect the directors of the Corporation to hold office until the next annual meeting of Shareholders or until the successors of such directors are elected or appointed. Shareholders will be asked to vote on the election of six directors at the Meeting, as further described below.

 

4

 

The persons designated as proxyholders in the accompanying form of proxy (absent contrary directions) intend to vote FOR the election of the directors as set forth above. The Corporation does not contemplate that any of such nominees will be unable to serve as directors; however, if for any reason any of the proposed nominees do not stand for election or are unable to serve as such, proxies held by the persons designated as proxyholders in the accompanying form of proxy will be voted for another nominee in their discretion unless the Shareholder has specified in his or her form of proxy that his or her Common Shares are to be withheld from voting in the election of directors.

 

The board of directors of the Corporation (the “Board”) has adopted a policy that entitles each Shareholder to vote for each nominee on an individual basis. In addition, the Board has adopted a policy stipulating that if the votes in favour of the election of a director nominee at the Meeting represent less than a majority (50% + 1 vote) of the Common Shares voted and withheld, the nominee shall, immediately following the Meeting, submit his or her resignation to the Board for consideration. The Human Resources and Corporate Governance Committee shall consider and recommend to the Board whether or not to accept the resignation. The Board will accept the resignation absent exceptional circumstances which would warrant the applicable director continuing to serve on the Board. The Board will determine whether or not to accept the resignation within 90 days following the applicable annual meeting. A press release disclosing the Board’s determination (and the reasons for rejecting the resignation, if applicable) shall be issued promptly following such determination. The nominee will not participate in any Human Resources and Corporate Governance Committee or Board deliberations on the resignation offer. The policy does not apply in circumstances involving contested elections.

 

The following table sets forth the name of each of the persons proposed to be nominated for election as a director of the Corporation, all positions and offices in the Corporation presently held by such nominees, the nominees’ municipality, province or state and country of residence, principal occupation within the five preceding years, the period during which the nominees have served as directors, and the number and percentage of Common Shares and Options (as defined herein) beneficially owned by the nominees, directly or indirectly, or over which control or direction is exercised. Mr. Damian Lamb, Mr. William Curran and Ms. Samira Sakhia are not standing for re-election to the Board.

 

      Number and Number and
      Percentage of Percentage of
  Positions with the   Common Options
  Corporation and   Shares Beneficially
  Date First   Beneficially Owned or
  Appointed to the   Owned or Controlled
Name, Age and Residence Board Principal Occupation Controlled  

Jean-François Pariseau(3)

Age: 49

Montréal, Québec, Canada

Director

June 4, 2015

Co-Founder and Partner at Amplitude Ventures (since July 2018); Partner, BDC Capital Healthcare Fund, a venture capital company (since July 2001 to June 2018).

13,441,792(1)

12.4%

 

Arun Menawat

Age: 64

Oakville, Ontario, Canada

Chief Executive

Officer and

Director

June 4, 2015

Chief Executive Officer and Director of the Corporation (since August 2016); President and Chief Executive Officer of Novadaq Technologies Inc. (from 2003 to 2016).

968,000

0.82%

2,765,279

2.35%

Kenneth Galbraith(2)(4)

Age: 56

Vancouver, British

Columbia, Canada

Director

January 17, 2017

Founder of Five Corners Capital, a venture capital management company (since 2013).  

49,500

0.04%

Arthur Rosenthal(3)(5)

Age: 72

Oro Valley, Arizona, USA

Director

June 14, 2018

Professor of Practice in the Biomedical Engineering Department at Boston University (since 2010); Chief Executive Officer of gEyeCue, Ltd., a medical technology company (since 2011).  

33,000

0.03%

Brian Ellacott(2)

Age: 62

Sanibel Island, Florida, USA

Director

June 14, 2018  

Chief Executive Officer Belmont Instrument Corporation, a medical device company (since 2017); President and Chief Executive Officer Laborie Medical Technologies, a medical device company (from 2013 to 2017).    

33,000

0.03%

Linda Maxwell

Age: 44

Toronto, Ontario, Canada

Director

October 9, 2018

Executive Director Ryerson University

(since June 2015); Technology Transfer

Manager University of Oxford (from

June 2013 to July 2014)

 

33,000

0.03%

 

 

 

5

 

Notes:

 

(1)       The Common Shares are controlled and held by BDC Capital.

(2)       Member of the Audit Committee.

(3)       Member of the Human Resources and Corporate Governance Committee.

(4)       Chair of the Audit Committee.

(5)       Chair of the Human Resources and Corporate Governance Committee.

 

Director Biographies

 

Jean-François Pariseau – Director – Mr. Pariseau is co-founder and Partner at Amplitude Ventures. Amplitude Ventures is a capital catalyst for highly innovative companies at the point of value acceleration. Amplitude Ventures works with Canada’s most promising healthcare companies, with a shared vision of bringing groundbreaking technologies to patients. Amplitude Ventures is focused on building world-class Canadian companies in precision medicine and next-generation medical devices. Before co-founding Amplitude Ventures, Jean-Francois was Partner at the Healthcare Fund of BDC Capital and an investment manager with CDP Capital Technology Ventures, a $2 billion global fund investing in healthcare, information technology and advanced technologies, where he was responsible for healthcare investments in Canada and the United States. Prior to joining the investment world, Jean-Francois was CEO of a consulting company specializing in regulatory affairs, and VP, R&D for a pharmaceutical-product distribution company, both of which he founded. Mr. Pariseau holds a Bachelor of Science in Biotechnology from Université de Sherbrooke, a Master of Science in Biomedical Sciences from Université de Montréal, and an MBA from HEC Montréal.

 

Arun Menawat – Chief Executive Officer and Director – Dr. Menawat has an accomplished history of executive leadership success in the healthcare industry. Prior to joining Profound, he served as the Chairman, President and CEO of Novadaq Technologies Inc., a TSX and NASDAQ listed company that marketed medical imaging and therapeutic devices for use in the operating room, since April 2003. Previously, he was President and Chief Operating Officer and Director of another publicly listed medical imaging software company, Cedara Software. His educational background includes a Bachelor of Science in Biology, University of District of Columbia, Washington, District of Columbia, and a Ph.D. in Chemical Engineering, from the University of Maryland, College Park, MD, including graduate research in Biomedical Engineering from the National Institute of Health, Bethesda, MD. He also earned an Executive MBA from the J.L. Kellogg School of Management, Northwestern University, Evanston, Illinois.

 

Kenneth Galbraith – Director – Mr. Galbraith is an accomplished life sciences industry veteran with over 25 years of experience acting as an executive, director, investor and advisor to companies in the biotechnology, medical device, pharmaceutical and healthcare sectors. Mr. Galbraith joined Ventures West as a General Partner in 2007 and led the firm’s biotechnology practice prior to founding Five Corners Capital in 2013 to continue management of the Ventures West investment portfolio. Previously, he served as the Chairman and Interim CEO of AnorMED until its sale to Genzyme Corp. in a cash transaction worth almost US$600 million. Starting his career in the life sciences sector in 1987, Mr. Galbraith spent 13 years in senior management with QLT Inc., retiring in 2000 from his position as Executive VP and CFO when QLT Inc.’s market capitalization exceeded US$5 billion. He has served on the board of directors of several public and private companies, including Angiotech Pharmaceuticals, Arbutus Biopharma and Cardiome Pharma. Mr. Galbraith currently serves on the board of directors of Macrogenics and Prometic Life Sciences. Mr. Galbraith earned a Bachelor of Commerce (Honors) degree from the University of British Columbia in 1985 and was appointed a Fellow of the Chartered Accountants of British Columbia in 2013.

 

6

 

Arthur L. Rosenthal – Director – Dr. Rosenthal is director and Chair of Compensation Committee for LivaNova PLC, a UK global medical technology company. Prior, Dr. Rosenthal served on the Cyberonics board of directors as a non-executive director and Chair of the Compensation Committee from January 2007 to October 2015. Since June 2010, Dr. Rosenthal has served as Professor of Practice in the Biomedical Engineering Department at Boston University. Since December 2011, Dr. Rosenthal has also served as CEO of gEyeCue, Ltd., which he co-founded, a development stage medical device company working on a guided biopsy for lower and upper gastrointestinal cancer screening. From June 2011 until July 2012, Dr. Rosenthal served as executive vice chairman of Cappella Medical Devices Ltd. (now ArraVasc Ltd.), a development-stage company focused on novel device solutions for coronary artery disease. From June 2009 until June 2011, Dr. Rosenthal served as President and CEO of Cappella, Inc. Dr. Rosenthal served as chairman, from January 2002, and CEO, commencing in January 2005, of Labcoat, Ltd. until its acquisition by Boston Scientific Corporation in December 2008. From January 1994 to May 2000, Dr. Rosenthal was a Senior Vice President, Corporate Officer, and Chief Development Officer of Boston Scientific, and from May 2000 until his retirement in January 2005, he was a Senior Vice President, Chief Scientific Officer, and Executive Committee Member of Boston Scientific. From 2000 until 2010, Dr. Rosenthal served as a non-executive director, and from 2006 through 2009, as chairman of the Remuneration Committee, of Renovo, Ltd., a U.K. based pharmaceutical company that became publicly traded in 2006. In July 2009, Dr. Rosenthal joined the board of Interface Biologics, Inc., a Toronto-based development stage company focused on drug delivery devices, as a non-executive director. In April 2011, Dr. Rosenthal was elected Chairman at Interface Biologics, Inc. From April 2013 to May 2015, Dr. Rosenthal served as non-executive director and Member of the Compensation Committee of Arch Technologies, Inc. and is currently and member of Arch’s Clinical Advisory Board. In 2015, Dr. Rosenthal was appointed to the Industrial Advisory Committee, CURAM (National University in Galway, Ireland). Dr. Rosenthal is a Fellow of the American Institute of Medical and Biological Engineering since 2003.

 

Brian Ellacott – Director – Mr. Ellacott is an experienced global medical device executive. Mr. Ellacott joined Belmont Instrument as Chief Executive Officer in December 2017. Belmont Instrument is a Boston based private equity owned medical device company with a leading global position in fluid warming and infusion systems. Prior to Belmont Instrument, Mr. Ellacott was the President and CEO of Laborie Medical Technologies (“Laborie”). Laborie is a Urology and Gastroenterology medical device company based in Toronto with manufacturing facilities in Toronto, Montreal, Enschede NL, Attikon Switzerland and Portsmouth New Hampshire. Mr. Ellacott joined private equity owned Laborie as President and CEO in July 2013 and in four years completed 14 global acquisitions tripling Laborie’s revenue and increasing EBITDA eight fold. The company was ranked as one of the fastest growing and most profitable medical device companies in the world. Prior to joining Laborie, Mr. Ellacott served as Executive Vice President and General Manager of Invacare’s (NYSE:IVC) $1 billion North and South American homecare and rehabilitation business. Mr. Ellacott has also held executive positions with Baxter International and American Hospital Supply, with assignments in Canada, Australia and the United States. Mr. Ellacott serves on the board of Belmont and is the past Chairman of the board of the Canadian Assistive Devices Association. Mr. Ellacott holds a Bachelor of Business Administration Degree from Laurier University, Waterloo, Ontario, Canada and is a dual United States and Canadian citizen.

 

Linda Maxwell – Director – Dr. Maxwell, a seasoned surgeon and entrepreneur, is the Founding and Executive Director of the Biomedical Zone, a business incubator for emerging health technology companies. It is an innovative strategic partnership between St. Michael’s Hospital and Ryerson University. Under Dr. Maxwell’s stewardship, the Biomedical Zone has gone from concept to creation to going concern, supporting Toronto’s leading health technology businesses and driving disruption and innovation adoption in the clinical setting. Dr. Maxwell’s breadth of experience and scope of expertise is founded on over a decade and a half as an accomplished head and neck/facial plastic surgeon. Her academic medical career is distinguished by university appointments as a clinical instructor, medical school faculty member, and published scientific author. A frequent public speaker and panelist, Dr. Maxwell has addressed national and international communities on scientific research, innovation, and entrepreneurship. Additionally, Dr. Maxwell has worked internationally as a senior tech transfer manager and partnership leader for innovation and commercialization for the National Health Service and University of Oxford. She also worked for Medtronic on business strategy for South America (Brazil) and continues to consult to Medtronic on international clinical trials as an external medical monitor. In addition to her professional endeavors, Dr. Maxwell is a member of the Institute of Corporate Directors. She serves as a director for Profound Medical, MedicAlert Foundation Canada and the Economic Club of Canada. She serves as an innovation and health technology subject matter expert for the Federal government’s Canadian Space Agency, Canadian Medical Association, and the Ontario Chief Innovation Strategist. Dr. Maxwell earned a Bachelor’s degree with honors from Harvard University (Biology, cum laude), M.D. from Yale University, and M.B.A. from University of Oxford. She completed six years of residency and fellowship training in surgery at the University of Toronto. Additionally, Dr. Maxwell successfully completed the Royal College of Canada, American College of Surgery, and American Board of Facial Plastic Reconstructive Surgery certifications.

 

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Cease Trade Orders, Bankruptcies and Penalties

 

No proposed director is, or has been, within the 10 years prior to the date hereof, a director, chief executive officer or chief financial officer of any company that:

 

(a) was the subject of a cease trade or similar order, or an order that denied such company access to any exemptions under applicable securities legislation for a period of more than 30 consecutive days that was issued while the proposed director was acting as director, chief executive officer or chief financial officer; or

 

(b) was the subject of a cease trade or similar order, or an order that denied such company access to any exemptions under applicable securities legislation for a period of more than 30 consecutive days that was issued after the proposed director ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer.

 

No proposed director is, or has been within the 10 years prior to the date hereof a director or executive officer of any other issuer that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of that person.

 

No proposed director has, within the 10 years prior to the date hereof, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of that person.

 

No proposed director has been subject to any penalties or sanctions imposed by a court relating to securities legislation or by any securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority or has been subject to any other penalties or sanctions imposed by a court or regulatory body that would be likely to be considered important to a reasonable securityholder in deciding whether to vote for the proposed director.

 

Approval of Unallocated Options

 

General

 

Section 613(a) of the TSX Company Manual provides that every three years after the institution of a security based compensation arrangement, all unallocated rights, options or other entitlements under such arrangement which does not have a fixed maximum number of securities issuable thereunder, must be approved by a majority of the issuer’s directors and by the issuer’s security holders. As the Corporation’s amended and restated share option plan (the “Share Option Plan”) is considered to be a security based compensation arrangement and as the maximum number of Common Shares issuable pursuant to the Share Option Plan is not a fixed number, but is instead equal to 13% of the outstanding Common Shares, approval is being sought at the Meeting to approve the grant of unallocated options (“Options”) under the Share Option Plan. Options are considered to be “allocated” under the Share Option Plan when issued and Options which remain available for grant under the Share Option Plan are referred to as “unallocated”.

 

As at the date of this Circular, there were 5,409,779 Options issued and outstanding, representing approximately 5.0% of the outstanding Common Shares. Accordingly, 8,637,363 Options remain unallocated and available for grant under the Share Option Plan, representing approximately 7.99% of the outstanding Common Shares. The terms of the Share Option Plan are fully described in this Circular under the heading “Statement of Executive Compensation – Share Option Plan”.

 

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Shareholder Approval

 

At the Meeting, Shareholders will be asked to pass the following ordinary resolution approving the unallocated Options issuable pursuant to the Share Option Plan:

 

BE IT RESOLVED THAT:

 

  1. all unallocated options under the share option plan of the Corporation are hereby approved;

 

  2. the Corporation shall have the ability to continue granting options under the share option plan of the Corporation until June 13, 2022, being the date that is three years from the date hereof; and

 

  3. any one director or officer of the Corporation is hereby authorized and directed for and in the name of and on behalf of the Corporation to execute or cause to be executed and to deliver or cause to be delivered all such documents, and to do or cause to be done all such acts and things, as in the opinion of such director or officer may be necessary or desirable in order to carry out the terms of this resolution, such determination to be conclusively evidenced by the execution and delivery of such documents or the doing of any such act or thing.”

 

If approval is obtained at the Meeting, the Corporation will not be required to seek further approval of the grant of unallocated Options under the Share Option Plan until June 13, 2022. If approval is not obtained at the Meeting, Options which have not been allocated as of June 13, 2019, and Options which are outstanding as of June 13, 2019, and which are subsequently cancelled, terminated or exercised, will not be available for a new grant of Options under the Share Option Plan. Previously allocated Options will continue to be unaffected by the approval or disapproval of the resolution. If approval is not obtained at the Meeting, the Board will have to consider alternate forms of performance based compensation, including additional cash bonuses, a share appreciation plan or other means in order to attract and retain qualified personnel.

 

Recommendation of the Board

 

The Board unanimously recommends that Shareholders vote FOR the foregoing resolution.

 

The persons designated as proxyholders in the accompanying form of proxy (absent contrary directions) intend to vote FOR the foregoing resolution.

 

Approval of Consolidation

 

General

 

The Board, in collaboration with the management, has been studying the potential benefits of a secondary listing on the NASDAQ Stock Market LLC (“NASDAQ”). Based on the stage of development of the Corporation, management’s observations regarding the market for peers of the Corporation whose securities are listed on a stock exchange in the United States and discussions with both United States-based financial advisers, the Corporation believes that there are potential benefits of a NASDAQ listing, including: (i) a greater average daily trading volume; (ii) additional coverage of Profound from United States analysts; (iii) the interest of a greater number of United States retail and institutional investors; and (iv) a potential increase in valuation.

 

To be accepted for listing on NASDAQ, the Corporation must meet a variety of requirements, one of which requires a minimum trading price of US$2.00, US$3.00 or US$4.00 per Common Share depending on a number of other listing requirements required to be met by the Corporation. In order to meet this minimum trading price requirement, the Corporation is contemplating a possible consolidation of the Common Shares (the “Consolidation”) in coordination with a NASDAQ listing. In evaluating the Consolidation ratio, the Board will also take into consideration the expectations of investors for a company with a market capitalization and maturity similar to Profound.

 

Accordingly, at the Meeting, Shareholders will be asked to consider a special resolution authorizing the Board to amend the articles of the Corporation to effect a consolidation of all of the issued and outstanding Common Shares, such that the trading price of the post-Consolidation Common Shares is in the range of US$12.00 to US$20.00 per post-Consolidation Common Share (or such other Consolidation ratio that will permit the Corporation to qualify for a potential secondary listing on the NASDAQ).

 

9

 

For illustrative purposes, should the trading price of the Common Shares prior to the Consolidation be US$0.62 (being the U.S. dollar equivalent of a price of $0.83 per Common Share, converted on the basis of an exchange rate of US$1.00 for $1.33), in order to attain a share price of US$12.00 per post-Consolidation Common Share, the Consolidation would need to be effected at a consolidation ratio of 19.36 for 1.

 

Although Shareholder approval for the Consolidation is being sought at the Meeting, the Consolidation would become effective at a date in the future to be determined by the Board if and when it is considered to be in the best interest of the Corporation to implement the Consolidation to enable a NASDAQ listing. The Board may determine not to implement the Consolidation at any time after the Meeting without further action on the part of or notice to the Shareholders.

 

Principal Effects of the Consolidation

 

The principal effects of the Consolidation include the following:

 

(a) the fair market value of each Common Share may increase and will, in part, form the basis upon which further Common Shares or other securities of the Corporation will be issued;

 

(b) the number of issued and outstanding Common Shares will be significantly reduced from 108,054,939 pre-Consolidation Common Shares to approximately 5,581,350 and 3,349,709 post-Consolidation Common Shares, depending on the ratio selected by the Board;

 

(c) the exercise prices and the number of Common Shares issuable upon the exercise or deemed exercise of any warrants of the Corporation will be automatically adjusted based on the Consolidation ratio selected by the Board;

 

(d) the exercise prices and the number of Common Shares issuable upon the exercise of any Options will be automatically adjusted based on the Consolidation ratio selected by the Board in order to preserve proportionately the rights and obligations of the optionees; and

 

(e) as the Corporation currently has an unlimited number of Common Shares authorized for issuance, the Consolidation will not have any effect on the number of Common Shares of the Corporation available for issuance.

 

Risks Associated with the Consolidation

 

There can be no assurance that the market price of the post-Consolidation Common Shares will increase as a result of the Consolidation. The marketability and trading liquidity of the post-Consolidation Common Shares may not improve. The Consolidation may result in some Shareholders owning “odd lots” of less than 100 Common Shares which may be more difficult for such Shareholders to sell or which may require greater transaction costs per Common Share to sell. Furthermore, there can be no assurance that a NASDAQ listing will be pursued by the Corporation and, if pursued, whether the Corporation will be accepted for listing, and if accepted for listing, whether the Corporation will realize the aforementioned potential benefits of a NASDAQ listing.

 

Effect on Fractional Share

 

No fractional Common Shares will be issued in connection with the Consolidation and, in the event that a Shareholder would otherwise be entitled to receive a fractional Common Share upon the Consolidation, the number of Common Shares to be received by such Shareholder will be rounded to the nearest whole number of Common Shares such that fractions equal to or greater than 0.5 will be rounded up, and if the fractional entitlement is less than 0.5, will be rounded down.

 

10

 

Effect on Share Certificate

 

If the Consolidation is implemented by the Board, following the announcement by the Corporation of the effective date of the Consolidation, registered Shareholders will be sent a letter of transmittal by the Transfer Agent containing instructions on how to exchange their share certificates representing pre-Consolidation Common Shares for new share certificates representing post-Consolidation Common Shares. Beneficial Shareholders holding Common Shares through a bank, broker or other nominee should note that such banks, brokers or other nominees may have different procedures for processing the Consolidation than those that will be put in place by the Corporation for the registered Shareholders.

 

To be effective, the Business Corporations Act (Ontario) requires that the Consolidation be approved by a special resolution of the Shareholders, being a majority of not less than two-thirds (2/3) of the votes cast by Shareholders present in person or by proxy at the Meeting. In addition to the approval of the Shareholders, the Consolidation requires regulatory approvals, including the approval of the Toronto Stock Exchange (“TSX”).

 

Shareholder Approval

 

At the Meeting, Shareholders will be asked to pass the following special resolution approving the proposed Consolidation:

 

BE IT RESOLVED THAT:

 

  1. pursuant to the Business Corporations Act (Ontario) (the “OBCA”), the articles of Profound Medical Corp. (the “Corporation”) be amended to consolidate all of the issued and outstanding common shares (the “Common Shares”), on the basis of a consolidation ratio to be selected by the board of directors of the Corporation (the “Board”), in its sole discretion, provided that the trading price of the post-consolidation Common Shares is in the range of US$12.00 to US$20.00 per post-consolidation Common Share (or such other consolidation ratio that will permit the Corporation to qualify for a potential secondary listing on the NASDAQ Stock Market LLC), effective as at the discretion of the Board;

 

  2. the Board be and is hereby authorized to revoke, without further approval of the shareholders, this special resolution at any time prior to the completion thereof, notwithstanding the approval by the shareholders of same, if determined, in the Board’s sole discretion to be in the best interest of the Corporation; and

 

  3. any director or officer of the Corporation is hereby authorized to execute or cause to be executed and to deliver or cause to be delivered, all such certificates, instruments, agreements, notices and other documents and to do or cause to be done all such other acts and things as such director or officer may determine to be necessary or desirable in order to carry out the intent of this resolution, including but not limited to, the filing of articles of amendment under the OBCA, such determination to be conclusively evidenced by the execution and delivery of such documents and other instruments or the doing of any such act or thing.”

 

Recommendation of the Board

 

The Board unanimously recommends that Shareholders vote FOR the foregoing resolution.

 

The persons designated as proxyholders in the accompanying form of proxy (absent contrary directions) intend to vote FOR the foregoing resolution.

 

Appointment of Auditor

 

At the Meeting, the Shareholders are required to appoint the auditors of the Corporation. Shareholders will be asked to vote on the appointment of PricewaterhouseCoopers LLP and to authorize the Board to fix their remuneration. PricewaterhouseCoopers LLP was first appointed as the auditors of the Corporation on June 22, 2015.

 

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The persons designated as proxyholders in the accompanying form of proxy (absent contrary directions) intend to vote FOR the appointment of the auditors as set forth above.

 

STATEMENT OF EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Objectives

 

Profound has relied on the experience of the Board and the Human Resources and Corporate Governance Committee in setting executive compensation. In considering compensation awards, the Human Resources and Corporate Governance Committee has considered the skill level of its executives as well as comparable levels of compensation for individuals with similar capabilities and experience. In regard to Profound’s current executive compensation arrangements, the Human Resources and Corporate Governance Committee has considered such factors as Profound’s current financial situation, the estimated financial situation of Profound in the mid-term and the need to attract and retain the key executives necessary for Profound’s long term success. The Human Resources and Corporate Governance Committee has determined that at this stage of Profound it is appropriate that compensation be in the form of base salary, Options, a potential bonus award and certain benefits plans.

 

Profound has established a Human Resources and Corporate Governance Committee, comprised of four independent directors, which oversees the Corporation’s remuneration policies and practices. The principal responsibilities of the Human Resources and Corporate Governance Committee include:

 

(a) with respect to human resources: (i) assist the Board in ensuring that the necessary policies and processes are in place by which all employees of the Corporation, with special attention to the executive group, will be fairly and competitively compensated; and (ii) produce a report on executive compensation for inclusion in the Corporation’s proxy statement as required by applicable rules and regulations; and

 

(b) with respect to corporate governance: (i) identify individuals qualified to become Board members, and recommend that the Board select the director nominees for the next annual meeting of shareholders; and (ii) develop and recommend to the Board the corporate governance guidelines and processes applicable to the Corporation, review these guidelines and processes at least annually and recommend changes to the Board.

 

Compensation Philosophy and Objectives of Compensation Programs

 

The executive compensation program adopted by Profound and applied to its executive officers is designed to:

 

(a) attract and retain qualified and experienced executives who have international business and operations experience and will contribute to the success of Profound;

 

(b) ensure that the compensation of the executive officers provides a competitive base compensation package, with additional compensation to reward success and create a strong link between corporate performance and compensation; and

 

(c) motivate executive officers to enhance long term shareholder value, with current compensation being weighted toward at-risk long term incentives in the form of Options and other security based incentives so as to foster alignment with the interests of the Shareholders.

 

The goals of the compensation program are to attract and retain the most qualified people with relevant experience, to motivate and reward such individuals on a short term and long term basis, and to create alignment between corporate performance and compensation. The Human Resources and Corporate Governance Committee and the Board intend that the total cash components of compensation (base salary plus discretionary cash bonus) target the median of a benchmark group in comparable industries with similar market capitalization (the “Compensation Peer Group”).

 

The Corporation does not believe that its compensation programs encourage excessive or inappropriate risk taking as: (i) the Corporation’s employees receive both fixed and variable compensation, and the fixed (salary) portion provides a steady income regardless of Common Share value which allows employees to focus on the Corporation’s business; and (ii) the Share Option Plan encourages a long term perspective due to the vesting provisions of the Options. The Corporation believes that its compensation program is appropriately structured and balanced to motivate its executives and reward the achievement of annual performance goals, as well as the achievement of long term growth in shareholder value.

 

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Aligning Management and Shareholders

 

The Corporation’s compensation program seeks to align management interests with Shareholder interests through both short-term and long-term incentives linking compensation to performance. The short-term incentive is an annual cash bonus which is linked to individual performance and the Corporation’s performance. Further, long-term incentives of stock option grants comprise a significant portion of overall compensation for the Corporation’s NEOs (as defined herein). The Human Resources and Corporate Governance Committee believes this is appropriate because it creates a direct correlation between variations in the Corporation’s share price (which is based in part on the Corporation’s financial performance) and the compensation of its NEOs, thereby aligning the interests of the Corporation’s executives and Shareholders.

 

Compensation Peer Group

 

In reviewing and approving the Corporation’s 2018 compensation program, the Human Resources and Corporate Governance Committee considered the recommendations of the CEO, which were based upon public disclosure information available for the Compensation Peer Group. The Human Resources and Corporate Governance Committee retained the services of Radford, a business unit of Aon Hewitt in November 2017, as its external independent compensation advisor to review the Corporation’s current executive compensation program. Radford assembled a benchmark peer group report to serve as a comparator for compensation purposes. The selection criteria for the comparator companies was based on revenue, market capitalization, business focus and headcount. The Radford compensation report was incorporated into the 2018 compensation plan for NEOs and directors. Radford was paid executive compensation related fees of $32,302 for the report. The following table sets forth the 2018 Compensation Peer Group.

 

Compensation Peer Group
 
BIOLASE PAVmed Inc.
Check-Cap Ltd. Pulse Biosciences
Cogentix Medical Restoration Robotics
Corindus Vascular Robotics REVA Medical
Entellus Medical Stereotaxis
Invuity TransEnterix
Microbot Medical Inc. ViewRay
Misonix Viveve Medical
Neovasc Inc.  

 

Base Salary

 

Base salary is intended to reflect an executive officer’s position within the corporate structure, his or her years of experience and level of responsibility, and salary norms in the sector and the general marketplace. As such, decisions with respect to base salary levels for executive officers are not based on objective identifiable performance measures but for the most part are determined by reference to competitive market information for similar roles and levels of responsibility, as well as more subjective performance factors such as leadership, commitment, accountability, industry experience and contribution. The Corporation’s view is that a competitive base salary is a necessary element for retaining qualified executive officers, as it creates a meaningful incentive for individuals to remain at Profound and not be unreasonably susceptible to recruiting efforts by the Corporation’s competitors.

 

In determining the base salary compensation of the Named Executive Officers (as defined herein), the Board considered: (i) recruiting and retaining executives critical to the success of Profound and the enhancement of shareholder value; (ii) providing fair and competitive compensation; (iii) balancing the interests of management and Shareholders; and (iv) rewarding performance, both on an individual basis and with respect to operations in general.

 

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Long-term Incentives

 

Long-term incentives, in the form of Options, are intended to align the interests of Profound’s directors and its executive officers with those of the Shareholders, to provide a long term incentive that rewards these individuals for their contribution to the creation of shareholder value and to reduce the cash compensation Profound would otherwise have to pay. The Share Option Plan is administered by the Board. In establishing the number of Options to be granted to any particular executive officer, reference was made to the number of Options granted to officers of other companies involved in similar businesses. The Board also considers previous grants of Options and the overall number of Options that are outstanding relative to the number of outstanding Common Shares in determining whether to make any new grants of Options and the size and terms of any such grants, as well as the level of effort, time, responsibility, ability, experience and level of commitment of the executive officer in determining the level of incentive stock option compensation.

 

Bonus Awards

 

The Board will consider whether it is appropriate and in the best interests of the Corporation to award a discretionary cash bonus to executive officers for the most recently completed financial year and if so, in what amount. A cash bonus may be awarded to reward extraordinary performance that has led to increased value for Shareholders through property acquisitions or divestitures, the formation of new strategic or joint venture relationships and/or capital raising efforts.

 

Quantitative performance objectives include the achievement of the Corporation’s revenue target, departmental and individual goals, which may be quantitative or qualitative in nature. These have been established for each individual executive officer by the Board with alignment of such corporate/individual goals with the CEO and include objectives such as research and product development, company productivity, revenue growth and long-term strategic guidance of the Corporation. These corporate, departmental and individual goals form the basis for the review of the executive officers and the determination of cash bonuses at the end of each year with the Board. These awards are reviewed yearly to ensure that corporate performance metrics and individual goals are consistent from year to year.

 

Bonus award payments are based on the following assessment of:

 

(a) whether or not the executive officers have successfully met or exceeded the established corporate, departmental and individual performance metrics and goals;

 

(b) the executive officers’ decisions and actions and whether or not they are aligned with the Corporation’s long-term growth strategy and have created value for Shareholders;

 

(c) whether any near-term goals and objectives were not met because the executive officers made decisions in the best long-term interests of the Corporation or due to factors outside of the executive officers’ control; and/or

 

(d) additional initiatives undertaken by the executive officers, which were not contemplated in the initial objectives.

 

The following targets, as a percentage of base salary, were approved for each NEO for the fiscal year ending December 31, 2018:

 

Position Target
   
CEO 65%
Other NEOs 20-45%

 

Benefits Plans

 

The Named Executive Officers are entitled to life insurance, health and dental benefits.

 

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Performance Graph

 

The following graph illustrates the cumulative return to Shareholders of a $100 investment in Common Shares from June 8, 2015 to December 31, 2018, as compared to the cumulative total return on the Standard & Poor’s/TSX Index and Standard & Poor’s/TSX Venture Index for the same period, assuming the reinvestment of cash distributions and/or dividends.

 

    June 8,     December 31,     December 31,     December 31,     December 31,  
    2015     2015     2016     2017     2018  
Profound Medical   $ 100.00     $ 53.33     $ 74.67     $ 56.00     $ 36.67  
S&P/TSX Composite Index   $ 100.00     $ 88.25     $ 103.69     $ 109.94     $ 97.14  
S&P/TSX Venture Composite Index   $ 100.00     $ 76.68     $ 111.08     $ 124.05     $ 81.20  

 

 

 

The trend shown in the above graph does not necessarily correspond to the Corporation’s trend of compensation for the NEOs (as defined herein) for the period disclosed above. The Corporation considers a number of factors in connection with its determination of appropriate levels of compensation including, but not limited to, the demand for and supply of skilled professionals with experience in the medical device industry, individual performance, the Corporation’s performance (which is not necessarily tied exclusively to the trading price of the Common Shares on the TSX and other factors discussed under “Compensation Discussion and Analysis” above).

 

Named Executive Officers

 

The following individuals are considered the “Named Executive Officers” or “NEOs” for the purposes of the disclosure:

 

(a) each individual who, during any part of the most recently completed financial year, served as the Corporation’s Chief Executive Officer or CEO, including an individual performing functions similar to a CEO;

 

(b) each individual who, during any part of the most recently completed financial year, served as the Corporation’s Chief Financial Officer or CFO, including an individual performing functions similar to a CFO;

 

(c) each of the three most highly compensated executive officers of the Corporation, including its subsidiaries, or the three highly compensated officers acting in a similar capacity, other than the CEO and CFO, at the end of the most recently completed financial year whose total compensation was more than $150,000 for the fiscal year ended December 31, 2018; and

 

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(d) each individual who would be a Named Executive Officer under paragraph (c) but for the fact the individual was not an executive officer of the Corporation and was not acting in a similar capacity as of December 31, 2018.

 

Summary Compensation Table

 

The following table sets forth information concerning the total compensation for the three most recently completed financial years paid to the Named Executive Officers as of the most recently completed financial year. Dr. Menawat is the only officer of the Corporation that also serves as a director of the Corporation.

 

        Non-Equity Incentive      
        Plan Compensation      
        ($)      
      Option-   Long      
      Based Annual Term Pension All Other Total
Name and   Salary Awards Incentive Incentive Value Compensation(4) Compensation
Principal Position Year ($) ($) Plan Plan ($) ($) ($)
Arun Menawat(1) 2018 647,665 Nil 208,000 Nil Nil Nil 855,665
Chief Executive Officer and Director 2017 331,500 Nil Nil Nil Nil Nil 331,500
  2016 125,370 2,197,221(5) 24,363 Nil Nil Nil 2,346,954
Aaron Davidson(2) 2018 209,446 913,015(6) Nil Nil Nil Nil 1,122,461
Chief Financial Officer and Senior Vice-President of Corporate Development 2017
2016
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Ian Heynen(3) 2018 200,976 730,412(6) Nil Nil Nil Nil 931,388
Senior Vice-President of Sales and Marketing 2017 Nil Nil Nil Nil Nil Nil Nil
  2016 Nil Nil Nil Nil Nil Nil Nil
Rashed Dewan 2018 190,102 - 26,010 Nil Nil Nil 216,112
Vice-President of Finance 2017 184,301 23,598(7) - Nil Nil Nil 207,899
  2016 178,500 124,513(8) 12,888 Nil Nil Nil 315,901
Goldy Singh 2018 209,131 Nil 15,604 Nil Nil Nil 224,735
Voice-president of Quality and Regulatory Affairs 2017 205,020 Nil - Nil Nil Nil 205,020
  2016 204,000 Nil 14,800 Nil Nil Nil 218,800

 

Notes:

 

(1) Dr. Menawat was appointed Chief Executive Officer on August 15, 2016, as such he no longer receives any Director or Committee fees.
(2) Mr. Davidson was hired as Chief Financial Officer and Senior Vice-President of Corporate Development on May 1, 2018.
(3) Mr. Heynen was hired as Senior Vice-President Sales & Marketing on April 23, 2018 and resigned on January 7, 2019.
(4) Nil indicates that perquisites and other personal benefits did not exceed $50,000 or 10% of the total salary of the NEO for the financial year.
(5) Option based awards granted utilize the Black-Scholes model to determine the fair value. The input factors to determine the fair value were volatility 99%, exercise price $1.23, interest rate 1.35% and expected life of 6 years.
(6) Option based awards granted utilize the Black-Scholes model to determine the fair value. The input factors to determine the fair value were volatility 82%, exercise price $1.06, interest rate 2.30% and expected life of 6 years.
(7) Option based awards granted utilize the Black-Scholes model to determine the fair value. The input factors to determine the fair value were volatility 135%, exercise price $0.85, interest rate 1.90% and expected life of 6 years.
(8) Option based awards granted utilize the Black-Scholes model to determine the fair value. The input factors to determine the fair value were volatility 99%, exercise price $1.20, interest rate 0.94% and expected life of 6 years.

 

16

 

Option-Based Awards

 

The following table sets forth information with respect to the unexercised Options granted under the Share Option Plan to the NEOs that were outstanding as of December 31, 2018.

 

    Option-Based Awards
        Value of
  Number of Common Option Exercise   Unexercised In-the-
Name and Shares Underlying Price Option Expiration Money Options
Principal Position Unexercised Options ($) Date ($)(6)
Arun Menawat(1) 33,000 1.50 Nov 12, 2024 Nil
Chief Executive Officer and Director 934,055 1.46 Aug 22,2026 Nil
  16,500 1.35 Sep 15, 2026 Nil
  364,141 1.10 Nov 24, 2026 Nil
  1,417,583 1.10 Dec 21, 2026 Nil
Aaron Davidson(2)        
Chief Financial Officer and Senior Vice-President of Corporate Development 500,000
500,000
1.19
0.93
May 22, 2028
Aug 23, 2028
Nil
Nil
Ian Heynen(3)        
Senior Vice-President of Sales and Marketing 400,000 1.19 May 22, 2028 Nil
  400,000 0.93 Aug 23, 2028 Nil
Rashed Dewan(4) 30,000 1.50 Sept 8, 2025 Nil
Vice-President of Finance 50,000 1.35 July 19, 2026 Nil
  75,000 1.10 Nov 24, 2026 Nil
  45,000 0.85 Nov 16, 2027 Nil
Goldy Singh(5) 50,000 0.24 Dec 1, 2021 15,500
Vice-President of Quality and Regulatory Affairs 25,000
300,000
0.24
1.50
Sept 12, 2022
Sept 8, 2025
7,750
Nil

 

Notes:

 

  (1) Dr. Menawat holds 2,765,279 Options, with 1,549,389 of these Options exercisable and the remaining balance vesting over a three year period.
  (2) Mr. Davison holds 1,000,000 Options, all Options remain unvested and will vest over a three year period.
  (3) Mr. Heynen holds 800,000 Options, all Options remain unvested and will vest over a three year period.
  (4) Mr. Dewan holds 200,000 Options, with 110,003 of these Options exercisable and the remaining balance vesting over a three year period.
  (5) Ms. Singh holds 375,000 Options, with 325,000 of these Options exercisable and the remaining balance vesting over a three year period.
  (6) The value shown is the product of the number of Common Shares underlying the Option multiplied by the difference between the Common Share TSX closing price on December 31, 2018 of $0.55 and the exercise price.

 

Incentive Plan Awards ― Value Vested or Earned During the Year Ended December 31, 2018

 

The following table sets forth information with respect to the value of Options vested during the year ended December 31, 2018 as well as the cash bonuses granted to the NEOs during the year ended December 31, 2018.

 

  Option-Based Awards Value Vested Non-Equity Incentive Plan Compensation
Name and During Year Value earned during the year
Principal Position ($)(1) ($)
Arun Menawat    
Chief Executive Officer and Director Nil Nil

 

17

 

  Option-Based Awards Value Vested Non-Equity Incentive Plan Compensation
Name and During Year Value earned during the year
Principal Position ($)(1) ($)
Aaron Davidson    
Chief Financial Officer and Senior Vice-President of Corporate Development Nil Nil
Ian Heynen    
Senior Vice-President of Sales and Marketing Nil Nil
Rashed Dewan    
Vice-President of Finance Nil Nil
Goldy Singh    
Vice-President of Quality and Regulatory Affairs Nil Nil

 

Note:

 

(1) The value shown is the product of the number of Common Shares underlying the Options that vested during the year multiplied by the difference between the Common Share TSX closing price on the day the Options vested and the exercise price of the Options that vested.

 

Termination and Change of Control Benefits

 

Each of Dr. Menawat, Mr. Davidson, Mr. Dewan and Ms. Singh are a party to an executive employment agreement (the “Executive Employment Agreements”) with the Corporation. The Executive Employment Agreements have an indefinite term and contain standard confidentiality and non-solicitation provisions. Profound has agreed pursuant to the Executive Employment Agreements that each of Dr. Menawat, Mr. Davidson, Mr. Dewan and Ms. Singh will receive base salaries determined by the Board and may receive discretionary bonuses, grants of Options, reimbursement of expenses, benefits and certain perquisites as set forth in the Executive Employment Agreements, with the amounts paid in 2018 with respect to such matters set forth in the Summary Compensation Table.

 

The following table sets forth information with respect to the estimated aggregate dollar amount to which each current NEO would have been entitled if the event resulting in termination of employment occurred on December 31, 2018.

 

      Value of Value of  
      Bonus and Option  
Name Triggering Event Cash Payment other Benefits Awards Total Payout
  Termination with cause/resignation Nil(1) Nil Nil(4) Nil
Arun Menawat Termination without cause $682,100(2) $446,472(2) Nil(4) $1,128,572(2)
  Change of control $1,364,200(2) $443,365(2) Nil $1,807,565(2)
  Termination with cause/resignation Nil(1) Nil Nil(4) Nil
Aaron Davidson Termination without cause $158,500 $95,100(3) Nil(4) $253,600
  Change of control $317,000 $142,650 Nil $459,650
  Termination with cause/resignation Nil(1) Nil Nil(4) Nil
Rashed Dewan Termination without cause $95,051(6) $12,966(3) Nil(4) $108,017
  Change of control Nil Nil Nil Nil
  Termination with cause/resignation Nil(1) Nil $23,250(4) $23,250
Goldy Singh Termination without cause $114,273(7) $10,135(3) $23,250 (4) $147,658
  Change of control Nil Nil $23,250 (5) $23,250

 

18 

 

 

Notes:

 

(1) In the event of a termination for just cause or resignation, the Corporation shall have no further obligation to Dr. Menawat, Mr. Davidson, Mr. Dewan or Ms. Singh, as applicable, other than the payment of unpaid base salary, any bonus declared but not yet paid, plus all outstanding vacation pay and expense reimbursement.
(2) Amounts paid in United States dollars and converted to Canadian dollars for reporting purposes. On December 31, 2018, the exchange rate for United States dollars expressed in Canadian dollars (as reported by the Bank of Canada) was US$1.00 = C$1.3642.
(3) The value shown is a multiple of the annual cost of benefits and the average cash bonus paid in respect of the years ended December 31, 2018, 2017 and 2016.
(4) The value shown is the product of the number of Common Shares underlying the vested Options multiplied by the difference between the Common Share TSX closing price on December 31, 2018 of $0.55 and the exercise price.
(5) The value shown is the product of the number of Common Shares underlying the Options multiplied by the difference between the Common Share TSX closing price on December 31, 2018 of $0.55 and the exercise price.
(6) If Mr. Dewan’s employment is terminated without cause, he is entitled to the greater of: (i) six months’ notice; or (ii) the minimum notice (or pay in lieu) and minimum severance, if any, to which he would be entitled under employments standards legislation.
(7) If Ms. Singh’s employment is terminated without cause, she is entitled to six months’ notice and minimum severance, if any, to which he would be entitled under employments standards legislation.

 

Director Compensation

 

The directors of the Corporation, other than the current CEO, Mr. Damian Lamb and Mr. Jean-François Pariseau, were paid in respect of the financial year-ended December 31, 2018, an annual fee of $20,000 for their services. The Chair of the Audit Committee is entitled to $10,000 and the Chair of the Human Resources and Corporate Governance Committee is entitled to $5,000. Directors of the Corporation are also eligible to receive Options as an initial grant when joining the Board and on an annual basis. During the financial year 2018, each of Ms. Samira Sakhia, Mr. Kenneth Galbraith and Mr. William Curran were granted 16,500 Options. Mr. Brian Ellacott, Dr. Arthur Rosenthal and Dr. Linda Maxwell were granted 33,000 Options for joining the Board. Except as set out below, directors are not eligible to receive other compensation.

 

Summary Compensation Table

 

The following table sets forth information concerning compensation paid to the non-executive directors for the year ended December 31, 2018.

 

      All Other  
  Fees Earned Option-based awards Compensation Total
Name ($) ($) ($) ($)
Damian Lamb Nil Nil Nil Nil
Jean-François Pariseau Nil Nil Nil Nil
William Curran 32,500 11,960(1) Nil 44,460
Kenneth Galbraith 35,625 11,960(1) Nil 47,585
Samira Sakhia 29,875 11,960(1) Nil 41,835
Brian Ellacott 12,250 23,920(1) Nil 36,170
Arthur Rosenthal 11,250 23,920(1) Nil 35,170
Linda Maxwell 5,000 13,793(2) Nil 18,793

 

Notes:

 

(1) Option based awards granted utilize the Black-Scholes model to determine the fair value. The input factors to determine the fair value were volatility 83%, exercise price $1.02, interest rate 2.19% and expected life of 6 years.
(2) Option based awards granted utilize the Black-Scholes model to determine the fair value. The input factors to determine the fair value were volatility 80%, exercise price $0.60, interest rate 2.47% and expected life of 6 years.

 

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Option-Based Awards

 

The following table sets forth information with respect to the unexercised Options granted under the Option Plan to the non-executive directors that were outstanding as of December 31, 2018.

 

    Option-Based Awards
        Value of
  Number of Common Option Exercise   Unexercised In-the-
  Shares Underlying Price Option Expiration Money Options
Name Unexercised Options ($) Date ($)(7)
Samira Sakhia(1) 16,500 0.97 Apr 25, 2027 Nil
  16,500 1.02 June 15, 2028 Nil
Kenneth Galbraith(2) 33,000 0.97 Apr 25, 2027 Nil
  16,500 1.02 June 15, 2028 Nil
William Curran(3) 33,000 0.24 Mar 16, 2022 10,230
  16,500 1.35 Sep 15, 2026 Nil
  16,500 0.97 Apr 24, 2027 Nil
  16,500 1.02 June 15, 2028 Nil
Brian Ellacott(4) 33,000 1.02 June 15, 2028 Nil
Arthur Rosenthal(5) 33,000 1.02 June 15, 2028 Nil
Linda Maxwell(6) 33,000 0.60 Nov 19, 2028 Nil
Damian Lamb Nil Nil Nil Nil
Nil Nil Nil Nil
Jean-François ariseau

 

Notes:

 

(1) Ms. Sakhia holds 33,000 Options, with 16,500 of these Options exercisable and the remaining balance vesting over a three year period.
(2) Mr. Galbraith holds 49,500 Options, with 11,000 of these Options exercisable and the remaining balance vesting over a three year period.
(3) Mr. Curran holds 82,500 Options, with 66,000 of these Options exercisable and the remaining balance vesting over a three year period.
(4) Mr. Ellacott holds 33,000 Options, all Options remain unvested and will vest over a three year period.
(5) Dr. Rosenthal holds 33,000 Options, all Options remain unvested and will vest over a three year period.
(6) Dr. Maxwell holds 33,000 Options, all Options remain unvested and will vest over a three year period.
(7) The value shown is the product of the number of Common Shares underlying the Option multiplied by the difference between the Common Share TSX closing price on December 31, 2018 of $0.55 and the exercise price.

 

20 

 

 

Incentive Plan Awards ― Value Vested or Earned During the Year Ended December 31, 2018

 

The following table sets forth information with respect to the value of Options vested during the year ended December 31, 2018 as well as the cash bonuses granted to non-executive directors during the year ended December 31, 2018.

 

  Option-Based Awards Value Vested Non-Equity Incentive Plan Compensation
  During Year Value earned during the year
Name ($)(1) ($)
Damian Lamb Nil Nil
Jean-François Pariseau Nil Nil
William Curran Nil Nil
Kenneth Galbraith Nil Nil
Samira Sakhia Nil Nil
Brian Ellacott Nil Nil
Arthur Rosenthal Nil Nil
Linda Maxwell Nil Nil

 

Note:

 

(1) The value shown is the product of the number of Common Shares underlying the Options that vested during the year multiplied by the difference between the Common Share TSX closing price on the day the Options vested and the exercise price of the Options that vested.

 

Share Option Plan

 

The Share Option Plan is administered by the Board which may, from time to time, delegate to a committee of the Board, all or any of the powers conferred to the Board under the Share Option Plan. The Share Option Plan was originally adopted by the Board on June 4, 2015, and then amended and restated on December 8, 2016 and again on July 13, 2018.

 

The amendments made on July 13, 2018 were as follows: (i) inclusion of the Insider Participation Limits (as defined herein); (ii) removal of TSXV required participation limits since the Corporation was no longer listed on the TSXV; (iii) clarification to the share reserve since the Corporation was listed on the TSX and pursuant to the Share Option Plan, the reserve changed from a fixed number to a fixed percentage as described below; (iv) inclusion of an additional amendment to the list of amendments that require Shareholder approval (being removing or exceeding the Insider Participation Limits); and (v) other amendments of a housekeeping nature.

 

The Share Option Plan provides that the Board may from time to time, in its discretion, grant to directors, officers, employees, consultants and any other person or entity engaged to provide ongoing services to the Corporation non-transferable Options to purchase Common Shares, provided that the maximum number of Common Shares reserved for issuance under the Share Option Plan is equal to 13% of the issued and outstanding shares in the capital of the Corporation at the time of any Option grant. If any Option is exercised, cancelled, expired, surrendered or otherwise terminated for any reason, the number of Common Shares in respect of which the Option is exercised, cancelled, expired, surrendered or otherwise terminated, as the case may be, will again be available for purchase pursuant to Options granted under the plan. As at December 31, 2018, 6,244,779 Options have been granted under the Share Option Plan, which represents 5.8% of the issued and outstanding shares in the capital of the Corporation as at December 31, 2018. As at December 31, 2018, 7,802,363 Options are available for grant under the Share Option Plan, which represents 7.2% of the issued and outstanding shares in the capital of the Corporation as at December 31, 2018.

 

The aggregate number of Common Shares that may be (i) issued to insiders of the Corporation within any one-year period, or (ii) issuable to insiders of the Corporation at any time, in each case, under the Share Option Plan alone or when combined with all other security-based compensation arrangements of the Corporation, cannot exceed 10% of the outstanding Common Shares (the “Insider Participation Limits”).

 

21 

 

 

The Board shall determine the exercise price of the Options, provided that, it cannot be less than the Market Price of the Common Shares on the date of grant. For the purposes of the Share Option Plan, “Market Price” means the volume-weighted average price of the Common Shares on the stock exchange where the majority of trading volume and value of the Common Shares occurs, for the five trading days immediately preceding the relevant date on which the Market Price is to be determined.

 

The expiry date for an Option shall not be later than the 10th anniversary of the date an Option is granted, subject to the expiry date falling with a corporate blackout period or within 5 business days following the expiry of such a blackout period, in which case the expiry date will be extended to the 10th business day following the expiry of the blackout period.

 

Unless otherwise specified by the Board, each Option generally vests and becomes exercisable as to 1/4 on the first anniversary of the date of grant and as to 1/36 on the first day of each calendar month thereafter. The Board has the discretion to permit accelerated vesting of Options.

 

The Corporation does not provide any financial assistance to optionees to facilitate the purchase of Common Shares issued pursuant to the exercise of Options under the Share Option Plan. Options granted under the Share Option Plan are not transferable or assignable (except to an optionee’s estate) and no Options may be exercised by anyone other than the optionee or his or her legal representative during the lifetime of the optionee.

 

The Share Option Plan contains the following provisions regarding the exercise and cancellation of Options following a change in the employment status of an optionee. In the event of:

 

(a) an optionee’s retirement, the optionee will continue to participate in the plan and each Option that has vested or that vests within 12 months following the retirement date continues to be exercisable until the earlier of the Option’s expiry date and the date that is 12 months from the retirement date, and any Options that have not been exercised by such time will immediately expire and be cancelled;

 

(b) an optionee’s death or disability, each vested Option is exercisable until the earlier of the Option’s expiry date and 6 months following the date of death or disability, as applicable, and any Options that have not been exercised by such time will immediately expire and be cancelled;

 

(c) a termination without cause for an employee optionee, or the termination by the Corporation or an affiliate of a consulting agreement or arrangement (other than for breach) or the death or disability of a consultant, each vested Option is exercisable until the earlier of the Option’s expiry date and 90 days following the date of termination, death or disability, as applicable, and any Options that have not been exercised by such time will immediately expire and be cancelled;

 

(d) a termination for cause or resignation of an employee optionee, or the termination by the Corporation or an affiliate of a consulting agreement or arrangement (for breach) or the voluntary termination by the consultant, all Options (whether vested or unvested) terminate on the date of termination or resignation, as applicable; and

 

(e) a director (who is not an employee or consultant) ceases to hold office, each vested Option is exercisable until the earlier of the Option’s expiry date and 60 days following the cessation date, and any Options that have not been exercised by such time will immediately expire and be cancelled.

 

The Board may from time to time, without notice and without Shareholder approval, amend, modify, change, suspend or terminate the Share Option Plan or any Options granted thereunder as it, in its discretion determines appropriate, provided, however, that no such amendment, modification, change, suspension or termination of the Share Option Plan or any Option granted thereunder may materially impair any rights of an optionee or materially increase any obligations of an optionee under the plan without the consent of the optionee, unless the Board determines such adjustment is required or desirable in order to comply with any applicable securities laws or stock exchange requirements. Amendments that can be made by the Board without Shareholder approval include, but are not limited to, housekeeping amendments, amendments to comply with applicable law or stock exchange rules, amendments necessary for Options to qualify for favorable treatment under applicable tax laws, amendments to the vesting provisions of the Share Option Plan or any Option, amendments to include or modify a cashless exercise feature, amendments to the termination or early termination provisions of the Share Option Plan or any Option, and amendments necessary to suspend or terminate the Share Option Plan. Shareholder approval is required for the following amendments to be made to the Share Option Plan:

 

22 

 

 

(a) increase to the number of Common Shares reserved for issuance under the Share Option Plan, except pursuant to the provisions in the plan that permit the Board to make equitable adjustments in the event of transactions affecting the Corporation or its capital;

 

(b) reduce the exercise price of an Option, except pursuant to the provisions in the plan that permit the Board to make equitable adjustments in the event of transactions affecting the Corporation or its capital;

 

(c) extend the term of an Option beyond the original expiry date, except where an expiry date would have fallen within a blackout period or within 5 business days following the expiry of such a blackout period;

 

(d) permit an Option to be exercisable beyond 10 years from its date of grant, except where an expiry date would have fallen within a blackout period;

 

(e) permit Options to be transferred other than for normal estate settlement purposes;

 

(f) remove or exceeds the Insider Participation Limits;

 

(g) permit awards, other than the Options, to be granted under the Share Option Plan; or

 

(h) delete or reduce the range of amendments which require Shareholder approval.

 

As required by section 613 of the TSX Company Manual, the Corporation’s annual burn rate, which represents the number of Options granted under the Share Option Plan divided by the weighted average number of Common Shares outstanding as at the end of a fiscal year, was 8.5% in 2016, 7.3% in 2017 and 5.8% in 2018.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table sets forth the securities of the Corporation that are authorized for issuance under the Share Option Plan as at the end of the Corporation’s most recently completed financial year.

 

  Number of securities to be Weighted-average exercise Number of securities
  issued upon exercise of price of outstanding remaining available for
  outstanding options, options, warrants and future issuance under
Plan Category warrants and rights rights equity compensation plans
Equity compensation plans approved by securityholders 6,244,779 $1.13 per Common Share 7,802,363
 
Equity compensation plans not approved by securityholders Nil Nil Nil
 
 
Total 6,244,779 $1.13 per Common Share 7,802,363

 

CORPORATE GOVERNANCE

 

The Board is committed to a high standard of corporate governance practices. The Board believes that this commitment is not only in the best interests of the Shareholders but that it also promotes effective decision making at the Board level. The Board is of the view that its approach to corporate governance is appropriate and continues to work to align with the recommendations currently in effect and contained in National Policy 58-201 - Corporate Governance Guidelines which are addressed below.

 

23 

 

 

Board Mandate

 

The Board has responsibility for the stewardship of the Corporation. The Board has adopted a written mandate for the Board (the “Mandate”) to confirm and enhance the Board’s ongoing duty and responsibility for stewardship of the Corporation, a copy of which is available on the Corporation’s website at www.profoundmedical.com. The Board is ultimately responsible for supervising the management of the business and affairs of the Corporation and, in doing so, is required to act in the best interests of the Corporation. The Board generally discharges its responsibilities either directly or through the Audit Committee and the Human Resources and Corporate Governance Committee. Specific responsibilities of the Board set out in the Mandate include:

 

  (a) Appointing Management – including approval of the Chief Executive Officer, the compensation of the executive officers and the oversight of succession planning programs;

 

  (b) Board Organization – including responding to recommendations received from the Human Resources and Corporate Governance Committee, but the Board retains the responsibility for managing its own affairs;

 

  (c) Strategic Planning – including the review and approval of the Corporation’s business, financial and strategic plans on at least an annual basis;

 

  (d) Monitoring of Financial Performance and Other Financial Reporting Matters – including the review of the Corporation’s ongoing financial performance and results of operations and review and approval of the Corporation’s audited and interim consolidated financial statements and management’s discussion and analysis of financial conditions and results of operations;

 

  (e) Risk Management – including the identification of the Corporation’s principal business risks and the implementation of appropriate systems to effectively monitor and manage such risks;

 

  (f) Policies and Procedures – including the approval and monitoring of all policies and procedures including those related to corporate governance, ethics and confidentiality;

 

  (g) Communication and Reporting – including the oversight of the timely and accurate disclosure of financial reports and other material corporate developments; and

 

  (h) Other Responsibilities – including those related to position descriptions, orientation and continuing education, nomination of directors and Board evaluations and matters in respect of any disposition, material commitment or venture, or significant expenditure in either monetary or business terms.

 

Composition of the Board

 

Director Independence

 

Damian Lamb, Jean-François Pariseau, Brian Ellacott, William Curran, Arthur Rosenthal, Samira Sakhia, Linda Maxwell and Kenneth Galbraith are all “independent” as such term is defined by National Instrument 58-101 – Disclosure of Corporate Governance Practices. Arun Menawat is non-independent as he is the Chief Executive Officer of the Corporation. Each of the independent directors has no direct or indirect material relationship with the Corporation, including any business or other relationship, which could reasonably be expected to interfere with the director’s ability to act with a view to the best interests of the Corporation or which could reasonably be expected to interfere with the exercise of the director’s independent judgment. Mr. Damian Lamb, Mr. William Curran and Ms. Samira Sakhia are not standing for re-election to the Board.

 

If the Chairman is not independent, the independent directors may select one of their members to be appointed Lead Director of the Board for such term as the independent directors may determine. The Lead Director is responsible for chairing regular meetings of the independent directors and seeking to ensure that the Board is able to carry out its role.

 

Promptly after the Meeting, the Board will consider whether to appoint Dr. Arun Menawat as Chairman of the Board. Since Dr. Menawat is not independent, the independent directors will also consider whether to appoint another nominee director as the Lead Director.

 

The table below shows the current Board and committee membership.

 

24 

 

 

    Committees
      Human Resources and
      Corporate Governance
  Year Appointed Audit Committee
Independent Board Members      
Damian Lamb (Chairman) 2015    
Jean-François Pariseau 2015   Member
William Curran 2015 Chair Member
Kenneth Galbraith 2017 Member Chair
Samira Sakhia 2017    
Arthur Rosenthal 2018   Member
Brian Ellacott 2018 Member  
Linda Maxwell 2018    
Not Independent – Management      
Arun Menawat 2015    

 

Meetings of Independent Directors

 

The entire complement of independent directors on the Board and each of the committees meet regularly without management present. The Chairman of the Board conducts these sessions at Board meetings and the Chair of each committee conducts them at committee meetings. During the last financial year ended December 31, 2018, there have been 7 such meetings of the independent directors.

 

Chairman of the Board

 

Promptly after the Meeting, the Board will consider whether to appoint the Chief Executive Officer, Dr. Arun Menawat, as the Chairman of the Board. Dr. Menawat is being considered as Chairman of the Board to ensure continuity through the Corporation’s ongoing director renewal process.

 

Dr. Arun Menawat is the Chief Executive Officer of the Corporation and as a result does not meet the Board’s independence standards. The primary functions of the Chairman are to facilitate the operations and deliberations of the Board and the satisfaction of the Board’s responsibilities under its mandate. The Chairman’s key responsibilities include duties relating to providing overall leadership to the Board, chairing board and Shareholder meetings, acting as a liaison between management, the members of the Board and the Chairs of the various committees of the Board, and communicating with Shareholders and regulators. The responsibilities of the Chairman are reviewed by the Human Resources and Corporate Governance Committee and considered by the Board for approval each year.

 

Director Term Limits and Other Mechanics of Board Renewal

 

The Board has not established any term limits for directors, as the Board takes the view that term limits are an arbitrary mechanism for removing directors which can result in valuable, experienced directors being forced to leave the Board solely because of length of service. The Board’s priorities continue to be ensuring the appropriate skill sets are present amongst the Board to optimize the benefit to the Corporation. The Board conducts annual evaluations of the individual directors, the committees of the Board and the Chairman of the Board, which are overseen by the Human Resources and Corporate Governance Committee, to ensure these objectives are met. See “Board Assessments”.

 

25 

 

 

Other Reporting Issuer Experience

 

The following table sets out proposed directors that are presently directors of other issuers that are reporting issuers (or the equivalent) in Canada or a foreign jurisdiction, the name of such reporting issuers and the name of the exchange or market applicable to such reporting issuers:

 

Name Name of Reporting Issuer Name of Exchange or Market (if applicable)
William Curran 3D Systems, Inc. New York Stock Exchange
Kenneth Galbraith Macrogenics, Inc., Prometic Life Sciences Inc. NASDAQ, Toronto Stock Exchange
Jean-François Pariseau Clementia Pharmaceuticals NASDAQ
Arthur Rosenthal LivaNova PLC NASDAQ
Samira Sakhia Antibe Therapeutics Inc., Nuvo Pharmaceuticals Inc., Knight Therapeutics Inc. and Crescita Therapeutics Inc. Toronto Stock Exchange

 

Board Meetings

 

The Board holds a minimum of 1 regular quarterly meetings and a corporate strategy session each year, as well as additional meetings as required. An in camera session of the directors is held at each regularly scheduled Board and committee meeting so that the independent members of the Board have an opportunity to meet without the presence of management members of the Board.

 

Meeting Attendance

 

  Board Meetings Attended in 2018 Committee Meetings Attended in 2018
Name No. % No. %
Damian Lamb 7 of 7 100% - -
Jean-François Pariseau 7 of 7 100% 4 of 4(3) 100%
Arun Menawat 7 of 7 100% - -
William Curran 7 of 7 100% 8 of 8(3) (4) 100%
Kenneth Galbraith 5 of 7 71% 6 of 8(3) (4) 75%
Samira Sakhia 4 of 7 57% 1 of 2(4) 50%
Arthur Rosenthal 5 of 5(1) 100% 2 of 2(3) 100%
Brian Ellacott 5 of 5(1) 100% 2 of 2(4) 100%
Linda Maxwell 1 of 2(2) 50% - -

 

Notes:

 

(1) Dr. Rosenthal and Mr. Ellacott joined the Board on June 14, 2018.
(2) Dr. Maxwell joined the Board on October 9, 2018.
(3) Human Resources and Compensation Committee.
(4) Audit Committee.

 

Orientation and Continuing Education

 

Pursuant to the Mandate, it is the responsibility of the Board to provide an orientation program for new directors and ongoing educational opportunities for all directors. New directors are expected to participate in an initial information session on the Corporation in the presence of its senior executive officers to learn about, among other things, the business of the Corporation, its financial situation and its strategic planning. All directors will receive a record of public information about the Corporation, as well as other relevant corporate and business information including corporate governance practices of the Corporation, the structure of the Board and its standing committees, its corporate organization, the charters of the Board and its standing committees, the Code (as defined herein) and other relevant corporate policies.

 

26

 

 

Continuing education opportunities are directed at enabling individual directors to maintain or enhance their skills and abilities as directors, as well as ensuring that their knowledge and understanding of the Corporation’s affairs remains current. Directors are kept informed as to matters which may impact the Corporation’s operations through regular reports and presentations at Board and committee meetings.

 

Code of Business Conduct and Ethics

 

The Corporation has adopt a written Code of Business Conduct and Ethics (the “Code”) for directors, officers and employees. The objective of the Code is to provide guidelines for maintaining the integrity, reputation, honesty, objectivity and impartiality of the Corporation and its subsidiaries. The Code addresses compliance with laws, conflicts of interest, corporate opportunity, confidentiality, fair dealing with customers, suppliers, competitors, officers and employees, protection and proper use of company assets and accounting complaints. The Board has the ultimate responsibility for the stewardship of the Code and is responsible for considering any request for waivers from the Code. Any waiver of the Code’s provisions is subject to the disclosure and other provisions of applicable securities laws and the applicable rules of any and all securities exchanges on which the securities of the Corporation are listed and posted for trading. A copy of the Code is available on the Corporation’s website at www.profoundmedical.com.

 

The Board monitors compliance with the Code and reviews it on at least an annual basis to determine whether updates are appropriate. Where a director or officer has any interest in or a perceived conflict involving a contract or business relationship with the Corporation, that director or officer is excluded from all discussions and deliberations regarding the contract or relationship and such director abstains from voting in respect thereof. Directors and executive officers have disclosed to the Corporation all directorships held by such member and the existence and nature of any interests that could result in a conflict situation with the Corporation.

 

The Board has also adopted a Whistleblower Policy relating to the reporting of inappropriate activity to encourage and promote a culture of ethical business conduct. The Whistleblower Policy is intended to encourage and facilitate the reporting of questionable accounting, internal accounting controls or auditing matters.

 

Nomination of Directors

 

The Human Resources and Corporate Governance Committee has the responsibility for reviewing the composition of the Board by taking into account, among other things, its size and the particular competencies and skills of its members. The Human Resources and Corporate Governance Committee, in consultation with the Chairman of the Board and Chief Executive Officer, will then identify potential Board nominees and recommend such nominees for election as directors based on the competencies and skills each new member possesses in the context of the needs of the Corporation. The Board as a whole is then responsible for nominating new directors.

 

The Board seeks nominees that have the following characteristics: (i) a track record in general business management; (ii) special expertise in an area of strategic interest to the Corporation; (iii) the ability to devote time; and (iv) support for the Corporation’s mission and strategic objectives.

 

While the Corporation has not adopted a written policy relating to the identification and nomination of women directors, it recognizes that diversity is an economic driver of competitiveness for companies and it strives to promote an environment and culture conducive to the appointment of well qualified persons so that there is appropriate diversity to maximize the achievement of corporate goals. Gender of a potential candidate is one component in the overall list of factors the Human Resources and Corporate Governance Committee considers when selecting candidates for executive officer and senior manager appointments, and membership on the Board and its committees. The Human Resources and Corporate Governance Committee is of the opinion that if gender was the overriding factor governing the selection of Board nominees, it could unduly restrict the Board’s ability to select the most appropriate nominees and candidates. The Corporation has not adopted targets regarding women on the Board as it does not believe that such targets are necessary at this time given the size of the Board and that the director nomination process recognizes the benefits of diversity. There are currently two women on the Board. However, Ms. Samira Sakhia is not standing for re-election to the Board.

 

Director and Executive Compensation

 

The Human Resources and Corporate Governance Committee oversees the remuneration policies and practices of the Corporation. The principal responsibilities of the Human Resources and Corporate Governance Committee include:

 

27

 

 

(i) considering the Corporation’s overall remuneration strategy and, where information is available, verifying the appropriateness of existing remuneration levels using external sources for comparison; (ii) comparing the nature and amount of the Corporation’s directors’ and executive officers’ compensation to performance against goals set for the year while considering relevant comparative information, independent expert advice and the financial position of the Corporation, and (iii) making recommendations to the Board in respect of director and executive officer remuneration matters, with the overall objective of ensuring maximum Shareholder benefit from the retention of high quality board and executive team members.

 

Board Assessments

 

The Board is responsible for ensuring that there is a process in place for annually evaluating the effectiveness and contribution of the Chief Executive Officer, the Board, the committees of the Board, the Chairman of the Board and the individual directors based on their applicable terms of reference or position description.

 

The objective of the assessments is to ensure the continued effectiveness of the Board in the execution of its responsibilities and to contribute to a process of continuing improvement. In addition to any other matters the Board deems relevant, the assessments may consider in the case of the Board or a committee, the applicable terms of reference, the applicable position descriptions, as well as the competencies and skills each individual director is expected to bring to the Board.

 

The Human Resources and Corporate Governance Committee annually reviews and makes recommendations to the Board on the method and content of such evaluations and oversees the evaluation process.

 

Board Committees

 

The Board has two standing committees, being the Audit Committee and the Human Resources and Corporate Governance Committee. Below is a description of the committees and their current membership.

 

Audit Committee

 

The Audit Committee oversees the accounting and financial reporting practices and procedures of the Corporation’s financial statements. The principal responsibilities of the Audit Committee include: (i) the integrity of the consolidated financial statements of the Corporation; (ii) the Corporation’s compliance with legal and regulatory requirements; (iii) the public accountants’ qualifications and independence; and (iv) the performance of the Corporation’s internal audit function and public accountants. The Audit Committee shall oversee the preparation of and review the report required by the rules of any and all securities regulatory bodies to which the Corporation is subject to be included in the Corporation’s annual proxy statement. The Audit Committee Charter is attached hereto as Schedule “A”.

 

Composition of the Audit Committee

 

The following are the current members of the Audit Committee:

 

Name Independence Financial Literacy
Kenneth Galbraith Independent Financially Literate
William Curran Independent Financially Literate
Brian Ellacott Independent Financially Literate

 

Relevant Education and Experience

 

The relevant education and experience of each member of the Audit Committee, is provided above, under the heading “Election of Directors”. All of the Audit Committee members are independent of management of the Corporation as required by the TSX and each member is financially literate in that each has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Corporation’s financial statements.

 

Audit Committee Oversight

 

At no time since the commencement of the Corporation’s most recently completed financial period was a recommendation of the Audit Committee to nominate or compensate an external auditor not adopted by the Board.

 

28

 

 

Pre-Approval Policies and Procedures

 

The Audit Committee has adopted specific policies and procedures for the engagement of non-audit services as described in Schedule “A” attached hereto.

 

External Auditor Service Fees (By Category)

 

The aggregate fees billed by the Corporation’s external auditor in the last two fiscal years as follows:

 

Financial Year Ending   Audit Fees(1)     Audit Related Fees(2)     Tax Fees(3)     All Other Fees(4)  
December 31, 2018   $ 365,776     $ 0     $ 61,215     $ 0  
December 31, 2017   $ 313,400     $ 29,700     $ 186,000     $ 0  

 

Notes:

 

(1) Audit fees includes annual audit, quarterly reviews and work performed in relation to the bought deals.
(2) Audit related fees includes work performed on acquisitions.
(3) Tax fees includes fees related to annual tax returns and scientific research credit return along with tax and transfer pricing advice.
(4) All other fees includes services other than those reported under (1), (2) and (3), and consulting services, risk management advisory services and IT reviews not performed in connection with the audit.

 

Human Resources and Corporate Governance Committee

 

The Human Resources and Corporate Governance Committee is comprised of Jean-François Pariseau, William Curran, Kenneth Galbraith and Arthur Rosenthal. All four members are independent directors.

 

The key responsibilities of the Human Resources and Corporate Governance Committee include:

 

(a) Annually review and approve corporate goals and objectives relevant to compensation of executive officers for whom compensation is required to be individually reported under applicable securities laws, evaluate the named executive officers’ performance in light of those goals and objectives, and set the named executive officers’ respective compensation levels based on this evaluation.
   
(b) Annually review the Chief Executive Officer’s evaluation of the performance of the other officers of the Corporation and such other senior management and key employees of the Corporation or any subsidiary of the Corporation as may be identified to the Committee by the Board (collectively, the “Designated Executives”) and review the Chief Executive Officer’s recommendations with respect to the amount of compensation to be paid to the Designated Executives.
   
(c) Annually review, assess the competitiveness and appropriateness of and approve the compensation package of each of the Designated Executives.
   
(d) Review and approve any employment contracts or arrangements with each of the Designated Executives, including any retiring allowance arrangements or any similar arrangements to take effect in the event of a termination of employment.
   
(e) Review and recommend to the Board compensation policies and processes and in particular, the compensation policies and processes for the Designated Executives.
   
(f) In determining the long-term incentive component of the Chief Executive Officer’s compensation and each Designated Executive’s compensation, consider the Corporation’s performance and relative shareholder return, the value of similar incentive awards to executives at comparable companies, and the awards given to Corporation executives in past years.
   
(g) Make recommendations to the Board with respect to incentive compensation and equity-based plans, and review and make recommendations with respect to the performance or operating goals for participants in such plans.

 

29

 

 

(h) Have the sole authority to retain and terminate any compensation consultant to be used to assist in the evaluation of director, Chief Executive Officer or senior executive compensation and have sole authority to approve the consultant’s fees and other retention terms.
   
(i) Adopt, administer, approve and ratify awards under incentive compensation and stock plans, including amendments to the awards made under any such plans, and review and monitor awards under such plans.
   
(j) Review and report to the Board on the appropriateness of the succession planning of the Corporation, including appointing, training and monitoring senior management.
   
(k) Review the significant human resources policies, plans and programs of the Corporation to ensure they are supportive of the Corporation’s near and long-term strategies.
   
(l) Undertake on behalf of, and in an advisory capacity to, the Board such other initiatives as may be necessary or desirable to assist the Board in discharging its responsibility to ensure that appropriate human resources development, performance evaluation, compensation and management development programs are in place and operating effectively.

 

Position Descriptions

 

The Board has developed written position descriptions which identify the responsibilities of the Chairman of the Board and the Chief Executive Officer. The Board has not developed written position descriptions for the Chair of each committee of the Board. The Board believes that the charters of the Audit Committee and the Human Resources and Corporate Governance Committee adequately delineate the roles of the Chairs of such committees. Each of the Audit Committee and the Human Resources and Corporate Governance Committee are responsible for reviewing their respective charters on a regular basis and to recommend to the Board any changes as considered appropriate from time to time.

 

AUDITOR

 

The auditors of the Corporation is PricewaterhouseCoopers LLP, Chartered Professional Accountants, Licensed Public Accountants, PwC Centre, 354 Davis Road, Suite 600, Oakville, ON L6J 0C5. PricewaterhouseCoopers LLP has served as the Corporation’s auditor since June 22, 2015.

 

MANAGEMENT CONTRACTS

 

The Corporation does not currently have any management contracts in place.

 

ADDITIONAL INFORMATION

 

Financial information pertaining to the Corporation is provided in the Financial Statements and related management’s discussion and analysis. Copies of the Financial Statements and related management’s discussion and analysis can be obtained by contacting Stephen Kilmer, Investor Relations, at 2400 Skymark Avenue, Unit 6, Mississauga, Ontario, L4W 5K5. Additional information relating to the Corporation is available on the SEDAR website at www.sedar.com.

 

DIRECTOR APPROVAL

 

The contents of this Circular and the sending thereof to the Shareholders, directors and auditor of the Corporation have been approved by the Board.

 

(Signed) “Arun Menawat

 

Arun Menawat

Director and Chief Executive Officer

May 6, 2019

 

30

 

 

SCHEDULE “A”

 

PROFOUND MEDICAL CORP.

(the “Company”)

 

AUDIT COMMITTEE CHARTER

 

A.       Purpose

 

The Audit Committee shall be directly responsible for the appointment, compensation and oversight of the work of the Company’s public accountants. The Audit Committee shall monitor: (1) the integrity of the consolidated financial statements of the Company; (2) the Company’s compliance with legal and regulatory requirements; (3) the public accountants’ qualifications and independence; and (4) the performance of the Company’s internal audit function and public accountants. The Audit Committee shall oversee the preparation of and review the report required by the rules of any and all securities regulatory bodies to which the Company is subject to be included in the Company’s annual proxy statement.

 

B.       Committee Membership

 

The Audit Committee shall consist of no fewer than three members. Each member of the Audit Committee shall be unrelated and independent, and the composition of the Audit Committee shall satisfy the independence, experience and financial expertise requirements of any and all securities exchange(s) on which the securities of the Company are listed and posted for trading and all other applicable securities and other laws. The Board shall appoint the members of the Audit Committee annually, considering the recommendation of the Human Resources and Corporate Governance Committee, and further considering the views of the Chair of the Board and the Chief Executive Officer, as appropriate. The members of the Audit Committee shall serve until their successors are appointed.

 

The Board shall have the power at any time to change the membership of the Audit Committee and to fill vacancies in it, subject to such new member(s) satisfying the independence, experience and financial expertise requirements referred to above. Except as expressly provided in this Charter or the by-laws of the Company, or as otherwise provided by law or the rules of the stock exchanges to which the Company is subject, the Audit Committee shall fix its own rules of procedure.

 

C.       Committee Authority and Responsibilities

 

The Audit Committee shall have the sole authority to appoint or replace the public accountants (subject, if applicable, to shareholder ratification), and shall approve all audit engagement fees and terms and all non-audit engagements with the public accountants. The Audit Committee shall consult with management but shall not delegate these responsibilities. In its capacity as a committee of the Board, the Audit Committee shall be directly responsible for the oversight of the work of the public accounting firm (including resolution of disagreements between management and the public accounting firm regarding financial reporting) for the purpose of preparing or issuing an audit report or related work, and the public accounting firm shall report directly to the Audit Committee. The Audit Committee shall have the authority, to the extent it deems necessary or appropriate, to retain and set and pay the compensation for special legal, accounting or other consultants to advise the committee and carry out its duties, and to conduct or authorize investigations into any matters within its scope of responsibilities.

 

The Audit Committee may request any officer or employee of the Company or the Company’s outside counsel or public accountants to attend a meeting of the Audit Committee or to meet with any members of, or consultants to, the Audit Committee.

 

The Audit Committee shall have the ability to communicate directly with the public accountants and the Company’s internal auditor, if any.

 

The Audit Committee, or another board committee comprised solely of independent directors if so designated by the Audit Committee, shall review all related party transactions on an ongoing basis, including to the extent required by any and all securities exchange(s) on which the securities of the Company are listed and posted for trading.

 

The Audit Committee shall make regular reports to the Board. The Audit Committee shall review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Board for approval. The Audit Committee shall annually review the Audit Committee’s own performance.

 

A-1

 

 

In performing its functions, the Audit Committee shall undertake those tasks and responsibilities that, in its judgment, would most effectively contribute and implement the purposes of the Audit Committee. The following functions are some of the common recurring activities of the Audit Committee in carrying out its oversight responsibility:

 

· Review and discuss with management and the public accountants the Company’s annual audited consolidated financial statements, including disclosures made in Management’s Discussion and Analysis of Financial Condition and Results of Operations and recommend to the Board whether the audited consolidated financial statements should be included in the Company’s annual report.
   
· Review and discuss with management and the public accountants the Company’s quarterly financial statements, including disclosures made in Management’s Discussion and Analysis of Financial Condition and Results of Operations or similar disclosures, prior to the filing of its quarterly report.
   
· Review and discuss with management and the public accountants the financial information and consolidated financial statements contained in any prospectus, registration statement, annual information form, circular or other material disclosure document of the Company, in each case prior to the filing of such documents.
   
· Review and discuss with management and the public accountants, as applicable: (a) major issues regarding accounting principles and consolidated financial statement presentations, including any significant changes in the Company’s selection or application of accounting principles, and major issues as to the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies; (b) analyses prepared by management or the public accountants setting forth significant financial reporting issues and judgments made in connection with the preparation of the consolidated financial statements, including analyses of the effects of alternative IFRS methods on the consolidated financial statements; (c) any management letter provided by the public accountants and the Company’s response to that letter; (d) any problems, difficulties or differences encountered in the course of the audit work, including any disagreements with management or restrictions on the scope of the public accountants’ activities or on access to requested information and management’s response thereto; (e) the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the consolidated financial statements of the Company; and (f) prior to their release, earnings press releases, as well as financial information and earnings guidance (generally or on a case-by-case basis) provided to analysts and rating agencies.
   
· Discuss with management the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures, including the Company’s risk assessment and risk management policies.
   
· Obtain and review a report from the public accountants at least annually regarding: (a) the public accountants’ internal quality control procedures; (b) any material issues raised by the most recent quality control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities within the preceding five years respecting one or more independent audits carried out by the firm; (c) any steps taken to deal with any such issues; and (d) all relationships between the public accountants and the Company.
   
· Evaluate the qualifications, performance and independence of the public accountants, including a review and evaluation of the lead partner of the public accountants and taking into account the opinions of management.
   
· Ensure the lead audit partner of the public accountants and the audit partner responsible for reviewing the audit are rotated at least every five years if required by applicable securities laws.
   
· Discuss with management and the public accountants any accounting adjustments that were noted or proposed by the public accountants but were passed (as immaterial or otherwise).
   
· Establish procedures for: (a) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters; and (b) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.

 

A-2

 

 

· Review disclosures made by the Company’s principal executive officer or officers and principal financial officer or officers regarding compliance with any certification obligations required by applicable laws and the rules promulgated thereunder, including the Company’s disclosure controls and procedures and internal controls for financial reporting and evaluations thereof.
   
· Review with management and approve the Company’s investment policies for its securities portfolio and review the portfolio management performance.
   
· Review the performances of the Chief Financial Officer and other senior executives involved in the financial reporting process, review financial and accounting personnel succession planning within the Company and, where possible, consult on the appointment of, or departure of, individuals occupying these positions.

 

D.       Limitations of Audit Committee’s Roles

 

While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to prepare consolidated financial statements, plan or conduct audits or to determine that the Company’s consolidated financial statements and disclosures are complete and accurate and are in accordance with IFRS principles and applicable rules and regulations. These are the responsibilities of management and the public accountants.

 

A-3

 

Exhibit 4.5

 

 

 

PROFOUND MEDICAL CORP.

 

INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

 

June 30, 2019

 

PRESENTED IN CANADIAN DOLLARS

 

1

 

 

Profound Medical Corp.

Interim Condensed Consolidated Balance Sheet

(Unaudited)

 

 

    June 30,
2019
$
    December 31,
2018
$
 
             
Assets                
                 
Current assets                
Cash     20,493,470       30,687,183  
Trade and other receivables (note 3)     2,934,283       2,686,112  
Investment tax credits receivable     480,000       480,000  
Inventory (note 4)     3,611,346       3,631,623  
Prepaid expenses and deposits     161,685       434,871  
Total current assets     27,680,784       37,919,789  
                 
Property and equipment (note 5)     914,848       1,207,357  
Intangible assets (note 6)     3,449,342       4,013,561  
Right-of-use assets (notes 2 and 7)     2,408,572       -  
Goodwill     3,409,165       3,409,165  
                 
Total assets     37,862,711       46,549,872  
                 
Liabilities                
                 
Current liabilities                
Accounts payable and accrued liabilities     2,339,451       3,912,350  
Deferred revenue     420,741       312,558  
Long-term debt (note 9)     3,475,358       1,339,583  
Provisions (note 8)     87,741       1,352,017  
Other liabilities (notes 9 and 10)     614,285       567,296  
Derivative financial instrument (note 9)     152,423       98,203  
Lease liabilities (notes 2 and 11)     211,599       -  
Income taxes payable     164,079       297,353  
Total current liabilities     7,465,677       7,879,360  
                 
Long-term debt (note 9)     8,562,737       10,615,662  
Deferred revenue     658,026       379,044  
Provisions (note 8)     45,162       49,319  
Other liabilities (notes 9 and 10)     432,545       1,000,153  
Lease liabilities (notes 2 and 11)     2,279,037       -  
                 
Total liabilities     19,443,184       19,923,538  
                 
Shareholders’ Equity                
                 
Share capital (note 12)     120,942,484       120,932,404  
Contributed surplus     17,208,040       16,756,294  
Accumulated other comprehensive loss     (86,935 )     (28,703 )
Deficit     (119,644,062 )     (111,033,661 )
                 
Total Shareholders’ Equity     18,419,527       26,626,334  
                 
Total Liabilities and Shareholders’ Equity     37,862,711       46,549,872  

 

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

 

2

 

 

Profound Medical Corp.

Interim Condensed Consolidated Statement of Loss and Comprehensive Loss

(Unaudited)

 

 

    Three
months
ended
June 30,
2019
$
    Three
months
ended
June 30,
2018
$
   

Six

months
ended
June 30,
2019
$

   

Six

months
ended
June 30,
2018
$

 
                         
Revenue                                
Products     465,840       170,931       1,813,621       543,425  
Services     108,269       42,412       236,276       46,253  
      574,109       213,343       2,049,897       589,678  
Cost of sales (note 14)     244,066       126,259       777,422       357,334  
Gross profit     330,043       87,084       1,272,475       232,344  
                                 
Operating Expenses (note 14)                                
Research and development – net of investment tax credits of $nil (2018 – $120,000)     3,186,355       2,347,909       5,864,101       4,864,690  
General and administrative     1,586,323       2,236,529       3,100,436       3,539,733  
Selling and distribution – net of revenue share obligation reversal (note 8)     1,154,869       1,113,225       625,524       2,060,127  
Total operating expenses     5,927,547       5,697,663       9,590,061       10,464,550  
                                 
Operating Loss     5,597,504       5,610,579       8,317,586       10,232,206  
                                 
Other income and expense                                
Finance costs (note 15)     337,220       313,606       651,905       633,569  
Finance income     (110,790 )     (117,357 )     (252,671 )     (157,161 )
      226,430       196,249       399,234       476,408  
Loss before income taxes     5,823,934       5,806,828       8,716,820       10,708,614  
                                 
Income taxes     20,200       24,200       54,000       60,600  
                                 
Net loss for the period     5,844,134       5,831,028       8,770,820       10,769,214  
                                 
Other comprehensive loss                                
Item that may be reclassified to profit or loss                                
Foreign currency translation adjustment - net of tax     (11,843 )     57,943       (58,232 )     14,695  
Net loss and comprehensive loss for the period     5,832,291       5,888,971       8,712,588       10,783,909  
                                 
Loss per share (note 16)                                
Basic and diluted net loss per share     0.05       0.05       0.08       0.12  

 

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

 

3

 

 

Profound Medical Corp.

Interim Condensed Consolidated Statement of Changes in Shareholders’ Equity

(Unaudited)

 

 

    Number
of shares
    Share
capital
$
    Contributed
surplus
$
    Accumulated
other
comprehensive
income (loss)
$
    Deficit
$
    Total
$
 
                                     
Balance – January 1, 2018     73,117,377       98,365,770       6,103,970       (57,929 )     (90,270,672 )     14,141,139  
                                                 
Net loss for the period     -       -       -       -       (10,769,214 )     (10,769,214 )
Cumulative translation adjustment – net of tax     -       -       -       14,695       -       14,695  
Exercise of share options     426,562       295,781       (193,406 )     -       -       102,375  
Share-based compensation (note 13)     -       -       476,931       -       -       476,931  
Issuance of units on bought deal financing (note 12)     34,500,000       22,276,555       9,767,750       -       -       32,044,305  
Balance – June 30, 2018     108,043,939       120,938,106       16,155,245       (43,234 )     (101,039,886 )     36,010,231  
                                                 
Balance – January 1, 2019     108,054,939       120,932,404       16,756,294       (28,703 )     (111,033,661 )     26,626,334  
Change in accounting policy for IFRS 16 (note 2)     -       -       -       -       160,419       160,419  
Restated balance – January 1, 2019     108,054,939       120,932,404       16,756,294       (28,703 )     (110,873,242 )     26,786,753  
                                                 
Net loss for the period     -       -       -       -       (8,770,820 )     (8,770,820 )
Cumulative translation adjustment – net of tax     -       -       -       (58,232 )     -       (58,232 )
Exercise of share options     18,000       10,080       (4,681 )     -       -       5,399  
Share-based compensation (note 13)     -       -       456,427       -       -       456,427  
Balance – June 30, 2019     108,072,939       120,942,484       17,208,040       (86,935 )     (119,644,062 )     18,419,527  

 

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

 

4

 

 

Profound Medical Corp.

Interim Condensed Consolidated Statement of Cash Flows

(Unaudited)

 

 

    Six months
ended
June 30,
2019
$
    Six months
ended
June 30,
2018
$
 
             
Operating activities                
Net loss for the period     (8,770,820 )     (10,769,214 )
Adjustments to reconcile net loss to net cash flows from operating activities:                
Depreciation of property and equipment (note 5)     257,299       284,167  
Amortization of intangible assets (note 6)     564,219       564,219  
Depreciation of right-of-use assets (note 7)     204,126       -  
Share-based compensation (note 13)     456,427       476,931  
Interest and accretion expense (note 15)     681,258       522,215  
Change in deferred rent     -       20,670  
Deferred revenue     387,165       28,520  
Change in fair value of derivative financial instrument (note 9)     54,220       -  
Change in fair value of contingent consideration (note 10)     (208,911 )     (24,546 )
Changes in non-cash working capital balances                
Investment tax credits receivable     -       (120,000 )
Trade and other receivables     (248,171 )     3,227,089  
Prepaid expenses and deposits     63,186       (93,660 )
Inventory     20,277       (1,144,721 )
Accounts payable and accrued liabilities     (1,612,144 )     (2,320,795 )
Provisions     (1,219,114 )     151,263  
Income taxes payable     (133,274 )     62,089  
Net cash flow used in operating activities     (9,504,257 )     (9,135,773 )
                 
Financing activities                
Issuance of common shares     -       34,500,000  
Transaction costs paid     -       (2,455,695 )
Payment of other liabilities     (16,203 )     (164,389 )
Payment of long-term debt and interest     (534,709 )     (1,953,822 )
Proceeds from share options exercised     5,399       102,375  
Payment of lease liabilities     (143,943 )     -  
Total cash (used in) from financing activities     (689,456 )     30,028,469  
                 
Net change in cash during the period     (10,193,713 )     20,892,696  
Cash – Beginning of period     30,687,183       11,103,223  
Cash – End of period     20,493,470       31,995,919  

 

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

 

5

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

1 Description of business

 

Profound Medical Corp. (Profound) and its subsidiaries (together, the Company) were incorporated under the Ontario Business Corporations Act on July 16, 2014. The Company is a medical technology company developing treatments to ablate the prostate gland, uterine fibroids and nerves for palliative pain relief for patients with metastatic bone disease.

 

The Company’s registered address is 2400 Skymark Avenue, Unit 6, Mississauga, Ontario, L4W 5K5.

 

2 Summary of significant accounting policies and basis of preparation

 

Basis of preparation

 

These interim condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS), applicable to the preparation of interim condensed consolidated financial statements, including International Accounting Standard (IAS) 34, Interim Financial Reporting. These interim condensed consolidated financial statements are presented in Canadian dollars and should be read in conjunction with the Company’s annual financial statements for the year ended December 31, 2018, which were prepared in accordance with IFRS.

 

These interim condensed consolidated financial statements were authorized for issue by the Board of Directors on August 14, 2019.

 

The interim condensed consolidated financial statements were prepared on a going concern basis under the historical cost convention.

 

The accounting policies adopted are consistent with those of the previous financial year except as noted below.

 

A new standard became applicable for the current reporting period and the Company had to change its accounting policies as a result. The impact of the adoption of this standard and the new accounting policy is disclosed below.

 

· IFRS 16, Leases (IFRS 16)

 

IFRS 16 sets out the principles for the recognition, measurement and disclosure of leases. IFRS 16 provides revised guidance on identifying a lease and for separating lease and non-lease components of a contract. IFRS 16 introduces a single accounting model for all lessees, thereby removing the distinction between operating and finance leases. IFRS 16 requires a lessee to recognize an asset (right-to-use the leased item) and a financial liability to pay rentals on the interim condensed consolidated balance sheets with terms of more than 12 months, unless the underlying asset is of low value. The standard permits either a full retrospective or a modified retrospective approach for the adoption. IFRS 16 was effective for annual periods beginning on or after January 1, 2019.

 

6

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

The Company has adopted IFRS 16 retrospectively from January 1, 2019, but has not restated comparative information, as permitted under the specific transitional provisions in the standard in accordance with the modified retrospective approach for adoption. The reclassifications and the adjustments arising from the new leasing standard are therefore recognized in the opening interim condensed consolidated balance sheet on January 1, 2019.

 

Adjustments recognized on adoption of IFRS 16

 

On adoption of IFRS 16, the Company recognized lease liabilities in relation to leases, which had previously been classified as operating leases under the principles of IAS 17, Leases (IAS 17). These liabilities were measured at the present value of the remaining lease payments, discounted using the incremental borrowing rate as of January 1, 2019. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on January 1, 2019 was 4%.

 

    $  
       
Operating lease commitments as at December 31, 2018     3,313,292  
Asset retirement obligation     111,100  
Discounted using the Company’s average incremental borrowing rate of 4.0%     (836,665 )
Lease liabilities recognized as at January 1, 2019     2,587,727  

 

The change in accounting policy affected the following items in the interim condensed consolidated balance sheet on January 1, 2019:

 

    Increase
(decrease)
$
 
       
Right-of-use assets     2,616,773  
Lease liabilities     2,587,727  
Prepaid expenses and deposits     (210,000 )
Provisions     (49,319 )
Other liabilities     (292,054 )
Deficit     160,419  

 

Practical expedients applied

 

The Company has elected to apply the practical expedient not to recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low value assets. The lease payments associated with these leases are recognized as an expense on a straight-line basis over the lease term.

 

The Company has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the Company has relied on its assessment made applying IAS 17 and IFRIC 4, Determining whether an Arrangement contains a Lease.

 

7

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

  

Accounting policy

 

At inception of a contract, the Company assesses whether a contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

 

The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured based on the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The assets are depreciated to the earlier of the end of the useful life of the right-of-use asset or the lease term using the straight-line method as this most closely reflects the expected pattern of consumption of the future economic benefits. The lease term includes periods covered by an option to extend if the Company is reasonably certain to exercise that option. Lease terms range from four to ten years for offices. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

 

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate.

 

The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option.

 

When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

 

8

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

3 Trade and other receivables

 

The trade and other receivables balance comprises the following:

 

    June 30,
2019
$
    December 31,
2018
$
 
             
Trade receivables     2,350,477       1,791,688  
Interest receivable     33,877       55,730  
Indirect tax receivables     510,851       565,832  
Other receivables     39,078       272,862  
                 
Total trade and other receivables     2,934,283       2,686,112  

 

Amounts past due represent trade receivables past due based on the customer’s contractual terms. The Company applies the simplified approach to providing for expected credit losses prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables. At June 30, 2019 and December 31, 2018, there were no trade receivables that are past due.

 

4 Inventory

 

    June 30,
2019
$
    December 31,
2018
$
 
             
Finished goods     2,017,634       2,305,746  
Raw materials     1,633,565       1,383,572  
Inventory provision     (39,853 )     (57,695 )
Total inventory     3,611,346       3,631,623  

 

During the three and six months ended June 30, 2019, $254,319 and $726,402 (three and six months ended June 30, 2018, $61,198 and $330,696, respectively) of inventory was recognized in cost of sales. The Company decreased its inventory provision by $3,606 and $17,842 during the three and six months ended June 30, 2019 (three and six months ended June 30, 2018 – decrease of $2,198 and $40,549). There were no other inventory writedowns charged to cost of sales during the period ended June 30, 2019.

 

9

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

5 Property and equipment

 

Property and equipment consist of the following:

 

   

Furniture

and

fittings

$

   

Research

and

manufact-
uring

equipment

$

   

Leasehold

improve-
ments

$

   

Computer

equipment

$

   

Computer

software

$

   

Total

$

 
                                     
At January 1, 2019                                                
Cost     235,169       1,386,692       718,742       212,541       176,462       2,729,606  
Accumulated depreciation     (138,604 )     (815,450 )     (182,235 )     (209,498 )     (176,462 )     (1,522,249 )
Net book value     96,565       571,242       536,507       3,043       -       1,207,357  
                                                 
Six months ended June 30, 2019                                                
Opening net book value     96,565       571,242       536,507       3,043       -       1,207,357  
Foreign exchange     -       (35,210 )     -       -       -       (35,210 )
Depreciation     (19,159 )     (200,734 )     (34,641 )     (2,765 )     -       (257,299 )
Closing net book value     77,406       335,298       501,866       278       -       914,848  
                                                 
At June 30, 2019                                                
Cost     235,169       1,388,922       718,742       212,541       176,462       2,731,836  
Accumulated depreciation     (157,763 )     (1,053,624 )     (216,876 )     (212,263 )     (176,462 )     (1,816,988 )
Net book value     77,406       335,298       501,866       278       -       914,848  

 

6 Intangible assets

 

Intangible assets consist of the following:

 

    Exclusive
licence
agreement
$
    Software
$
    Proprietary
technology
$
    Brand
$
    Total
$
 
                               
As at January 1, 2019                                        
Cost     50,000       257,254       4,489,295       883,140       5,679,689  
Accumulated amortization     (25,000 )     (118,938 )     (1,271,967 )     (250,223 )     (1,666,128 )
Net book value     25,000       138,316       3,217,328       632,917       4,013,561  
                                         
Six months ended June 30, 2019                                        
Opening net book value     25,000       138,316       3,217,328       632,917       4,013,561  
Amortization     (1,250 )     (25,725 )     (448,929 )     (88,315 )     (564,219 )
Closing net book value     23,750       112,591       2,768,399       544,602       3,449,342  
                                         
As at June 30, 2019                                        
Cost     50,000       257,254       4,489,295       883,140       5,679,689  
Accumulated amortization     (26,250 )     (144,663 )     (1,720,896 )     (338,538 )     (2,230,347 )
Net book value     23,750       112,591       2,768,399       544,602       3,449,342  

 

10

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

7 Right-of-use assets

 

    Leased
premises
$
 
       
As at January 1, 2019        
Cost     2,616,773  
Accumulated depreciation     -  
Net book value     2,616,773  
         
Six months ended June 30, 2019        
Opening net book value     2,616,773  
Foreign exchange     (4,075 )
Depreciation     (204,126 )
Closing net book value     (2,408,572 )
         
As at June 30, 2019        
Cost     2,616,773  
Accumulated depreciation     (208,201 )
Net book value     2,408,572  

 

The Company leases office premises in Mississauga, Canada and Vantaa, Finland. These lease agreements are typically entered into for four to ten-year periods.

 

8 Provisions

 

    Asset
retirement
obligation
$
    Revenue
share
obligation
$
    Warranty
provision
$
    Total
$
 
                         
As at January 1, 2019     49,319       1,241,657       110,360       1,401,336  
Change in accounting policy for IFRS 16 (note 2)     (49,319 )     -       -       (49,319 )
Restated balance as at January 1, 2019     -       1,241,657       110,360       1,352,017  
Additions     -       -       65,922       65,922  
Expiry     -       (1,241,657 )     (40,998 )     (1,282,655 )
Foreign exchange     -       -       (2,381 )     (2,381 )
As at June 30, 2019     -       -       132,903       132,903  
Less: Current portion     -       -       87,741       87,741  
Long-term portion     -       -       45,162       45,162  

 

Asset retirement obligation

 

The asset retirement obligation was related to the Company’s leasehold improvements. This amount was transferred as part of the adoption of IFRS 16 (note 2).

 

11

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

Revenue share obligation

 

During January 2019, the Company replaced the original co-marketing and co-selling agreement with Siemens with a new agreement. Under the new agreement, all prior financial commitments and obligations owed to Siemens are released and replaced with a non-exclusive licence resulting in a one-time fixed licence fee of US$100,000 and a per annum payment per device interfaced to a Siemens MRI scanner. In exchange for the one-time fixed licence fee and per annum payments, the Company obtained a non-exclusive licence and reasonable support for the term of the agreement.

 

Warranty provision

 

The warranty provision is related to the Company’s estimate of future warranty obligations on product sales, which generally have a term of 12 to 24 months.

 

9 Long-term debt

 

A summary of the long-term debt is as follows:

 

    June 30,
2019
$
    December 31,
2018
$
 
             
CIBC loan     12,038,095       11,955,245  
Less: Current portion     3,475,358       1,339,583  
Long-term portion     8,562,737       10,615,662  

 

On July 30, 2018, the Company signed a term loan agreement with CIBC Innovation Banking (CIBC) to provide a secured loan for total initial gross proceeds of $12,500,000 maturing on July 29, 2022 with an interest rate based on prime plus 2.5%. The Company is required to make interest only payments until October 31, 2019 and monthly repayments on the principal of $378,788 plus accrued interest commencing on October 31, 2019. All obligations of the Company under the term loan agreement are guaranteed by current and future subsidiaries of the Company and include security of first priority interests in the assets of the Company and its subsidiaries. The Company has the ability to draw an additional $6,250,000 subject to the achievement of certain financing and product development milestones. The Company has a financial covenant in relation to the CIBC loan where unrestricted cash is required to be greater than operating cash expenditures for a trailing three-month period, reported on a monthly basis. The Company is in compliance with this financial covenant as at June 30, 2019.

 

12

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

    June 30,
2019
$
    December 31,
2018
$
 
             
Balance – Beginning of period     11,955,245       -  
Proceeds received     -       12,500,000  
Transaction costs     -       (930,520 )
Interest and accretion expense     617,559       517,409  
Repayment     (534,709 )     (131,644 )
Balance – End of period     12,038,095       11,955,245  
Less: Current portion     3,475,358       1,339,583  
Long-term portion     8,562,737       10,615,662  

 

In connection with this term loan agreement on July 31, 2018, the Company also issued 321,714 common share purchase warrants to CIBC, with each warrant entitling the holder to acquire one common share at a price of $0.97 per common share until the date that is 60 months from the closing of the term loan agreement, with a cashless exercise feature. The cashless exercise feature causes the conversion ratio to be variable and the warrants are therefore classified as a financial liability. Gains and losses on the warrants are recorded within finance costs on the interim condensed consolidated statements of loss and comprehensive loss. A pricing model with observable market based inputs was used to estimate the fair value of the warrants issued. The estimated fair value of the warrants as at June 30, 2019 and December 31, 2018 was $152,423 and $98,203, respectively. The variables used to determine the fair values are as follows:

 

    June 30,
2019
    December 31,
2018
 
             
Share price   $ 0.79     $ 0.55  
Volatility     88 %     86 %
Expected life of warrants     4.1 years       4.6 years  
Risk free interest rate     1.41 %     1.88 %
Dividend yield     -       -  

 

The Federal Economic Development Agency (FedDev) loan with total proceeds of $867,000 was unsecured and non-interest bearing. The final repayment of $563,550 was made on July 25, 2018.

 

During the three and six months ended June 30, 2019 and 2018, the Company recognized $nil of interest and accretion expense on this loan (three and six months ended June 30, 2018 - $77,783 and $90,775, respectively).

 

The Health Technology Exchange (HTX) loans with total proceeds of $1,500,000 were unsecured and bore interest at 4.50% per annum. The final repayment of $1,094,698, including accrued interest, was made on March 31, 2018.

 

During the three and six months ended June 30, 2019 and 2018, the Company recognized $nil of interest and accretion expense on these loans (three and six months ended June 30, 2018 - $nil and $18,078, respectively).

 

13

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

On April 30, 2015, Profound Medical Inc. signed an agreement with Knight Therapeutics Inc. (Knight) to provide a secured loan of $4,000,000 (the Knight Loan) for an initial period of four years with an interest rate of 15% per annum, with payments of interest and principal deferred until June 30, 2017. As part of the agreement, Knight was also granted a royalty of 0.5% on net sales resulting from global sales of the Company’s products until May 20, 2019 (the royalty). In addition, the Company also entered into a distribution, licence and supply agreement with Knight pursuant to which Knight will act as the exclusive distributor of the Company’s product in Canada for an initial ten-year term, renewable for successive ten-year terms by either party. In connection with these arrangements, the Company issued to Knight 4% of the common shares of the Company (1,717,450 common shares). On July 25, 2018, the full amount of the Knight Loan, including prepayment fees, was repaid for a total payment of $3,188,023.

 

The royalty was initially recorded at fair value and was subsequently carried at amortized cost using the effective interest rate method. The initial fair value of the royalty was determined using future revenue forecasts for the term of the loan and a discount rate of 18%. During the three and six months ended June 30, 2019, the Company revised the fair value of the royalty, using future revenue forecasts for the term of the loan and a discount rate of 18%, and recognized an interest accretion recovery of $6,361 and $3,450, respectively (three and six months ended June 30, 2018 - accretion recovery of $7,931 and $3,383, respectively). This liability is included within other liabilities on the interim condensed consolidated balance sheets.

 

10 Other liabilities

 

    Knight
royalty
payable
$
    Contingent
consideration
$
    Deferred
rent
$
    Total
$
 
                         
As at January 1, 2019     19,653       1,255,741       292,055       1,567,449  
Change in accounting policy for IFRS 16 (note 2)     -       -       (292,055 )     (292,055 )
Restated balance as at January 1, 2019     19,653       1,255,741       -       1,275,394  
Amounts paid     (16,203 )     -       -       (16,203 )
Change in fair value     -       (208,911 )     -       (208,911 )
Accretion recovery (note 15)     (3,450 )     -       -       (3,450 )
As at June 30, 2019     -       1,046,830       -       1,046,830  
Less: Current portion     -       614,285       -       614,285  
Long-term portion     -       432,545       -       432,545  

 

Knight royalty payable

 

As part of the Knight Loan, Knight was granted a royalty of 0.5% on net sales resulting from global sales of the Company’s products until May 20, 2019.

 

Contingent consideration

 

On July 31, 2017, the Company entered into an Asset and Share Purchase Agreement (the agreement) to acquire all of the issued and outstanding shares and certain assets of Royal Philips’ (Philips) Sonalleve MR-HIFU business (Sonalleve). The agreement includes certain contingent consideration payments payable monthly in euro tied to future revenue levels of the Sonalleve business summarized as follows:

 

14

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

· 5% of revenue between the date of acquisition and December 31, 2017;

 

· 6% of revenue during the year ending December 31, 2018;

 

· 7% of revenue during the years ending December 31, 2019 and 2020; and

 

· if total revenues are in excess of a defined amount from the date of acquisition to December 31, 2020, then the Company will be required to pay 7% of revenue from the date of acquisition to December 31, 2019.

 

The contingent consideration is classified as a Level 3 financial liability within the fair value hierarchy given its fair value is estimated using the discounted value of estimated future payments. The key assumptions in valuing the contingent consideration include: estimated projected net sales; the likelihood of certain levels being reached; and a discount rate of 15%.

 

Deferred rent

 

The deferred rent obligation was related to the Company’s straight-line rent accrual for its current premises. This amount was transferred as part of the adoption of IFRS 16 (note 2).

 

11 Lease liabilities

 

    June 30,
2019
$
 
       
As at January 1, 2019     2,587,727  
Repayments     (143,943 )
Foreign exchange     (20,297 )
Interest and accretion expense     67,149  
Balance – End of period     2,490,636  
Less: Current portion     211,599  
Long-term portion     2,279,037  

 

12 Share capital

 

Common shares

 

The Company is authorized to issue an unlimited number of common shares.

 

Issued and outstanding (with no par value)

 

    June 30,
2019
$
    December 31,
2018
$
 
             
108,072,939 (December 31, 2018 – 108,054,939) common shares     120,942,484       120,932,404  

 

15

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

Warrants

 

As a result of the March 20, 2018 bought deal financing, 17,250,000 warrants were issued.

 

A summary of warrants outstanding is shown below:

 

    Number of
warrants
    Weighted
average
exercise
price
$
   

Weighted

average

remaining

contractual

life

(years)

 
                   
Balance – January 1, 2019 and June 30, 2019     22,571,714       1.39       3.17  

 

13 Share-based payments

 

Share options

 

Compensation expense related to share options for the three and six months ended June 30, 2019 was $383,789 and $456,427, respectively (three and six months ended June 30, 2018 - $235,873 and $476,931, respectively).

 

A summary of the share option changes during the period presented and the total number of share options outstanding as at those dates are set forth below:

 

   

Number

of options

   

Weighted

average

exercise

price

$

 
             
Balance January 1, 2019     6,244,779       1.13  
Granted     4,982,400       0.92  
Exercised     (18,000 )     0.30  
Forfeited/expired     (835,250 )     1.06  
Balance June 30, 2019     10,373,929       1.04  

 

The company estimated the fair value of the share options granted during the period using the Black-Scholes option pricing model with the weighted average assumptions below. Due to the absence of company-specific volatility rates for the expected life of the share options, the company chose comparable companies in the medical device industry.

 

    May 15,
2019
    May 16,
2019
 
             
Share price on date of issuance   $ 0.91     $ 0.94  
Expected volatility     82 %     82 %
Expected life of share options     6 years       6 years  
Risk-free interest rate     1.59 %     1.59 %
Dividend yield     -       -  
Number of share options issued     133,000       4,849,400  

 

16

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

The following table summarizes information about the share options outstanding as at June 30, 2019:

 

 

Exercise price

$

 

Number of

options

outstanding

   

Weighted

average

remaining

contractual life

(years)

   

Number of

options

exercisable

 
                   
0.24     212,750       3.19       212,750  
0.60     33,000       9.40       -  
0.85     315,000       8.38       124,663  
0.91     133,000       9.88       -  
0.92     4,849,400       9.88       -  
0.93     500,000       9.16       -  
0.97     66,000       7.82       55,000  
0.99     28,000       8.75       8,747  
1.02     115,500       8.97       71,500  
1.10     1,971,724       7.47       1,243,874  
1.19     518,000       8.90       140,291  
1.35     132,500       7.15       107,961  
1.46     934,055       7.15       661,622  
1.50     565,000       6.17       528,621  
      10,373,929       8.64       3,155,029  

 

14 Nature of expenses

 

   

Three

months
ended
June 30,
2019
$

   

Three

months
ended
June 30,
2018
$

   

Six

months
ended
June 30,
2019
$

   

Six

months
ended
June 30,
2018
$

 
                         
Production and manufacturing costs     68,171       45,537       464,477       237,590  
Salaries and benefits     2,473,969       2,657,601       5,012,176       5,095,979  
Consulting fees     1,378,418       1,286,739       2,297,765       2,552,083  
Research and development expense     613,821       266,463       1,096,785       320,255  
Sales and marketing expenses     368,339       427,721       (696,955 )     685,885  
Amortization and depreciation     516,350       424,548       1,026,028       848,386  
Share-based compensation     383,789       235,873       456,427       476,931  
Rent     125,974       193,075       216,133       348,741  
Other expenses     242,782       286,365       494,647       256,035  
      6,171,613       5,823,922       10,367,483       10,821,885  

 

17

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

 

15 Finance costs

 

    Three
months
ended
June 30,
2019
$
    Three
months
ended
June 30,
2018
$
   

Six

months
ended
June 30,
2019
$

   

Six

months
ended
June 30,
2018
$

 
                         
Knight loan (note 9)     -       264,766       -       416,745  
Change in fair value of contingent consideration     (185,197 )     (73,193 )     (208,911 )     (24,546 )
CIBC loan (note 9)     312,050       -       617,559       -  
HTX and FedDev loans (note 9)     -       77,783       -       108,853  
Change in fair value of derivative financial instrument (note 9)     (3,251 )     -       54,220       -  
Lease liability interest expense (note 11)     33,556       -       67,149       -  
Royalty interest accretion recovery (note 9 and 10)     (6,361 )     (7,931 )     (3,450 )     (3,383 )
Provisions (note 8)     -       1,261       -       2,488  
Foreign exchange (gain) loss     186,423       50,920       125,338       133,412  
      337,220       313,606       651,905       633,569  

 

16 Loss per share

 

The following table shows the calculation of basic and diluted loss per share:

 

   

Three

months
ended
June 30,
2019
$

   

Three

months
ended
June 30,
2018
$

   

Six

months
ended
June 30,
2019
$

   

Six

months
ended
June 30,
2018
$

 
                         
Net loss for the period     5,844,134       5,831,028       8,770,820       10,769,214  
Weighted average number of common shares     108,061,539       107,727,319       108,058,221       92,614,640  
Basic and diluted loss per share     0.05       0.05       0.08       0.12  

 

For the periods noted above, the computation of diluted loss per share is equal to the basic loss per share due to the anti-dilutive effect of the share options and warrants.

 

Of the 10,373,929 (June 30, 2018 – 5,535,029) share options and 22,571,714 (June 30, 2018 – 22,250,000) warrants not included in the calculation of diluted loss per share for the period ended June 30, 2019, 25,726,743 (June 30, 2018 – 24,347,875) were exercisable.

 

18

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

17 Related party transactions

 

Key management includes the Company’s directors and senior management team. The remuneration of directors and the senior management team was as follows:

 

   

Three

months
ended
June 30,
2019
$

   

Three

months
ended
June 30,
2018
$

   

Six

months
ended
June 30,
2019
$

   

Six

months
ended
June 30,
2018
$

 
                         
Salaries and employee benefits     347,258       705,127       696,848       908,853  
Termination benefits     -       -       -       114,750  
Directors’ fees     37,500       20,084       75,000       40,031  
Share-based compensation     315,536       228,792       372,170       401,596  
      700,294       954,003       1,144,018       1,456,230  

 

Executive employment agreements allow for additional payments in the event of a liquidity event, or if the executive is terminated without cause.

 

18 Segment reporting

 

The Company’s operations are categorized into one industry segment, which is medical technology focused on magnetic resonance guided ablation procedures for the treatment of prostate disease, uterine fibroids and palliative pain treatment for patients with metastatic bone disease. The Company is managed geographically in Canada, Germany and Finland.

 

For the three-month period ended June 30, 2019:

 

    Canada
$
    Germany
$
    Finland
$
    Total
$
 
                         
Revenue                                
Product     351,822       114,018       -       465,840  
Services     19,590       88,679       -       108,269  
      371,412       202,697       -       574,109  
Cost of sales     59,698       184,368       -       244,066  
Gross profit     311,714       18,329       -       330,043  
                                 
Operating expenses                                
Research and development     2,548,997       -       637,358       3,186,355  
General and administrative     1,507,414       -       78,909       1,586,323  
Selling and distribution     659,343       412,861       82,665       1,154,869  
Total operating expense     4,715,754       412,861       798,932       5,927,547  
                                 
Operating loss     4,404,040       394,532       798,932       5,597,504  
Net finance costs                             226,430  
Loss for the period before income taxes                             5,823,934  

 

19

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

For the six-month period ended June 30, 2019:

 

    Canada
$
    Germany
$
    Finland
$
    Total
$
 
                         
Revenue                                
Product     1,289,131       524,490       -       1,813,621  
Services     31,768       204,508       -       236,276  
      1,320,899       728,998       -       2,049,897  
Cost of sales     215,140       562,282       -       777,422  
Gross profit     1,105,759       166,716       -       1,272,475  
                                 
Operating expenses                                
Research and development     4,444,216       -       1,419,885       5,864,101  
General and administrative     2,908,411       -       192,025       3,100,436  
Selling and distribution     (332,591 )     789,449       168,666       625,524  
Total operating expense     7,020,035       789,449       1,780,577       9,590,061  
                                 
Operating loss     5,914,276       622,733       1,780,577       8,317,586  
Net finance costs                             399,234  
Loss for the period before income taxes                             8,716,820  

 

For the three-month period ended June 30, 2018:

 

    Canada
$
    Germany
$
    Finland
$
    Total
$
 
                         
Revenue                                
Product     -       170,931       -       170,931  
Services     12,119       30,293       -       42,412  
      12,119       201,224       -       213,343  
Cost of sales     -       126,259       -       126,259  
Gross profit     12,119       74,965       -       87,084  
                                 
Operating expenses                                
Research and development     2,009,586       -       338,323       2,347,909  
General and administrative     2,236,529       -       -       2,236,529  
Selling and distribution     599,998       333,040       180,187       1,113,225  
Total operating expense     4,846,113       333,040       518,510       5,697,663  
                                 
Operating loss     4,833,994       258,075       518,510       5,610,579  
Net finance costs                             196,249  
Loss for the period before income taxes                             5,806,828  

 

20

 

 

Profound Medical Corp.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2019

 

For the six-month period ended June 30, 2018:

 

    Canada
$
    Germany
$
    Finland
$
    Total
$
 
                         
Revenue                                
Product     -       543,425       -       543,425  
Services     12,119       34,134       -       46,253  
      12,119       577,559       -       589,678  
Cost of sales     -       357,334       -       357,334  
Gross profit     12,119       220,225       -       232,344  
                                 
Operating expenses                                
Research and development     3,835,311       -       1,029,379       4,864,690  
General and administrative     3,359,195       -       180,538       3,539,733  
Selling and distribution     1,003,598       726,324       330,205       2,060,127  
Total operating expense     8,198,104       726,324       1,540,122       10,464,550  
                                 
Operating loss     8,185,985       506,099       1,540,122       10,232,206  
Net finance costs                             476,408  
Loss for the period before income taxes                             10,708,614  

 

Other financial information by segment as at June 30, 2019:

 

    Canada
$
    Germany
$
    Finland
$
    Total
$
 
                         
Total assets     34,015,086       896,755       2,950,871       37,862,711  
Goodwill and intangible assets     6,858,507       -       -       6,858,507  
Property and equipment     662,624       -       252,224       914,848  
Right-of-use assets     2,127,101       -       281,471       2,408,572  
Amortization of intangible assets     564,219       -       -       564,219  
Depreciation of property and equipment     134,672       267       122,360       257,299  
Depreciation of right-of-use asset     146,697       -       57,429       204,126  

 

Other financial information by segment as at December 31, 2018:

 

    Canada
$
    Germany
$
    Finland
$
    Total
$
 
                         
Total assets     42,437,691       1,093,184       3,018,997       46,549,872  
Goodwill and intangible assets     7,422,726       -       -       7,422,726  
Property and equipment     797,296       266       409,795       1,207,357  
Amortization of intangible assets     1,128,437       -       -       1,128,437  
Depreciation of property and equipment     296,093       3,100       246,808       546,001  

 

21

 

 

Exhibit 4.7

 

ITEM 3. KEY INFORMATION

 

A. Selected Financial Data

 

The following table sets forth selected consolidated financial information for the periods indicated, prepared in accordance with IFRS. The selected consolidated statements of operations data and balance sheet data as of and for the years ended December 31, 2018, 2017 and 2016 are derived from our audited consolidated financial statements set forth elsewhere in this Registration Statement. The selected consolidated statements of operations data for the three and six months ended June 30, 2019 and 2018 and selected consolidated balance sheet data as of June 30, 2019 are derived from our unaudited consolidated financial statements included elsewhere in this Registration Statement.

 

The selected consolidated financial information should be read in conjunction with the financial statements and accompanying notes thereto contained elsewhere in this Registration Statement and discussions in Item 5, “Operating and Financial Review and Prospects”. The selected consolidated financial information set out below may not be indicative of our future performance.

 

    Three Months
Ended June 30,
    Six Months
Ended June 30,
    Year Ended
December 31,
 
    2019     2018     2019     2018     2018     2017     2016  
      (Unaudited)       (Unaudited)                          
Figures in C$ unless otherwise stated Consolidated Statements of Operations Data:                                                        
Revenues     574,109       213,343       2,049,897       589,678       2,602,278       4,904,550       -  
Cost of sales     244,066       126,259       777,422       357,334       1,778,501       3,032,208       -  
Gross profit     330,043       87,084       1,272,475       232,344       823,777       1,872,342       -  
Expenses:                                                        
Research and development expenses     3,186,355       2,347,909       5,864,101       4,864,690       10,265,388       9,638,190       9,988,693  
General and administrative expenses     1,586,323       2,236,529       3,100,436       3,539,733       6,656,723       5,935,215       4,369,288  
Selling and distribution expenses     1,154,869       1,113,225       625,524       2,060,127       4,091,347       3,925,804       1,282,433  
Total expenses     5,927,547       5,697,663       9,590,061       10,464,550       21,013,458       19,499,209       15,640,414  
Finance costs     337,220       313,606       651,905       633,569       826,312       1,249,084       829,899  
Financial income     (110,790 )     (117,357 )     (252,671 )     (157,161 )     (483,788 )     (127,732 )     (157,598 )
Net finance costs     226,430       196,249       399,234       476,408       342,524       1,121,352       672,301  
Loss before income taxes     5,823,934       5,806,828       8,716,820       10,708,614       20,532,205       18,748,219       16,312,715  
Income tax expense     20,200       24,200       54,000       60,600       230,784       74,123       14,054  
Net loss attributable to shareholders for the period     5,844,134       5,831,028       8,770,820       10,769,214       20,762,989       18,822,342       16,326,769  
Other comprehensive income     (11,843 )     57,943       (58,232 )     14,695       29,226       (69,245 )     11,316  
Net loss and comprehensive loss for the period     5,832,291       5,888,971       8,712,588       10,783,909       20,792,215       18,753,097       16,338,085  
                                                         
Loss per share:                                                        
Basic and diluted weighted average shares outstanding     108,061,539       107,727,319       108,058,221       92,614,640       100,395,649       61,404,141       41,510,145  
Basic and diluted     0.05       0.05       0.08       0.12       0.21       0.31       0.39  

 

1

 

 

    As of
June 30,
    As of
December 31,
 
    2019     2018     2017  
    (Unaudited)              
Consolidated Balance Sheet Data:                        
Cash(1)   C$ 20,493,470     C$ 30,687,183     C$ 11,103,223  
Total assets     37,862,711       46,549,872       27,879,379  
Total liabilities     19,443,184       19,923,538       13,738,240  
Deficit     (119,644,062 )     (111,033,661 )     (90,270,672 )
Total shareholders’ equity     18,419,527       26,626,334       14,141,139  

 

(1) Following FDA clearance of our TULSA-PRO system in August 2019, we paid a C$250,000 milestone payment to Sunnybrook under the Sunnybrook License. See Item 4.B, “Business Overview—Intellectual Property—Licenses”.

 

B. Capitalization and Indebtedness

 

The following table sets forth our capitalization as of June 30, 2019. You should read this information together with our historical financial information and other information provided in this Registration Statement, including Item 5, “Operating and Financial Review and Prospects” and our unaudited consolidated financial statements as of and for the three months ended June 30, 2019 and 2018, including the notes thereto, set forth elsewhere in this Registration Statement.

 

    As of June 30,
2019
 
    (Unaudited)  
Figures in C$ unless otherwise stated        
Long-Term Debt        
Long-term bank loan (secured) (non-current portion)(1)   $ 8,562,737  
Total long-term debt     8,562,737  
         
Equity        
Share capital     120,942,408  
Contributed surplus     17,208,040  
Accumulated other comprehensive loss     (86,935 )
Deficit     (119,644,062 )
Total equity     18,419,527  
         
Total Capitalization (long-term debt and equity)   $ 26,982,264  

 

(1) Excludes current portion of C$3,475,358.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

An investment in the Common Shares involves a high degree of risk and should be considered highly speculative due to the nature and present early stage of our business. The following risks are the material risks that we face; however, the risks below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we believe to be immaterial may also adversely affect our business. If any of the following risks occur, our business, financial condition and results of operations could be seriously harmed and you could lose all or part of your investment. Before deciding to invest in any Common Shares, investors should carefully consider the risk factors described below.

 

2

 

 

Risk Factors Relating to Our Operating History and Financial Condition

 

We have a limited operating history and history of operating losses.

 

We commenced operations in June 2008 and have only begun generating revenues in 2017. As of June 30, 2019, we had an accumulated deficit of C$119,644,062 and had cash and cash equivalents of approximately C$20.5 million. Since inception, we have incurred significant losses each year. For the six months ended June 30, 2019, we recorded a net loss of C$8,770,820, and for the year ended December 31, 2018, we recorded a net loss of C$20,762,989. We expect to incur significant operating losses even as we begin to commercialize the TULSA-PRO system in the United States following our recent FDA clearance, which will require significant expenditures to increase our sales and marketing capabilities and expand our manufacturing and distribution capacity, as well as other expenses related to increasing reimbursement coverage and gaining market acceptance among patients, physicians/clinicians and others in the medical community. In addition, we plan to continue product research and development and clinical trials and may pursue additional regulatory approvals. There is no assurance that we will ever successfully commercialize our systems, generate significant revenues from our approved products or achieve profitability. Even if profitability is achieved, we may not be able to sustain or increase profitability. Our failure to achieve or maintain profitability could negatively impact the value of the Common Shares.

 

Our business is capital intensive and requires significant investment to increase our commercial capacity for our approved products, and the resources to do so may not be available in amounts or on terms acceptable to us, if at all.

 

Our business requires substantial capital investment in order to commercialize our approved products, in particular to expand our sales and marketing capabilities and increase our manufacturing capacity, as well as to conduct research and development and to obtain regulatory approvals for existing products and future product candidates. We will likely need additional capital to fund our current and planned business activities and to fund any significant expansion of operations. In order to secure financing, if available, it is likely that we would need to sell additional Common Shares and/or securities that are exchangeable for or convertible into Common Shares, incur additional indebtedness and/or enter into development, manufacturing, distribution and/or licensing relationships. Any future equity financing may be dilutive to existing shareholders. Any future debt financing arrangements we enter into (like our CIBC Loan Agreement as described below) would likely contain restrictive covenants that would impose significant operating and, if any, financial restrictions on us. The availability of equity or debt financing will be affected by, among other things, our commercial progress and market acceptance in respect of the TULSA-PRO system and other approved products, as well as the results of our research and development, our ability to obtain regulatory approvals, the state of the capital markets generally, strategic alliance agreements, and other relevant considerations.

 

Any additional financing may not be obtained on favorable terms, if at all. If we cannot obtain adequate funding on reasonable terms, we may not be able advance our business strategy and/or the commercialization of our approved products, and we may need to terminate or delay clinical trials, curtail significant regulatory initiatives, and/or sell, license or assign rights to our technologies, products or product candidates.

 

Our cash outflows are expected to consist primarily of expenditures to increase our commercial capacity, particularly in sales and marketing, as well as in manufacturing and distribution. In addition, we intend to continue internal and external research and development efforts to develop and expand our product pipeline, as well as incur general and administrative expenditures to support our corporate infrastructure. If we do not obtain sufficient additional capital, there may be substantial doubt about our ability to continue as a going concern and realize assets and pay liabilities as they become due. Depending upon the results of our research and development programs and the availability of financial resources, we could decide to accelerate, terminate or reduce certain projects, or commence new ones. Any failure on our part to raise additional funds on terms favorable to us, or at all, may require us to significantly change or curtail current or planned operations in order to conserve cash until such time, if ever, that sufficient proceeds from operations are generated, and could result in us not taking advantage of business opportunities, in the termination or delay of clinical trials for one or more of our product candidates, in curtailment of our product development programs designed to identify new product candidates, and/or in the sale or assignment of rights to our technologies, products or product candidates. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

 

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Our CIBC Loan Agreement contains financial and non-financial covenants that may impact how we operate our business. In addition, failure to comply with any of these covenants could have a material adverse effect on our business.

 

Our CIBC Loan Agreement contains financial and non-financial covenants, including a requirement that our unrestricted cash is at all times greater than our operating cash expenditures during any trailing three month period. Complying with such covenants may at times necessitate that we must forego other favorable business opportunities. Moreover, our failure to comply with any of these covenants would likely constitute a default under any other similar facilities and agreements that we may enter into in the future, and could give rise to an acceleration of some, if not all, of our other then outstanding indebtedness, if any, which would have a material adverse effect on our business. Our indebtedness may grow as our business grows and/or we make acquisitions. If our income from operations underperforms, we may have to utilize cash flow or capital resources to fund our debt service payments. If our cash flow and capital resources are insufficient to service amounts owed under our current or any future indebtedness, we may be forced to reduce or delay capital expenditures, dispose of assets, license or assign the rights to our technology, issue equity or incur additional debt to obtain necessary funds, or restructure our debt, any or all of which could have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot guarantee that we would be able to take any of these actions on terms acceptable to us, or at all; that these actions would enable us to continue to satisfy our capital requirements; or that these actions would be permitted under the terms of our debt agreements. In particular, the CIBC Loan Agreement contains covenants with respect to capital expenditures and other indebtedness, maintaining minimum cash balances at all times and certain financial covenants. We have granted a security interest over all of our assets (including the shares of our subsidiaries owned by us). Events of default under the CIBC Loan Agreement include among other things, any covenant breach (subject, in certain instances, to a cure period), insolvency of Profound or its subsidiaries, the occurrence of certain events which would have a material adverse effect, cross defaults to other agreements, a failure to comply with certain financial tests, and a change of control of Profound or its subsidiaries. The enforcement by CIBC of its rights and remedies pursuant to the terms of the CIBC Loan Agreement and associated documentation could result in CIBC, its agent or any third party purchaser thereof owning all of our assets, including the shares of our subsidiaries.

 

We are exposed to foreign currency risk, which exposure will increase as we commercialize our approved products in the United States; to date, we have not hedged against risk associated with foreign exchange rate exposure.

 

As we commercialize our approved products, in particular our TULSA-PRO system in the United States, we expect that a significant portion of our revenues, expenses, current assets and current liabilities will be denominated in United States dollars, Euros and other foreign currencies. Currently, our financial statements are expressed in Canadian dollars. A decrease in the value of such foreign currencies relative to the Canadian dollar could result in decreases in revenues from currency exchange rate fluctuations. To date, we have not hedged against risk associated with foreign exchange rate exposure. Consequently, our results of operations may be negatively affected by foreign currency exchange rate fluctuations, which could have a negative impact on the market price of our Common Shares.

 

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Risks Related to Our Business and Growth Strategy

 

We may not achieve our commercialization and future product development goals in the time frames expected, or at all.

 

We may set goals for and makes public statements regarding the timing of the accomplishment of objectives material to our success, such as the timing and extent of product launches in the jurisdictions where they are approved for marketing and sale, in particular our expected commercialization of the TULSA-PRO system following our recently obtained FDA clearance in the United States; third-party reimbursement for our approved products; the timing and terms of any collaborations, partnerships, licenses, acquisitions or other agreements; the commencement and completion of clinical trials, including follow-up data on our TACT Pivotal Clinical Trial; and anticipated regulatory submission and approval dates for our products in additional jurisdictions, and for future product candidates. The actual timing of these events can vary dramatically due to factors such as the uncertainties inherent in the arrangements sufficient to commercialize our products, including in respect of manufacturing, distribution and marketing, as well as market competition and adverse results from our clinical trials, and other factors and described herein, many of which are beyond our control. There can be no assurance that we will achieve our commercialization goals in respect of the TULSA-PRO system in the United States, or that future efficacy and safety results from our TACT Pivotal Clinical Trial will be favorable. If we fail to commercialize the TULSA-PRO system in the United States or any other approved products in the time frame and to the extent that we anticipate, our business, results of operations and financial condition may be materially adversely affected, and the price of the Common Shares could decline.

 

Our products, including the TULSA-PRO system, may not achieve or maintain expected levels of market acceptance.

 

The commercial success of our approved products, including the TULSA-PRO system which was recently FDA-cleared in the United States, is dependent upon achieving and maintaining market acceptance. New medical devices that appear promising in development may fail to reach the market or may have only limited or no commercial success. Levels of market acceptance for our products could be impacted by several factors, many of which are not within our control, including but not limited to:

 

· safety, efficacy, convenience and cost-effectiveness of our systems as a method of ablation of prostate tissue, uterine fibroids, bone metastases compared to products of our competitors or other forms of treatment;

 

· scope of approved uses and marketing approval or clearance;

 

· timing of market entry of our products versus those of our competitors;

 

· difficulties in, or excessive costs required in the process of, manufacturing our products;

 

· expanding compatibility of our systems to work with MRI scanners other than those made by Philips and Siemens, and maintaining our existing relationships with Philips and Siemens;

 

· infringement or alleged infringement of the patents or intellectual property rights of others;

 

· acceptance of the price of our products relative to those of our competitors;

 

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· acceptance and adoption of our products by patients, physicians/clinicians and the medical community;

 

· the availability of training necessary for proficient use of our products, as well as willingness of physicians and technicians to participate in such training;

 

· the perceived risks generally associated with the use of new products and procedures;

 

· the placement of our products in treatment guidelines published by leading medical organizations;

 

· the size and growth rate of the market for our products in the major geographies in which we operate or intend to operate, in particular in the United States; and

 

· acceptance of our products by government and third-party payers for adequate reimbursement coverage.

 

In addition, the success of any new product will depend on our ability to either successfully build our in-house sales and marketing capabilities or to maintain or secure new, or to realize the benefits of existing or future arrangements with, third-party marketing or distribution partners. See “—We intend to rely primarily on our in-house sales and marketing capabilities for our commercialization strategy, which will require substantial build-up and commitment of resources” and “—We currently rely on our collaborative partners, and we may rely on additional collaborative partnerships, to assist in the sales and marketing and/or distribution of our approved products” below. If we are unable to commercialize new products successfully, whether through a failure to achieve market acceptance, a failure to build our own in-house sales and marketing capabilities, a failure to maintain or secure new or existing marketing partners or to realize the benefits of our arrangements with our marketing and distribution partners, there may be a material adverse effect on our business, financial condition and results of operations and it could cause the market value of our Common Shares to decline.

 

Market acceptance of our approved products also depends on our ability to identify and address the relevant market. For example, our TULSA-PRO system is FDA-cleared in the United States for transurethral ultrasound ablation (“TULSA”) of prostate tissue, and is not specific to any particular condition or disease. For more information, see “We may be subject to fines, penalties or injunctions if we are determined to be promoting the use of our products for unapproved or “off-label” uses or engaged in false or misleading promotion.” below. Furthermore, our estimates of the number of patients who have received or might have been candidates to use a specific product may not accurately reflect the true market or market prices for such products or the extent to which such products will actually be used by patients. Our failure to successfully introduce and market our approved products could have a material adverse effect on our business, financial condition, and results of operations.

 

Successful commercialization of our approved products, including the TULSA-PRO system, and future product development depends upon our maintaining strong working relationships with physicians/clinicians.

 

If we fail to maintain positive working relationships with physicians/clinicians, our approved products, including our TULSA-PRO system, may not achieve the level of market acceptance sufficient for successful commercialization of the products. It is important for us to market our approved systems successfully to physicians/clinicians who we expect will use our approved products, and we depend on our sales and marketing personnel (and those of our collaborative partners, e.g., Philips and Siemens) to do so in an effective manner. We can provide no assurance that physicians/clinicians will prescribe or otherwise utilize our TULSA-PRO systems based on our existing clinical data (such as our TACT data) or the results of any future clinical trials, or at all. See “—Data from our clinical trials may not support regulatory approvals or clearances and/or reimbursement coverage for our products” below. We also rely on our relationships with physicians/clinicians to further develop our existing products and develop future product candidates in line with the clinical needs and expectations of the professionals who we expect will use and support the devices. These development efforts are similarly dependent upon us and our collaborative partners maintaining working relationships with physicians/clinicians.

 

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In addition, we rely on physicians/clinicians to provide considerable knowledge and experience that assists us in the marketing and sale of our approved products and development of our products and product candidates. Physicians/clinicians assist us as researchers, marketing and product consultants, inventors and public speakers. If we are unable to maintain strong relationships with these professionals and continue to receive their advice and input, the development and marketing of our products could suffer, which could have a material adverse effect on our business, financial condition and operating results.

 

Physicians/clinicians misuse could result in negative publications, negative sentiment or adverse events, thereby limiting market acceptance and future sales of our products.

 

There is a risk that physicians/clinicians may misuse our products, such as not following the instructions for use, not using our products on the intended patient population, using our products with unapproved or modified hardware or software, or misuse by inadequately trained staff. Physicians/clinicians may also initiate their own clinical studies which may be poorly designed or controlled, and may result in adverse safety or efficacy results. Any of the foregoing could result in negative publications, negative sentiment or adverse events or regulatory actions in respect of our products, thereby limiting market acceptance and sales of our products, which could have a material adverse effect on our business, financial condition and results of operations.

 

We rely on the compatibility of our products with MRI scanners in the successful commercialization of our products.

 

We have designed our TULSA-PRO system to be capable of integration with some of the MRI scanners from two of the major MRI manufacturers (Philips and Siemens), and the Sonalleve system with one MRI manufacturer (Philips). Although we believe that our approved products can be used by the vast majority of hospitals and treatment facilities, not all such facilities utilize MRI scanners that are compatible with the TULSA-PRO and Sonalleve systems, and such facilities would be required to acquire (or outsource to other facilities that already have) compatible MRI equipment, which may increase their costs and which could restrict or delay utilization of our systems by such facilities. Accordingly, we intend to expand compatibility of the systems with other MRI scanners in the future, which would require design changes to our systems, collaboration with the manufacturer of the MRI scanner and may require additional regulatory approvals. We may be unsuccessful in making the necessary design changes and, if required, receiving the necessary regulatory approvals for such changes, and the terms of any such arrangements that we may enter into in the future with the MRI scanner manufacturers may not be on as favorable terms. Accordingly, we can provide no assurance that we will be successful in any such expansion of the compatibility of our products to other MRI scanners.

 

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Successful commercialization of our approved products will also depend on the cost of the system and the availability of coverage and adequate reimbursement coverage from third-party payers.

 

Successful commercialization of our approved products, including our TULSA-PRO system, depends largely upon the cost of the system and the availability of coverage and adequate reimbursement for the system, and the medical procedure associated with its use, from third-party payers, such as government healthcare programs, private health insurers and other organizations, such as health maintenance organizations and managed care organizations. We expect that our systems will be purchased by health-care providers, including clinics and hospitals that use MRI scanners that are compatible with our systems, and that these providers will subsequently bill various third-party payers or will be responsible for covering the costs of the system through the provider’s operating budget. Although we expect there to be an out-of-pocket market for our approved products, an out-of-pocket market alone is unlikely to be sufficient to support successful commercialization of our products. To date we have not secured significant coverage or reimbursement for any of our products from government or third-party payors in the jurisdictions where we have regulatory approvals, including our TULSA-PRO system in the United States. We can provide no assurance that third-party payers will provide coverage and adequate reimbursement for our TULSA-PRO system to treat our targeted indications based on our existing clinical data (such as our TACT data) or the results of any future clinical trials, or at all. See “—Data from our clinical trials may not support regulatory approvals or clearances and/or coverage and reimbursement for our products” below. Accordingly, we likely will need to conduct additional research and successfully complete additional clinical trials in order to obtain such coverage (e.g., follow-up data from our TACT Pivotal Clinical Trial). Such additional research and clinical trials may require significant time and resources, and may not be successful, which could result in the postponement of or inability to obtain coverage and reimbursement for our approved products, which could significantly delay or otherwise negatively affect our commercialization strategy. Any of the foregoing could, in turn, have a material adverse effect on our business, results of operations and financial condition.

 

Third-party payers carefully review and increasingly challenge the prices charged for medical devices, procedures and services. Government healthcare programs in the United States and the European Union may reimburse certain providers at a pre-determined all-inclusive amount for all the costs associated with a particular procedure performed or course of treatment, based on such factors as the patient’s principal diagnosis, age and severity or complexity. Similarly, the surgeon or physician may be reimbursed at a pre-determined amount based on the procedure performed, and without taking into consideration the actual costs incurred, including the actual cost of the specific devices used.

 

New products are being increasingly scrutinized with respect to whether or not they will be covered at all by the various health plans and at what level of reimbursement. In some instances, economic research studies are and will be required to demonstrate whether our products and approach are superior from a long-term cost containment standpoint. Third-party payers may determine that our products are not medically necessary, not cost-effective, experimental, or primarily intended for non-approved indications. Such determinations could have a material adverse effect on our business, results of operations and financial condition.

 

Further, healthcare reform measures may be adopted in the future that may impose more rigorous coverage and reimbursement standards. We are unable to predict what, if any, additional legislation or regulation impacting the healthcare industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on our business.

 

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We intend to rely primarily on our in-house sales and marketing capabilities for our commercialization strategy, which will require substantial build-up and commitment of resources.

 

We intend to rely primarily on our in-house sales and marketing capabilities in order to advance our commercialization strategy, particularly in the United States in respect of our recently FDA-cleared TULSA-PRO system. This will require a substantial commitment of time and resources in the near-term, and we may be unsuccessful in executing on this strategy, which could negatively impact our anticipated commercialization. We are in the early stages of expanding our U.S. sales and marketing capabilities and can provide no assurance that we will be successful in establishing a marketing presence and sales force sufficient to commercialize the TULSA-PRO system successfully in the United States.

 

In addition, by relying on an in-house sales and marketing function, we may have less visibility in the U.S. market (particularly among hospitals) than we would have if we had significant third-party distribution relationships. Any shortcomings in our in-house sales force may have a material adverse effect on our business, results of operations and financial condition.

 

We currently rely on our collaborative partners, and we may rely on additional collaborative partnerships, to assist in the sales and marketing and/or distribution of our approved products.

 

We currently rely on our collaborative partnerships for the sales and marketing and/or distribution of our approved products, in particular Philips and Siemens, who promote our systems that are compatible with the MRI scanners produced and sold by them to end users, including hospitals and clinics. In the future, we intend to enter into similar arrangements with other producers of MRI scanners to increase the compatibility of our products and to promote and increase market acceptance among hospitals, clinics and other end-users. However, we can provide no assurance that we will be successful in establishing such additional arrangements, which could negatively impact our commercialization strategy and may have a material adverse effect on our business, results of operations and financial condition. See “—We rely on the compatibility of our products with MRI scanners in the successful commercialization of our products” above.

 

We may also seek out, evaluate and negotiate other third-party marketing and/or distribution arrangements for our products in the jurisdictions where they are approved, which may involve the commitment of substantial time and effort and may not ultimately result in an arrangement that is favorable to our commercialization goals (e.g. if such third-party marketing or distribution partners are not as successful in promoting our products as anticipated). If any of these third party collaborators are unable or unwilling to promote and/or deliver our products to our customers in an effective manner, then our business, financial condition and operating results could be materially impacted.

 

Additionally, if any of our relationships with third-party collaborators is terminated, whether by us or the third party for any reason, there can be no assurance that we will be able to obtain alternative sales and marketing and/or distribution channels rapidly or effectively enough to prevent disruptions in sales generated in those markets or otherwise to ensure the success of our products in those markets. Any such termination may have material adverse impact on our business, results of operations and financial condition.

 

We may experience manufacturing scaling issues in connection with our commercialization strategy, as we have limited experience assembling and testing our approved products, including the TULSA-PRO system, at a significant scale.

 

As we implement our commercialization strategy, in particular in respect of the TULSA-PRO system in the United States, we may not be able to produce sufficient quantities of systems or maintain consistent quality control in the production of our systems. We have limited experience in assembling and testing our approved products, including our TULSA-PRO system, on a commercial scale. To commercialize our approved products successfully and become profitable, we must be able to assemble and test such in commercial quantities in compliance with applicable regulatory requirements, and at an acceptable cost. Increasing our capacity to assemble and test our products on a commercial scale will require us to improve internal efficiencies, including hiring additional experienced personnel, which may result in significant capital expenditures. We may encounter a number of difficulties in increasing our assembly and testing capacity, including:

 

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· managing production yields;

 

· maintaining quality control and assurance;

 

· providing component and service availability;

 

· maintaining adequate control policies and procedures;

 

· hiring and retaining qualified personnel; and

 

· complying with U.S. and Canadian regulations (including at the state, provincial and/or federal levels) and applicable foreign regulations.

 

In particular, our ability to increase our assembly and testing capacity successfully will greatly depend on our ability to hire, train and retain an adequate number of employees, in particular employees with the appropriate level of knowledge, background and skills to assemble and test our products. We compete with several other medical device companies to hire and retain these skilled employees, and we may be unable to hire and retain such employees in numbers sufficient to increase our in-house capabilities.

 

We currently intend to partner with one or more additional QSR-compliant and FDA-registered contract manufacturers for our TULSA-PRO systems in the United States. However, we may not be successful in establishing or maintaining such partnerships on acceptable terms or in the timeframe necessary to commercialize our products successfully, or at all.

 

In addition, we may encounter difficulties in scaling our manufacturing operations, whether in-house or through third-party contract manufacturers, as a result of, among other things, quality control and quality assurance issues and availability of components and raw material supplies. Any such quality control issues may negatively affect production and sales of our products, and may require increased repair or re-engineering costs due to product returns, defects and increased expenses due to switching to alternate suppliers, and reputational damage, any of which could negatively affect our business and reputation.

 

If we are unable to satisfy commercial demand for our products, in particular our TULSA-PRO system in the United States, due to our inability (or the inability of any of our contract manufacturers) to assemble and test such products in sufficient quantities with consistent quality control, and in compliance with applicable regulatory requirements (and in a cost-efficient manner), our ability to commercialize such products successfully, and market acceptance of our products could be adversely affected as our target customers may instead purchase or use our competitors’ products. This, in turn, could have a material adverse effect on our business, results of operations and financial condition.

 

We rely on third parties to manufacture and supply components of our systems.

 

The TULSA-PRO and Sonalleve systems consists of common electronic components, proprietary capital equipment and proprietary disposables. We purchase standard electronic components for our systems from a number of third-party vendors. The capital equipment consists of custom system electronics, a treatment delivery console, fluid circuits and an MRI compatible robotic positioning system. Printed circuit boards and assemblies and custom mechanical parts are outsourced from approved suppliers.

 

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We cannot be certain that manufacturing sources for all components will continue to be available or that we can continue to outsource the manufacturing of our components on reasonable or acceptable terms. If we encounter delays or difficulties with contract manufacturers, delivery of our products could be delayed. In addition, we could be forced to secure new or alternative contract manufacturers or suppliers. Securing a replacement contract manufacturer or supplier could be difficult, and we may not be able to do so in a timely manner or without significant expense. Any loss of a manufacturer or any difficulties that could arise in the manufacturing process could significantly affect our ability to supply sufficient amounts of our products to our customers on a timely basis, which may negatively affect our market share and, correspondingly, could have a material adverse effect on our business, results of operations and financial condition.

 

In addition, not all of our suppliers provide us with guaranteed minimum production levels, and we rely on single-source suppliers for some of our components. See “—We depend on single-source suppliers for some of the components in our systems” below. Furthermore, we do not currently have long-term supply contracts, and accordingly, our suppliers could terminate their services at any time without penalty within agreed notice periods. As a result, there can be no assurance that we will be able to obtain sufficient quantities of components in the future necessary to commercialize our approved products.

 

Our reliance on third-party manufacturers and suppliers involves a number of additional risks, including, among other things:

 

· contract manufacturers or suppliers may fail to comply with regulatory requirements or make errors in manufacturing that could negatively affect the efficacy or safety of our products or cause delays in shipments of products;

 

· we or our contract manufacturers and suppliers may not be able to respond to unanticipated changes in customer orders, and if orders do not match forecasts, our suppliers may have excess or inadequate inventory of materials and components;

 

· we or our contract manufacturers and suppliers may be subject to price fluctuations of raw materials and key components due to a lack of long-term supply arrangements for key components;

 

· we or our contract manufacturers and suppliers may lose access to critical services and components, resulting in an interruption in the manufacture, assembly and shipment of our products;

 

· we may experience delays in delivery by our contract manufacturers and suppliers due to changes in demand from us or our other customers;

 

· fluctuations in demand for products that our contract manufacturers and suppliers manufacture for others may affect their ability or willingness to deliver components in a timely manner;

 

· suppliers or contract manufacturers may wish to discontinue supplying components or services for risk management reasons;

 

· we may not be able to find new or alternative components or reconfigure our system and manufacturing processes in a timely manner if the necessary components become unavailable; and

 

· contract manufacturers and suppliers may encounter financial hardships unrelated to our demand, which could inhibit their ability to fulfill orders and meet our requirements.

 

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If any of these risks materialize, it could significantly increase costs and impact our ability to meet demand for our products, in particular in respect of our planned commercialization of TULSA-PRO in the United States. If we are unable to satisfy commercial demand for the TULSA-PRO system or other approved products in a timely manner, our ability to generate revenue could be impaired, market acceptance of our products could be adversely affected, and customers may instead purchase or use competitors’ products. As a result, our business, results of operations and financial condition may be materially adversely affected.

 

We depend on single-source suppliers for some of the components in our systems.

 

We currently rely on a single source for the manufacture of some of the components of our TULSA-PRO and Sonalleve systems. Although we intend to procure alternative supply sources for our components as our commercialization efforts increase, we can provide no assurance that we will be successful. Establishing additional or replacement suppliers for these components will take a substantial amount of time and could result in increased costs and impair our ability to produce our products. In addition, our products are highly technical and are required to meet exacting specifications, and any quality control problems that we experience from such alternative supply sources could negatively affect our reputation and market acceptance of our products.

 

We may also have difficulty obtaining similar components from other suppliers that are acceptable to the FDA or foreign regulatory authorities. The failure of our suppliers to comply with strictly enforced regulatory requirements could expose us to regulatory action, including warning letters, product recalls, termination of distribution, product seizures, or civil penalties. See “—Risks Relating to the Regulation of the Company and Our Products” below for more information.

 

If we fail to procure alternative supply sources on acceptable terms or at all, our planned commercialization of TULSA-PRO in the United States could be negatively affected, which could have a material adverse effect on our business, operating results and financial condition.

 

We face significant competition in the markets for our products, and in particular, there are numerous devices and procedures that compete with our TULSA-PRO system.

 

Our products face significant competition from currently available and future medical devices or surgical methodologies that are used in the same patient populations as our products. See Item 4.B, “Information on the Company—Business Overview—Competition”. Some of these available options are well-established, and our competitors have greater financial resources, development, selling and marketing capabilities than we do. We may face further competition from medical equipment/supply companies that focus their efforts on developing and marketing products that are similar in nature to our products, but that in some instances offer improvements over our products. Our competitors may succeed in developing technologies and products that are more effective or less expensive to use than our products. These developments could render our products uncompetitive, which would have a material adverse effect on our business, financial condition and operating results. In addition, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products. They may also establish exclusive collaborative or licensing relationships with our competitors.

 

Further, our industry is also subject to changing industry standards, market trends and customer preferences and to competitive pressures which can, among other things, necessitate revisions in pricing strategies, price reductions and reduced profit margins. Our success will depend, in part, on our ability to achieve technological superiority in our products and operations and maintain such superiority in the face of new technologies. No assurance can be given that further modification of our product offerings will not be required in order to meet demands or to make changes necessitated by developments made by competitors that might render our products less competitive. Our future success will be influenced by our ability to continue to develop, test and market our products and future product candidates, including increasing and/or maintaining their compatibility with MRI scanners. Although we have committed resources to these efforts, there can be no assurance that we will be successful.

 

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Data from our clinical trials may not support regulatory approvals or clearances and/or reimbursement coverage for our products.

 

Regulatory clearances and approvals for the commercial sale of any of our product candidates require that we demonstrate through clinical trials that the product candidate is safe and effective for its intended use or, to receive 510(k) clearance in the United States, that the product candidate is substantially equivalent to an existing predicate device for its intended use. While we have obtained 510(k) clearance for TULSA-PRO, additional follow-up data from our TACT Pivotal Clinical Trial may not be consistent with our 12-month data in terms of efficacy and/or side effect profile, which in certain circumstances may result in the FDA taking regulatory actions that are adverse to us. In addition, our TACT Pivotal Clinical Trial involves a relatively small patient population. Because of the small sample size, the results may not be indicative of future results.

 

We believe that third-party payers, in determining reimbursement coverage for our products, including the TULSA-PRO system, generally would rely upon our clinical trial results, such as TACT, that were obtained in support of our regulatory approvals; however, we may be required to provide additional data from our existing trials and/or conduct additional clinical trials prior to obtaining reimbursement coverage for the TULSA-PRO system and other approved products, which would likely involve significant time and expense, and may have a material adverse effect on our business, results of operations and financial condition.

 

In the future, we may also seek regulatory approvals, which may include 510(k) clearance, for other product candidates, which likewise could be adversely affected by insufficient clinical trial results. Obtaining product clearance or approval and conducting the requisite clinical trials is a long, expensive and uncertain process and is subject to delays and failures at any stage. There can be no assurance that clinical trials will be completed successfully within any specified period of time, if at all. In addition, a regulatory authority may disagree with our interpretation of the data from our clinical trials, or may find the clinical trial data inadequate to support clearance or approval, and may require us to extend existing clinical trials and/or pursue additional clinical trials, which would increase costs and could further delay regulatory approval or clearance of our products, or cause such regulatory approvals or clearances to be denied altogether.

 

The data from a clinical trial may be inadequate to support clearance or approval of an application to the regulatory authorities for numerous reasons including, but not limited to:

 

· prevalence and severity of adverse events and other unforeseen safety issues;

 

· changes in regulatory requirements, policies or guidelines;

 

· the interim or final results are insufficient (including in respect of the time period for which results were obtained), inconclusive or unfavorable as to the safety or efficacy of the device;

 

· the FDA or other regulatory authorities concluding that a clinical trial design is inadequate to demonstrate safety and efficacy for a particular use, or to demonstrate substantial equivalence to a predicate device; and

 

· the FDA or other regulatory authorities concluding that the trial was not conducted in compliance with regulatory requirements or lacked controls necessary to ensure the integrity of the trial data.

 

13

 

 

We, the FDA or other regulatory authorities may suspend or terminate clinical trials at any time if it is determined that patients may be or are being exposed to unacceptable health risks, including the risk of death, that our devices are not manufactured under acceptable conditions or with acceptable quality, or that the trial is not being conducted according the protocol and in compliance with Good Clinical Practice and regulatory requirements. Further, success in preclinical studies and early clinical trials does not mean that future clinical trials will be successful because medical devices and/or treatment options in later stage clinical trials may fail to demonstrate sufficient safety and efficacy to the satisfaction of the FDA and other regulatory authorities despite having progressed through initial clinical trials. We cannot be sure that the later trials will replicate the results of prior trials.

 

Even if our clinical trials are completed as planned, there can be no certainty that trial results will support our product candidate claims or that the FDA or foreign authorities will agree with our conclusions regarding them or agree that they are adequate to support approval or clearance. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our regulatory submissions and, ultimately, negatively affect our ability to commercialize our systems and generate revenues.

 

If our products do not prove to be, or continue to prove to be, safe and effective, or substantially equivalent to a predicate device, in clinical trials to the satisfaction of the relevant regulatory authorities or third party payers, if the clinical studies do not support our product candidate claims or if they result in the discovery of adverse side effects, then our regulatory approvals and reimbursement coverage (as applicable) may be delayed or denied altogether, and our business, financial condition and results of operation could be materially adversely affected.

 

We may rely on third parties to perform clinical trial planning and to facilitate obtaining regulatory approvals or clearances for our product candidates.

 

We may rely on third parties to provide clinical trial planning and regulatory services for our product candidates. We may be unable to find suitable partners, external consultants or service providers to provide such services or such arrangements may not be available on commercially reasonable terms. Further, we may engage third parties that may cease to be able to provide these services or may not provide these services in a timely or professional manner. Accordingly, we may not be able to successfully manage such services, execute clinical trials or obtain regulatory approvals or clearances for our product candidates, which may negatively affect our business. If we fail to establish such arrangements when, and as necessary, we could be required to undertake these activities at our own expense, which would significantly increase capital requirements and may delay the development, approval and future commercialization of our product candidates, which could have a material adverse effect on our business, financial condition and operating results.

 

We depend on key managerial personnel for our continued success.

 

We are highly dependent upon our small team of managerial personnel, particularly that of our Chief Executive Officer, Arun Menawat. We do not maintain any “key man” insurance policies on Mr. Menawat or any other members of senior management. Our anticipated growth will require additional expertise and the addition of new qualified personnel. There is intense competition for qualified personnel in the medical device field. Therefore, we may not be able to attract and retain the qualified personnel necessary for the development of our business. We must continue to retain, motivate and recruit executives and other key employees. The failure to motivate, or the loss of the services of, existing personnel, as well as the failure to recruit additional key managerial personnel in a timely manner, would harm our business development programs, and our ability to manage day-to-day operations, attract collaboration partners, attract and retain other employees, generate revenues, and could have a material adverse impact on our business, financial condition and results of operations.

 

14

 

 

Research and development carries substantial risk and we may not be able to expand our product portfolio.

 

Future growth may also depend on, among other factors, our ability to successfully develop new product candidates and make product improvements to meet evolving market needs. We may not be able to successfully expand our product portfolio to generate new revenue opportunities in the future. Although we believe we have the scientific and technical resources available to improve our products and develop new products, future products will nevertheless be subject to the risks of failure inherent in the development of products based on innovative technologies. In addition, any such research and development activities may involve significant capital expenditures. There can be no assurance that we will be able to successfully develop future products and tests, which would prevent us from introducing new products in the marketplace and negatively impact our ability to grow revenues and become profitable.

 

In addition, the identification of new product candidates for development may require that we enter into licensing or other collaborative agreements with others, including medical device and pharmaceutical companies and research institutions. These collaborative agreements may require that we pay license fees, make milestone payments or pay royalties or grant rights, including marketing rights, to one or more parties, and such amounts may be material to our results of operations and financial condition. Moreover, these arrangements may contain covenants restricting our product development or business efforts in the future. Any such arrangements would also increase our reliance on third parties.

 

We may be subject to product liability claims, which can be expensive, difficult to defend and may result in large judgments or settlements, and/or warranty claims on our products.

 

The use of medical devices for treatment of humans, whether in clinical trials or after marketing clearance or approval is obtained, can result in product liability claims. Product liability claims can be expensive, difficult to defend and may result in large judgments or settlements against us. In addition, third party collaborators and licensees may not protect us from product liability claims.

 

We currently maintain product liability insurance in connection with the use of our products in clinical trials and in commercial use; however, we may not have adequate protection against all potential liabilities under these insurance policies. If we are unable to obtain sufficient levels of insurance at acceptable cost or otherwise protect against potential product liability claims, we will be exposed to product liability claims. A successful product liability claim in excess of our insurance coverage could harm our financial condition, results of operations and prevent or interfere with our commercialization efforts and future product development. In addition, any successful claim may prevent us from obtaining adequate product liability insurance in the future on commercially desirable terms. Even if a claim is not successful, defending such a claim may be time-consuming and expensive.

 

We also bear the risk of warranty claims on our products, generally for one year after sale. We may not be successful in claiming recovery of the relevant components from our suppliers in the event of a successful warranty claim against us by a customer, or that any recovery from such suppliers would be adequate. In addition, warranty claims brought by our customers related to third-party components may arise after the expiration of our corresponding warranty with our third-party suppliers, which would require us to bear the burden of any such warranty claims.

 

15

 

 

Rising insurance costs could negatively impact our profitability.

 

The cost of insurance, including director and officer, worker’s compensation, property, product liability and general liability insurance, has risen significantly in recent years and is expected to continue to increase. In particular, our product liability insurance is subject to price increases if we experience product liability claims. In response, we may increase deductibles and/or decrease certain coverages to mitigate these costs. These increases, and our increased risk due to increased deductibles and reduced coverages, could have a negative impact on our business, financial condition and results of operations.

 

We are increasingly dependent on sophisticated information technology systems to operate our business and if we fail to properly maintain the integrity of our data or we experience a cyber-attack or other breach of these systems, our business could be adversely affected.

 

We are increasingly dependent on sophisticated information technology for our development activities, products and infrastructure. We rely on information technology systems to process, transmit and store electronic information in our day-to-day operations. The complexity of our information technology systems makes them vulnerable to increasingly sophisticated cyber-attacks, malicious intrusion, breakdown, destruction, loss of data privacy, or other significant disruption. Any such event could be prolonged and/or could go undetected for a significant period of time. Our products and their information systems require an ongoing commitment of resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards, the increasing need to protect patient and customer information, and changing customer patterns.

 

In addition, third parties may attempt to hack into our products or systems and may obtain data relating to patients, our products or our proprietary information. If we fail to maintain or protect our information systems and data integrity effectively, we could lose existing customers, have difficulty attracting new customers, have problems in determining product cost estimates and establishing appropriate pricing, have difficulty preventing, detecting, and controlling fraud, have disputes with customers, physicians, and other health care professionals, become subject to litigation, have regulatory sanctions or penalties imposed, experience increases in operating expenses, incur expenses or lose revenues as a result of a data privacy breach, or suffer other adverse consequences. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

 

A portion of our employees are unionized, and our good labor relations may not continue.

 

As of June 30, 2019, 14 of our employees in Vantaa, Finland are unionized. Currently, labor relations are good; however, the maintenance of a productive and efficient labor environment cannot be assured. If any of our employees at our other manufacturing facilities unionize in the future, or if protracted and extensive work stoppages occur, labor disruptions such as strikes or lockouts could have a material adverse effect on our business, financial condition and results of operations.

 

If our facilities are damaged or destroyed, we may experience delays that could negatively impact our revenues.

 

Our facilities may be affected by natural or man-made disasters. If our facilities were affected by a disaster, we would be forced to rely on third party manufacturers or to set up production at another manufacturing facility. In such an event, we might not be able to find a suitable alternate manufacturer or might face significant delays in manufacturing which would prevent us from being able to sell our products. In addition, our insurance may not be sufficient to cover all of the potential losses and may not continue to be available to us on acceptable terms, or at all.

 

16

 

 

We face risks associated with acquisition of businesses and technologies.

 

As part of our growth strategy, we intend to evaluate and may pursue additional acquisitions of, or significant investments in, complementary companies or technologies to increase our technological capabilities and expand our product offerings. For example, in July 2017, we acquired from Philips the technologies and asset underlying our Sonalleve system. Acquisitions and the successful integration of new technologies, products, assets or businesses may require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations. Other risks typically encountered with acquisitions include disruption of our ongoing business; difficulties in integration of the acquired operations and personnel; inability of our management to maximize our financial and strategic position by the successful implementation or integration of the acquired technology into our product offerings; being subject to known or unknown contingent liabilities, including taxes, expenses and litigation costs; and inability to realize expected synergies or other anticipated benefits which may, among other things, also lead to goodwill impairments or other write-offs. For example, our ability to achieve the anticipated benefits of the Sonalleve Transaction depends in part on our ability to realize the anticipated growth opportunities and synergies from the acquired assets and technologies, including our further development of the Sonalleve system.

 

We cannot assure you that we will be successful in overcoming these risks or any other problems we may encounter in connection with the Sonalleve Transaction or potential future acquisitions. Our inability to successfully integrate the operations of an acquired business, including a successful implementation of the technologies and assets we acquire, and realize anticipated benefits associated with an acquisition, could have a material adverse effect on our business, financial condition, results of operations and cash flows. Acquisitions or other strategic transactions may also result in dilution to our existing shareholders if we issue additional equity securities as consideration or partial consideration as well as in the incurrence of indebtedness if we borrow funds to finance such transactions.

 

Risks Relating to Regulation of the Company and Our Products

 

Our business is subject to limitations imposed by government regulations.

 

The preclinical testing and clinical trials of any products developed by us and the manufacturing, labeling, sale, distribution, export or import, marketing, advertising and promotion of any of those products are subject to rigorous regulation by U.S., Canadian, EU and other foreign regulatory authorities at the federal, provincial, state and local governmental levels, as applicable. Our medical devices are principally regulated in the United States by the FDA, in the European Union Notified Bodies (carrying out conformity assessment procedures) and the competent authorities of the EU member states (supervising Notified Bodies and manufacturers of medical devices), in Canada by Health Canada (particularly, the TPD), and by other similar regulatory authorities in other jurisdictions. Government regulation substantially increases the cost and risk of researching, developing, manufacturing and selling products.

 

We may be unable to obtain, or experience significant delays in obtaining, FDA clearances or other regulatory approvals for our product candidates and/or enhancements to our approved or cleared products.

 

Our products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities and notified bodies. The process of obtaining FDA clearances or approvals, or equivalent third country approvals to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all. We expect to generate a significant portion of our revenues from sales of our marketed systems, in particular our recently FDA-cleared TULSA-PRO system, but may be unable to do so if the systems do not continue to prove to be safe and effective for our intended use in clinical trials to the satisfaction of the relevant regulatory authorities in the United States, the EU, China or other countries. In addition, no assurance can be given that our other product candidates will prove to be safe and effective in clinical trials or that we will receive regulatory approvals in the jurisdictions where we seek to market the systems. For example, we are in discussion with the FDA regarding Sonalleve and have submitted an application requesting designation of a regulatory pathway; however, we can provide no assurance that an acceptable regulatory pathway will be available or that we will ever apply for or obtain FDA approval for Sonalleve in the future. In addition, no assurance can be given that current regulations relating to regulatory approval will not change or become more stringent.

 

17

 

 

Any delay in, or failure to receive or maintain, regulatory clearance, approval or other products under development would adversely affect our ability to commercialize our approved products, thereby adversely affecting operations and could prevent us from generating revenue from these products or achieving profitability. Any failure to obtain regulatory approval would materially adversely affect our business, financial condition and results of operations.

 

If clinical trials are conducted in a manner that fails to meet all FDA requirements, the FDA may delay our clearances or approvals, or the deficiencies may be so great that the FDA could refuse to accept all or part of our data or trigger enforcement action.

 

Clinical trials are generally required to support PMA approval and de novo classification and are sometimes required to support 510(k) clearance. Such trials, if conducted in the United States and involve a significant risk device require an IDE application to be approved in advance by the FDA for a specified number of patients and study sites. Clinical trials involving a non-significant risk device do not require FDA approval of an IDE application and are subject to abbreviated requirements under the IDE regulation. Further, some clinical trials are exempted from the IDE regulation. Although we do not expect to need to obtain an additional IDE application for any further clinical trials involving TULSA-PRO system, we may need to obtain one for any expansion to the label.

 

In addition, IDE applications may be required in support of clinical trials involving other product candidates. Clinical trials are subject to extensive monitoring, recordkeeping and reporting requirements. Clinical trials must be conducted under the oversight of an IRB for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices. To conduct a clinical trial, we must also obtain the patients’ informed consent that complies with FDA requirements, state and federal privacy regulations and human subject protection regulations. We, the FDA or the IRB could suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Additionally, we may decide at any time, for business or other reasons, to terminate a clinical trial. Even if a clinical trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device for its intended use or may otherwise not be sufficient to obtain FDA clearance or approval to market the product in the United States. Following completion of a clinical trial, we would need to collect, analyze and present the data in an appropriate submission to the FDA. Even if a study is completed and submitted to the FDA, the results of clinical testing may not demonstrate the safety and efficacy of the device for its intended use, or may be equivocal or otherwise not be sufficient to obtain clearance or approval of our product. In addition, the FDA may perform a bioresearch monitoring inspection of a study and if it finds deficiencies, we will need to expend resources to correct those deficiencies, which may delay clearance or approval or the deficiencies may be so great that the FDA could refuse to accept all or part of the data or could trigger enforcement action.

 

18

 

 

Even if our products are approved by regulatory authorities, if we or our suppliers fail to comply with ongoing FDA or other foreign regulatory authority requirements or if we experience unanticipated problems with our products, we could be subject to restrictions or withdrawal from the market.

 

Any product for which we obtain regulatory clearance or approval, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and other regulatory bodies. In particular, we and our suppliers are required to comply with the QSR and international standards for the manufacture of products and other regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any product for which we obtain regulatory clearance or approval. Regulatory bodies, such as the FDA, enforce the QSR and other regulations through periodic inspections. We and our contract manufacturers have been, and anticipate in the future being, subject to such inspections.

 

The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA and other regulatory bodies, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things, any of the following enforcement actions:

 

· untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;

 

· customer notifications for repair, replacement or refunds;

 

· recall, withdrawal, detention or seizure of our products;

 

· operating restrictions or partial suspension or total shutdown of production;

 

· refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;

 

· operating restrictions;

 

· withdrawing PMA approvals that have already been granted;

 

· suspension, variation, or withdrawal of our CE Certificates of Conformity;

 

· refusals to allow imports and/or to issue documentation necessary to facilitate exports;

 

· refusal to grant export approval for our products; or

 

· imposition of civil, administrative or criminal penalties.

 

If any of these actions were to occur, we may be required to expend significant time and resources to address or defend such actions, and our reputation may be harmed and our product sales and/or profitability may be negatively affected. Furthermore, key component suppliers may not currently be, or may not continue to be, in compliance with all applicable regulatory requirements, which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.

 

In addition, we may be required to conduct costly post-market testing and surveillance to monitor the safety or effectiveness of our products, and we must comply with medical device reporting requirements, including the reporting of certain adverse events and malfunctions related to our products. Later discovery of previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as QSR, may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any product we manufacture or distribute, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties which would have a material adverse effect on our business, financial condition, and results of operations.

 

19

 

 

Our products that have received regulatory clearance or approval are subject to extensive post-market regulation that could affect sales, marketing and profitability

 

With respect to the products for which we have obtained regulatory clearance or approval, we are subject to post-marketing regulatory obligations, including requirements by the FDA, EU competent authorities, Health Canada and similar agencies in other jurisdictions to maintain records regarding product safety and to report to regulatory authorities serious or unexpected adverse events. The occurrence of unanticipated serious adverse events or other safety problems could cause the governing agencies to impose significant restrictions on the indicated uses for which the product may be marketed, impose other restrictions on the distribution or sale of the product or require potentially costly post-approval studies. In addition, post-market discovery of previously unknown safety problems or increased severity or significance of a pre-existing safety signal could result in withdrawal of the product from the market and product recalls. Compliance with extensive post-marketing record keeping and reporting requirements requires a significant commitment of time and funds, which may limit our ability to successfully commercialize approved products.

 

We may be subject to fines, penalties or injunctions if we are determined to be promoting the use of our products for unapproved or “off-label” uses or engaged in false or misleading promotion.

 

Regulatory clearances and approvals may be subject to limitations on the intended uses for which our products may be marketed and reduce our potential to successfully commercialize our products. While physicians/clinicians, in most jurisdictions, can use our products in ways or circumstances other than those strictly within the scope of the regulatory clearance or approval, we are required, in many jurisdictions, to limit our training and promotion of our products to the cleared or approved intended uses. For example, if the FDA determines that our promotional materials, labeling, training or other marketing constitutes promotion of an uncleared or unapproved, or “off-label” use, it could request that we modify or cease use of those training or promotional materials until we obtain FDA clearance or approval for those uses or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and/or criminal penalties. Discussions that may be viewed as off-label promotion by FDA include discussions regarding treatment of a specific disease or condition when FDA has cleared or approved a device with a general tool-type indication that does not mention any particular disease or condition. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion of an uncleared or unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, our reputation could be damaged and adoption of our products would be impaired.

 

In addition to promoting our products in a manner consistent with our clearances and approvals, we must have adequate substantiation for the claims we make for our products. If any of our claims are determined to be false, misleading or deceptive, we could be subject to enforcement action. In addition, unsubstantiated claims also present a risk of consumer class action or consumer protection litigation and competitor challenges.

 

20

 

 

Modifications to our approved products may require new regulatory clearances or approvals or may require us to recall or cease marketing our products until such additional clearances or approvals are obtained.

 

Certain modifications to our products may require the submission of new 510(k) notifications, PMA supplements, or other regulatory agency approval applications or documents. If a modification is implemented to address a safety concern, we may also need to initiate a recall or cease distribution of the affected device. The FDA can review a manufacturer’s decision not to submit a new 510(k) notification or PMA for a modification and may disagree. The FDA may also on its own initiative determine that clearance of a new 510(k) or approval of a new PMA submission is required. We may make additional modifications to our products in the future that we believe do not or will not require clearance of a new 510(k) or approval of a new PMA. If we begin manufacture and distribution of the modified devices and the FDA later disagrees with our determination and requires the submission of a new 510(k) or PMA for the modifications, we may also be required to recall the distributed modified devices and to stop distribution of the modified devices until we have received approval or clearance for the modified device, which could have an adverse effect on our business. If the FDA does not clear or approve the modified devices, we may need to redesign the devices, which could also harm our business. When a device is marketed without a required clearance or approval, the FDA has the authority to bring an enforcement action, including injunction, seizure and criminal prosecution. The FDA considers such additional actions generally when there is a serious risk to public health or safety and the company’s corrective and preventive actions are inadequate to address the FDA’s concerns

 

Where we determine that modifications to our products require clearance of a new 510(k) or approval of a new PMA or PMA supplement, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. For those products sold in the European Economic Area, we must notify an EU Notified Body, if significant changes are made to the products or if there are substantial changes to our quality assurance systems affecting those products. Delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm its future growth.

 

Our contract manufacturers are subject to regulatory compliance by the FDA, Health Canada and regulatory authorities in the EU and other jurisdictions.

 

Our contract manufacturers must comply with applicable FDA, EU, Health Canada and other applicable foreign regulations, which include quality control and quality assurance requirements, as well as the corresponding maintenance of records and documentation and manufacture of devices according to the specifications contained in the applicable regulatory file. If our contract manufacturers do not or cannot comply with these requirements, our ability to commercialize our approved products may be adversely affected.

 

The introduction of new or alternative manufacturers or suppliers also may require manufacturing or design changes to our products that are subject to FDA and other regulatory clearances or approvals. Similarly, in the European Union, the introduction of new or alternative manufacturers or suppliers could be considered to constitute a substantial change to our quality system or result in design changes to our products which could affect compliance with the Essential Requirements. These changes must be disclosed to our notified body in the EU before implementation. The Notified Body will then assess the changes and verify whether they affect the products’ conformity with the Essential Requirements. If the assessment is favorable the Notified Body will issue a new CE Certificate of Conformity or an addendum to the existing certificates attesting compliance with the Essential Requirements. We may also be required to assess the new manufacturer’s compliance with all applicable regulations and guidelines, which could further impede our ability to manufacture our products in a timely manner. As a result, we could incur increased production costs, experience delays in deliveries of our products, suffer damage to our reputation, and experience a material adverse effect on our business, financial condition, and results of operations.

 

21

 

 

Our products may in the future be subject to product recalls that could harm our reputation, business and financial results.

 

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious adverse health consequences or death. In addition, we may initiate voluntary recalls of our products in the future to the extent we experience safety or other concerns with such products. For voluntary corrections or removals, the FDA requires that manufacturers report to the FDA within 10 working days after the correction or removal is initiated if the action was initiated to reduce a risk to health posed by the device or to remedy a violation of the FFDCA caused by the device which may present a risk to health. Companies are required to maintain certain records of corrections and removals, even if they are not reportable to the FDA. We may determine that any particular voluntary recall that we initiate does not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.

 

In the European Union, incidents must be reported to the relevant authorities of the European Union Member States, and manufacturers are required to take FSCAs, to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. For purposes of these regulations, an “incident” is defined as any malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or might have led to the death of a patient or user or of other persons or to a serious deterioration in their state of health. An FSCA may include the recall, modification, exchange, destruction or retrofitting of the device. In addition, governmental or other competent bodies or authorities have the authority to require the recall of products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of the TULSA-PRO system, Sonalleve system or any future products would divert managerial and financial resources and could have an adverse effect on our financial condition and results of operations.

 

If our products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting regulations, and such events can result in voluntary corrective actions or agency enforcement actions.

 

Under FDA medical device reporting regulations, manufacturers are required to report to the FDA information that reasonably suggests that one of their marketed devices may have caused or contributed to a death or serious injury or has malfunctioned and that the device or a similar device marketed by the manufacturer would likely cause or contribute to death or serious injury if the malfunction were to recur. If we fail to report these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against us. Similar enforcement action could be taken by the competent authorities in the European Union if we do not comply with our medical devices vigilance obligations. In addition, our EU notified body could decide to suspend or withdraw our CE Certificates of Conformity. Any such adverse event involving the TULSA-PRO or Sonalleve systems also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection, audit or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of personnel time and capital, distract management from operating the business and may harm our reputation and could have a material adverse effect on our business, financial condition and operating results.

 

22

 

 

Legislative or regulatory reform of the healthcare systems in which we intend to operate may affect our ability to sell our products profitably and could adversely affect our business.

 

The government and regulatory authorities in the United States, the European Union, Canada and other markets in which we expect to sell our devices may propose and adopt new legislation and regulatory requirements relating to medical product approval criteria, manufacturing and marketing requirements. In addition, regulations and guidance promulgated by the FDA, the EU and other regulatory bodies are often revised or reinterpreted by the agency in ways that may significantly affect our business and products. It is impossible to predict whether legislative changes will be enacted or regulations, guidance or interpretations changed and what the impact of such changes, if any, may be. Such legislation or changes in regulatory requirements, or the failure to comply with such, could adversely impact our operations and could have a material adverse effect on our business, financial condition and results of operations.

 

For example, in the United States, as part of the Food and Drug Administration Safety and Innovation Act of 2012, Congress enacted several reforms entitled the Medical Device Regulatory Improvements and additional miscellaneous provisions which impacted FDA medical device regulation both pre- and post-approval. In 2016, Congress enacted the 21st Century Cures Act, which included a number of modifications to the medical device provisions of the FFDCA, including a new priority review program for “breakthrough devices”. Further, the FDA Reauthorization Act of 2017, amended certain pre- and post-market requirements for medical devices. For example, the legislation imposed a new user fee for de novo classification requests. The FDA has implemented, and continues to implement, these reforms, which could impose additional regulatory requirements upon us and delay our ability to obtain new 510(k) clearances or PMA approvals or increase the costs of compliance. Any change in the laws or regulations that govern the clearance and approval processes relating to our products could make it more difficult and costly to obtain clearance or approval for new products, or to produce, market and distribute products. Significant delays in receiving clearance or approval, or the failure to receive clearance or approval for our products would have a material adverse effect on our business, financial condition and operating results.

 

On April 5, 2017, the EU adopted a new Regulation on medical devices (Regulation (EU) 2017/745 of the European Parliament and of the Council on Medical Devices (“MDR”)) and a new Regulation on in vitro diagnostic medical devices (Regulation (EU) 2017/746 of the European Parliament and of the Council on in vitro diagnostic medical devices (“IVDR”)), which will become fully applicable on May 26, 2020 and May 26, 2022, respectively. The Regulations do not set out a substantially different regulatory system, but contemplate, among other things, stricter controls of medical devices, including strengthening of the conformity assessment procedures, increased expectations as regards clinical data for devices and pre-market regulatory review of high-risk devices and an extension of transparency requirements through the establishment of a comprehensive EU database on medical devices and of a device traceability system allowing to trace the device from its manufacturer through the supply chain to the final user. The MDR and the IVDR also introduce new classification rules according to which manufacturers must test their products and adapt their documentation. For example, stricter clinical requirements now apply to Class III medical devices and implants. After the expiry of the transitional periods as provided by the MDR and the IVDR, respectively, only devices that have been CE marked under the MDR/IVDR may be placed on the market in the EU. Any notification of Notified Bodies which are responsible for conformity assessments regarding medical devices (except for low risk medical devices classified as Class I with no measuring function and which are not sterile) will cease to be valid from May 26, 2020. Only a few Notified Bodies currently have a notification under the MDR. The new legislation may therefore delay the CE marking of our product candidates under development or impact our ability to renew the CE marking our currently CE marked products on a timely basis.

 

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The growth of overall healthcare costs as a percentage of gross domestic product in many countries means that governments and payers are under intense pressure to control healthcare spending even more tightly. As a result, our businesses and the healthcare industry in general are operating in an ever more challenging environment with very significant pricing pressures. In recent years, national, federal, provincial, state and local officials and legislators have proposed, or are reportedly considering proposing, a variety of price-based reforms to the healthcare systems in the United States, the European Union and other countries. Some proposals include measures that would limit or eliminate payments for certain medical procedures and treatments or subject pricing to government control. Furthermore, in certain foreign markets, the pricing or profitability of healthcare products is subject to government controls and other measures that have been prepared by legislators and government officials. While we cannot predict whether any such legislative or regulatory proposals or reforms will be adopted, the adoption of any such proposals or reforms could adversely affect the commercial viability of our existing and potential products.

 

The ACA was intended to expand healthcare coverage within the United States, primarily through the imposition of health insurance mandates on employers and individuals and expansion of the Medicaid program. The legislation imposes a number of changes to the U.S. healthcare market that are designed to reduce the number of uninsured individuals through, among other things, expansion of certain federal and state healthcare programs such as Medicaid, and establishment of health insurance exchanges. In addition, the legislation imposes changes directly affecting the device industry, specifically taxes on medical device makers in the form of a 2.3% excise tax on all medical device sales in the United States. The tax has been delayed multiple times, most recently on January 22, 2018, when President Trump signed legislation delaying implementation through the end of 2019. The tax will go into effect on January 1, 2020, if the delay is not further extended or the medical tax is not permanently repealed. It is uncertain whether future legislation will suspend, modify or repeal this tax. The tax could materially and adversely affect our business, cash flows and results of operations.

 

The ACA also focuses on a number of Medicare provisions aimed at improving quality and decreasing costs. The Medicare provisions include value-based payment programs, increased funding of comparative effectiveness research, reduced hospital payments for avoidable readmissions and hospital acquired conditions, and pilot programs to evaluate alternative payment methodologies that promote care coordination (such as bundled physician and hospital payments). Additionally, the law includes a productivity adjustment, or reduction in the annual rate of inflation for Medicare payments to a number of providers, including hospitals, that began in 2011. The United States President and certain members of the U.S. Congress have indicated their desire to repeal and replace all or portions of the ACA and to decrease fiscal burdens. Recently enacted legislation addresses certain ACA measures and effectively repeals the individual mandate insurance requirement. In addition, in December 2018, a federal district court judge in Texas found the ACA to be unconstitutional, although the ruling was stayed while the case is appealed. It is unclear whether, when and how a repeal of, or a court order enjoining, the ACA would be effectuated and what the effect on the healthcare sector would be.

 

Other measures by the current administration that address ACA provisions include regulatory changes to healthcare insurance exchange parameters. According to the Trump administration’s statements describing the changes, they are intended to increase flexibility, improve affordability, promote stability, and reduce unnecessary burdens. We cannot predict the full effect of these new measures, what other health care laws, and regulations and programs will be ultimately implemented at the federal or state level, or the effect of any future legislation, regulation or court order. However, any changes that deny or restrict coverage or lower reimbursement for our products or reduce medical procedure volumes could adversely affect our business and results of operations. Changes in the law or regulatory framework that reduce our revenues or increase our costs would have a material adverse effect on our business, financial condition and results of operations and cash flows.

 

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Other legislation or regulatory proposals may adversely affect our revenues and profitability.

 

Existing and proposed changes in the laws and regulations affecting public companies may cause us to incur increased costs as we evaluate the implications of new rules and responds to new requirements. Failure to comply with the new rules and regulations could result in enforcement actions or the assessment of other penalties. The new laws and regulations could make it more difficult to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, or as executive officers. We may be required to hire additional personnel and utilize additional outside legal, accounting and advisory services, all of which could cause our general and administrative costs to increase beyond what we currently have planned. Although we intend to evaluate and monitor developments with respect to these rules, we cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs.

 

We are subject to “fraud and abuse” laws, anti-bribery laws, environmental laws and privacy and security regulations. Any violation by our employees or other agents could expose us to severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 

Our business is subject to the FCPA in the United States, which generally prohibits companies and company employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. The FCPA also requires companies to maintain accurate books and records and internal controls. In addition, we are subject to other anti-bribery laws of the nations in which we conduct business that apply similar prohibitions as the FCPA (e.g., The Bribery Act 2010 in the United Kingdom, Articles 299a and 299b of the German Criminal Code specifically addressing bribery in the healthcare sector, the Corruption of Foreign Public Officials Act in Canada and the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions of the Organisation for Economic Co-operation and Development). Our employees or other agents may, without our knowledge and despite our efforts, engage in prohibited conduct under our policies and procedures and the FCPA or other anti-bribery laws to which we may be subject. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 

Our operations may be directly or indirectly affected by various broad United States or foreign healthcare fraud and abuse laws. In particular, the United States federal healthcare program Anti-Kickback Statute prohibits any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, in return for or to induce the referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of an item or service, for which payment may be made under United States federal healthcare programs, such as the Medicare and Medicaid programs. This statute has been interpreted to apply to arrangements between device manufacturers on one hand and prescribers and purchasers on the other. For example, the United States government has sought to apply the Anti-Kickback Statute to device manufacturers’ financial relationships with physician consultants. Among other theories, the United States government has alleged that such relationships are payments to induce the consultants to arrange for or recommend the ordering, purchasing or leasing of the manufacturers’ products by the hospitals, medical institutions and other entities with whom they are affiliated. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and arrangements that involve remuneration that could induce prescribing, purchases, or recommendations may be subject to government scrutiny if they do not qualify for an exemption or a safe harbor.

 

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Also, the False Claims Act prohibits persons from knowingly submitting, or causing to be submitted, a false claim to, or the knowing use of false statements to obtain payment from the federal government. Suits filed under the False Claims Act can be brought by the United States government or they can be brought by an individual on behalf of the United States government, as “qui tam” actions, and such individuals, commonly known as “whistleblowers,” may share in any damages paid by the entity to the United States government in fines or settlement. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the United States government, plus civil penalties of up to $22,363 for each separate false claim. Various states have also enacted laws modeled after the False Claims Act.

 

Profound is also subject to various privacy and security regulations, including but not limited to HIPAA in the United States. HIPAA mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common health care transactions (e.g., health care claims information and plan eligibility, referral certification and authorization, claims status, plan enrolment, coordination of benefits and related information), as well as standards relating to the privacy and security of individually identifiable health information, which govern the use and disclosure of such information and require the adoption of administrative, physical and technical safeguards to protect such information. In addition, many U.S. states, Canadian provinces and other countries have enacted comparable laws addressing the privacy and security of health information, some of which are more stringent than HIPAA. Failure to comply with these laws could result in the imposition of significant civil and criminal penalties. The costs of compliance with these laws and the potential liability associated with the failure to comply with these laws could have a material adverse effect on our business, financial condition and operating results.

 

Compliance with environmental laws and regulations could be expensive, and failure to comply with these laws and regulations could subject us to significant liability.

 

We may use hazardous materials in our research and development and manufacturing processes. We are subject to various regulations governing use, storage, handling and disposal of these materials and associated waste products. We will need one or more licenses to handle such materials, but there can be no assurance that it will be able to retain these licenses in the future or obtain licenses under new regulations if and when they are required by governing authorities. We cannot completely eliminate the risk of contamination or injury resulting from hazardous materials, and we may incur liability as a result of any such contamination or injury. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources and any applicable insurance. We would also likely incur expenses related to any such incidents. Such future expenses or liability could have a significant negative impact on its business, financial condition and results of operations. Further, we cannot assure that the cost of compliance with these laws and regulations will not materially increase in the future. We may also be subject to liability in respect of the operations of prior owners or operators of any properties we may own, at manufacturing sites where operations have previously resulted in spills, discharges or other releases of hazardous substances into the environment. We could be held strictly liable under environmental laws for contamination of property that we occupy without regard to fault or whether our actions were in compliance with law at the time. Our liability could also increase if other responsible parties, including prior owners or operators of our facilities, fail to complete their clean-up obligations or satisfy indemnification obligations to us. Similarly, if we fail to ensure compliance with applicable environmental laws in foreign jurisdictions in which we operate, we may not be able to offer our products and may be subject to civil or criminal liabilities.

 

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Risk Factors Relating to Intellectual Property

 

If we breach any of the agreements under which we license rights to our technology from third parties, we could lose license rights that are important to our business. Certain of our license agreements may not provide an adequate remedy for their breach by the licensor.

 

We license certain development and commercialization rights for certain technologies used in our systems, and expect to enter into similar licenses in the future. For instance, we license exclusive intellectual property rights from Sunnybrook that enable us to use, manufacture, distribute and sell the TULSA-PRO system. Under this royalty-free license, we are subject to various obligations, including the milestone payment of C$250,000 we paid upon obtaining FDA clearance of our TULSA-PRO system, and legal costs associated with patent application preparation, filing and maintenance. If we breach or otherwise terminate any of the agreements under which we license rights to our technology from third parties, we could lose intellectual property rights that are important to our business, and incur other liabilities. Certain of our license agreements may not provide an adequate remedy for their breach by the licensor. The loss or breach of any of these license agreements could have a material adverse effect on our business, results of operations and financial condition.

 

Our proprietary rights may not adequately protect our technologies.

 

Our commercial success will depend on our ability to obtain patents (or exclusive rights thereto) and to maintain adequate protection for our technologies in the United States, Europe, Canada and other countries. We own or have exclusive rights to multiple issued United States patents and several pending United States patent applications in respect of our products. For the TULSA-PRO system, our patent rights include rights licensed to us from Sunnybrook and other intellectual property that we have developed. We acquired the patent rights for the Sonalleve system from Philips. We or our licensors will be able to protect such proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies and future products are covered by valid and enforceable patents or are effectively maintained as trade secrets.

 

We apply for patents covering our technologies as we deem appropriate. However, we may fail to apply for patents on important technologies in a timely fashion, or at all. Our existing patent applications and any future patents we may obtain may not be sufficiently broad to prevent others from utilizing our technologies or from developing competing products and technologies. In addition, we cannot guarantee that:

 

· we or our licensors were the first to make the inventions covered by each of our licensed or issued patents and pending patent applications;

 

· we or our licensors were the first to file patent applications for these inventions;

 

· others will not independently develop similar or alternative technologies or duplicate any of our or our licensors’ technologies;

 

· any of our or our licensors’ pending patent applications will result in issued patents;

 

· any of our or our licensors’ patents will be valid or enforceable;

 

· any patents issued to us or our licensors and collaboration partners will provide us with any competitive advantages, or will not be challenged by third parties;

 

· we will develop or in-license additional proprietary technologies that are patentable; or

 

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· the patents of others will not have an adverse effect on our business.

 

The actual protection afforded by a patent varies on an offering-by-offering basis, from country to country and depends upon many factors, including the type of patent, the scope of our or our licensors’ coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patents. Our or our licensors’ ability to maintain and solidify our or our licensors’ proprietary position for our products will depend on our or our licensors’ success in obtaining effective patent claims and enforcing those claims once granted. Our or our licensors’ issued patents and those that may be issued in the future may be challenged, invalidated or circumvented, and the rights granted under any such issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar products or offerings. Due to the extensive amount of time required for the development, testing and regulatory review of a medical device, it is possible that, before our devices can be commercialized, any relevant patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.

 

Protection afforded by patents may be adversely affected by recent or future changes to patent related statutes and administrative procedures, for example, such as in the laws of the United States or to USPTO rules. Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. For example, on September 16, 2011, the Leahy-Smith Act was signed into law in the United States. The Leahy-Smith Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and may also affect patent litigation. However, it is not fully clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. As such, the Leahy-Smith Act and its implementation, as well as any future changes to patent law in the United States or elsewhere, could increase the uncertainties and costs surrounding the prosecution of our or our licensors’ patent applications and the enforcement or defense of our or our licensors’ issued patents, all of which could have a material adverse effect on our business, financial condition and operating results.

 

Moreover, we or our licensors may be subject to a third party preissuance submission of prior art to the USPTO and other patent offices, or become involved in opposition, derivation, re-examination, inter partes review or interference proceedings, or other preissuance or post-grant proceedings in the United States or other jurisdictions, challenging our or our licensors’ patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our or our licensors’ patent rights, allow third parties to commercialize our technology or product and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third party patent rights. In addition, if the breadth or strength of protection provided by our or our licensors’ patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future products. Changes to the current patent statutes may adversely affect the protection afforded by our patents and/or open our patents up to third party attack in non-litigation settings. The costs of patent enforcement or invalidity proceedings could be substantial, result in adverse determinations, and divert management attention from our business.

 

We also rely on trade secrets to protect some of our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to maintain. While we use reasonable efforts to protect our trade secrets, our or our collaboration partners’ employees, consultants, contractors or scientific and other advisors may unintentionally or wilfully disclose our proprietary information to competitors. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain, and may divert our efforts and attention from other aspects of our business. In addition, non-U.S. courts are sometimes less willing than courts in the United States to protect trade secrets. If our competitors independently develop equivalent knowledge, methods and know-how, we would not be able to assert our trade secrets against them and our business could be harmed.

 

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We may not be able to protect our intellectual property rights throughout the world.

 

Filing, prosecuting and defending patents on all of our product candidates, and products and services, when and if we have any, in every jurisdiction would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we or our licensors have not obtained patent protection to develop competing products. These products may compete with our products, when and if we have any, and may not be covered by any of our or our licensors’ patent claims or other intellectual property rights.

 

The laws of some countries do not protect intellectual property rights to the same extent as the laws of the United States and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, may not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology and/or pharmaceuticals, which could make it difficult for us to stop the infringement of our patents. Proceedings to enforce our or our licensors’ patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

 

The patent protection for our technologies may expire before we are able to maximize our commercial value which may subject us to increased competition and reduce or eliminate our opportunity to generate product revenue.

 

The patents for our technologies have varying expiration dates; although the patents for the technologies we used are not expected to expire in the near term, when these patents expire, we may be subject to increased competition and may not be able to recover our development costs or license fees. In some of the larger economic territories, such as the United States and the European Union, patent term extension/restoration may be available to compensate for time taken during aspects of a product candidate’s regulatory review. However, we cannot be certain that any extension will be granted or, if granted, what the applicable time period or the scope of patent protection afforded during any extended period will be. If we or our licensors are unable to obtain patent term extension/restoration or some other exclusivity, we could be subject to increased competition and our opportunity to establish or maintain product revenue could be substantially reduced or eliminated. Furthermore, we may not have sufficient time to recover our development costs prior to the expiration of our or our licensors’ patents in the United States or elsewhere.

 

We may incur substantial costs as a result of litigation or other proceedings relating to enforcement of our or our licensors’ patent and other intellectual property rights and we may be unable to protect our rights to, or use of, our technology.

 

If we choose to go to court to try to stop or prevent a third party from using the inventions claimed in our or our licensors’ patents, that third party has the right to ask the court to rule that these patents are invalid and/or should not be enforced against that third party. Even if we were successful in stopping the infringement of these patents, these lawsuits are expensive and would consume time and other resources, and divert attention from other aspects of our business. In addition, there is a risk that the court will decide that these patents are invalid or unenforceable and that we do not have the right to prevent the other party from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to prevent the other party’s activities on the ground that such other party’s activities do not infringe our rights.

 

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We may be subject to lawsuits from, liable for damages to, or be required to enter into license agreements with, a third party that claims we infringed its patents or otherwise misused its proprietary information.

 

If we wish to use the technology in issued and unexpired patents owned by others, we will need to obtain a license from the owner, enter into litigation to challenge the validity or enforceability of these patents or incur the risk of litigation in the event that the owner asserts that we infringed these patents. The failure to obtain a license for technology or the failure to challenge an issued patent owned by others that we may require to develop or commercialize our product candidates may have a material adverse impact on us.

 

In addition, if a third party asserts that we infringed its patents or other proprietary rights, we could face a number of risks that could seriously harm our results of operations, financial condition and competitive position, including:

 

· patent infringement and other intellectual property claims, which would be costly and time consuming to defend, whether or not the claims have merit, and which could delay the regulatory approval process and divert management’s attention from our business;

 

· substantial damages for past infringement, including possible treble damages in some jurisdictions, which we may have to pay if a court determines that our product candidates, offerings or technologies infringe a competitor’s patent or other proprietary rights;

 

· a court prohibiting us from selling or licensing our technologies unless the third party licenses patents or other proprietary rights to us on commercially reasonable terms, which it is not required to do; and

 

· if a license is available from a third party, we may have to pay substantial royalties or lump sum payments or grant cross licenses to our patents or other proprietary rights to obtain that license.

 

The coverage of patents is subject to interpretation by the courts and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods of use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may not be able to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.

 

Patent laws in the United States as well as the laws of certain other jurisdictions provide for provisional rights in published patent applications beginning on the date of publication, including the right to obtain reasonable royalties, if a patent is subsequently issued and certain other conditions are met. While we believe that there may be multiple grounds on which to challenge the validity of United States patents and the counterparts filed in other jurisdictions possibly relevant to our business, we cannot predict the outcome of any invalidity challenge. Alternatively, it is possible that we may determine it is prudent to seek a license from a patent holder to avoid potential litigation and other potential disputes. We cannot be sure that a license would be available to us on acceptable terms, or at all.

 

Because some patent applications in certain jurisdictions may be maintained in secrecy until the patents are issued, because patent applications in the United States and many other jurisdictions are typically not published until 18 months after filing and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our or our licensors’ issued patents or our pending applications or our licensors’ pending applications, or that we or our licensors were the first to invent the technology.

 

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Patent applications filed by third parties that cover technology similar to ours may have priority over our or our licensors’ patent applications and could further require us to obtain rights to issued patents covering such technologies. If another party files a United States patent application on an invention similar to ours, we may elect to participate in or be drawn into an interference or other proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that such efforts would be unsuccessful, resulting in a loss of our United States patent position with respect to such inventions.

 

We may also be subject to damages resulting from claims that we or our employees or consultants have wrongfully used or disclosed alleged trade secrets of third parties. Many of our employees were previously employed, and certain of our consultants are currently employed, at universities or medical device companies, including our competitors or potential competitors. Although we have not received any claim to date, we may be subject to claims that we, or these employees or consultants, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of these current or former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. We may be subject to claims that employees of our partners or licensors of technology licensed by us have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. We may become involved in litigation to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel; and even if we are successful in defending such claims, they can be expensive and would consume time and other resources, and divert attention from other aspects of our business.

 

Some of our competitors may be able to sustain the costs of complex patent and other intellectual property litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations. We cannot predict whether third parties will assert these claims against us or against our licensors, or whether those claims will harm our business. If we or our licensors are forced to defend against these claims, whether they are with or without any merit, whether they are resolved in favor of or against us or our licensors, we may face costly litigation and diversion of management’s attention and resources. As a result of these disputes, we may have to develop costly non-infringing technology, or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable to us, if at all, which could have a material adverse effect on our business, financial conditions and results of operations.

 

Risk Factors Relating to Our Common Shares

 

Future sales or the issuances of our securities may cause the market price of our Common Shares to decline.

 

The market price of our Common Shares could decline as a result of issuances of securities (including our Common Shares) by us, exercises of outstanding options or warrants for additional Common Shares or sales by our existing shareholders of Common Shares in the market, or the perception that these issuances or sales could occur. Sales of Common Shares by shareholders may make it more difficult for us to sell equity securities at a time and price that we deem appropriate. As at August 26, 2019, there were a total of 10,373,929 outstanding share options issued under our Share Option Plan and 22,571,714 outstanding warrants issued pursuant to the Bought Deals and the CIBC Loan Agreement. In addition, as at August 26, 2019, 3,675,553 options remain available for future grant under the Share Option Plan. Sales or issuances of substantial numbers of Common Shares, or the perception that such sales or issuances could occur, may adversely affect prevailing market prices of the Common Shares. With any such sale or issuance of Common Shares, investors may suffer dilution and we may experience dilution in our earnings per share.

 

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We expect that the price of our Common Shares may fluctuate significantly.

 

The market price of securities of many companies, particularly development and early commercial stage medical device companies, experience wide fluctuations in price that are not necessarily related to the operating performance, underlying asset values or prospects of such companies.

 

The market price of our Common Shares could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

 

· delays in respect of our commercialization of the TULSA-PRO system in the United States;

 

· adverse results or delays in our future planned data collection for the TACT Pivotal Clinical Trial and any future clinical trials that we may conduct;

 

· regulatory actions with respect to our products and/or product candidates;

 

· changes in laws or regulations applicable to our products or any future product candidates, including but not limited to clinical trial requirements for approvals;

 

· actual or anticipated fluctuations in our financial condition and operating results;

 

· actual or anticipated changes in our growth rate relative to our competitors;

 

· competition from existing products or new products that may emerge;

 

· announcements by us, our collaborators or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;

 

· failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;

 

· issuance of new or updated research or reports by securities analysts;

 

· fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

· share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

· additions or departures of key management or scientific personnel;

 

· disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for its products;

 

· announcement or expectation of additional debt or equity financing efforts;

 

· sales or issuances of our Common Shares by us, our insiders or our other shareholders, including by exercise of outstanding options or warrants; and

 

· general economic and market conditions.

 

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These and other market and industry factors may cause the market price and demand for our Common Shares to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their Common Shares and may otherwise negatively affect the liquidity of our Common Shares. In addition, stock markets in general, and the TSX, the Nasdaq and the share prices of biotechnology companies in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In addition, following our planned listing on Nasdaq, there may be price variations between the TSX and Nasdaq because of our dual listing.

 

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our Common Shares, the price of our Common Shares could decline.

 

The trading market for our Common Shares will rely in part on the research and reports that equity research analysts publish about us and our business, over which we have no control. The price of our Common Shares could decline if one or more equity analysts downgrade our Common Shares or if analysts issue other unfavorable commentary or cease publishing reports about us or our business.

 

We may be subject to securities litigation, which is expensive and could divert management attention.

 

The market price of our Common Shares may be volatile, and in the past companies that have experienced volatility in the market price of their shares have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could adversely impact our business. Any adverse determination in litigation could also subject us to significant liabilities.

 

We have never paid dividends on our Common Shares and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our Common Shares will likely depend on whether the price of our Common Shares increases.

 

We have not paid dividends on our Common Shares to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our Common Shares will be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from your investment in our Common Shares if the price of our Common Shares increases.

 

If we are unable to satisfy the requirements of Sarbanes-Oxley, or our internal controls over financial reporting are not effective, the reliability of our financial statements may be questioned.

 

We will become subject to the requirements of Sarbanes-Oxley if our Common Shares are listed on Nasdaq. Section 404 of Sarbanes-Oxley (“Section 404”) requires companies subject to the reporting requirements of the U.S. securities laws to complete a comprehensive evaluation of our internal controls over financial reporting. To comply with this statute, we will be required to document and test our internal control procedures and our management will be required to assess and issue a report concerning our internal controls over financial reporting. Pursuant to the JOBS Act, we will be classified as an “emerging growth company.” Under the JOBS Act, emerging growth companies are exempt from certain reporting requirements, including the independent auditor attestation requirements of Section 404(b) of Sarbanes-Oxley. Under this exemption, our independent auditor will not be required to attest to and report on management’s assessment of our internal controls over financial reporting during a five year transition period. We will need to prepare for compliance with Section 404 by strengthening, assessing and testing our system of internal controls to provide the basis for our report. However, the continuous process of strengthening our internal controls and complying with Section 404 is complicated and time-consuming. Furthermore, we believe that our business will grow both domestically and internationally, in which case our internal controls will become more complex and will require significantly more resources and attention to ensure our internal controls remain effective overall. During the course of our testing, our management may identify material weaknesses or significant deficiencies, which may not be remedied in a timely manner to meet the deadline imposed by Sarbanes-Oxley. If our management cannot favorably assess the effectiveness of our internal controls over financial reporting, or our independent registered public accounting firm identifies material weaknesses in our internal controls, investor confidence in our financial results may weaken, and the market price of our securities may suffer.

 

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As a foreign private issuer whose shares are listed on Nasdaq, we intend to follow certain home country corporate governance practices instead of certain Nasdaq requirements.

 

As a foreign private issuer whose shares will be listed on Nasdaq, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the Nasdaq rules. We intend to adopt and approve material changes to equity incentive plans in accordance with TSX listing rules, which do not impose a requirement of shareholder approval for such actions. In addition, we intend to follow the TSX listing rules in respect of private placements instead of Nasdaq requirements to obtain shareholder approval for certain dilutive events (such as issuances that will result in a change of control, certain transactions other than a public offering involving issuances of a 20% or greater interest in us and certain acquisitions of the stock or assets of another company) and the minimum quorum requirement for a shareholders meeting. Under Nasdaq listing rules, the required minimum quorum for a shareholders meeting is 33 1/3% of the outstanding common shares, and our minimum quorum requirement is only 10% of the total number of voting rights attaching to all outstanding Common Shares. See Item 10.B, “Additional Information—Memorandum and Articles of Association—Meetings”. Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq corporate governance rules for domestic issuers.

 

We will incur significantly increased costs and devote substantial management time as a result of operating as a U.S. public company.

 

As a U.S. public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company or as a Canadian public company. For example, we will be subject to the reporting requirements of the U.S. Exchange Act, and will be required to comply with the applicable requirements of Sarbanes-Oxley and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC and the including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404, which involve annual assessments of a company’s internal controls over financial reporting. We may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and may need to establish an internal audit function. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a U.S. public company or the timing of such costs.

 

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We may lose foreign private issuer status in the future, which could result in significant additional costs and expenses.

 

We may in the future lose foreign private issuer status if a majority of our common shares are held in the United States and we fail to meet the additional requirements necessary to avoid loss of foreign private issuer status, such as if: (i) a majority of our directors or executive officers are U.S. citizens or residents; (ii) a majority of our assets are located in the United States; or (iii) our business is administered principally in the United States. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer will be significantly more than the costs incurred as an SEC foreign private issuer. If we are not a foreign private issuer, we would be required to file periodic and current reports and registration statements on U.S. domestic issuer forms with the SEC, which are generally more detailed and extensive than the forms available to a foreign private issuer. In addition, we may lose the ability to rely upon exemptions from corporate governance requirements that are available to foreign private issuers.

 

It may be difficult for United States investors to effect services of process or enforcement of actions against us or certain of our directors and officers under U.S. federal securities laws.

 

Profound is incorporated under the laws of the Province of Ontario, Canada. A majority of our directors and officers reside in Canada. Because all or a substantial portion of our assets and these persons are located outside the United States, it will be difficult for United States investors to effect service of process in the United States upon us or our directors or officers, or to realize in the United States upon judgments of United States courts predicated upon civil liabilities under the U.S. Exchange Act or other United States laws. It may also be difficult to have a judgment rendered in a U.S. court recognized or enforced against us in Canada.

 

We may be a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes, which generally would result in certain adverse U.S. federal income tax consequences to our U.S. shareholders.

 

In general, a non-U.S. corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income (the “income test”) or (ii) 50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income (the “asset test”). Generally, “passive income” includes interest, dividends, rents, royalties and certain gains, and cash is a passive asset for PFIC purposes. We have made no determination as to whether we are classified as a PFIC for U.S. federal income tax purposes. The determination of whether we are a PFIC depends on the particular facts and circumstances (such as the valuation of our assets, including goodwill and other intangible assets) and is also affected by the application of the PFIC rules, which are subject to differing interpretations. The fair market value of our assets is expected to depend, in part, upon (i) the market price of the Common Shares, which is likely to fluctuate, and (ii) the composition of our income and assets, which will be affected by how, and how quickly, we spend any cash that is raised in any financing transaction. If we were a PFIC for any taxable year during which a U.S. shareholder owned the Common Shares, such U.S. shareholder generally will be subject to certain adverse U.S. federal income tax consequences, including increased tax liability on gains from dispositions of the Common Shares and certain distributions and a requirement to file annual reports with the Internal Revenue Service. In light of the foregoing, no assurance can be provided that we are not currently a PFIC or that we will not become a PFIC in any future taxable year. Prospective investors should consult their own tax advisers regarding our PFIC status. See Item 10.E, “Additional Information—Taxation—Certain U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”

 

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ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

1. Name, Address and Incorporation; Trading Market

 

Profound is the company resulting from a “three-cornered” amalgamation involving Mira, Mira Subco (a subsidiary formed to complete the amalgamation) and Profound Medical Inc. (“Old PMI”). Old PMI was formed by articles of incorporation under the OBCA on June 13, 2008. Mira was formed by articles of incorporation under the OBCA on July 16, 2014, and following its initial public offering in Canada, was a “capital pool company” listed on the TSX-V. As a capital pool company, Mira had no assets other than cash and did not carry on any operations. On June 3, 2015, in anticipation of the amalgamation, Mira changed its name to “Profound Medical Corp.” (becoming “Profound”) and completed a consolidation of its share capital on the basis of one post-consolidation common share for every 13.6363 pre-consolidation common shares. On June 4, 2015, Mira (now “Profound”), Mira Subco and Old PMI completed the amalgamation, with Profound as our surviving holding company, and Mira Subco and Old PMI amalgamating to form a new OBCA subsidiary, Profound Medical Inc. (“PMI”), to serve as the holding subsidiary of our operating subsidiaries. Upon completion of the amalgamation, we commenced trading on the TSX-V. On July 13, 2018, we graduated from the TSX-V and commenced trading on the TSX under the symbol “PRN”.

 

We intend to apply to list our Common Shares on the Nasdaq in connection with this Registration Statement. Such a listing is dependent upon satisfaction of all necessary listing requirements as well as this Registration Statement becoming effective with the SEC. On June 13, 2019, we received shareholder approval for a special resolution authorizing the Board to amend our articles of incorporation to effect a consolidation of all of the issued and outstanding Common Shares (the “Share Consolidation”), such that the trading price of the Common Shares following the Share Consolidation would permit us to qualify for a potential listing on the Nasdaq. Although shareholder approval for the Share Consolidation has been obtained, the exact ratio of the Share Consolidation has not yet been determined, and will not become effective until a date in the future to be determined by the Board in order to satisfy the applicable listing eligibility requirements of the Nasdaq.

 

Our head and registered office is located at 2400 Skymark Avenue, Unit 6, Mississauga, Ontario, Canada L4W 5K5, and its telephone number is (647) 476-1350. Our agent for service of process in the United States is Corporation Service Company, located at 251 Little Falls Drive, Wilmington, DE 19808.

 

2. Summary Corporate History and Intercorporate Relationships

 

Intercorporate Relationships

 

Profound operates its business through its direct subsidiary, PMI, and its indirect subsidiaries, Profound Medical Oy, Profound Medical GmbH and Profound Medical (U.S.) Inc.

 

The following diagram illustrates the organizational structure of Profound and its subsidiaries, their respective jurisdictions of incorporation and the percentage of voting and non-voting securities owned by Profound as of the date of this Registration Statement.

 

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Corporate History

 

2019 Highlights (Year-to-Date)

 

On August 15, 2019, we received 510(k) clearance from the FDA to market TULSA-PRO for transurethral ultrasound ablation of prostate tissue.

 

On July 9, 2019, we announced that we sold our first TULSA-PRO system in Japan. The system was purchased by Hokuyu Hospital in Sapporo via Japan’s PMD Act expanded access program. The PMD Act, regulated by Japan’s PMDA and Ministry of Health, Labor and Welfare (“MHLW”), allows physicians to import, with permission from the MHLW, an unapproved medical device directly from the distributor in cases where there is a clinical urgency and there are no alternatives in Japan.

 

On June 13, 2019, our shareholders approved a special resolution authorizing the Board to amend our articles of incorporation to effect a consolidation of all of the issued and outstanding Common Shares at a consolidation ratio that would permit us to qualify for a potential listing on the Nasdaq.

 

In May 2019, based on the TACT 12-month follow-up data, we submitted an application to the FDA for clearance to market TULSA-PRO in the United States.

 

On May 5, 2019, Dr. Scott Eggener presented 12-month results of the TACT Pivotal Clinical Trial for TULSA-PRO, including the primary efficacy and safety endpoints, as well as key secondary endpoints.

 

On April 16, 2019, we announced that the first prostate cancer treatment using a first-of-its-kind TULSA-PRO installation had been performed in Trier, Germany.

 

On April 4, 2019, we announced positive topline results from the TACT Pivotal Clinical Trial of TULSA-PRO in patients with prostate cancer.

 

Effective as of January 21, 2019, we entered into and replaced our original co-marketing and co-selling agreement with Siemens.

 

2018 Highlights

 

On September 18, 2018, we press released 3-year clinical outcomes in prostate patients and a BPH subgroup analysis of our Phase I Clinical Trial for TULSA-PRO which was included in a presentation at the Deutschen Gesellschaft für Urologie (DGU) 2018 conference.

 

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On July 30, 2018, we entered into the CIBC Loan Agreement, which provided up to C$18.75 million of borrowing capacity. The first tranche of C$12.5 million was funded upon execution of the agreement, with the option of a second tranche of up to an additional C$6.25 million available through December 31, 2019, subject to the satisfaction of certain financing and product development milestones.

 

On July 11, 2018, we received final approval for listing of the Common Shares on the TSX to trade under the symbol “PRN”.

 

On May 9, 2018, we obtained Chinese Food and Drug Administration approval for Sonalleve for the non-invasive treatment of uterine fibroids.

 

On March 20, 2018, we completed the 2018 Bought Deal in which we issued 34,500,000 Common Shares at a price of C$1.00 per Common Share, for total gross proceeds of C$34.5 million.

 

In February 2018, we completed patient enrollment in the TACT Pivotal Clinical Trial.

 

2017 Highlights

 

On November 6, 2017, we announced the expanded clinical use in Germany of TULSA-PRO in prostate care to include BPH.

 

On September 20, 2017, we closed the 2017 Bought Deal in which we issued 10,000,000 Common Shares at a price of C$1.00 per Common Share, for total gross proceeds of C$10 million.

 

On July 31, 2017, we completed the acquisition of the Sonalleve technology from Philips, and expanded our non-exclusive strategic sales relationship to include distribution of Sonalleve.

 

On March 27, 2017, we announced that the first TULSA-PRO patient paid procedure was conducted at the ALTA Klinik in Bielefeld, Germany under the supervision of Dr. Agron Lumiani.

 

2016 Highlights

 

On November 14, 2016, we completed the 2016 Bought Deal in which we issued 15,820,000 Common Shares at a price of C$1.10 per Common Share for aggregate gross proceeds of C$17,402,000.

 

On May 19, 2016, the FDA granted approval of an IDE application for our TACT Pivotal Clinical Trial.

 

On May 11, 2016, we announced the signing of a sales and marketing agreement with Philips to collaborate in the commercialization of our TULSA-PRO system in Europe, Canada, the United States and other markets, subject to regulatory clearance in those jurisdictions.

 

On April 28, 2016, we announced our first commercial sale of our TULSA-PRO system in Europe.

 

On April 11, 2016, we affixed the CE Mark to the TULSA-PRO system following receipt of a CE Certificate of Conformity from our notified body in the European Union. The CE Mark affixed to the medical device enables us to market the TULSA-PRO system in the European Union and in other jurisdictions accepting CE marked medical devices such as Norway, Iceland, Liechtenstein and Switzerland.

 

On February 26, 2016, we entered into a strategic collaboration agreement with Siemens, aimed at advancing the commercial launch of our TULSA-PRO system.

 

Principal Capital Expenditures and Divestitures

 

See Item 5.B, “Liquidity and Capital Resources”.

 

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Internet Availability of Company Information

 

The SEC maintains an Internet site (http://www.sec.gov) that makes available reports and other information that the Company files or furnishes electronically with it. The Company’s Internet site can be found at http://www.profoundmedical.com. The information on our website is not incorporated by reference into this Registration Statement and should not be considered a part of this Registration Statement, and the reference to our website in this Registration Statement is an inactive textual reference only.

 

B. Business Overview

 

Overview

 

We are an early commercial-stage medical device company focused on the development and marketing of customizable, incision-free therapeutic systems for the ablation of diseased tissue using our platform technology. Our leading approved product is our TULSA-PRO system, which in August 2019 received FDA clearance as a Class II device in the United States for thermal ablation of prescribed prostate tissue, benign and malignant, using transurethral ultrasound ablation (“TULSA”) based on our TULSA-PRO whole gland ablation clinical trial (the “TACT Pivotal Clinical Trial” or “TACT”), and is also CE marked in the European Union for ablation of targeted prostate tissue (benign or malignant). In addition, our Sonalleve system is CE marked in the EU for the treatment of uterine fibroids and palliative pain relief associated with metastases in bone, and is also approved in China for the treatment of non-invasive treatment of uterine fibroids. Our systems are designed to be used with MRI scanners and are currently compatible with MRI scanners manufactured by Philips and Siemens. To date, we have primarily generated revenues from our limited commercialization of our systems in the EU (principally in Germany) and Asia. We intend to commence commercialization of the TULSA-PRO system in the United States in the near term following our recent FDA clearance. We also continue to pursue additional regulatory approvals, research and development, clinical studies and acquisitions in order to expand the applications of our platform technology and expand our commercial footprint.

 

Our Technology Platform

 

We anticipate that, based on our TACT clinical data and additional studies conducted in the European Union, physicians may elect to use TULSA-PRO to ablate benign or malignant prostate tissue in patients with a variety of prostate diseases. Prostate diseases include prostate cancer and benign prostatic hyperplasia (“BPH”). Prostate cancer is one of the most common types of cancer affecting men, with an annual incidence of newly diagnosed cases reaching 450,000 in Europe, according to the International Agency for Research on Cancer, and 175,000 in the United States according to the American Cancer Society. The American Cancer Society further estimates that there are currently 5.8 million men living with prostate cancer in these two geographies. Although ten-year survival outcomes for prostate cancer remain favorable, it is still one of most common causes of cancer deaths among men. BPH is a histologic diagnosis that refers to the proliferation of smooth muscle and epithelial cells within the prostatic transition zone. According to the American Urological Association, BPH is nearly ubiquitous in the aging male with worldwide autopsy proven histological prevalence increases starting at ages 40 to 45 years, reaching 60% at age 60 and 80% at age 80.

 

We believe that we are the only company to provide customizable, incision-free therapies which combine real-time MRI, thermal ultrasound and closed-loop temperature feedback control for the radiation-free and incision-free ablation of diseased tissue. We believe that our platform technology has the potential to offer clinicians and qualified patients a better alternative to current standards of care for removing or otherwise ablating benign or malignant prostate tissue, such as traditional surgery or radiation therapy, with respect to clinical outcomes, side effects and recovery time.

 

TULSA-PRO and Sonalleve share the common technological concept of using MRI to enable visualization of the surgeon desired tissue in real time. Both products also use thermal ultrasound technology to heat and ablate tissue. The TULSA-PRO ablation is a catheter-based design, which is to be inserted transurethrally into the prostate to provide a robotically driven sweeping ultrasound for continuous ablation of the surgeon defined prostate volume. The Sonalleve ultrasound is provided through a disc located outside the patient and designed to focus the ultrasound to a specific location inside the patient. The focal point provides the energy for ablation. We believe that Sonalleve has the potential to provide us with a platform to expand into additional applications that may offer similar advantageous incision-free ablation related benefits for various disease conditions.

 

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TULSA-PRO

 

Our TULSA-PRO System

 

Our TULSA-PRO system combines real-time MRI, robotically-driven transurethral sweeping action/thermal ultrasound and closed-loop temperature feedback control. The combination enables the TULSA-PRO system to provide customizable and predictable radiation-free and incision-free ablation of a surgeon-defined prostate volume while actively protecting the urethra and rectum through water cooling to minimize the impact of ablation on the patient’s natural functional abilities.

 

Our TULSA-PRO system is comprised of two categories of components: disposables and the capital equipment used in conjunction with a customer’s MRI scanner. We have designed the TULSA-PRO system to be capable of integration with many major MRI scanners currently deployed in hospitals and treatment facilities. That integration allows the TULSA-PRO system to display high resolution images of the prostate and surrounding anatomy. The integrated MRI is used for treatment planning but, more importantly, to provide real-time measurement of temperature in the prostate as the treatment is occurring to enable the physician/clinician to control and monitor tissue ablation. We have designed our TULSA-PRO technology to work optimally with particular MRI scanners sold by Siemens and Philips and we intend to increase compatibility of the TULSA-PRO system with models from other MRI vendors over time.

 

The ultrasound applicator (the “UA”) is a sterile, single use, disposable component of the TULSA-PRO system. The UA produces directional ultrasound beams, through a linear array of 10 independent ultrasound transducers, each of which is independently computer controlled using real-time MRI feedback to deliver heat out to the prescribed treatment boundary. The UA is introduced into the patient via the urethra and is precisely located within the prostate using the system’s robotic positioning, which is controlled by the system’s software together with MRI feedback for guidance. The real time measurement of the temperature from the MR and the precision of transurethral ultrasound is intended to enable the TULSA-PRO system to sculpt the ablated tissue volume to the shape of the patient’s prostate, which may assist in avoiding damage to sensitive structures, including the bladder neck and urethral sphincter.

 

We believe there are a number of expected clinical advantages of TULSA-PRO procedure over the existing standard of care. As described below, TULSA-PRO technology has demonstrated accurate and precise ablation of targeted prostate tissue, while providing a well-tolerated favorable safety profile with relatively minor impact on urinary, erectile and bowel function at 12 months.

 

TACT – Our Pivotal Clinical Trial

 

We received FDA clearance for our TULSA-PRO system in August 2019 based on our TACT Pivotal Clinical Trial. The TACT Pivotal Clinical Trial is a prospective, open-label, single-arm pivotal clinical study, of 115 prostate cancer patients across 13 research sites in the United States, Canada and Europe. We commenced our TACT Pivotal Clinical Trial in August 2016, and completed patient enrollment in February 2018.

 

On May 5, 2019, Dr. Scott Eggener, Chief Investigator of the TACT Pivotal Clinical Trial, presented 12-month follow-up outcomes during the American Urological Association’s 2019 Annual Meeting Plenary Program in Chicago, IL, including the primary efficacy and safety endpoints, as well as key secondary endpoints. The TACT Pivotal Clinical Trial met its primary Prostate-Specific Antigen (“PSA”) reduction endpoint in 110 of 115 (approximately 96%) patients, with median interquartile range PSA reduction of approximately 95% (91-98%) and nadir of 0.34 (0.12-0.56) ng/ml, and with low rates of severe toxicity and residual clinically significant prostate cancer.

 

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The median age of enrolled patients was 65 years and the median PSA level was 6.3 ng/ml. The study focused on a clinically significant prostate cancer population, where 67.0% (77 out of 115) had NCCN (National Comprehensive Cancer Network) intermediate-risk disease, and 62.6% (72 out of 115) had Grade Group 2 (GG2) or Gleason Score 7 (GS7) disease. Of the 43 patients with GG1 or GS6 disease, 60.5% (26 out of 43) had high-volume disease (≥ 3 cores positive, or ≥ 50% cancer core length). Treatment intent was whole-gland ablation with sparing of the urethra and urinary sphincter. Median targeted prostate volume was 40 cc with treatment delivery time of 51 minutes. A median of 97.6% of the prescribed target volume was heated to ablative temperatures with spatial ablation precision of ±1.4 mm measured on MRI thermometry during treatment.

 

The primary efficacy endpoint of TACT is the proportion of patients achieving a post-treatment PSA reduction ≥ 75% of their pre-treatment baseline value. The FDA-approved protocol’s pre-established performance goal for the success proportion was 50% of patients.

 

Secondary efficacy endpoints include prostate volume reduction on 12-month MRI and histological response on 12-month 10-core prostate biopsy. The median perfused prostate volume of patients in TACT decreased from 41 cc to 4 cc, based on assessment from the local research sites, pending review by a central radiology core lab. Of the 115 patients enrolled in the study, only 4 (3.5%) did not undergo follow-up biopsy, in all cases due to patient refusal. Among 68 men with pre-treatment intermediate-risk GG2 disease, 54 (79.4%) were free of GG2 disease on one-year biopsy. Among 94 men with pre-treatment GG2 or high-volume GG1 disease, 72 (76.6%) were free of GG2 or high-volume GG1 disease on follow-up biopsy. Of the 111 men with one-year biopsy data, 72 (64.9%) had a complete histological response with no evidence of any cancer, and 16 (14.4%) had low-volume GG1 disease which has virtually no potential for metastases or cancer-related mortality. The 20.6% rate of residual clinically significant prostate cancer in an intermediate-risk patient population is similar or better than that reported in prospective studies of modern external beam radiation therapy and other ablation technologies. In addition, the TACT patients remain amenable to re-treatment with TULSA-PRO or standard of care therapies.

 

The primary safety endpoint of TACT is the frequency and severity of adverse events graded according to the Common Terminology Criteria for Adverse Events, or CTCAE. The rate and nature of attributable adverse events were similar to the favorable safety profile reported in the Phase I Safety & Feasibility Study of TULSA-PRO (as described below). In the TACT study, attributable serious adverse events occurred in 7.0% of patients, including 4.3% genitourinary infection, 0.9% urinary retention, 0.9% urinoma, 0.9% ileus (related to urinary catheter), 0.9% deep vein thrombosis, and 0.9% urethral stricture, and in all cases the adverse events were resolved. Similarly, 7.8% of patients experienced an attributable severe (Grade 3) adverse event, all resolved. There were no rectal injuries or fistulas, and no attributable Grade ≥ 4 adverse events.

 

Additional secondary endpoints of TACT focus on functional side effects commonly associated with current prostate cancer therapies, such as erectile dysfunction and urinary incontinence. At 12 months, 23.5% of patients had moderate erectile dysfunction (surgeon assessed Grade 2 adverse event, intervention such as medication indicated) and no patient experienced severe erectile dysfunction (Grade 3, intervention such as medication not helpful). Erectile function was also evaluated using the IIEF Patient-Reported Questionnaire. The median change in IIEF-5 was a decrease in 3 points, less than the minimal clinically important difference in erectile function. At 12 months, 75.0% (69 out of 92) of previously potent patients were able to maintain erections sufficient for penetration (IIEF question 2 ≥ 2). With respect to urinary function, 2.6% of patients had moderate urinary incontinence (surgeon assessed Grade 2 adverse event, pads indicated) at 12 months. Urinary function was also evaluated using the EPIC Patient-Reported Questionnaire. At 12 months, there was 99.1% (111 out of 112) preservation of urinary continence (≤1 pad/day), and a 96.2% rate of leak-free continence (leak <1 time/day).

 

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Multivariate predictors of GG2 disease at one-year biopsy included presence of intraprostatic calcifications at screening, MRI thermal coverage of target volume, and PIRADS ≥ 3 lesion at one-year post-treatment MRI (p < 0.05).

 

Based on the 12-month outcomes of the TACT Pivotal Clinical Trial, we submitted our application to the FDA in May 2019 for clearance to market the TULSA-PRO system in the United States, and on August 15, 2019, we received 510(k) clearance for commercial sales of TULSA-PRO as a Class II device in the United States for thermal ablation of prescribed prostate tissue, benign and malignant, using transurethral ultrasound ablation.

 

Phase I Safety and Feasibility Study

 

In March 2014, we completed enrollment and treatment of 30 patients in the Phase I TULSA multi-jurisdictional safety and feasibility study. The procedure was delivered using our TULSA-PRO system, with the objective of determining its clinical safety and feasibility for prostate ablation in the primary treatment setting of patients with localized prostate cancer.

 

In October 2015, the results of our safety and feasibility study were accepted for publication in European Urology, the official journal of the European Association of Urology. We presented the successful 12-month Phase I clinical trial outcomes at the European Symposium on Focused Ultrasound Therapy. Upon completion of the study, the clinical data was also submitted to European regulatory authorities for regulatory clearance in Europe. Based on our Phase I clinical trial results, in April 2016, we received a CE Certificate of Conformity for the TULSA-PRO system from our notified body in the EU, and in the fourth quarter of 2016, we initiated a pilot commercial launch of TULSA-PRO in key European markets where the CE Mark is accepted.

 

Sonalleve

 

Our Sonalleve system combines real-time MRI and thermometry with focused ultrasound delivered from the outside of the patient to enable precise and incision-free ablation of diseased tissue. We acquired the Sonalleve technology from Philips in 2017. The Sonalleve system is CE marked in the EU for the treatment of uterine fibroids and palliative pain treatment of bone metastases. In 2018, the Sonalleve system was also approved in China by the National Medical Products Administration (“NMPA”) for the non-invasive treatment of uterine fibroids. We are in the early stages of exploring additional potential indications for which the Sonalleve technology has been shown in pre-clinical studies to have the potential for clinical application, such as non-invasive ablation of abdominal cancers and hyperthermia for cancer therapy.

 

Overview of Uterine Fibroids

 

Uterine fibroids are the most common non-cancerous tumors in women of childbearing age. Based on data from the Agency for Healthcare Research and Quality, we estimate that uterine fibroids occur in 70-80% of the female population, but only approximately one third of these cases will require treatment. In addition, based on data from the Agency for Healthcare Research and Quality, we estimate that in the United States, 26 million women between the ages of 15 and 50 have uterine fibroids, and more than 15 million of them will experience associated symptoms or health concerns during their lifetimes. Uterine fibroids cause a variety of symptoms that can significantly reduce the quality of life for a woman, which can include bleeding, pain, pressure and reproductive challenges including infertility, multiple miscarriages, and premature labor. Treatment options differ in fundamental aspects such as cost, invasiveness, recovery time, risks, likelihood of long-term resolution of symptoms, need for future care for fibroids, and influence on future childbearing potential.

 

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Our Sonalleve System

 

The procedure using the Sonalleve system consists of imaging the uterus in an MRI scanner and heating the fibroid or adenomyosis with high-intensity focused ultrasound energy until the tissue reaches the temperature that causes necrosis. The MRI scanner monitors the progress of the treatment. For the patient, the technique can be much more convenient and comfortable than traditional surgical procedures, such as hysterectomy or myomectomy. These require hospital admission on an in-patient basis and sometimes weeks of recovery. In contrast, with Sonalleve fibroid therapy, patients can be treated on an outpatient basis without the need for anesthesia, discharged the same day and almost fully recovered within a few days.

 

The Sonalleve bone pain relief application is indicated for palliative treatments to relieve pain associated with bone metastasis. In the later stages of their disease, many cancer patients develop bone metastases. Bone changes and malformations irritate nerve endings, which can cause severe and debilitating pain and become unbearable for many patients. Conventional treatment with strong medication or radiation therapy can result in unpleasant side effects. Sonalleve provides an alternative option to alleviate this pain. Pain relief can be expected in as quickly as 2-3 days as compared to radiation therapy which could take up to three weeks.

 

The ultrasound energy utilized in the Sonalleve system is MR High Intensity Focused Ultrasound (“HIFU”) or MR-HIFU. MR-HIFU therapy uses a focused transducer to bundle ultrasound energy into a small volume at the target locations inside the body under MRI and visualization. During treatment, the ultrasound energy beam passes through the intact skin and soft tissue, causing localized high temperatures in the focus area. The skin and intermediate tissue are left unharmed. Within a few seconds this produces a well-defined region of coagulative necrosis.

 

The Sonalleve system is designed to be integrated with Philips MRI scanners and we intend to expand this compatibility to additional MRI scanner brands in the future. MRI can measure temperature changes within the human body non-invasively. 3D MR images provide the anatomical reference data for treatment planning, while real-time temperature sensitive images are acquired during ablation to provide real-time information about treatment progress and monitor critical anatomical structures.

 

There are over 200 publications from leading institutions globally on Sonalleve technology. There are also over approximately 60 medical and scientific institutions globally that make up the installed base of Sonalleve system.

 

Sales and Marketing

 

To date, we have primarily generated revenues from our limited commercialization of our systems, including disposables and related services, in the EU (principally in Germany) and Asia. For the year ended December 31, 2018, approximately 52% and 48% of our revenues were generated in the EU and Asia, respectively, compared to 77%, 12% and 11% in the EU, South America and Asia, respectively, for the year ended December 31, 2017. For the year ended December 31, 2016, we had no revenue as we only started our pilot commercial launch in 2017. We intend to commence commercialization of the TULSA-PRO system in the United States in the near term following our recent FDA clearance.

 

Historically treatment of conditions such as localized prostate disease and uterine fibroids have included surgical intervention. Over time, surgery has evolved from an ‘open’ technique, to laparoscopic, to robotic surgery. The surgeon’s motivation behind this evolution has been to perform procedures that reduce invasiveness, improve clinical outcomes, and reduce recovery times. We are now taking this concept to the next level by enabling customizable, incision-free therapies for the MRI-guided ablation of diseased tissue with the TULSA-PRO and Sonalleve systems. These incision-free and radiation-free procedures offer surgeons the option of providing predictable and customizable procedures that eliminate invasiveness, offer the potential to improve clinical outcomes and further reduce hospital stays and patient recovery times.

 

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For the TULSA-PRO system, we generate revenue from the sale of the capital equipment, procedure-related sales of disposable single use components of the system (which are sold on a per patient basis), and service revenue for ongoing maintenance of the systems. The key customer segments for TULSA-PRO we are targeting include academic/university/clinical leadership hospitals as well as private clinics with access to MRI scanners. We are establishing our own direct sales and marketing teams for sales of TULSA-PRO systems and the disposable components related thereto, as well as for Sonalleve systems in the jurisdictions where it is approved. The primary focus of our direct sales team is to cultivate adoption of the TULSA-PRO technology, support clinical customers with the TULSA-PRO procedures and increase the utilization of the systems and disposable components. We expect to generate recurring revenues from the sale of disposables and service maintenance.

 

We also collaborate with our strategic partners Philips and Siemens for lead generation and distribution of the capital equipment, which are currently available through the Philips and Siemens sales catalogs. The catalogs provide access and enable the sales teams of each collaborator to provide quotations for potential sales, in those jurisdictions where the product is approved for sale by the relevant regulatory bodies.

 

Sales of Sonalleve currently are primarily a one-time capital sale with limited recurring service revenue. Given that it is currently only compatible with Philips MRI scanners, we rely primarily on our strategic partnership with Philips for lead generation and sale of the capital units, which are available through the Philips sales catalog. With regulatory approval for the sale of Sonalleve only in the EU and China, our current commercial focus is limited to those jurisdictions.

 

Competition

 

TULSA-PRO

 

Our TULSA-PRO system is intended to ablate benign and malignant prostate tissue. There are currently no marketed devices indicated for the treatment of prostate diseases or prostate cancer and our FDA indication and CE mark in the European Union also do not include treatment of any particular disease or condition. However, there are a number of devices indicated for the destruction or removal of prostate tissue and devices indicated for use in performing surgical procedures that physicians and surgeons currently utilize when treating patients with prostate disease, including prostate cancer. Approaches that physicians and surgeons currently use to address prostate disease include: (1) watchful waiting/active surveillance; (2) simple prostectomy; (3) radical prostatectomy (includes open, laparoscopic and robotic procedures); (4) radiation therapies including, external beam radiation therapy (“EBRT”), brachytherapy and high dose radiation (“HDR”); (5) cryoablation and (6) trans-rectal high intensity focused ultrasound (“HIFU”). In addition, certain adjunct or less common procedures are used or are under development to address prostate disease, such as androgen deprivation therapy (“ADT”) and proton beam therapy. We anticipate that physicians may likewise elect to use our TULSA-PRO system to ablate benign or malignant prostate tissue in patients with prostate disease such that our system faces competition from these other options.

 

These competing options each have their own limitations and benefits and may be appropriate for only limited patient populations. For example, active surveillance is generally recommended for patients who have been diagnosed with earlier stage, lower risk, disease where the possibility of side effects from intervention may outweigh the expected benefit of the chosen procedure. For clinicians and patients, the gap between active surveillance and the most commonly utilized options of surgery or radiation therapy impose the possibility of substantial side effects, creating a need for a less invasive methodology to remove diseased prostate tissue that is both radiation- and incision-free and provides a more favorable side-effect profile.

 

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Watchful Waiting; Active Surveillance

 

Watchful waiting means no treatment until there is an indication that the cancer has spread. Active surveillance is monitoring of the prostate cancer closely with PSA tests and digital rectal exams. Prostate biopsies may also be done to see if the cancer is becoming more aggressive. Test results will indicate whether a more aggressive treatment option should be considered.

 

Simple Prostatectomy

 

Simple prostatectomy is recommended for men with severe urinary symptoms caused by an obstructive prostate gland and whose symptoms are not responsive to other medical or minimally-invasive therapies. Simple prostatectomy involves removing only the obstructive portion of the prostate gland rather than the entire gland and surrounding tissue. A simple prostatectomy can be open or robotic. Open simple prostatectomy can be conducted through retropubic, suprapubic, or perineal routes. Simple prostatectomy has higher morbidity and longer hospitalization in comparison to less invasive therapies such as transurethral resection of the prostate. Simple prostatectomy is contraindicated in the presence of cancer.

 

Radical Prostatectomy

 

Radical prostatectomy, an open surgical removal of the entire prostate gland and some surrounding tissues, represents a current standard of care, practiced by urologists in North America and Europe, which procedure involves the removal of the localized cancerous tissue. However, the conventional open surgical technique has high post-surgery incidences of impotence and incontinence and long recovery time. Relatively recently, robotic surgery systems have become more common in the market. Cited benefits of the robotic technique include improved precision and range of motion. Risks specific to the robotic technique include longer operation time, the possible need to convert the procedure to a non-robotic approach, and the need for additional or larger incision sites. Converting the procedure could mean a longer operation time, resulting in a longer time under anesthesia.

 

External Beam Radiation Therapy

 

EBRT requires multiple weekly clinic visits over a period of six to eight weeks. The procedure directs a beam of radiation from outside the body to cancerous tissue inside the body. Although such procedures are relatively costly with studies showing significant risk of collateral damage and lengthy recovery times, it is non-invasive. It can also be used to irradiate cancer that has spread to other areas.

 

Brachytherapy and High Dose Radiation

 

With brachytherapy, radioactive seeds are implanted in the prostate to irradiate the cancerous tissue. The seeds irradiate the prostate over time and decay in place to background levels; they remain implanted and inert afterwards. Side effects of brachytherapy are similar to those of EBRT in terms of urinary, bowel and erectile function. An alternative is high dose radiation, or HDR, in which highly radioactive seeds are temporarily inserted, then removed during the same procedure, leaving nothing implanted afterward. HDR has the ability to target tissue, but requires hospital stays and usually is accompanied by adjunct EBRT over several weeks.

 

Cryoablation

 

Cryoablation freezes cells to death by introducing cooled liquids and gases to an area of cancerous tissue. Studies show cryoablation offers poor precision and has delivered impotence rates that are almost as high as those for conventional radical prostatectomy. The procedure also carries a risk of potential damage to the tissue between the urethra and rectum, potentially resulting in a urinary rectal fistulas.

 

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Trans-rectal High Intensity Focused Ultrasound (“HIFU”)

 

Trans-rectal HIFU is used increasingly in the European Union, United States and Canada. This technique utilizes focused ultrasound that is delivered through the rectal wall to treat the prostate. Image guidance is generally provided by ultrasound. At an FDA urology panel meeting in 2014, the panel indicated that HIFU can lead to complications such as rectal fistulae and rectal incontinence. Due to the focused treatment zone, this treatment requires approximately three hours to complete. One limitation of HIFU is prostate size; the procedure is limited to patients with prostate volume smaller than 40 cubic centimeters. Patients with larger prostates need a separate surgical procedure, such as transurethral resection of the prostate (“TURP”) or ADT, both described below, to de-bulk or reduce the size of the prostate prior to HIFU. This additional procedure increases costs and the risk of complications. Recent studies have indicated positive survival outcomes and thermal ultrasound appears to be gaining traction in certain settings.

 

Adjunct and Emerging Therapies

 

Androgen deprivation therapy, or ADT, uses hormones to suppress testosterone production and alleviate symptoms, but with the primary side-effect of reduced sexual interest and activity. Although historically used as a last line of defense for the disease (and typically in a palliative setting), it is increasingly used as a first line treatment or in combination with other treatments.

 

TURP is a surgical procedure that removes portions of the prostate gland through the penis. This procedure is used to relieve moderate to severe urinary symptoms caused by an enlarged prostate, a condition known as BPH. This procedure is also used in adjunct to a HIFU procedure when a prostate gland is larger than 40 cubic centimeters.

 

Proton beam therapy is a way to deliver radiation to tumors using tiny, sub-atomic particles (protons) instead of the photons used in conventional radiation treatment. Proton beam therapy uses new technology to accelerate atoms to approximately 93,000 miles per second, separating the protons from the atom. While moving at this high speed, the particles are “fired” at the patient’s tumor. These charged particles deliver a very high dose of radiation to the cancer but release very little radiation to the normal tissue in their path. In theory, this approach minimizes damage to healthy organs and structures surrounding the cancer. The radiation beams must pass through the skin, the bladder and the rectum on the way to the prostate gland, and once they reach the gland, they encounter normal prostate cells and the nerves that control penile erections. Damage to these tissues can lead to complications, including bladder problems, rectal leakage or bleeding, and erectile dysfunction.

 

We believe that use of the TULSA-PRO system as a tool to ablate prostate tissue can provide a clinician and his or her patients with the following clinical advantages:

 

· Clinically shown to have millimeter accuracy designed to ablate prostate tissue while sparing nearby critical structures, and that real time MR thermometry also ensures precision in ablation temperature, minimizing side effects that can occur from overheating;

 

· Enables clinician to define the boundaries of the tissue to be ablated, whether the whole prostate or any of its subsections, to ensure customization of the needs of each patient;

 

· Transurethral approach allows for ablation of even the largest prostates that may be 120 cubic centimeters or larger in size;

 

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· Potential to be a single outpatient procedure with a rapid recovery time; and

 

· Designed to be compatible with leading MRI platforms and could become part of a continuum of care from MR imaging diagnosis, MR guided biopsy to MR guided treatment.

 

We believe that the flexibility of the TULSA-PRO system may allow us to demonstrate its use as a tool for ablating benign and malignant diseased prostate tissue with greater speed and precisions than current options while minimizing potential side effects. We believe that the TULSA-PRO system may overcome certain limitations of other devices and methodologies for removing or addressing disease prostate tissue including HIFU, such as complications associated with trans-rectal delivery and limitations relating to prostate size. We believe that a transurethral (inside out) ablation approach with millimeter accuracy has advantages over HIFU in ablating the whole gland safely.

 

Sonalleve

 

The treatment choices for uterine fibroids usually depend on the symptoms of the patient, size of the fibroid, desire for future pregnancy, and preference of the treating gynecologist. Most common treatment options for uterine fibroids include: (1) hormonal medications including gonadotrophin releasing hormone agonists (“Gn-RH”); (2) progesterone releasing intra-uterine devices; (3) surgical procedures such as hysterectomy and myomectomy; and (4) uterine artery embolization.

 

We believe that the Sonalleve system may provide a treatment option that is more convenient and comfortable with less side effects than surgical procedures, such as hysterectomy or myomectomy.

 

Hormonal Medications

 

Fibroids can be treated with hormonal drugs, such as Gn-RH agonists. Gn-RH agonists can treat fibroids by blocking the production of estrogen and progesterone, putting women into a temporary postmenopausal state. As a result, menstruation stops, fibroids shrink and anemia is often alleviated. Other hormonal medications can also be utilized in patients with uterine fibroids. In many cases, however, medication may provide only temporary relief from the symptoms caused by fibroids. The symptoms often return when the patient stops taking the medication. Moreover, the side effects of some drugs may cause them to be unsuitable for some patients. Gn-RH agonists typically are used for no more than three to six months because long-term use can cause loss of bone.

 

Progesterone Releasing Intra-Uterine Devices

 

Progesterone releasing intra-uterine devices can relieve heavy bleeding caused by fibroids. However, these devices can only provide symptom relief and do not impact the fibroid itself.

 

Uterine Artery Embolization

 

Uterine artery embolization involves injection of embolic agents into the arteries that supply the uterus, thereby cutting off the blood supply to the fibroids. Many women require at least one day of hospitalization and heavy pain medication. The prolonged pain may slow down the recovery period. Complications may occur if the blood supply to the ovaries or other organs is compromised.

 

Surgery

 

Surgical options for the treatment of uterine fibroids include hysterectomy and myomectomy. Hysterectomy is a surgical procedure which involves the complete removal of uterus with or without removal of the cervix, ovaries and fallopian tubes. Hysterectomy can be performed abdominally in an open, laparoscopic, robotic-assisted or vaginal method. Surgical options are associated with blood loss, hospital stays, long recovery times, pain and scarring. Post-operative complications can include infections, urinary incontinence, vaginal prolapse, fistula formation and chronic pain. After a hysterectomy, a woman will enter menopause and is infertile. Myomectomy is a surgical procedure to remove uterine fibroids from the wall of the uterus. The procedure can be performed with an abdominal incision, laparoscopic, or hysteroscopic.

 

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We believe that use of the Sonalleve system as a tool to ablate uterine fibroids can provide a clinician and his or her patients with the following clinical advantages:

 

· Millimeter accuracy designed to ablate uterine fibroid while sparing nearby critical structures;

 

· Outpatient procedure with rapid recovery time, not requiring general anesthesia; and

 

· Non-invasive approach using thermal ablation designed to heat the uterine fibroid; and guided by real-time MRI with temperature (thermometry) feedback.

 

Alliances and Partnerships

 

Philips

 

On July 31, 2017, we entered into the Philips Share Purchase Agreement with Philips in order to expand the existing collaboration and acquire the Sonalleve technology, which we use in our Sonalleve system (the “Sonalleve Transaction”).

 

Under the terms of the Philips Share Purchase Agreement, we acquired from Philips its Sonalleve assets for upfront consideration of 7,400,000 Common Shares. The Philips Share Purchase Agreement includes earn-out provisions that require us to pay additional consideration of: (i) 5% of Net Sales (as defined below) occurring after July 31, 2017 for the calendar year 2017; (ii) 6% of Net Sales occurring in the calendar year 2018; and (iii) 7% of Net Sales occurring in the calendar years 2019 and 2020. To the extent that the cumulative Net Sales for the full calendar years 2017 through 2020 exceeds €45,300,000, we will be required to pay an additional earn-out equal to 7% of Net Sales for the period beginning after July 31, 2017 through December 31, 2019. To date, we have paid €99,059 (C$147,469) as part of the earn-out provision, including €80,771 (C$121,157) for the year ended December 31, 2018.

 

“Net Sales” include the revenues (less any royalties) received by us or third parties on our behalf in respect of the sale or transfer of the Sonalleve technology, any subsequent, successor or next-generation treatment technology of which is primarily based on Sonalleve and which utilizes intellectual property rights acquired under the Philips Share Purchase Agreement or any future product that combines the technologies of Sonalleve and TULSA-PRO and any amounts received by us with respect to service agreements, but does not include any revenues with respect to consumables.

 

As part of the Sonalleve Transaction, we expanded our non-exclusive strategic sales relationship with Philips for our TULSA-PRO system to include distribution of Sonalleve.

 

We have also entered into several other agreements with Philips, including (1) the Philips Supply Agreement pursuant to which Philips is required to manufacture our Sonalleve systems for a certain period, (2) the Philips Confidentiality Agreement in which Philips agreed to certain non-competition terms, and (3) a Philips Resale Purchasing Agreement, in which Philips is permitted to purchase and resell certain of our products to its customers. For more details on these agreements, see Item 10.C, “Additional Information—Material Contracts”.

 

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Siemens

 

On February 26, 2016, we entered into a strategic collaboration agreement with Siemens (the “Original Siemens Agreement”), aimed at advancing the commercial launch of our TULSA-PRO system in approved jurisdictions. As of April 1, 2018, our TULSA-PRO systems are marketed by Siemens through its electronic catalog.

 

On February 11, 2019, we entered into the New Siemens Agreement, effective as of January 21, 2019, which replaced the Original Siemens Agreement. Under the New Siemens Agreement, all prior financial commitments and obligations owed to Siemens were released and replaced with a one-time fixed license fee and per annum payments calculated based on annual volume of our systems interfaced to a Siemens MRI scanner. The initial term of the New Siemens Agreement is five years, but will be automatically extended for successive terms of one year thereafter unless terminated earlier. We also obtained a non-exclusive license to Siemens Access I interface software and reasonable support for the term of the New Siemens Agreement.

 

Knight

 

Knight acts as our exclusive distributor for TULSA-PRO in Canada pursuant to a 10-year distribution, license and supply agreement initially entered into in April 2015 (which may be extended for successive 10-year periods at the option of either party). Currently, we are not planning any significant commercialization efforts in Canada.

 

Manufacturing and Supply

 

We rely principally on third parties for the manufacturing of the components of our system; however, we are responsible for assembly and testing.

 

We have designed the TULSA-PRO system to be capable of integration with some of the MRI scanners from two of the major MRI manufacturers (Philips and Siemens) and the Sonalleve system with one MRI manufacturer (Philips). As not all hospital and treatment facilities utilize MRI scanners that are compatible with the TULSA-PRO and Sonalleve systems, such facilities would be required to acquire compatible MRI technology, which may involve additional capital expenditure and which could restrict or delay utilization of the systems by such facilities. Accordingly, we intend to expand compatibility of the systems with other MRI scanners in the future.

 

Our systems are assembled from off-the-shelf and custom-made components. We have entered into and expect to enter into additional manufacturing, licensing and distribution arrangements with one or more QSR compliant and FDA registered contract manufacturers for the materials and components used in our products. The TULSA-PRO and Sonalleve systems consist of common electronic components, proprietary capital equipment and proprietary disposables. We purchase standard electronic components from a number of third party vendors. The capital equipment consists of custom system electronics, treatment delivery console, fluid circuits and an MRI compatible robotic positioning system. Printed circuit boards and assemblies and custom mechanical parts are outsourced to approved suppliers. TULSA-PRO disposables consist of the UA, an endo-rectal cooling device and associated accessories. Due to sterility requirements used in connection with the TULSA-PRO system, the UA must be manufactured under clean conditions. We have developed proprietary automated manufacturing test equipment to improve quality and provide scalability as demand grows and this equipment is assembled and tested in-house. We assemble and test the UA and endo-rectal cooling device in-house.

 

We have no long-term contracts with our suppliers, and we are not bound by any minimum purchase volume undertakings with such suppliers.

 

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We currently rely on single source suppliers for certain components used in our systems. In connection with our anticipated commercialization of our approved products, we intend to procure alternative supply arrangements for these components. See Item 3.D, “Risk Factors—Risk Factors Relating to Our Business and Growth Strategy—We depend on single-source suppliers for some of the components in our systems.”

 

Regulation

 

On August 15, 2019, we obtained 510(k) clearance for commercial sale of the TULSA-PRO as a Class II device in the United States, and have previously received a CE Certificate of Conformity for our products in European Union, and have recently obtained regulatory approval for Sonalleve in China. Additionally, the TULSA-PRO system has received regulatory clearances or approvals for commercial sale in Saudi Arabia, Singapore and China, while the Sonalleve system has received regulatory clearance or approval for commercial sale in Canada, Saudi Arabia, South Korea and Malaysia. Our long-term goal is to expand our regulatory indications in Asia and other parts of the world where potential profitable business development opportunities warrant such investments.

 

United States

 

The FDA strictly regulates medical devices under the authority of the FFDCA and the regulations promulgated under the FFDCA. The FFDCA and the implementing regulations govern, among other things, the following related to our products: preclinical and clinical testing, design, manufacture, safety, efficacy, labeling, storage, record keeping, sales and distribution, importation, post-market adverse event reporting, recalls, and advertising and promotion.

 

The TULSA-PRO system, and any future medical devices that we may develop, will be classified by the FDA under the statutory framework described in the FFDCA. Medical devices are classified into three classes from lowest risk (Class I) to highest risk (Class III). Unless an exemption applies, medical devices require FDA clearance or approval prior to commercial sale in the United States depending on the assigned risk class. Most Class I devices and some Class II devices are exempt from premarket review requirements. Class I devices are subject to the “general controls” of the FFDCA, which include facility registration and device listing, quality system requirements, labeling requirements, medical device reporting, and reporting of corrections and removals. Most Class II devices and some Class I devices require FDA clearance of a 510(k) premarket notification prior to marketing. A 510(k) premarket notification must demonstrate that the device is substantially equivalent to a previously marketed predicate device. In addition to the general controls, Class II devices are subject to “special controls,” such as performance standards and guidance documents, as identified in the classification regulation for the device type. Class III devices require FDA approval of a premarket approval application, or PMA, demonstrating the safety and effectiveness of the device, prior to commercial distribution. Class III devices are those deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. Class III devices are subject to the general controls and any conditions of approval in the PMA approval order, which can include postmarket study requirements. Novel devices that have not been classified and devices deemed not substantially equivalent to a predicate device are automatically classified into Class III. For such low- to moderate-risk devices, the manufacturer can submit a de novo classification request to classify the device into Class I or Class II. 510(k) premarket notifications, de novo classification requests, and PMA applications are subject to the payment of user fees paid at the time of submission for FDA review.

 

Clinical trials are generally required to support a PMA application and are sometimes required for 510(k) clearance or de novo classification requests. Such trials, if conducted in the United States, generally require an IDE application, approved in advance by the FDA for a specified number of patients and study sites, unless the product is deemed a non-significant risk device eligible for more abbreviated IDE requirements or an exemption applies. Clinical trials are subject to extensive monitoring, recordkeeping and reporting requirements as well as a requirement to submit information regarding certain clinical trials to a public database maintained by the National Institutes of Health. Clinical trials must be conducted under the oversight of an IRB, for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices and informed consent.

 

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After a device is placed on the market, numerous regulatory requirements apply. Device manufacturers and importers must register their establishments annually, list the devices they manufacturer and pay an annual registration fee. Device manufacturers are also subject to the QSR, which includes both design control requirements and good manufacturing practice requirements (such as requirements for purchasing controls, document controls, production and process controls, labeling and packaging controls, control of nonconforming product, complaint handling, corrective and preventative actions, storage, handling, distribution, and servicing). Devices must be labeled in accordance with the FDA’s device labeling regulations, including Unique Device Identification requirements. The FDA also regulates the promotion of medical devices, including a requirement that all device promotion be truthful and non-misleading and a prohibition against the promotion of devices for uncleared, unapproved or off-label use or indications. Under the medical device reporting regulations, manufacturers and initial importers must submit a report to the FDA if they become aware of information that reasonably suggests that one of their marketed devices may have caused or contributed to a death or serious injury or malfunctioned and the malfunction would be likely to cause or contribute to a death or serious injury if it were to recur. Manufacturers must also report any corrections or removals that include repairs, adjustments, relabeling, or destruction of distributed devices, if the correction or removal was initiated to reduce a risk to health or to remedy a violation of the FFDCA caused by the device which may present a risk to health.

 

The FDA has broad enforcement authority to take action against a failure to comply with the clinical trial, premarket review, or postmarket regulatory requirements discussed above and the agency conducts routine inspections of device manufacturers to determine compliance with these requirements. FDA enforcement typically takes the form of inspectional observations at the close of inspection, an Untitled Letter (a private letter raising compliance questions), or a Warning Letter (a public letter alleging noncompliance). However, the FDA has authority to take additional enforcement actions including: civil monetary penalties, criminal fines and prosecution, injunctions, mandatory recall, and import detentions.

 

European Union

 

In the European Union, legal manufacturers of medical devices, such as the TULSA-PRO and Sonalleve systems, are required to comply with the Essential Requirements laid down in Annex I to the Council Directive 93/42/EEC concerning medical devices, known as the Medical Devices Directive (“MDD”). Active implantable medical devices and in-vitro diagnostic medical devices are regulated in separate EC directives. Compliance with these requirements entitles us to affix the CE Mark to our medical devices, without which they cannot be commercialized in the European Union. To demonstrate compliance with the Essential Requirements and obtain the right to affix the CE Mark to our medical devices, we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. The MDD provides for four different classifications of medical devices based on their risk: Class I, Class IIa, Class IIb and Class III. Except for low risk medical devices (Class I with no measuring function and which are not sterile), in relation to which the manufacturer may prepare an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the Essential Requirements, a conformity assessment procedure requires the intervention of a Notified Body. A Notified Body is a private body or company designated by the competent authorities of a European Union Member State to conduct conformity assessments and to execute the provisions of the MDD (as implemented in the respective national legal system) in the interest of public health. Depending on the device’s risk category/class, the conformity assessment of the Notified Body extends to the quality assurance system established by the manufacturer and/or the product design, as well as to the Technical Documentation to be compiled by the manufacturer for each device.

 

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As part of the conformity assessment process, medical device manufacturers must carry out a clinical evaluation of their medical devices to verify that they comply with the relevant Essential Requirements covering safety and performance. A clinical evaluation is defined as a “methodologically sound ongoing procedure to collect, appraise and analyze clinical data pertaining to a medical device and to evaluate whether there is sufficient clinical evidence to confirm compliance with relevant essential requirements for safety and performance when using the device according to the manufacturer’s Instructions for Use”. A clinical evaluation must address the intended purpose of the device, clinical performance, benefits that outweigh associated risks and the usability of the device.

 

This assessment must be based on clinical data (Annex X of the MDD), which can be obtained from (i) clinical studies conducted on the devices being assessed; (ii) scientific literature from similar devices whose equivalence with the assessed device can be demonstrated; or (iii) both clinical studies and scientific literature. As part of the conformity assessment procedure, depending on the type of devices, the Notified Body will review the manufacturer’s clinical evaluation for the medical device.

 

If the Notified Body finds, as a result of its conformity assessment, that the quality assurance system and/or the product design is compliant with the applicable legal provisions, it issues a CE Certificate of Conformity, which is valid for a maximum of five (5) years. On the basis of these Notified Body CE Certificates of Conformity, the manufacturer is able to draw up an EC Declaration of Conformity and affix the CE Mark to the relevant device, followed by the ID number of the Notified Body. The CE mark allows the device to be placed on the market throughout the EU and the European Economic Area (“EEA”), as well as in Switzerland and Turkey based on bi-lateral treaties.

 

The Notified Body is obliged to perform regular audits and, before the expiry date of a certificate of conformity, renewal audits at the manufacturer’s site upon prior notification. In addition to these notified audits, on the basis of a Commission Recommendation of 2012, the EU member states were advised by the European Commission to conduct unannounced audits (including testing of product samples) on a regular basis.

 

If the requirements for application of the CE mark are not (or no longer) fulfilled, or in other cases of non-compliance with applicable medical devices law:

 

· the Notified Body has the power to withdraw, suspend or limit the scope of the applicable certificate of conformity, in accordance with the principle of proportionality;

 

· the competent supervisory authority of the EU member state may enforce the provisions of the MDD, e.g. by preventing the product from being put on the market, ordering a recall or shutting down a manufacturing site;

 

· criminal or administrative sanctions (e.g. fines) may apply.

 

In the European Union, we must establish a medical device vigilance system, including post-marketing surveillance and adverse event reporting procedures. Under this system, incidents occurring in the EU that might lead to or might have led to the death of a patient or user or of other persons or to a serious deterioration in their state of health must be reported to the relevant authorities of the European Union Member States. Manufacturers are required to take FSCAs, including product recalls and withdrawals, to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. Manufacturers have to appoint a safety officer having the necessary professional qualifications to fulfil the reporting requirements and to coordinate the necessary actions. For class I devices and certain other devices, the manufacturer of the device or its authorized representative in the EU, must also register with the competent authority before placing the product on the market in the EU.

 

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The advertising and promotion of our products in the European Union is subject to the provisions of the Medical Devices Directive, Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other national legislation in the individual European Union Member States governing the advertising and promotion of medical devices. These laws may limit or restrict the advertising and promotion of our products to the public and may impose limitations on our promotional activities with healthcare professionals. In Germany, a company which advises healthcare professionals on the handling and use of medical devices – as may be the case for the TULSA-PRO and Sonalleve devices – has to appoint a “medical devices advisor” (Medizinprodukteberater) with appropriate qualification and professional experience as set out in the German Medical Devices Act (Medizinproduktegesetz).

 

On April 5, 2017, the EU adopted a new Medical Devices Regulation (EU) 2017/745 (the “New EU MDR”), which will repeal and replace the Medical Device Directive effective May 26, 2020. The New EU MDR does not set out a substantially different regulatory system, but clearly envisages, among other things, stricter controls of medical devices, including strengthening of the conformity assessment procedures, increased expectations as regards clinical data for devices and pre-market regulatory review of high-risk devices. The New EU MDR also envisages greater control over Notified Bodies and their standards, increased transparency through the establishment of a comprehensive EU database on medical devices, more robust device vigilance requirements and clarification of the rules for clinical investigations. Further, new classification rules apply. Under transitional provisions, medical devices with notified body certificates issued under the Medical Devices Directive prior to May 25, 2017 may continue to be placed on the market for the remaining validity of the certificate. Certificates of conformity issued by Notified Bodies in accordance with the MDD after May 25, 2017 and prior to May 26, 2020 will remain valid until the end of the period indicated on the certificate, but will expire on May 26, 2024 at the latest, except for certificates issued in accordance with Annex IV to Directive 90/385/EEC or Annex IV to the MDD which shall become void at the latest on May 27, 2022. After the expiry of any applicable transitional period, only devices that have been CE marked under the New EU MDR may be placed on the market in the EU.

 

Canada

 

Health Canada’s Therapeutic Products Directorate (“TPD”) is the Canadian authority that regulates medical devices. In general, prior to being given market authorization to sell a Class II, III or IV medical device in Canada, a manufacturer must present and/or attest to substantive scientific evidence of a product’s safety, efficacy and quality as required by the Food and Drugs Act and the Medical Devices Regulations (“Canada MDR”).

 

The Medical Devices Bureau (“MDB”) of the TPD applies the Canada MDR through a combination of pre-market review, post-approval surveillance and quality systems in the manufacturing process. Medical devices are classified into one of four classes, where Class I represents the lowest risk and Class IV represents the highest risk. In order to perform investigational testing in Canada for a Class II, III or IV medical device, authorization for the testing must be granted by the MDB. A Medical Device License is a pre-market requirement for a Class II, III and IV medical device, including for Class II, III or IV medical devices previously authorized for sale for investigational testing now to be offered for general/commercial sale. A Medical Device License is issued to the device manufacturer, provided the requirements of the Canada MDR are met.

 

The Canada MDR requires that medical devices be manufactured under a certified QMS that meets the criteria of the international standard, ISO 13485 Medical devices – Quality management systems – Requirements for regulatory purposes. The MDB currently recognizes the Medical Device Single Audit Program, a program designed to include compliance with the QMS requirements of the Canada MDR. We are manufacturing the TULSA-PRO system under a certified ISO 13485 Quality Management System.

 

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Our Current Regulatory Status

 

TULSA-PRO

 

On August 15, 2019, we received 510(k) clearance for commercial sales of the TULSA-PRO as a Class II device in the United States for transurethral ultrasound ablation (“TULSA”) of prostate tissue, and in April 2016 the TULSA-PRO system was CE marked in the European Union for ablation of targeted prostate tissue (benign or malignant). Outside of these jurisdictions, the TULSA-PRO system will require country-specific pre-market clearance or approval prior to launch.

 

Upon completion of our Phase I safety and feasibility study for TULSA-PRO in April 2016, we were granted CE Mark approval for the commercial sale of the TULSA-PRO system in Europe and in other CE Mark jurisdictions.

 

In August 2016, we initiated TACT Pivotal Clinical Trial, which the FDA approved under an IDE application. The TACT Pivotal Clinical Trial was designed to support a 510(k) premarket notification submission in the United States. This submission was made in May 2019 in support of clearance of the TULSA-PRO system by the FDA for use in the ablation of prostate tissue in the United States.

 

In Canada, we are currently manufacturing the TULSA-PRO system under a certified ISO 13485 Quality Management System. However, on October 26, 2017, Health Canada refused Medical Device License approval of TULSA-PRO requiring further clinical evidence beyond the Phase I data. We are in the process of evaluating the additional requirements with Health Canada, however, the Canadian market is not considered a lower priority from a commercialization strategy perspective in light of its relatively small size.

 

Sonalleve

 

The Sonalleve applications to treat uterine fibroids and bone metastasis are CE marked and available in the European Union and its member states. The uterine fibroids application is also available for sale in Canada. Philips Oy had registered Sonalleve in several Middle East, North African, and South Asian countries. We are in the process of transferring existing regulatory registrations of Sonalleve from Philips Oy to us. We are also in the process of assessing current clinical research network activities and the investigator lead studies in the United States to form regulatory strategies for several potential indications.

 

In 2018, Sonalleve was also approved in China by the NMPA for the non-invasive treatment of uterine fibroids.

 

Reimbursement

 

Our ability to successfully commercialize our products depends in large part on the extent to which coverage and reimbursement for such products and related treatments or procedures will be available from government health administration authorities, government and private health insurers, and other organizations or third-party payers. Pricing and reimbursement procedures and decisions vary from country to country. Many government health authorities and private payers condition payment on the cost-effectiveness of the product. Even if a device is CE marked or has received regulatory clearance or approval, there is no guarantee that third party payers will reimburse providers or patients for the cost of the device and related procedures or that the amount of such reimbursement will be adequate to cover the cost of the device. The availability of adequate coverage and reimbursement to hospitals and clinicians using our products therefore is critical to our ability to generate revenue.

 

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Although we expect there to be an out-of-pocket market for our approved products, an out-of-pocket market alone is unlikely to be sufficient to support successful commercialization of our products. To date, our products do not have significant coverage or reimbursement from government or third-party payers in the jurisdictions where they are approved. For more information, see Item 3.D, “Risk Factors—Risks Related to Our Business and Growth Strategy—Successful commercialization of our approved products will also depend on the cost of the system and the availability of coverage and adequate reimbursement from third-party payers.”

 

We plan to pursue reimbursement for our products in these and other key markets where we have regulatory approvals.

 

Intellectual Property

 

Our intellectual property is comprised of a broad and world-wide portfolio of patents, patent applications, trademarks, copyrights, trade secrets and other proprietary assets. Our intellectual property portfolio is both growing and dynamic and includes approximately 38 patent families representing approximately 120 granted or allowed patents and 58 patent applications in various stages of review and prosecution around the world.

 

Many of our patents and patent applications claim electronic and mechanical aspects of hardware, software and methods related to ultrasonic ablation of tissue. The intellectual property assets are largely directed to (i) using real time MRI imaging as a tool to plan, monitor or control said ultrasonic ablation; (ii) MRI thermometry methods, especially in respect of our ultrasound therapy processes and devices; (iii) the phasing, beam-forming, and control of acoustic arrays and similar energy sources; (iv) computational method to improve filtering, imaging and analyzing the results of MRI-guided thermal therapy processes; and (v) secondary and support systems such as active cooling of near-target tissues. The portfolio covers both the “TULSA” and the “Sonalleve” families of products, as well as generic technologies and applications and extensions of our products.

 

We believe that the protection of our intellectual property is an essential element of our business and we intend to continue our investment in the development of our intellectual property portfolio. We have worked over the past year to pursue, maintain and expand on the intellectual property portfolio acquired from Philips in 2017. This intellectual property has been strengthened and extended to many jurisdictions around the globe in support of our sales, development and marketing efforts.

 

We pursue a global intellectual property strategy, registering for patent protection in all jurisdictions where we intend to carry on business, including the United States, Canada, Japan, major European markets (e.g., Germany, France, U.K., Italy, Spain and Turkey) and the emerging markets (e.g., Brazil, Russia, India, and China).

 

We also rely upon trade secrets, know-how and other proprietary, confidential information for the protection of our technology. We require all employees, consultants, scientific advisors and other contractors to enter into confidentiality agreements to protect against the disclosure of such proprietary information. Each inventor is required to execute a formal assignment specific to each invention that he or she has listed, and which is officially recorded in the proper patent office.

 

Licenses

 

In addition to developing our own intellectual property portfolio, we have licensed and acquired intellectual property rights from third parties through exclusive licenses, collaborative research and asset purchase agreements. Material license agreements include an exclusive license with Sunnybrook entered into on May 16, 2011 (the “Sunnybrook License”). Under the Sunnybrook License, Sunnybrook granted us an exclusive worldwide and royalty-free right to use certain defined Sunnybrook technology in connection with, among other things, manufacturing, marketing and selling products such as the TULSA-PRO system, in the field of MRI-guided transurethral ultrasound therapy. Under the license, we are subject to various obligations, including a milestone payment of C$250,000 that was paid in connection with our recent FDA clearance of TULSA-PRO. In addition, we are required to pay legal costs associated with patent application preparation, filing and maintenance. If either party to the Sunnybrook License breaches or fails to perform a material obligation and fails to cure such breach or perform such obligations within a 30 day cure period, the non-breaching party may terminate the agreement. Material obligations include our agreement not to use the technology or intellectual property outside of the license scope, not to use the technology or intellectual property outside the field of MRI-guided transurethral ultrasound therapy (or permitting our customers to do so) and not to breach confidentiality obligations.

 

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C. Organizational Structure

 

For the organizational structure of our company, see Item 4.A, “History and Development of the Company—Summary Corporate History and Intercorporate Relationships—Intercorporate Relationships”.

 

D. Property, Plants and Equipment

 

We operate from leased premises in three different locations. We do not own any real estate property.

 

Location   Area   Premise Use   Expiry Date
2400 Skymark Ave, Unit 6, Mississauga, ON, Canada   38,148 ft2   Corporate offices and administration, Manufacturing, Research and Development   September 30, 2026
Äyritie 4B, 01510 Vantaa, Finland   6,372 ft2   Manufacturing, Research and Development   December 31, 2021
Kehrwieder 9, 20457 Hamburg, Germany   162 ft2   Sales and Marketing   month to month

 

We assemble and test TULSA-PRO and Sonalleve systems at dedicated manufacturing facilities located in Canada and Finland which are ISO 13485 certified. Our manufacturing model consists primarily of outsourcing manufacturing of the components of our systems where it is most cost effective to do so, while assembling and quality testing the final products in-house. Additionally, single use products are assembled entirely in the Mississauga facility within a class 300 clean room which became operational in August 2017. Our manufacturing facilities have sufficient capacity to meet our manufacturing needs through the foreseeable future.

  

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management

 

Directors

 

Set out below is information with respect to our directors. Our directors are elected by our shareholders at each annual general meeting.

 

Name, Age and
Residence
  Positions with
the Company
  Date First Appointed to the Board   Principal Occupation
Arun Menawat
Age: 64
Oakville, Ontario, Canada
  Chief Executive Officer and Director   June 4, 2015   Chief Executive Officer and Director of the Company (since August 2016); Chairman, President and Chief Executive Officer of Novadaq Technologies Inc. (from 2003 to 2016).
             
Brian Ellacott(1)
Age: 62
Sanibel Island, Florida, USA
  Director   June 14, 2018   Chief Executive Officer Belmont Instrument Corporation, a medical device company (since 2017); President and Chief Executive Officer Laborie Medical Technologies, a medical device company (from 2013 to 2017).
             

Steve Forte(1)

Age: 40

Montréal, Québec, Canada

  Director   August 6, 2019   Chief Financial Officer Clementia Pharmaceutical (from August 2018 to July 2019); Chief Financial Officer Thinking First (from September 2015 to August 2018); Executive Director of Finance (from September 2014 to September 2015); Vice-President, Financial Reporting Aptalis Pharma Inc. (from April 2011 to May 2014)

 

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Name, Age and
Residence
  Positions with
the Company
  Date First Appointed to the Board   Principal Occupation
Kenneth Galbraith(1)(2)(3)
Age: 56
Vancouver, British Columbia, Canada
  Director   January 17, 2017   Chief Executive Officer Prometic Life Sciences (since April 2019); Founder of Five Corners Capital, a venture capital management company (since 2013).
             
Linda Maxwell (2)
Age: 45
Toronto, Ontario, Canada
  Director   October 9, 2018   Surgeon (since 2005); Executive Director, Biomedical Zone at Ryerson University (since June 2015); Technology Transfer Manager University of Oxford (from June 2013 to July 2014)
             
Jean-François Pariseau(2)
Age: 50
Montréal, Québec, Canada
  Director   June 4, 2015   Co-Founder and Partner at Amplitude Ventures (since July 2018); Partner, BDC Capital Healthcare Fund, a venture capital company (since July 2001 to June 2018).
             
Arthur Rosenthal(4)
Age: 72
Oro Valley, Arizona, USA
  Director   June 14, 2018   Professor of Practice in the Biomedical Engineering Department at Boston University (since 2010); Chief Executive Officer of gEyeCue, Ltd., a medical technology company (since 2011).

 

(1) Member of the Audit Committee.

 

(2) Member of the Human Resources and Corporate Governance Committee.

 

(3) Chair of the Audit Committee.

 

(4) Chair of the Human Resources and Corporate Governance Committee.

 

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Director Biographies

 

Arun Menawat – Chief Executive Officer and Director – Dr. Menawat has an accomplished history of executive leadership success in the healthcare industry. Since April 2003 until to joining Profound, he served as the Chairman, President and CEO of Novadaq Technologies Inc., a TSX and Nasdaq listed company that marketed medical imaging and therapeutic devices for use in the operating room. Previously, he was President and Chief Operating Officer and Director of another publicly listed medical imaging software company, Cedara Software. His educational background includes a Bachelor of Science in Biology, University of District of Columbia, Washington, D.C., and a Ph.D. in Chemical Engineering, from the University of Maryland, College Park, MD, including graduate research in Biomedical Engineering from the National Institute of Health, Bethesda, MD. He also earned an Executive M.B.A. from the J.L. Kellogg School of Management, Northwestern University, Evanston, IL.

 

Brian Ellacott – Director – Mr. Ellacott is an experienced global medical device executive. Mr. Ellacott joined Belmont Instrument as Chief Executive Officer in December 2017. Belmont Instrument is a Boston based private equity owned medical device company with a leading global position in fluid warming and infusion systems. Prior to Belmont Instrument, Mr. Ellacott was the President and CEO of Laborie. Laborie is a Urology and Gastroenterology medical device company based in Toronto with manufacturing facilities in Toronto, Montreal, Enschede NL, Attikon Switzerland and Portsmouth New Hampshire. Mr. Ellacott joined private equity owned Laborie as President and CEO in July 2013 and in four years completed 14 global acquisitions tripling Laborie’s revenue and increasing EBITDA eight fold. The company was ranked as one of the fastest growing and most profitable medical device companies in the world. Prior to joining Laborie Medical Technologies (“Laborie”), Mr. Ellacott served as Executive Vice President and General Manager of Invacare’s (NYSE: IVC) $1 billion North and South American homecare and rehabilitation business. Mr. Ellacott has also held executive positions with Baxter International and American Hospital Supply, with assignments in Canada, Australia and the United States. Mr. Ellacott serves on the board of Belmont Instrument and is the past Chairman of the board of the Canadian Assistive Devices Association. Mr. Ellacott holds a Bachelor of Business Administration Degree from Wilfrid Laurier University, Waterloo, Ontario, Canada and is a dual United States and Canadian citizen.

 

Steve Forte – Director – Mr. Forte is a senior finance leader with broad experience managing complex, large-scale finance environments. Mr. Forte was most recently CFO of Clementia Pharmaceuticals (NASDAQ: CMTA), which was sold earlier this year to Ipsen S.A. in a transaction valued at US$1.3 billion. His experience includes nearly a decade at Aptalis Pharma Inc., where he was responsible for the overall corporate controllership function of a multinational pharmaceutical company with approximately $700 million in annual revenue. At Aptalis, Mr. Forte was responsible for SEC reporting and led the preparation of an SEC S-1 registration statement for a U.S. IPO on Nasdaq prior to the successful sale of the company to Forest Labs. Mr. Forte’s prior experience also includes Chief Financial Officer of Thinking Capital Financial Corporation, a leading Canadian financial technology firm. Mr. Forte received his Bachelor of Commerce in Accountacy from Concordia University and is a Certified Professional Accountant in the Province of Quebec and a Certified Information Systems Auditor with ISACA.

 

Kenneth Galbraith – Director – Mr. Galbraith is an accomplished life sciences industry veteran with over 30 years of experience acting as an executive, director, investor and advisor to companies in the biotechnology, medical device, pharmaceutical and healthcare sectors. Mr. Galbraith currently serves as the Chief Executive Officer of Prometic Life Sciences Inc. (TSX: PLI), a biotechnology company. Mr. Galbraith joined Ventures West as a General Partner in 2007 and led the firm’s biotechnology practice prior to founding Five Corners Capital in 2013 to continue management of the Ventures West investment portfolio. Previously, he served as the Chairman and Interim CEO of AnorMED until its sale to Genzyme Corp. in a cash transaction worth almost US$600 million. Starting his career in the life sciences sector in 1987, Mr. Galbraith spent 13 years in senior management with QLT Inc., retiring in 2000 from his position as Executive VP and CFO when QLT Inc.’s market capitalization exceeded US$5 billion. He has served on the board of directors of several public and private companies, including Angiotech Pharmaceuticals, Arbutus Biopharma and Cardiome Pharma. Mr. Galbraith currently serves on the board of directors of Macrogenics and Prometic Life Sciences Inc. Mr. Galbraith earned a Bachelor of Commerce (Honors) degree from the University of British Columbia in 1985 and was appointed a Fellow of the Chartered Accountants of British Columbia in 2013.

 

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Linda Maxwell – Director – Dr. Maxwell, a seasoned surgeon and entrepreneur, is the Founding and Executive Director of the Biomedical Zone, a business incubator for emerging health technology companies. It is an innovative strategic partnership between St. Michael’s Hospital and Ryerson University. Under Dr. Maxwell’s stewardship, the Biomedical Zone has gone from concept to creation to going concern, supporting Toronto’s leading health technology businesses and driving disruption and innovation adoption in the clinical setting. Dr. Maxwell’s breadth of experience and scope of expertise is founded on over a decade and a half as an accomplished head and neck/facial plastic surgeon. Her academic medical career is distinguished by university appointments as a clinical instructor, medical school faculty member, and published scientific author. A frequent public speaker and panelist, Dr. Maxwell has addressed national and international communities on scientific research, innovation, and entrepreneurship. Additionally, Dr. Maxwell has worked internationally as a senior tech transfer manager and partnership leader for innovation and commercialization for the National Health Service and University of Oxford. She also worked for Medtronic on business strategy for South America (Brazil) and continues to consult to Medtronic on international clinical trials as an external medical monitor. In addition to her professional endeavors, Dr. Maxwell is a member of the Institute of Corporate Directors. She serves as a director for Profound, Gardiner Museum, and the Economic Club of Canada. She serves as an innovation and health technology subject matter expert for the Federal government’s Canadian Space Agency, Canadian Medical Association, and the Ontario Chief Innovation Strategist. Dr. Maxwell earned a Bachelor’s degree with honors from Harvard University (Biology, cum laude), M.D. from Yale University, and M.B.A. from University of Oxford. She completed six years of residency and fellowship training in surgery at the University of Toronto. Additionally, Dr. Maxwell successfully completed the Royal College of Canada, American College of Surgery, and American Board of Facial Plastic Reconstructive Surgery certifications.

 

Jean-François Pariseau – Director – Mr. Pariseau is co-founder and Partner at Amplitude Ventures. Amplitude Ventures is a capital catalyst for highly innovative companies at the point of value acceleration. Amplitude Ventures works with Canada’s most promising healthcare companies, with a shared vision of bringing groundbreaking technologies to patients. Amplitude Ventures is focused on building world-class Canadian companies in precision medicine and next-generation medical devices. Before co-founding Amplitude Ventures, Mr. Pariseau was Partner at the Healthcare Fund of BDC Capital and an investment manager with CDP Capital Technology Ventures, a $2 billion global fund investing in healthcare, information technology and advanced technologies, where he was responsible for healthcare investments in Canada and the United States. Prior to joining the investment world, Jean-Francois was CEO of a consulting company specializing in regulatory affairs, and VP, R&D for a pharmaceutical-product distribution company, both of which he founded. Mr. Pariseau holds a Bachelor of Science in Biotechnology from Université de Sherbrooke, a Master of Science in Biomedical Sciences from Université de Montréal, and an M.B.A. from HEC Montréal.

 

Arthur L. Rosenthal – Director – Dr. Rosenthal is director and Chair of Compensation Committee for LivaNova PLC, a UK global medical technology company. Prior, Dr. Rosenthal served on the Cyberonics board of directors as a non-executive director and Chair of the Compensation Committee from January 2007 to October 2015. Since June 2010, Dr. Rosenthal has served as Professor of Practice in the Biomedical Engineering Department at Boston University. Since December 2011, Dr. Rosenthal has also served as CEO of gEyeCue, Ltd., which he co-founded, a development stage medical device company working on a guided biopsy for lower and upper gastrointestinal cancer screening. From June 2011 until July 2012, Dr. Rosenthal served as executive vice chairman of Cappella Medical Devices Ltd. (now ArraVasc Ltd.), a development-stage company focused on novel device solutions for coronary artery disease. From June 2009 until June 2011, Dr. Rosenthal served as President and CEO of Cappella, Inc. Dr. Rosenthal served as chairman, from January 2002, and CEO, commencing in January 2005, of Labcoat, Ltd. until its acquisition by Boston Scientific Corporation in December 2008. From January 1994 to May 2000, Dr. Rosenthal was a Senior Vice President, Corporate Officer, and Chief Development Officer of Boston Scientific, and from May 2000 until his retirement in January 2005, he was a Senior Vice President, Chief Scientific Officer, and Executive Committee Member of Boston Scientific. From 2000 until 2010, Dr. Rosenthal served as a non-executive director, and from 2006 through 2009, as chairman of the Remuneration Committee, of Renovo, Ltd., a U.K. based pharmaceutical company that became publicly traded in 2006. In July 2009, Dr. Rosenthal joined the board of Interface Biologics, Inc., a Toronto-based development stage company focused on drug delivery devices, as a non-executive director. In April 2011, Dr. Rosenthal was elected Chairman at Interface Biologics, Inc. From April 2013 to May 2015, Dr. Rosenthal served as non-executive director and Member of the Compensation Committee of Arch Technologies, Inc. and is currently a member of Arch’s Clinical Advisory Board. In 2015, Dr. Rosenthal was appointed to the Industrial Advisory Committee, CURAM (National University in Galway, Ireland). Since 2003, Dr. Rosenthal has been a Fellow of the American Institute of Medical and Biological Engineering.

 

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Senior Management

 

Set out below is information with respect to our senior management. Our officers serve for an indefinite term, subject to the terms of their employment agreements.

 

Name   Position   Date Appointed
Arun Menawat   Chief Executive Officer and Director   August 15, 2016
Mathieu Burtnyk   Vice-President of Clinical Affairs   July 7, 2011
Aaron Davidson   Chief Financial Officer and Senior Vice-President of Corporate Development   May 1, 2018
Rashed Dewan   Vice President of Finance, Manufacturing and Service   July 5, 2016
Guruprit (Goldy) Singh   Vice President of Regulatory Affairs and Product Management   December 1, 2011

 

Senior Management Biographies

 

Arun Menawat – Chief Executive Officer and Director – see “Director Biographies” above.

 

Mathieu Burtnyk – Vice President of Clinical Affairs – Dr. Mathieu Burtnyk has over 15 years of experience creating and developing imaging technologies and therapeutic ultrasound solutions, from benchtop to bedside, with a focus on prostate disease. He started his career in academia, obtaining his PhD in Medical Biophysics at the University of Toronto and Sunnybrook Health Sciences Center. He is the inventor of the patented closed-loop temperature feedback control algorithm used by the TULSA-PRO today in clinic. Mathieu joined Profound in 2011 as Scientist progressing to Clinical Scientist, Director of Clinical Affairs and now VP Clinical Affairs, where he has led the scientific design and execution of pre-clinical, Phase I and TACT Pivotal clinical studies.

 

Aaron Davidson – Chief Financial Officer and Senior Vice-President of Corporate Development – Mr. Aaron Davidson has been the CFO and Senior Vice President of Corporate Development of Profound since May 2018, a medical technology company that is developing real-time MRI-guided thermal ultrasound systems for incision-free ablation of abnormal or cancerous tissue. Before joining Profound, Mr. Davidson served as Co-Head and Managing Director of H.I.G. BioHealth Partners from January 2004 through May 2018, where he focused on investment opportunities with emerging life sciences companies. Mr. Davidson began his career with Eli Lilly and Company, where he spent a decade in various operating management roles in the United States and Canada, including financial management, business development, strategic planning, market research and general management. Mr. Davidson continues to serve as a Venture Partner at H.I.G. Previously, Mr. Davidson led investments in, worked with the management teams of, and represented H.I.G. as a board member of several successful companies, including Alder Biopharmaceuticals (public), Forsight Vision5 (acquired), Gemin X Pharmaceuticals (acquired), HyperBranch Medical Technology (acquired), Intact Vascular, OnTarget Laboratories, Novadaq Technologies (public/acquired), and Salmedix (acquired). Mr. Davidson earned his M.B.A. from Harvard Business School and a Bachelor’s Degree in Finance from McGill University.

 

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Rashed Dewan – Vice President of Finance, Manufacturing and Service – Mr. Dewan joined Profound in 2015 as Director of Finance and Corporate Controller. He has also served as Vice President, Finance and Interim Chief Financial Officer, and most recently, since 2018, as our Vice President of Finance, Manufacturing and Service. Prior to joining us, Mr. Dewan previously held senior finance and management roles with Xylem Canada from September 2013 to June 2015, Natus Medical from March 2010 to August 2013 and Psion Teklogix from 2001 to 2009. Mr. Dewan has over 20 years of finance and accounting experience in public and private companies, with expertise in the medical device sector. Mr. Dewan has extensive experience with systems design and implementation and a strong track record of success in accounting, finance, sales and operations management. Mr. Dewan is a Certified Public Accountant, and has a Bachelor of Science Degree with a concentration in Accounting from the University of Southern California.

 

Guruprit (Goldy) Singh – Vice President of Regulatory Affairs and Product Management – Ms. Singh is Vice President Regulatory Affairs & Product Management of Profound. She joined the Company in December 2011 as a VP Quality Assurance and Regulatory Affairs. In this role, she provided strategic direction on regulatory affairs, quality assurance, risk management, and clinical trials ensuring the product is introduced to markets efficiently and effectively. In 2019, she was given responsibility for the overall product management process of a particular product line. She works closely with internal and external stakeholders such as researchers, engineers, clinicians, hospital administrations, regulatory bodies etc. to ensure that the strategies are executable and achieve desired results. Before joining Profound, Ms. Singh spent 22 years in medical device companies in the Greater Toronto Area. Prior to Profound, she worked for Natus, as Director Quality Assurance and Regulatory Affairs, managed compliance and day-to-day operations through a substantial growth period including six acquisitions and commercialization of high-tech medical devices. She also worked for Philips and C.R. Bard. Ms. Singh has a Bachelor’s Degree with a major in Biology and Physics from Ranchi University, India.

 

B. Compensation

 

Executive Compensation

 

Compensation Discussion and Analysis

 

Objectives

 

We have relied on the experience of the Board and the Human Resources and Corporate Governance Committee in setting executive compensation. In considering compensation awards, the Human Resources and Corporate Governance Committee has considered the skill level of its executives as well as comparable levels of compensation for individuals with similar capabilities and experience. In regard to our current executive compensation arrangements, the Human Resources and Corporate Governance Committee has considered such factors as our current financial situation, our estimated financial situation in the mid-term and the need to attract and retain the key executives necessary for our long term success. The Human Resources and Corporate Governance Committee has determined that at this stage of the Company’s development it is appropriate that compensation be in the form of base salary, options, a potential bonus award and certain benefits plans.

 

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Compensation Philosophy and Objectives

 

The executive compensation program adopted by us and applied to our executive officers is designed to:

 

(a) attract and retain qualified and experienced executives who have international business and operations experience and will contribute to our success;

 

(b) ensure that the compensation of the executive officers provides a competitive base compensation package, with additional compensation to reward success and create a strong link between corporate performance and compensation; and

 

(c) motivate executive officers to enhance long term shareholder value, with current compensation being weighted toward at-risk long-term incentives in the form of options and other security based incentives so as to foster alignment with the interests of our shareholders.

 

The goals of the compensation program are to attract and retain the most qualified people with relevant experience, to motivate and reward such individuals on a short term and long term basis, and to create alignment between corporate performance and compensation. The Human Resources and Corporate Governance Committee and the Board intend that the total cash components of compensation (base salary plus discretionary cash bonus) target the median of a benchmark group in comparable industries with similar market capitalization (the “Compensation Peer Group”).

 

We do not believe that our compensation programs encourage excessive or inappropriate risk taking as: (i) our employees receive both fixed and variable compensation, and the fixed (salary) portion provides a steady income regardless of Common Share value which allows employees to focus on our business; and (ii) the Share Option Plan encourages a long term perspective due to the vesting provisions of the options (see “—Share Option Plan” below). We believe that our compensation program is appropriately structured and balanced to motivate our executives and reward the achievement of annual performance goals, as well as the achievement of long term growth in shareholder value.

 

Elements of Compensation

 

Base Salary

 

Base salary is intended to reflect an executive officer’s position within the corporate structure, his or her years of experience and level of responsibility, and salary norms in the sector and the general marketplace. As such, decisions with respect to base salary levels for executive officers are not based on objective identifiable performance measures but for the most part are determined by reference to competitive market information for similar roles and levels of responsibility, as well as more subjective performance factors such as leadership, commitment, accountability, industry experience and contribution. Our view is that a competitive base salary is a necessary element for retaining qualified executive officers, as it creates a meaningful incentive for individuals to remain with us and not be unreasonably susceptible to recruiting efforts by our competitors.

 

In determining the base salary compensation of the Named Executive Officers (as defined herein), the Board considered: (i) recruiting and retaining executives critical to the success of the Company and the enhancement of shareholder value; (ii) providing fair and competitive compensation; (iii) balancing the interests of management and our shareholders; and (iv) rewarding performance, both on an individual basis and with respect to operations in general.

 

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Long-Term Incentives

 

Long-term incentives, in the form of options, are intended to align the interests of our directors and our executive officers with those of our shareholders, to provide a long-term incentive that rewards these individuals for their contribution to the creation of shareholder value and to reduce the cash compensation we would otherwise have to pay. The Share Option Plan is administered by the Board. In establishing the number of options to be granted to any particular executive officer, reference was made to the number of options granted to officers of other companies involved in similar businesses. The Board also considers previous grants of options and the overall number of options that are outstanding relative to the number of outstanding Common Shares in determining whether to make any new grants of options and the size and terms of any such grants, as well as the level of effort, time, responsibility, ability, experience and level of commitment of the executive officer in determining the level of incentive stock option compensation.

 

Bonus Awards

 

The Board will consider whether it is appropriate and in our best interests to award a discretionary cash bonus to executive officers for the most recently completed financial year and if so, in what amount. A cash bonus may be awarded to reward extraordinary performance that has led to increased value for our shareholders through property acquisitions or divestitures, the formation of new strategic or joint venture relationships and/or capital raising efforts.

 

Quantitative performance objectives include the achievement of our revenue targets, departmental and individual goals, which may be quantitative or qualitative in nature. These have been established for each individual executive officer by the Board with alignment of such corporate/individual goals with the CEO and include objectives such as research and product development, company productivity, revenue growth and our long-term strategic guidance. These corporate, departmental and individual goals form the basis for the review of the executive officers and the determination of cash bonuses at the end of each year with the Board. These awards are reviewed yearly to ensure that corporate performance metrics and individual goals are consistent from year to year.

 

Bonus award payments are based on the following assessment of:

 

(a) whether or not the executive officers have successfully met or exceeded the established corporate, departmental and individual performance metrics and goals;

 

(b) the executive officers’ decisions and actions and whether or not they are aligned with our long-term growth strategy and have created value for our shareholders;

 

(c) whether any near-term goals and objectives were not met because the executive officers made decisions in our best long-term interests or due to factors outside of the executive officers’ control; and/or

 

(d) additional initiatives undertaken by the executive officers, which were not contemplated in the initial objectives.

 

The following targets, as a percentage of base salary, were approved for each NEO for the fiscal year ending December 31, 2018:

 

Position   Target  
CEO     65%  
Other NEOs     20-45%  

 

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Benefits Plans

 

The Named Executive Officers, as defined below, are entitled to life insurance, health and dental benefits.

 

Performance Graph

 

The following graph illustrates the cumulative return to shareholders of a C$100 investment in Common Shares from June 8, 2015 to December 31, 2018, as compared to the cumulative total return on the Standard & Poor’s/TSX Index and Standard & Poor’s/TSX Venture Index for the same period, assuming the reinvestment of cash distributions and/or dividends.

 

   

June 8,

2015

   

December 31,

2015

   

December 31,

2016

   

December 31,

2017

   

December 31,

2018

 
Profound Medical   C$ 100.00     C$ 53.33     C$ 74.67     C$ 56.00     C$ 36.67  
S&P/TSX Composite Index   C$ 100.00     C$ 88.25     C$ 103.69     C$ 109.94     C$ 97.14  
S&P/TSX Venture Composite Index   C$ 100.00     C$ 76.68     C$ 111.08     C$ 124.05     C$ 81.20  

 

 

The trend shown in the above graph does not necessarily correspond to our trend of compensation for the NEOs (as defined herein) for the period disclosed above. We consider a number of factors in connection with our determination of appropriate levels of compensation including, but not limited to, the demand for and supply of skilled professionals with experience in the medical device industry, individual performance, our performance (which is not necessarily tied exclusively to the trading price of the Common Shares on the TSX or any other stock exchanges on which our Common Shares are listed and other factors discussed under “Compensation Discussion and Analysis” above).

 

Named Executive Officers

 

The following individuals are considered the “Named Executive Officers” or “NEOs” for the purposes of the disclosure:

 

(a) each individual who, during any part of the most recently completed financial year, served as our Chief Executive Officer (“CEO”), including an individual performing functions similar to a CEO;

 

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(b) each individual who, during any part of the most recently completed financial year, served as our Chief Financial Officer (“CFO”), including an individual performing functions similar to a CFO;

 

(c) each of our three most highly compensated executive officers, or the three highly compensated officers acting in a similar capacity, other than the CEO and CFO, at the end of the most recently completed financial year whose total compensation was more than C$150,000 for the fiscal year ended December 31, 2018; and

 

(d) each individual who would be a Named Executive Officer under paragraph (c) but for the fact the individual was not one of our executive officers and was not acting in a similar capacity as of December 31, 2018.

 

Summary Compensation Table

 

The following table sets forth information concerning the total compensation for the three most recently completed financial years paid to the Named Executive Officers for the year ended December 31, 2018. Dr. Menawat is our only officer who also serves as one of our directors.

 

                      Non-Equity Incentive
Plan Compensation
                 
Name and Principal Position   Year     Salary     Option-
Based
Awards
    Annual
Incentive
Plan
    Long
Term
Incentive
Plan
  Pension
Value
    All Other
Compensation
  Total
Compensation
 
          (C$)     (C$)     (C$)     (C$)     (C$)   (C$)  
Arun Menawat(1)     2018       647,665       Nil       208,000     Nil     Nil     Nil     855,665  
Chief Executive Officer and Director     2017       331,500       Nil       Nil     Nil     Nil     Nil     331,500  
      2016       125,370       2,197,221 (5)     24,363     Nil     Nil     Nil     2,346,954  
Aaron Davidson(2)     2018       209,446       913,015 (6)     Nil     Nil     Nil     Nil     1,122,461  
Chief Financial Officer and Senior Vice-     2017       Nil       Nil       Nil     Nil     Nil     Nil     Nil  
President of Corporate Development     2016       Nil       Nil       Nil     Nil     Nil     Nil     Nil  
Ian Heynen(3)     2018       200,976       730,412 (6)     Nil     Nil     Nil     Nil     931,388  
Senior Vice-President of Sales and     2017       Nil       Nil       Nil     Nil     Nil     Nil     Nil  
Marketing     2016       Nil       Nil       Nil     Nil     Nil     Nil     Nil  
Rashed Dewan     2018       190,102       -       26,010     Nil     Nil     Nil     216,112  
Vice-President of Finance     2017       184,301       23,598 (7)     -     Nil     Nil     Nil     207,899  
      2016       178,500       124,513 (8)     12,888     Nil     Nil     Nil     315,901  
Guruprit (Goldy) Singh     2018       209,131       Nil       15,604     Nil     Nil     Nil     224,735  
Vice-President of Regulatory Affairs and     2017       205,020       Nil       -     Nil     Nil     Nil     205,020  
Product Management     2016       204,000       Nil       14,800     Nil     Nil     Nil     218,800  

 

(1) Dr. Menawat was appointed CEO on August 15, 2016, as such he no longer receives any Director or Committee fees.

 

(2) Mr. Davidson was hired as CFO and Senior Vice-President of Corporate Development on May 1, 2018.

 

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(3) Mr. Heynen was hired as Senior Vice-President Sales & Marketing on April 23, 2018 and resigned on January 7, 2019.

 

(4) Nil indicates that perquisites and other personal benefits did not exceed C$50,000 or 10% of the total salary of the NEO for the financial year.

 

(5) Option based awards granted utilize the Black-Scholes model to determine the fair value. The input factors to determine the fair value were volatility 99%, exercise price C$1.23, interest rate 1.35% and expected life of 6 years.

 

(6) Option based awards granted utilize the Black-Scholes model to determine the fair value. The input factors to determine the fair value were volatility 82%, exercise price C$1.06, interest rate 2.30% and expected life of 6 years.

 

(7) Option based awards granted utilize the Black-Scholes model to determine the fair value. The input factors to determine the fair value were volatility 135%, exercise price C$0.85, interest rate 1.90% and expected life of 6 years.

 

(8) Option based awards granted utilize the Black-Scholes model to determine the fair value. The input factors to determine the fair value were volatility 99%, exercise price C$1.20, interest rate 0.94% and expected life of 6 years.

 

Option-Based Awards

 

The following table sets forth information with respect to the unexercised options granted under the Share Option Plan to the NEOs that were outstanding as of December 31, 2018.

 

          Option-Based Awards  
Name and Principal Position   Number of
Common Shares
Underlying
Unexercised
Options
    Option Exercise
Price
    Option
Expiration Date
  Value of
Unexercised In-
the-Money
Options(6)
 
          (C$)         (C$)  
Arun Menawat(1)     33,000       1.50     Nov 12, 2024     Nil  
Chief Executive Officer and Director     934,055       1.46     Aug 22, 2026     Nil  
      16,500       1.35     Sep 15, 2026     Nil  
      364,141       1.10     Nov 24, 2026     Nil  
      1,417,583       1.10     Dec 21, 2026     Nil  
      2,000,000       0.92     May 16, 2029     Nil  
Aaron Davidson(2)     500,000       1.19     May 22, 2028     Nil  
Chief Financial Officer and Senior Vice-     500,000       0.93     Aug 23, 2028     Nil  
President of Corporate Development     1,000,000       0.92     May 16, 2029     Nil  
Ian Heynen(3)     400,000       1.19     May 22, 2028     Nil  
Senior Vice-President of Sales and Marketing     400,000       0.93     Aug 23, 2028     Nil  
Rashed Dewan(4)     30,000       1.50     Sept 8, 2025     Nil  
Vice-President of Finance     50,000       1.35     July 19, 2026     Nil  
      75,000       1.10     Nov 24, 2026     Nil  
      45,000       0.85     Nov 16, 2027     Nil  
      25,000       0.92     May 16, 2029     Nil  

 

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Guruprit (Goldy) Singh(5)     50,000       0.24     Dec 1, 2021     15,500  
Vice-President of Regulatory Affairs and     25,000       0.24     Sept 12, 2022     7,750  
Product Management     300,000       1.50     Sept 8, 2025     Nil  
      200,000       0.92     May 16, 2029     Nil  

 

(1) As of December 31, 2018, Dr. Menawat held 2,765,279 options, with 1,549,389 of these options exercisable and the remaining balance vesting over a three-year period. In addition, Dr. Menawat was granted 2,000,000 additional options on May 16, 2019.

 

(2) As of December 31, 2018, Mr. Davidson held 1,000,000 options, all options remain unvested and will vest over a three-year period. In addition, Mr. Davidson was granted 1,000,000 additional options on May 16, 2019.

 

(3) Mr. Heynen was hired as Senior Vice-President Sales & Marketing on April 23, 2018 and resigned on January 7, 2019. All of these options expired upon his resignation.

 

(4) As of December 31, 2018, Mr. Dewan held 200,000 options, with 110,003 of these options exercisable and the remaining balance vesting over a three-year period. In addition, Mr. Dewan was granted 25,000 additional options on May 16, 2019.

 

(5) As of December 31, 2018, Ms. Singh held 375,000 options, with 325,000 of these options exercisable and the remaining balance vesting over a three-year period. In addition, Ms. Singh was granted 200,000 additional options on May 16, 2019.

 

(6) The value shown is the product of the number of Common Shares underlying the option multiplied by the difference between the Common Share TSX closing price on December 31, 2018 of C$0.55 and the exercise price.

 

Executive Employment Agreements – Termination and Change of Control Benefits

 

Each of Dr. Menawat, Mr. Davidson, Mr. Dewan, Ms. Singh and Dr. Burtnyk are party to executive employment agreements (the “Executive Employment Agreements”) with us. The Executive Employment Agreements have an indefinite term and contain standard confidentiality and non-solicitation provisions. We have agreed pursuant to the Executive Employment Agreements that each of Dr. Menawat, Mr. Davidson, Mr. Dewan, Ms. Singh and Dr. Burtnyk will receive base salaries determined by the Board and may receive discretionary bonuses, grants of options, reimbursement of expenses, benefits and certain perquisites as set forth in the Executive Employment Agreements. The amounts paid in 2018 with respect to the applicable Executive Employment Agreements are set forth in the Summary Compensation Table above.

 

The following table sets forth information with respect to the estimated aggregate dollar amount to which each current NEO would have been entitled under his or her Executive Employment Agreement if an event resulting in termination of employment occurred on December 31, 2018.

 

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Name   Triggering Event   Cash Payment   Value of Bonus and other Benefits     Value of Option Awards     Total Payout
Arun Menawat   Termination with cause/resignation   Nil(1)   Nil     Nil(4)     Nil
    Termination without cause   C$682,100(2)   C$446,472(2)     Nil(4)     C$1,128,572(2)
    Change of control   C$1,364,200(2)   C$443,365(2)     Nil     C$1,807,565(2)
Aaron Davidson   Termination with cause/resignation   Nil(1)   Nil     Nil(4)     Nil
    Termination without cause   C$158,500   C$95,100(3)     Nil(4)     C$253,600
    Change of control   C$317,000   C$142,650     Nil     C$459,650
Rashed Dewan   Termination with cause/resignation   Nil(1)   Nil     Nil(4)     Nil
    Termination without cause   C$95,051(6)   C$12,966(3)     Nil(4)     C$108,017
    Change of control   Nil   Nil     Nil     Nil
Guruprit (Goldy) Singh   Termination with cause/resignation   Nil(1)   Nil     C$23,250(4)     C$23,250
    Termination without cause   C$106,110(7)   C$10,135(3)     C$23,250 (4)     C$147,658
    Change of control   Nil   Nil     C$23,250 (5)     C$23,250

 

(1) In the event of a termination for just cause or resignation, we will have no further obligation to Dr. Menawat, Mr. Davidson, Mr. Dewan or Ms. Singh, as applicable, other than the payment of unpaid base salary, any bonus declared but not yet paid, plus all outstanding vacation pay and expense reimbursement.

 

(2) Amounts paid in United States dollars and converted to Canadian dollars for reporting purposes. On December 31, 2018, the exchange rate for United States dollars expressed in Canadian dollars (as reported by the Bank of Canada) was US$1.00 = C$1.3642.

 

(3) The value shown is a multiple of the annual cost of benefits and the average cash bonus paid in respect of the years ended December 31, 2018, 2017 and 2016.

 

(4) The value shown is the product of the number of Common Shares underlying the vested options multiplied by the difference between the Common Share TSX closing price on December 31, 2018 of C$0.55 and the exercise price.

 

(5) The value shown is the product of the number of Common Shares underlying the options multiplied by the difference between the Common Share TSX closing price on December 31, 2018 of C$0.55 and the exercise price.

 

(6) If Mr. Dewan’s employment is terminated without cause, he is entitled to the greater of: (i) six months’ notice; or (ii) the minimum notice (or pay in lieu) and minimum severance, if any, to which he would be entitled under employments standards legislation.

 

(7) If Ms. Singh’s employment is terminated without cause, she is entitled to six months’ notice and minimum severance, if any, to which she would be entitled under employments standards legislation.

 

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Director Compensation

 

Our directors were paid an annual fee of C$20,000 for their services in the year ended December 31, 2018, other than Dr. Menawat, who was compensated as CEO and Mr. Damian Lamb and Mr. Jean-François Pariseau, who were compensated by their employers (affiliates of the Company). Members of the Audit Committee received an additional C$5,000 for the year. Members of the Human Resources and Corporate Governance Committee received an additional C$2,500 for the year, and the Chair of the Audit Committee received an additional C$10,000 and the Chair of the Human Resources and Corporate Governance Committee received an additional C$5,000 for the year. Director and committee fees were prorated for partial year terms of service. Our directors are also eligible to receive an initial grant of options when joining the Board and additional grants on an annual basis. During 2018, each of Ms. Samira Sakhia, Mr. Kenneth Galbraith and Mr. William Curran were granted 16,500 options. Mr. Brian Ellacott, Dr. Arthur Rosenthal and Dr. Linda Maxwell were granted 33,000 options for joining the Board in 2018. Except as set out above, Directors are not eligible to receive any other compensation.

 

Summary Compensation Table

 

The following table sets forth information concerning compensation paid to the non-executive directors for the year ended December 31, 2018.

 

Name   Fees Earned     Option-based
awards
    All Other
Compensation
  Total  
    (C$)     (C$)     (C$)   (C$)  
Damian Lamb(3)     Nil       Nil     Nil     Nil  
Jean-François Pariseau     Nil       Nil     Nil     Nil  
William Curran(3)     32,500       11,960 (1)   Nil     44,460  
Kenneth Galbraith     35,625       11,960 (1)   Nil     47,585  
Samira Sakhia(3)     29,875       11,960 (1)   Nil     41,835  
Brian Ellacott(4)     12,250       23,920 (1)   Nil     36,170  
Arthur Rosenthal(4)     11,250       23,920 (1)   Nil     35,170  
Linda Maxwell(5)     5,000       13,793 (2)   Nil     18,793  

 

(1) Option based awards granted utilize the Black-Scholes model to determine the fair value. The input factors to determine the fair value were volatility 83%, exercise price C$1.02, interest rate 2.19% and expected life of 6 years.

 

(2) Option based awards granted utilize the Black-Scholes model to determine the fair value. The input factors to determine the fair value were volatility 80%, exercise price C$0.60, interest rate 2.47% and expected life of 6 years.

 

(3) Mr. Lamb, Mr. Curran, and Ms. Sakhia stepped down from the Board on June 13, 2019. Ms. Sakhia’s options will expire 90 days after the date of such resignation, and Mr. Curran’s options will expire as indicated in the table under “Option-Based Awards” below.

 

(4) Mr. Ellacott and Mr. Rosenthal joined the Board on June 14, 2018.

 

(5) Ms. Maxwell joined the Board on October 9, 2018.

 

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Option-Based Awards

 

The following table sets forth information with respect to the unexercised options granted under the Share Option Plan to the non-executive directors that were outstanding as of December 31, 2018.

 

          Option-Based Awards  
Name   Number of
Common Shares
Underlying
Unexercised
Options
    Option Exercise
Price
    Option
Expiration Date
  Value of
Unexercised In-
the-Money
Options(7)
 
          (C$)         (C$)  
Samira Sakhia(1)(8)     16,500       0.97     Apr 25, 2027     Nil  
      16,500       1.02     June 15, 2028     Nil  
Kenneth Galbraith(2)     33,000       0.97     Apr 25, 2027     Nil  
      16,500       1.02     June 15, 2028     Nil  
William Curran(3)(8)     33,000       0.24     Mar 16, 2022     10,230  
      16,500       1.35     Sep 15, 2026     Nil  
      16,500       0.97     Apr 24, 2027     Nil  
      16,500       1.02     June 15, 2028     Nil  
Brian Ellacott(4)     33,000       1.02     June 15, 2028     Nil  
Arthur Rosenthal(5)     33,000       1.02     June 15, 2028     Nil  
Linda Maxwell(6)     33,000       0.60     Nov 19, 2028     Nil  
Damian Lamb(8)     Nil       Nil     Nil     Nil  
Jean-François Pariseau     Nil       Nil     Nil     Nil  

 

(1) As of December 31, 2018, Ms. Sakhia held 33,000 options, with 16,500 of these options exercisable and the remaining balance vesting over a three-year period.

 

(2) As of December 31, 2018, Mr. Galbraith held 49,500 options, with 11,000 of these options exercisable and the remaining balance vesting over a three-year period.

 

(3) As of December 31, 2018, Mr. Curran held 82,500 options, with 66,000 of these options exercisable and the remaining balance vesting over a three-year period.

 

(4) As of December 31, 2018, Mr. Ellacott held 33,000 options, all options remain unvested and will vest over a three-year period.

 

(5) As of December 31, 2018, Dr. Rosenthal held 33,000 options, all options remain unvested and will vest over a three-year period.

 

(6) As of December 31, 2018, Dr. Maxwell held 33,000 options, all options remain unvested and will vest over a three-year period.

 

(7) The value shown is the product of the number of Common Shares underlying the Option multiplied by the difference between the Common Share TSX closing price on December 31, 2018 of C$0.55 and the exercise price.

 

(8) Mr. Lamb, Mr. Curran, and Ms. Sakhia stepped down from the board on June 13, 2019. Ms. Sakhia’s options will expire 90 days after the date of such resignation, and Mr. Curran’s options will expire as indicated in the table above.

 

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Share Option Plan

 

The Share Option Plan is administered by the Board which may, from time to time, delegate to a committee of the Board, all or any of the powers conferred to the Board under the Share Option Plan. The Share Option Plan was originally adopted by the Board on June 4, 2015, and then amended and restated on December 8, 2016 effective January 26, 2017 and again on July 13, 2018.

 

The Share Option Plan provides that the Board may from time to time, in its discretion, grant to directors, officers, employees, consultants and any other person or entity engaged to provide ongoing services to the Company non-transferable options to purchase Common Shares, provided that the maximum number of Common Shares reserved for issuance under the Share Option Plan is equal to 13% of the issued and outstanding shares in the capital of the Company at the time of any option grant. If any option is exercised, cancelled, expired, surrendered or otherwise terminated for any reason, the number of Common Shares in respect of which the option is exercised, cancelled, expired, surrendered or otherwise terminated, as the case may be, will again be available for purchase pursuant to options granted under the plan. As at August 26, 2019, 10,373,929 options have been granted under the Share Option Plan, and 3,675,553 options are available for future grant under the Share Option Plan.

 

The aggregate number of Common Shares that may be (i) issued to insiders of the Company within any one-year period, or (ii) issuable to insiders of the Company at any time, in each case, under the Share Option Plan alone or when combined with all other security-based compensation arrangements of the Company, cannot exceed 10% of the outstanding Common Shares (the “Insider Participation Limits”).

 

The Board shall determine the exercise price of the options, provided that, it cannot be less than the Market Price of the Common Shares on the date of grant. For the purposes of the Share Option Plan, “Market Price” means the volume-weighted average price of the Common Shares on the stock exchange where the majority of trading volume and value of the Common Shares occurs (currently, the TSX), for the five trading days immediately preceding the relevant date on which the Market Price is to be determined.

 

The expiry date for an option under the Share Option Plan shall not be later than the 10th anniversary of the date such option is granted, subject to the expiry date falling with a corporate blackout period or within 5 business days following the expiry of such a blackout period, in which case the expiry date will be extended to the 10th business day following the expiry of the blackout period.

 

Unless otherwise specified by the Board, each option under the Share Option Plan generally vests and becomes exercisable as to 1/4 on the first anniversary of the date of grant and as to 1/36 on the first day of each calendar month thereafter. The Board has the discretion to permit accelerated vesting of options.

 

We do not provide any financial assistance to optionees to facilitate the purchase of Common Shares issued pursuant to the exercise of options under the Share Option Plan. Options granted under the Share Option Plan are not transferable or assignable (except to an optionee’s estate) and no options may be exercised by anyone other than the optionee or his or her legal representative during the lifetime of the optionee.

 

We intend to adopt and approve material changes to the Share Option Plan, and any other equity incentive plans that we may have in the future, in accordance with TSX listing rules, which do not impose a requirement of shareholder approval for such actions.

 

In addition, following our proposed listing on Nasdaq, we plan to file a registration statement on Form S-8 to register the Common Shares issuable upon exercise of options granted under the Share Option Plan.

 

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C. Board Practices

 

Our directors are elected by shareholders at each annual general meeting.

 

Audit Committee

 

Our audit committee (the “Audit Committee”) consists of all independent directors within the meaning of Nasdaq listing standards and Rule 10A-3 under the U.S. Exchange Act. Currently, the members of the Audit Committee are Kenneth Galbraith (Chair), Brian Ellacott and Steve Forte. The Audit Committee oversees the accounting and financial reporting practices and procedures of our financial statements. The principal responsibilities of the Audit Committee include: (i) overseeing the quality and integrity of our internal controls and accounting procedures, including reviewing our procedures for internal control with our external auditor and CFO; (ii) reviewing and assessing the quality and integrity of our annual and quarterly financial statements and related management discussion and analysis, as well as all other material continuous disclosure documents; (iii) monitoring compliance with legal and regulatory requirements related to financial reporting; (iv) reviewing and approving the engagement of our external auditor and independent audit fees; (v) reviewing the qualifications, performance and independence of our external auditor, considering the external auditor’s recommendations and managing the relationship with the external auditor, including meeting with the external auditor as required in connection with the audit services provided to us; (vi) assessing our financial and accounting personnel; (vii) reviewing our risk management procedures; (viii) reviewing any significant transactions outside of our ordinary course of business and any pending litigation involving us; and (ix) examining improprieties or suspected improprieties with respect to accounting and other matters that affect financial reporting.

 

Audit Committee Charter

 

The Audit Committee reviews and reassesses the adequacy of its charter periodically as it deems appropriate and recommend changes to the Board. The performance of the Audit Committee is evaluated with reference to its charter annually or otherwise periodically as deemed appropriate by the Board. A copy of our Audit Committee’s charter is available on our website at https://profoundmedical.com/investors/#governance. The information on our website is not incorporated by reference into this Registration Statement and should not be considered a part of this Registration Statement, and the reference to our website in this Registration Statement is an inactive textual reference only.

 

Audit Committee Oversight

 

At no time since the commencement of our most recently completed financial period was a recommendation of the Audit Committee to nominate or compensate an external auditor not adopted by the Board.

 

External Auditor Service Fees by Category

 

The aggregate fees billed (excluding out-of-pocket expenses) by our external auditor in the last two fiscal years are as follows:

 

Financial Year Ending    

Audit
Fees(1)

   

Audit
Related
Fees(2)

   

Tax Fees(3)

   

All Other
Fees(4)

 
December 31, 2018     C$ 365,776       -     C$ 61,215       -  
December 31, 2017     C$ 313,400     C$ 29,700     C$ 186,000       -  

 

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(1) Audit fees include annual audit, quarterly reviews and work performed in relation to the 2018 Bought Deal.

 

(2) Audit related fees includes work performed on acquisitions.

 

(3) Tax fees includes fees related to annual tax returns and scientific research credit return along with tax and transfer pricing advice.

 

Human Resources and Corporate Governance Committee

 

Our Human Resources and Corporate Governance Committee is comprised of four independent directors; currently, Arthur Rosenthal (Chair), Kenneth Galbraith, Jean-Francois Pariseau and Linda Maxwell. The Human Resources and Corporate Governance Committee oversees our remuneration policies and practices. The principal responsibilities of the Human Resources and Corporate Governance Committee include:

 

(a) with respect to human resources: (i) assist the Board in ensuring that the necessary policies and processes are in place by which all of our employees, with special attention to the executive group, will be fairly and competitively compensated; and (ii) produce a report on executive compensation for inclusion in our proxy statement as required by applicable rules and regulations; and

 

(b) with respect to corporate governance: (i) identify individuals qualified to become Board members, and recommend that the Board select the director nominees for the next annual meeting of shareholders; and (ii) develop and recommend to the Board the corporate governance guidelines and processes applicable to us, review these guidelines and processes at least annually and recommend changes to the Board. 

 

A copy of our Human Resources and Corporate Governance Committee’s charter is available on our website at https://profoundmedical.com/investors/#governance. The information on our website is not incorporated by reference into this Registration Statement and should not be considered a part of this Registration Statement, and the reference to our website in this Registration Statement is an inactive textual reference only.

 

Statement of Corporate Governance Practices

 

The Board is committed to a high standard of corporate governance practices. The Board believes that this commitment is not only in the best interests of our shareholders but that it also promotes effective decision making at the Board level. The Board is of the view that its approach to corporate governance is appropriate and continues to work to align with the recommendations currently in effect and contained in National Policy 58-201 - Corporate Governance Guidelines which are addressed below. In connection with our Nasdaq listing, we will become subject to certain U.S. corporate governance requirements. However, we intend to comply with home country jurisdiction rules, including the rules of the TSX, instead of certain applicable Nasdaq rules, including with respect to shareholder approvals of equity compensation plans and additional issuances of our Common Shares and the minimum quorum requirement for a shareholders meeting. Under Nasdaq listing rules, the required minimum quorum for a shareholders meeting is 33 1/3% of the outstanding common shares, and our minimum quorum requirement is only 10% of the total number of voting rights attaching to all outstanding Common Shares. See Item 10.B, “Additional Information—Memorandum and Articles of Association—Meetings”.

 

Mandate of the Board

 

The Board has responsibility for stewardship of the Company. The Board has adopted a written mandate for the Board (the “Mandate”) to confirm and enhance the Board’s ongoing duty and responsibility for stewardship of the Company, a copy of which is available on our website at www.profoundmedical.com. The information on our website is not incorporated by reference into this Registration Statement and should not be considered a part of this Registration Statement, and the reference to our website in this Registration Statement is an inactive textual reference only. The Board is ultimately responsible for supervising the management of our business and affairs and, in doing so, is required to act in our best interests. The Board generally discharges its responsibilities either directly or through the Audit Committee and the Human Resources and Corporate Governance Committee. Specific responsibilities of the Board set out in the Mandate include:

 

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(a) Appointing Management – including approval of the CEO, the compensation of the executive officers and the oversight of succession planning programs;

 

(b) Board Organization – including responding to recommendations received from the Human Resources and Corporate Governance Committee, but the Board retains the responsibility for managing its own affairs;

 

(c) Strategic Planning – including the review and approval of our business, financial and strategic plans on at least an annual basis;

 

(d) Monitoring of Financial Performance and Other Financial Reporting Matters – including the review of our ongoing financial performance and results of operations and review and approval of our audited and interim consolidated financial statements and management’s discussion and analysis of financial conditions and results of operations;

 

(e) Risk Management – including the identification of our principal business risks and the implementation of appropriate systems to effectively monitor and manage such risks;

 

(f) Policies and Procedures – including the approval and monitoring of all policies and procedures including those related to corporate governance, ethics and confidentiality;

 

(g) Communication and Reporting – including the oversight of the timely and accurate disclosure of financial reports and other material corporate developments; and

 

(h) Other Responsibilities – including those related to position descriptions, orientation and continuing education, nomination of directors and Board evaluations and matters in respect of any disposition, material commitment or venture, or significant expenditure in either monetary or business terms.

 

Composition of the Board

 

Director Independence

 

Jean-François Pariseau, Brian Ellacott, Arthur Rosenthal, Linda Maxwell, Kenneth Galbraith and Steve Forte are all “independent” as such term is defined by National Instrument 58-101 – Disclosure of Corporate Governance Practices and applicable Nasdaq listing rules. Arun Menawat is non-independent as he is our CEO. Each of the independent directors has no direct or indirect material relationship with us, including any business or other relationship, which could reasonably be expected to interfere with the director’s ability to act with a view to our best interests or which could reasonably be expected to interfere with the exercise of the director’s independent judgment.

 

If the Chairman is not independent, the independent directors may select one of their members to be appointed Lead Director of the Board for such term as the independent directors may determine. The Lead Director is responsible for chairing regular meetings of the independent directors and seeking to ensure that the Board is able to carry out its role.

 

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Dr. Arun Menawat acts as Chairman of the Board. Since Dr. Menawat is not independent, Brian Ellacott has been appointed Lead Director of the Board.

 

The table below shows the current Board and committee membership.

 

 

Committees

 

Year Appointed

 

Audit

 

Human Resources and
Corporate Governance
Committee

Not Independent – Management          
Arun Menawat (Chairman) 2019 (2015 as director)        
Independent Board Members          
Jean-François Pariseau 2015       Member
Kenneth Galbraith 2017   Chair   Member
Arthur Rosenthal 2018       Chair
Brian Ellacott 2018   Member    
Linda Maxwell 2018       Member
Steve Forte 2019   Member    

 

Meetings of Independent Directors

 

All independent directors on the Board and each of the committees meet regularly without management present. The Chairman of the Board conducts these sessions at Board meetings and the Chair of each committee conducts them at committee meetings. During the year ended December 31, 2018, there were 7 such meetings of the independent directors.

 

Chairman of the Board

 

Our Chairman, Dr. Arun Menawat, is our Chief Executive Officer and as a result does not meet the Board’s independence standards. The primary functions of the Chairman are to facilitate the operations and deliberations of the Board and the satisfaction of the Board’s responsibilities under its mandate. The Chairman’s key responsibilities include duties relating to providing overall leadership to the Board, chairing Board and shareholder meetings, acting as a liaison between management, the members of the Board and the Chairs of the various committees of the Board, and communicating with shareholders and regulators. The responsibilities of the Chairman are reviewed by the Human Resources and Corporate Governance Committee and considered by the Board for approval each year.

 

Director Term Limits and Other Mechanics of Board Renewal

 

The Board has not established any term limits for directors, as the Board takes the view that term limits are an arbitrary mechanism for removing directors which can result in valuable, experienced directors being forced to leave the Board solely because of length of service. The Board’s priorities continue to be ensuring the appropriate skill sets are present amongst the Board to optimize the benefit to us. The Board conducts annual evaluations of the individual directors, the committees of the Board and the Chairman of the Board, which are overseen by the Human Resources and Corporate Governance Committee, to ensure these objectives are met.

 

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Other Reporting Issuer Experience

 

The following table sets out our current directors who are presently directors of other issuers that are public companies in the United States, Canada or a foreign jurisdiction, the name of such public companies and the name of the exchange or market applicable to such public companies:

 

Name   Name of Public Company   Name of Exchange or Market
(if applicable)
Kenneth Galbraith   Macrogenics, Inc., Prometic Life Sciences Inc.   Nasdaq, Toronto Stock Exchange
Arthur Rosenthal   LivaNova PLC   Nasdaq

 

Board Meetings

 

The Board holds a minimum of one regular meeting per quarter and a corporate strategy session each year, as well as additional meetings as required. An in camera session of the directors is held at each regularly scheduled Board and committee meeting so that the independent members of the Board have an opportunity to meet without the presence of management members of the Board.

 

Meeting Attendance

 

    Board Meetings Attended
in 2018
  Committee Meetings
Attended in 2018
 
Name   No.   %     No.     %  
Damian Lamb(5)   7 of 7     100 %     -       -  
Jean-François Pariseau   7 of 7     100 %     4 of 4(3)       100 %
Arun Menawat   7 of 7     100 %     -       -  
William Curran(5)   7 of 7     100 %     8 of 8(3) (4)       100 %
Kenneth Galbraith   5 of 7     71 %     6 of 8(3) (4)       75 %
Samira Sakhia(5)   4 of 7     57 %     1 of 2(4)       50 %
Arthur Rosenthal   5 of 5(1)     100 %     2 of 2(3)       100 %
Brian Ellacott   5 of 5(1)     100 %     2 of 2(4)       100 %
Linda Maxwell   1 of 2(2)     50 %     -       -  

 

(1) Dr. Rosenthal and Mr. Ellacott joined the Board on June 14, 2018.

 

(2) Dr. Maxwell joined the Board on October 9, 2018.

 

(3) Human Resources and Compensation Committee.

 

(4) Audit Committee.

 

(5) Mr. Lamb, Mr. Curran, and Ms. Sakhia stepped down from the board on June 13, 2019.

 

Orientation and Education

 

We will provide new directors with copies of relevant financial, technical and other information regarding our programs. Board members are also encouraged to communicate with management and the external auditor and, to keep themselves current with industry trends and developments. Board members have full access to our records.

 

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D. Employees

 

As of June 30, 2019, we had 67 full-time employees, 14 of whom in Vantaa, Finland that were unionized. We believe that our relations with our employees are positive. We intend to add staff and consulting resources in order to support product development, market access, field support and additional clinical trials.

 

E. Share Ownership

 

As of August 26, 2019, our NEOs and directors in 2018, as a group, beneficially owned a total of 18,547,317 Common Shares, representing beneficial ownership of 17.2% of the Common Shares.

 

The following table states the number of Common Shares beneficially owned by each of our NEOs and directors in 2018 as of August 26, 2019. The persons listed below are deemed to be the beneficial owners of Common Shares underlying options and/or warrants that are exercisable within 60 days from the above date. The percentages shown below are based on an aggregate total of 108,027,939 outstanding Common Shares as of August 26, 2019, plus the number of Common Shares underlying options and warrants that are exercisable within 60 days for the indicated beneficial owner.

 

Name of Beneficial Owner   Number of
Common Shares
Beneficially Owned
    Percent of
Outstanding
Common Shares
 
Named Executive Officers (2018)                
Arun Menawat(1)     3,006,862       2.7 %
Aaron Davidson     *       *  
Rashed Dewan     *       *  
Ian Heynen(2)     -       -  
Guruprit (Goldy) Singh     *       *  
                 
Non-Executive Directors (2018)                
William Curran(3)     *       *  
Brian Ellacott     *       *  
Kenneth Galbraith     -       -  
Damian Lamb(3)(4)     14,828,144       13.6 %
Linda Maxwell     *       *  
Jean-Francois Pariseau     -       -  
Arthur Rosenthal     -       -  
Samira Sakhia(3)     *       *  

 

*     Represents less than 1% beneficial ownership of the Common Shares.

 

(1) Includes 1,888,862 Common Shares underlying options issued under our Share Option Plan (see Item 6.B, “Compensation—Director Compensation” and Item 6.B, “Compensation—Share Option Plan”) and pursuant to a shareholder-approved option grant in January 2017 (see Item 7.B, “Related Party Transactions”) and 150,000 Common Shares underlying warrants purchased in connection with the 2017 Bought Deal and the 2018 Bought Deal (see Item 5.B, “Liquidity and Capital Resources—Recent Sources and Uses of Financing—Bought Deals” and Item 7.B, “Related Party Transactions”).

 

(2) Mr. Heynen resigned on January 7, 2019.

 

(3) Mr. Curran, Mr. Lamb and Ms. Sakhia stepped down from the Board on June 13, 2019.

 

(4) Represents beneficial ownership of 13,328,144 Common Shares and 750,000 Common Shares underlying warrants directly held by Genesys, of which entity Mr. Lamb is an officer. See Item 7.A, “Major Shareholders”.

 

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A. Major Shareholders

 

As of August 26, 2019, we had 108,027,939 issued and outstanding Common Shares.

 

The following table states the number of Common Shares beneficially owned by each person known to us who beneficially owns more than 5% of our issued and outstanding Common Shares as of August 26, 2019. The persons listed below are deemed to be the beneficial owners of Common Shares underlying options and/or warrants that are exercisable within 60 days from the above date. The percentages shown below are based on an aggregate total of 108,027,939 outstanding Common Shares as of August 26, 2019, plus the number of Common Shares underlying options or warrants that are exercisable within 60 days for the indicated beneficial owner.

 

Name   Number of
Common Shares
Beneficially Owned
    Percent of
Outstanding
Common Shares
 
BDC Capital Inc. (“BDC Capital”)     13,441,792       12.4 %
Genesys Ventures II LP (“Genesys”) (1)     14,828,144       13.6 %
Gagnon Securities LLC     11,305,534       10.5 %

 

(1)       Includes 750,000 Common Shares underlying warrants purchased in connection with the 2018 Bought Deal. See also Item 5.B, “Liquidity and Capital Resources—Recent Sources and Uses of Financing—Bought Deals” and Item 7.B, “Related Party Transactions”.

 

Significant Changes in the Ownership of Major Shareholders

 

During the past three years, to our knowledge, the significant changes in the percentage ownership of our major shareholders were as follows:

 

· On January 8, 2019, Gagnon Securities LLC reported that it became the beneficial owner of more than 10% of our Common Shares.

 

· On March 20, 2018, Genesys acquired 1,500,000 Common Shares and 750,000 warrants to purchase Common Shares in the 2018 Bought Deal.

 

· On November 14, 2016, Genesys acquired 2,727,272 Common Shares in the 2016 Bought Deal.

 

· On November 14, 2016, BDC Capital acquired 3,636,363 Common Shares in the 2016 Bought Deal.

 

Major Shareholders Voting Rights

 

Our major shareholders do not have different voting rights from other holders of our Common Shares.

 

Record Holders

 

Based on our records and a review of the information provided to us by the TSX, as of August 2, 2019, there were 2,420 holders of record of our ordinary shares, of which 896 record holders, holding approximately 36% of our outstanding ordinary shares, had registered addresses in the United States. These numbers are not representative of the number of beneficial holders of our ordinary shares nor is it representative of where such beneficial holders reside primarily because many of these ordinary shares may be held of record by brokers or other nominees.

 

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B. Related Party Transactions

 

Except as disclosed below, none of our directors or officers, nor any of our proposed nominees for election as a director, nor any of our other insiders, nor any associate or affiliate of any one of them, has or has had, at any time since the beginning of our financial year ended December 31, 2016, any material interest, direct or indirect, in any transaction or proposed transaction that has materially affected or would materially affect us.

 

In March 2018, Genesys, of which entity Mr. Lamb (our former director) is an officer, purchased 1,500,000 of units in the 2018 Bought Deal at a price of C$1.00 per unit, for total consideration of C$1,500,000.

 

Three members of our senior management, Dr. Menawat, Mr. Davidson and Mr. Dewan, also purchased our units in the 2018 Bought Deal, in the amounts of 150,000 units (150,000 Common Shares and 75,000 warrants), 125,000 units (125,000 Common Shares and 62,500 warrants) and 50,000 units (50,000 Common Shares and 25,000 warrants), respectively, at a price of C$1.00 per unit, for total consideration of C$150,000, C$125,000 and C$50,000 respectively. The units were issued on the same terms as the units issued in the 2018 Bought Deal. For more information, see Item 5.B, “Liquidity and Capital Resources—Recent Sources and Uses of Financing—Bought Deals”.

 

In September 2017, three members of our senior management, Dr. Menawat, Mr. Dewan and Ms. Singh, purchased our units in the 2017 Bought Deal, in the amounts of 150,000 units (150,000 Common Shares and 75,000 warrants), 100,000 units (100,000 Common Shares and 50,000 warrants) and 100,000 units (100,000 Common Shares and 50,000 warrants), respectively, at a price of C$1.00 per unit, for total consideration of C$150,000, C$100,000 and C$100,000, respectively. The units were issued on the same terms as the units issued in the 2017 Bought Deal. For more information, see Item 5.B, “Liquidity and Capital Resources—Recent Sources and Uses of Financing—Bought Deals”.

 

At the Special Meeting of Shareholders of the Company held in January 2017, the disinterested shareholders approved the grant of an option to purchase 1,417,583 Common Shares for an exercise price of C$1.10 to Arun Menawat.

 

In November 2016, Genesys, of which entity Mr. Lamb is an officer, purchased 2,727,272 Common Shares in the 2016 Bought Deal at a price of C$1.10 per Common Share, representing aggregate consideration of C$2,999,999.20. Genesys acquired the Common Shares for investment purposes.

 

In November 2016, BDC Capital purchased 3,636,363 Common Shares in the 2016 Bought Deal at a price of C$1.10 per Common Share, representing aggregate consideration of C$3,999,999.30. BDC Capital acquired the Common Shares for investment purposes.

 

Agreements with Directors and Officers

 

We have employment agreements in place with our Chief Executive Officer, Arun Menawat; our Chief Financial Officer, Aaron Davidson; our Vice President, Finance, Rashed Dewan and our Vice-President of Regulatory Affairs and Product Management, Guruprit (Goldy) Singh and Mathieu Burtnyk, our Vice President Clinical Affairs. See Item 6.B, “Compensation—Named Executive Officers—Executive Employment Agreements – Termination and Change of Control Benefits”.

 

C. Interests of Experts and Counsel

 

Not Applicable.

 

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ITEM 10. ADDITIONAL INFORMATION

 

A. Share Capital

 

Our authorized capital consists of an unlimited number of Common Shares without par value.

 

As at August 26, 2019, there were a total of 108,027,939 Common Shares issued and outstanding. The holders of the Common Shares are entitled to receive notice of and to attend all annual and special meetings of our shareholders and to one vote in respect of each common share held at such meetings. Since January 1, 2016, we have issued a total of 68,599,612 Common Shares, principally in connection with the Bought Deals and issuances upon exercise of options and warrants

 

As at August 26, 2019, there were a total of 10,373,929 outstanding share options issued under our Share Option Plan and 22,571,714 outstanding warrants issued pursuant to the Bought Deals and the CIBC Loan Agreement. See Item 5.B, “Liquidity and Capital Resources—Recent Sources and Uses of Financing”. In addition, as at August 26, 2019, 3,675,553 options remain available for future grant under the Share Option Plan. See Item 6.B, “Compensation—Share Option Plan”.

 

B. Memorandum and Articles of Association

 

Set out below is a description of our articles of incorporation (our “Articles”) and of the Business Corporations Act (Ontario) (as currently in effect) related to our articles of incorporation.

 

Incorporation

 

Profound is organized under the Business Corporations Act (Ontario) (“OBCA”). Profound’s Ontario corporation number is 2426652.

 

Objects and Purposes of our Company

 

Our Articles do not contain and are not required to contain a description of our objects and purposes. There is no restriction contained in our Articles of the business that we may carry on.

 

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Voting on Certain Proposal, Arrangement, Contract or Compensation by Directors

 

Neither our Articles nor our by-laws restrict our directors’ power to: (a) vote on a proposal, arrangement or contract in which the directors are materially interested; (b) to vote with regard to compensation payable to themselves or any other members of their body in the absence of an independent quorum; or (c) borrow money. Additionally, a director is not required to hold a share in our capital as qualification for his or her office but must be qualified as required by the OBCA to become, act or continue to act as a director.

 

Share Rights

 

The holders of the Common Shares are entitled to receive notice of and to attend all annual and special meetings of the shareholders of the Company and to one vote in respect of each common share held at such meetings.

 

Procedures to Change the Rights of Shareholders

 

The rights, privileges, restrictions and conditions attaching to the Common Shares are contained in our Articles and such rights, privileges, restrictions and conditions may be changed by amending our Articles. In order to amend such Articles, the OBCA requires a resolution to be passed by a majority of not less than two-thirds of the votes cast by the shareholders entitled to vote thereon. In addition, if we resolve to make certain amendments to its Articles, a holder of Common Shares may dissent with regard to such resolution and, if such shareholder so elects, we would have to pay such shareholder the fair value of the Common Shares so held. The types of amendment that would be subject to dissent rights include without limitation: (a) to add, remove or change restrictions on the issue, transfer or ownership of shares of a class or series of our shares; and (b) to add, remove or change any restriction upon the business that we may carry on or upon the powers we may exercise.

 

Meetings

 

Each director holds office until our next annual general meeting or until his or her office is earlier vacated in accordance with the provisions of the OBCA. A director appointed or elected to fill a vacancy on our board of directors also holds office until our next annual general meeting.

 

Annual meetings of our shareholders must be held at such time in each year not more than fifteen (15) months after the last annual meeting, as the board of directors may determine. Pursuant to our by-laws, notice of the time and place of a meeting of shareholders must be sent not less than twenty-one (21) days and not more than fifty (50) days, before such meeting.

 

The only persons entitled to attend a meeting of our shareholders are voting persons, the directors, the auditor and, if any, the chairperson, the managing director and the President, as well as others permitted by the chairperson of the meeting.

 

The OBCA provides that our shareholders may requisition a special meeting in accordance with the OBCA. The OBCA provides that the holders of not less than five (5) percent of our issued shares that carry the right to vote at a meeting may requisition our directors to call a special meeting of shareholders for the purposes stated in the requisition.

 

Under our by-laws, the quorum for the transaction of business at a meeting of our shareholders is two or more voting persons present in person and authorized to cast in the aggregate not less than ten (10) percent of the total number of votes attaching to all Common Shares. Under Nasdaq listing rules, the required minimum quorum for a shareholders meeting is 33 1/3% of the outstanding common shares; however, we are relying on an exception for “foreign private issuers” to this quorum requirement insofar as the provisions of our Articles are permitted under the OBCA.

 

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Limitations on Ownership of Securities

 

Except as provided in the Investment Canada Act (Canada), there are no limitations specific to the rights of non-Canadians to hold or vote the Common Shares under the laws of Canada or Ontario, or in our Articles or by-laws.

 

Change in Control

 

There are no provisions in our Articles or by-laws that would have the effect of delaying, deferring or preventing a change in control of us, and that would operate only with respect to a merger, acquisition or corporate restructuring involving us or any of our subsidiaries.

 

Ownership Threshold

 

Neither our by-laws nor our Articles contain any provisions governing the ownership threshold above which shareholder ownership must be disclosed. In addition, securities legislation in Canada requires that we disclose in our proxy information circular for our annual meeting and certain other disclosure documents filed by us under such legislation, holders who beneficially own more than ten (10) percent of our issued and outstanding Common Shares.

 

C. Material Contracts

 

Except for contracts entered into in the ordinary course of business, the following are our only material agreements (the “Material Contracts”):

 

· Amended and Restated Technology License Agreement dated May 16, 2011 between PMI and Sunnybrook (the “Sunnybrook License”);

 

· Loan Agreement with Canadian Imperial Bank of Commerce dated July 30, 2018 (the “CIBC Loan Agreement”);

 

· Asset and Share Purchase Agreement dated July 31, 2017 between Philips and PMI (the “Philips Share Purchase Agreement”);

 

· Supply Agreement dated July 31, 2017 between PMI and Philips Medical Systems Nederland B.V. (the “Philips Supply Agreement”);

 

· Noncompetition, Nonsolicitation and Confidentiality Agreement dated July 31, 2017 between Philips and PMI (the “Philips Confidentiality Agreement”);

 

· Resale Purchasing Agreement dated July 31, 2017 between Philips Medical and PMI (the “Philips Resale Purchasing Agreement”); and

 

· Agreement between PMI and Siemens, dated February 11, 2019 (the “New Siemens Agreement”) and effective as of January 21, 2019.

 

Sunnybrook License

 

See Item 4.B, “Business Overview—Intellectual Property—Licenses”.

 

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CIBC Loan Agreement

 

See Item 5.B, “Liquidity and Capital Resources—Recent Sources and Uses of Financing—CIBC Loan”.

 

Philips Share Purchase Agreement

 

See Item 4.A, “Business Overview—Alliances and Partnerships—Philips”.

 

Philips Supply Agreement

 

On July 31, 2017, we entered into the Philips Supply Agreement with Philips Medical Systems Nederland B.V. (“Philips Medical”) in connection with the Sonalleve Transaction. Under the terms of the Philips Supply Agreement and until such time as the manufacturing of our Sonalleve systems is assumed by us, Philips Medical agrees to serve as a contract manufacturer to us for our Sonalleve systems. We work together with Philips Medical to ensure that production capacity and delivery times are appropriate to meet our sales forecasts.

 

Philips Confidentiality Agreement

 

On July 31, 2017, we entered into the Philips Confidentiality Agreement with Philips in connection with the Sonalleve Transaction. Under the terms of the Philips Confidentiality Agreement, Philips has agreed to (i) not compete in related lines of business, anywhere in the world, for period of three years after closing; (ii) not solicit any of our employees for so long as agreements related to the Sonalleve Transaction are in force, plus an additional two years; and (iii) maintain in confidence any confidential information that if disseminated would be detrimental to our business, for a period of ten years after closing.

 

Philips Resale Purchasing Agreement

 

On July 31, 2017, we entered into the Philips Resale Purchasing Agreement with Philips Medical in connection with the Sonalleve Transaction. Under the terms of the agreement, Philips Medical is permitted to purchase certain of our products for the purpose of reselling such products to its customers. In addition, we are permitted to sell additional products directly to customers of Philips Medical upon an initial sale of the Philips products to such customers.

 

New Siemens Agreement

 

See Item 4.A, “Business Overview—Alliances and Partnerships—Siemens”.

 

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Exhibit 4.8 

 

MATERIAL CHANGE REPORT

 

1. Name and Address of Company

 

Profound Medical Corp. (“Profound”)

2400 Skymark Avenue, Unit 6

Mississauga, Ontario

L4W 5K6

 

2. Date of Material Change

 

August 16, 2019.

 

3. News Release

 

A news release announcing the material change referred to in this report were disseminated on August 16, 2019, and filed on SEDAR at www.sedar.com.

 

4. Summary of Material Change

 

On August 16, 2019, Profound received 510(k) clearance from the U.S. Food and Drug Administration (“FDA”) to market TULSA-PRO® for ablation of prostate tissue.

 

5. Full Description of Material Change

 

On August 16, 2019, Profound received 510(k) clearance from the FDA to market TULSA-PRO® for ablation of prostate tissue. The FDA’s clearance of TULSA-PRO® was based on Profound’s TACT pivotal clinical trial, which met all of its primary and secondary efficacy and safety endpoints. TACT enrolled 115 patients across the United States, Canada and Europe with biopsy-proven, organ-confined prostate cancer (67% and 33% of subjects had NCCN intermediate and low risk disease, respectively). All patients received primary treatment of whole-gland prostate ablation with sparing of the urethra and urinary sphincter. TACT demonstrated that the TULSA-PRO® provides safe and effective prostate tissue ablation, with minimal adverse events, significant prostate volume and PSA reduction, and low rates of residual prostate disease. The favorable safety profile offered by the TULSA-PRO® contrasts with radical prostatectomy and radiation therapy that can leave many men with permanent erectile dysfunction, urinary incontinence and bowel dysfunction. The TACT pivotal clinical trial also demonstrated a favorable risk-benefit profile in the context of other ablative approaches, including whole-gland HIFU and cryotherapy.

 

The FDA label for TULSA-PRO® will allow U.S. surgeons to perform prostate tissue ablation procedures indiscriminate of tissue type.

 

6. Reliance on subsection 7.1(2) if National Instrument 51-102

 

Not applicable.

 

 

2 -

 

 

7. Omitted Information

 

Not applicable.

 

8. Executive Officer

 

For further information, please contact:

 

Aaron Davidson

Chief Financial Officer

Telephone: (647) 476-1350

 

9. Date of Report

 

September 3, 2019

 

Cautionary Note Regarding Forward-Looking Statements

 

This material change report includes forward-looking statements regarding Profound and its business which may include, but is not limited to, statements with respect to the expectations regarding the use of Profound’s technology in the treatment of prostate cancer. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “is expected”, “expects”, “scheduled”, “intends”, “contemplates”, “anticipates”, “believes”, “proposes” or variations (including negative variations) of such words and phrases, or state that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved. Such statements are based on the current expectations of the management of Profound. The forward-looking events and circumstances discussed in this report may not occur by certain specified dates or at all and could differ materially as a result of known and unknown risk factors and uncertainties affecting Profound, including, without limitation, risks regarding the pharmaceutical industry, economic factors, the equity markets generally and risks associated with growth and competition. Although Profound has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. No forward-looking statement can be guaranteed and actual future results may vary materially. Accordingly, readers are advised not to place undue reliance on forward-looking statements or information. Except as required by applicable securities laws, forward-looking statements speak only as of the date on which they are made and Profound undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, other than as required by law.

 

 

Exhibit 4.9

 

FORM 51-102F3

MATERIAL CHANGE REPORT

 

1. Name and Address of Company

 

Profound Medical Corp. (“Profound”, or the “Company”)

Unit 6, 2400 Skymark Avenue

Mississauga, Ontario

L4W 5K5

 

2. Date of Material Change

 

September 13, 2019

 

3. News Release

 

A press release disclosing the material change was disseminated via Globe Newswire on September 13, 2019 and subsequently filed on SEDAR.

 

4. Summary of Material Change

 

On September 13, 2019, Profound entered into an underwriting agreement with Canaccord Genuity Corp. and Echelon Wealth Partners Inc. (collectively, the “Underwriters”) in connection with a financing of an aggregate of 9,090,910 units of the Company (the “Units”) at a price of $1.10 per Unit (the “Offering Price”) for aggregate gross proceeds of approximately $10 million (the “Offering”).

 

Profound agreed to grant the Underwriters an over-allotment option to purchase up to an additional 1,363,636 Units at the Offering Price, exercisable in whole or in part at any time on or prior to the date that is 30 days following the closing of the Offering. If the over-allotment is exercised in full, the aggregate gross proceeds of the Offering will be approximately $11.5 million.

 

5. Full Description of Material Change

 

5.1       Full Description of Material Change

 

On September 13, 2019, Profound entered into an underwriting agreement with the Underwriters in connection with a financing of an aggregate of 9,090,910 Units at the Offering Price for aggregate gross proceeds of approximately $10 million. Each Unit will consist of one common share of Profound (each a “Common Share”) and one-half of one warrant, with each whole warrant entitling the holder to acquire one Common Share at a price of $1.55 per Common Share until the date that is two years from the closing date of the Offering

 

Profound agreed to grant the Underwriters an over-allotment option to purchase up to an additional 1,363,636 Units at the Offering Price, exercisable in whole or in part at any time on or prior to the date that is 30 days following the closing of the Offering. If the over-allotment is exercised in full, the aggregate gross proceeds of the Offering will be approximately $11.5 million.

 

 

 

In consideration for their services, the Underwriters will receive a fee consisting of a cash commission equal to six per cent of the gross proceeds of the Offering (including gross proceeds from any exercise of the over-allotment option).

 

The net proceeds of the Offering are expected to be used: (i) to support certain costs and expenses for reimbursement clinical trial support and the ongoing TUSLA-PRO® Ablation Clinical Trial; (ii) to expand infrastructure to execute on global sales and marketing plans; (iii) for research and development initiatives; and (iv) for general corporate purposes.

 

The Offering will be conducted in all provinces of Canada (other than Québec) pursuant to a prospectus supplement to the Company’s short form base shelf prospectus dated September 19, 2018 and in the United States, on a private placement basis, pursuant to an exemption from the registration requirements of the United States Securities Act of 1933, as amended. The Offering is subject to normal regulatory approvals and is expected to close on or about September 20, 2019.

 

5.2       Disclosure for Restructuring Transactions

 

Not applicable.

 

6. Reliance on subsection 7.1(2) of the National Instrument 51-102

 

Not applicable.

 

7. Omitted Information

 

No information has been omitted in this material change report on the basis that it is confidential information.

 

8. Executive Officer

 

The following is the name and business telephone number of an executive officer of the Company who is knowledgeable about the material change and this report.

 

Stephen Kilmer

(647) 872-4849

skilmer@profoundmedical.com

 

9. Date of Report

 

September 19, 2019

 

 

 

Cautionary Note Regarding Forward-Looking Statements

 

This material change report includes forward-looking statements regarding Profound and its business which may include, but is not limited to, statements with respect to the use of the proceeds and the size and the timing of the completion of the Offering. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “is expected”, “expects”, “scheduled”, “intends”, “contemplates”, “anticipates”, “believes”, “proposes” or variations (including negative variations) of such words and phrases, or state that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved. Such statements are based on the current expectations of the management of Profound. The forward-looking events and circumstances discussed in this release may not occur by certain specified dates or at all and could differ materially as a result of known and unknown risk factors and uncertainties affecting Profound, including, without limitation, uncertainties inherent to current capital markets, the ability to receive any required approvals or consents in connection with the Offering, the ability of Profound to satisfy the conditions of the Offering or otherwise close the Offering, and related risks and uncertainties. Although Profound has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. No forward-looking statement can be guaranteed and actual future results may vary materially. Accordingly, readers are advised not to place undue reliance on forward-looking statements or information. Except as required by applicable securities laws, forward-looking statements speak only as of the date on which they are made and Profound undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, other than as required by law.

 

 

Exhibit 5.1

 

 

 

September 27, 2019

 

Consent of Independent Registered Public Accounting Firm

 

We hereby consent to the inclusion in this Registration Statement on Form F-10 of Profound Medical Corp. of our report dated August 14, 2019 relating to the financial statements of Profound Medical Corp., which appear in this Registration Statement.

 

/s/ PricewaterhouseCoopers LLP

 

Chartered Professional Accountants, Licensed Public Accountants

 

Oakville, Ontario, Canada

 

PricewaterhouseCoopers LLP

PwC Centre, 354 Davis Road, Suite 600, Oakville, Ontario, Canada L6J 0C5

T: +1 905 815 6300, F: +1 905 815 6499, www.pwc.com/ca

 

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

 

 

 

 

Exhibit 5.2

 

 

1114 Avenue of the Americas,

23rd Floor

New York, New York 10036.7703 USA

P. 212.880.6000  |  F. 212.682.0200

 

www.torys.com

 

September 27, 2019

 

Profound Medical Corp.

2400 Skymark Avenue, Unit 6

Mississauga, Ontario

L4W 5K5, Canada

 

Ladies and Gentlemen:

 

RE: REGISTRATION STATEMENT ON FORM F-10

 

We hereby consent to the references to our firm name in the prospectus filed as part of this registration statement on Form F-10 of Profound Medical Corp. In giving this consent, we do not thereby admit that we come within the category of persons whose consent is required by the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder.

 

/s/ Torys LLP
 
Torys LLP