Document:

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

 

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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.

 

     

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	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.

 

     

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	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.”

 

     

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	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.

 

     

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	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.

 

     

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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.

 

     

    - 11 -

      

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.

 

     

    - 12 -

     

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.

 

     

    - 13 -

     

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.

 

     

    - 14 -

     

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.

 

     

    - 15 -

     

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.

 

     

    - 16 -

     

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.

 

     

    - 17 -

     

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:

 

     

    - 18 -

     

	 	·	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.

 

     

     
- 19 -

     

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.

 

     

     
- 20 -

     

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.

 

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	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.

 

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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-8Exhibit 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.

 

    	 	2	 

     

    

 

 

 

 

 

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.

 

    	 	3	 

     

    

 

 

 

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.

 

    	 	4	 

     

    

 

 

 

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

 

    	 	5	 

     

    

 

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.

 

    	 	6	 

     

    

 

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

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