Exhibit 99.1

 

 

 

 
TITAN MEDICAL INC.
Financial Statements
Years Ended December 31, 2018 and 2017

(IN UNITED STATES DOLLARS)


 
Tel:  416 865 0200
Fax:  416 865 0887
www.bdo.ca
 
BDO Canada LLP
222 Bay Street
Suite 2200, PO Box 131
Toronto ON  M5K 1H1 Canada
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Shareholders of Titan Medical Inc.
 
Opinion on the Financial Statements
We have audited the accompanying financial statements of Titan Medical Inc. (the “Company”), which comprise the balance sheet as of December 31, 2018, the related statements of changes in shareholders’ equity and deficit, net and comprehensive loss, and cash flow for the year ended December 31, 2018, and the related notes including a summary of significant accounting policies and other explanatory information (collectively referred to as the “financial statements”).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018, and the results of their operations and their cash flows for the year ended December 31, 2018, in conformity with International Financial Reporting Standards (IFRSs) as issued by International Accounting Standards Board (“IASB”).
 
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Further, we are required to be independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and to fulfill our other ethical responsibilities in accordance with these requirements.
 
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
 2
 
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
 

(signed) BDO Canada LLP
 

Chartered Professional Accountants, Licensed Public Accountants

Toronto, Ontario
February 13, 2019

We have served as the Company's auditor since 2010.
 
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
Tel:  416 865 0200
Fax:  416 865 0887
www.bdo.ca
 
BDO Canada LLP
222 Bay Street
Suite 2200, PO Box 131
Toronto ON  M5K 1H1 Canada
 

INDEPENDENT AUDITOR’S REPORT

To the Shareholders of Titan Medical Inc.

We have audited the accompanying financial statements of Titan Medical Inc., which comprise the balance sheet as at December 31, 2017 and the statements of shareholders’ equity and deficit, net and comprehensive loss and cash flows for the year ended December 31, 2017 and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements 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 entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

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

Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of Titan Medical Inc. as at December 31, 2017 and its financial performance and its cash flows for the year ended December 31, 2017 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

(signed) BDO Canada LLP

Chartered Accountants, Licensed Public Accountants

Toronto, Ontario
February 13, 2018

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
TITAN MEDICAL INC.
                  
Balance Sheets
                  
As at December 31, 2018 and December 31, 2017
                   
(In U.S Dollars)
                  
   
Note
    
December 31, 2018
    
December 31, 2017
  
                   
Assets
                  
                   
Current Assets:
                  
     Cash and cash equivalents
        
$
11,471,243
    
$
26,130,493
  
     Amounts receivable
          
143,225
      
75,151
  
     Deposits
    
8
      
8,541,630
      
2,538,434
  
     Prepaid expense
            
586,581
      
149,593
  
Total Current Assets
          
$
20,742,679
    
$
28,893,671
  
                         
Furniture and Equipment
    
3
      
–
      
6,714
  
Patent Rights
    
4
      
1,172,485
      
774,225
  
Total Assets
          
$
21,915,164
    
$
29,674,610
  
                         
Liabilities
                        
                         
Current Liabilities:
                        
Accounts payable and accrued liabilities
          
$
6,447,888
    
$
2,218,352
  
Warrant liability
    
2h, 5(a), 6
   
11,250,167
      
17,849,460
  
Total Liabilities
            
17,698,055
      
20,067,812
  
                         
Shareholders' Equity
                        
                         
     Share Capital
    
5a
   
170,502,394
      
154,016,519
  
     Contributed Surplus
            
6,652,409
      
5,146,784
  
     Warrants
    
5b
   
–
      
741,917
  
     Deficit
            
(172,937,694
)
    
(150,298,422
)
Total Equity
            
4,217,109
      
9,606,798
  
                         
Total liabilities and equity
          
$
21,915,164
    
$
29,674,610
  

Commitments (Note 8)
See notes to financial statements

Approved on behalf of the Board:

       
John E. Barker
  
David McNally
  
Chairman
  
President and CEO
  
TITAN MEDICAL INC.
                                
Statements of Shareholders’ Equity and Deficit
                                
For the Years Ended December 31, 2018 and 2017
                          
(In U.S. Dollars)
                                      
         
Share Capital
    
Share Capital
    
Contributed
                 
Total
  
   
Note
    
Number
    
Amount
    
Surplus
    
Warrants
    
Deficit
    
Equity
  
                                           
Balance - December 31, 2016
    
5(a)
   
5,550,382
    
$
112,742,810
    
$
3,707,432
    
$
855,800
    
$
(116,711,438
)
  
$
594,604
  
                                                         
Issued pursuant to agency agreement
            
4,232,428
      
20,799,951
                              
20,799,951
  
Issued private placement
            
1,009,263
      
4,564,737
                              
4,564,737
  
Issued other
            
7,500
      
67,954
                              
67,954
  
Share issue expense
                    
(2,132,238
)
                            
(2,132,238
)
Warrants exercised during the year
            
1,755,141
      
17,392,158
                              
17,392,158
  
Warrants expired during the year
                    
113,883
              
(113,883
)
            
–
  
Broker warrants exercised during the year
            
132,009
      
467,264
                              
467,264
  
Stock based compensation
                            
1,439,352
                      
1,439,352
  
Net and Comprehensive loss for the year
                                            
(33,586,984
)
    
(33,586,984
)
                                                         
                                                         
Balance - December 31, 2017
            
12,686,723
    
$
154,016,519
    
$
5,146,784
    
$
741,917
    
$
(150,298,422
)
  
$
9,606,798
  
                                                         
Issued pursuant to agency agreement
            
8,975,126
      
16,915,394
                              
16,915,394
  
Issued Other
            
7,500
      
66,234
                              
66,234
  
Share issue expense
                    
(1,297,668
)
                            
(1,297,668
)
Warrants exercised during the year
            
6,500
      
59,998
                              
59,998
  
Warrants expired during the year
                    
741,917
              
(741,917
)
            
–
  
Stock based compensation
                            
1,505,625
                      
1,505,625
  
Net and Comprehensive loss for the year
                                            
(22,639,272
)
    
(22,639,272
)
                                                         
                                                         
Balance - December 31, 2018
            
21,675,849
    
$
170,502,394
    
$
6,652,409
    
$
-
    
$
(172,937,694
)
  
$
4,217,109
  

See notes to financial statements
TITAN MEDICAL INC.  
         
 
Statements of Net and Comprehensive Loss  
         
 
For the Years Ended December 31, 2018, and 2017  
         
 
(In U.S Dollars)                  

 
    Year Ended     Year Ended  
    Note     December 31, 2018     December 31, 2017  

             
 
Revenue:         $ –     $ –  

                     
Expenses:  
                 
     Amortization  
      29,041       17,360  
     Consulting fees  
      785,128       598,804  
     Stock based compensation      5(b)
    1,505,625       1,439,352  
     Insurance             252,514       25,897  
     Management salaries and fees             2,683,187       2,449,323  
     Marketing and investor relations             231,032       277,737  
     Office and general             412,039       284,532  
     Professional fees             485,639       452,751  
     Rent             97,782       97,817  
     Research and Development             32,858,339       12,900,855  
     Travel             350,016       339,628  
     Foreign exchange (gain)/loss             (979,894 )     542,664  

            38,710,448       19,426,720  

                       
Finance Income (cost):                        
    Interest             288,300       17,442  
    Gain (Loss) on change in fair value of warrants      2(h), 5(a), 6
    17,095,220       (13,133,671 )
    Warrant liability issue cost             (1,312,344 )     (1,044,035 )

            16,071,176       (14,160,264 )

                       
Net and Comprehensive Loss For The Year           $ 22,639,272     $ 33,586,984  

                       
Basic and Diluted Loss Per Share           $ (1.36 )   $ (4.25 )

                       
Weighted Average Number of Common Shares,                        
Basic and Diluted             16,635,092       7,899,443  

See notes to financial statements
TITAN MEDICAL INC.
            
Statement of Cash Flows
            
For the Years Ended December 31, 2018 and 2017
            
(In U.S Dollars)
            
   
Year Ended
    
Year Ended
  
   
December 31, 2018
    
December 31, 2017
  
             
Cash provided by (used in):
            
             
Operating activities:
            
     Net loss for the year
  
$
(22,639,272
)
  
$
(33,586,984
)
     Items not involving cash:
                
          Amortization
    
29,041
      
17,360
  
          Stock based compensation
    
1,505,625
      
1,439,352
  
          Other share compensation
    
66,234
      
120,171
  
          Warrant liability-fair value adjustment
    
(17,095,220
)
    
12,423,889
  
          Warrant liability-foreign exchange adjustment
    
(984,462
)
    
305,475
  
          Loss on extinquishment of other liabilities
    
–
      
709,782
  
Changes in non-cash working capital items:
                
     Amounts receivable, prepaid expenses and deposits
    
(6,508,259
)
    
(504,056
)
     Accounts payable and accrued liabilities
    
4,229,536
      
(13,849
)
Cash used in operating activities
    
(41,396,777
)
    
(19,088,860
)
                 
Financing activities:
                
     Net proceeds from issuance of common shares and warrants
    
27,158,114
      
41,084,278
  
Cash provided by financing activities
    
27,158,114
      
41,084,278
  
                 
Investing Activities:
                
     Increase in furniture and equipment
    
–
      
(3,427
)
     Cost of Patents
    
(420,587
)
    
(201,409
)
Cash used in investing activities
    
(420,587
)
    
(204,836
)
                 
Increase (decrease) in cash and cash equivalents
    
(14,659,250
)
    
21,790,582
  
Cash and cash equivalents, beginning of year
    
26,130,493
      
4,339,911
  
Cash and cash equivalents, end of year
  
$
11,471,243
    
$
26,130,493
  
Cash and cash equivalents comprise:
                
     Cash
  
$
100,130
    
$
354,295
  
     Cash Equivalents
    
11,371,113
      
25,776,198
  
   
$
11,471,243
    
$
26,130,493
  

See notes to financial statements
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)

1.
DESCRIPTION OF BUSINESS
Nature of Operations:
 
Titan Medical Inc’s (the “Company”) business continues to be in the research and development stage and is focused on the continued research and development of the next generation surgical robotic platform.  In the near term, the Company will continue efforts to complete product development and proceed to pre-clinical and confirmatory human studies and satisfaction of appropriate regulatory requirements.  Upon receipt of regulatory approvals, the Company will transition from the research and development stage to the commercialization stage.  The completion of these latter stages will be subject to the Company receiving additional funding in the future.
 
The Company is incorporated in Ontario, Canada in accordance with the Business Corporations Act. The address of the Company’s corporate office and its principal place of business is Toronto, Canada.
 
Basis of Preparation:
 
(a)
Statement of Compliance
These financial statements for the year ended December 31, 2018 and December 31, 2017 have been prepared in accordance with International Accounting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
 
The financial statements were authorized for issue by the Board of Directors on February 13, 2019.
 
(b)
Basis of Measurement
These financial statements have been prepared on the historical cost basis except for the revaluation of the warrant liability, which is measured at fair value.

(c)
Functional and Presentation Currency
These financial statements are presented in United States dollars (“U.S.”), which is the Company’s functional and presentation currency.
 
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
(a)
Use of Estimates and Judgements
The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of provisions at the date of the financial statements and the reported amount of expenses during the year. Financial statement items subject to significant judgement include, the measurement of stock-based compensation and the fair value estimate of the initial measurement of new warrant liabilities and the remeasurement of unlisted warrant liabilities. While management believes that the estimates and assumptions are reasonable, actual results may differ.
 
These financial statements have been prepared in accordance with accounting principles applicable to going        concern, which contemplates that the Company will be able to realize its assets and settle its liabilities in the normal course as they come due during the normal course of operations for the foreseeable future. The Company has shareholders’ deficiency of $172,937,694 and current losses of $22,639,272. The Company currently does not generate any revenue (other than interest income on its cash balances) and accordingly it is primarily dependent upon equity financing for any additional funding required for development and operating expenses. The Company expects that approximately US $45 million in incremental funding is needed, for the next 12 months to maintain its currently anticipated pace of development.  If additional funding is not available, the pace of the Company’s product development plan may be reduced. These conditions indicate the existence of a material uncertainty that
5
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

may cast significant doubt on the ability of the Company to continue as a going concern if additional funding is    not secured.  However, based on internal forecasts, Management believes that the Company has sufficient funds to meet its obligations under a reduced development plan, if necessary, for the ensuing twelve months.
 
 Fair Value
 
The Black-Scholes model used by the Company to determine fair values of stock options and warrants was developed for use in estimating the fair value of the stock options and warrants.

(b)
Cash and Cash Equivalents
 
Cash and cash equivalents include cash balances and amounts on deposit in interest saving account and short-term promissory notes expiring January 30, 2019 with interest rates ranging from 2.18% to 2.32%.
 
(c)
Furniture and Equipment
Furniture and equipment are recorded at cost less accumulated amortization and accumulated impairment losses, if any.  The Company records amortization using the straight-line method over the estimated useful lives of the capital assets as follow:
a) Computer Equipment                                      3 years
b) Furniture and Fixtures                                     3 – 5 years
c) Leasehold Improvements                                Term of the lease

(d)
Impairment of Long-Lived Assets
The Company reviews computer equipment, furniture and equipment, leasehold improvements and patent rights for objective evidence of impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable.   Recoverability is measured by comparison of the asset’s carrying amount to the asset’s recoverable amount, which is the greater of fair value less cost to sell and value in use. Value in use is measured as the expected future discounted cash flows expected to be derived from the asset. If the carrying value exceeds the recoverable amount, the asset is written down to the recoverable amount.

(e)
Patent Rights
Patent rights are recorded at cost less accumulated amortization and accumulated impairment loss.  Straight line amortization is provided over the estimated useful lives of the assets, as prescribed by the granting body, which range up to twenty years.

(f)
Deferred Income Taxes
The Company uses the asset and liability method of accounting for income taxes.  Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, unused tax losses and income tax reductions, and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse.  A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.  Management has determined not to recognize its net deferred tax assets, as it is not considered probable that future tax benefits will be realized.
6
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  (g)
Foreign Currency
Transactions in currencies other than U.S. dollars are translated at exchange rates in effect at the date of the transactions. Foreign exchange differences arising on settlement are recognized separately in net and comprehensive loss. Monetary year end balances are converted to U.S. dollars at the rate in effect at that time.  Non-monetary items in a currency other than U.S. dollars that are measured in terms of historical cost are translated using the exchange rate at the date of transaction or date of adoption of U.S functional currency, whichever is later. Foreign exchange gains and losses are included in net and comprehensive loss.
 
(h)
Warrant Liability
In accordance with IAS 32, because the exercise prices of warrants issued are not a fixed amount as they are denominated in a currency (Canadian dollars) other than the Company’s functional currency (U.S. dollar), as well as the warrants issued August 10, 2018 with the cashless exercise options, the warrants are accounted for as a derivative financial liability.  Each Warrant Liability is initially measured at fair value and subsequent changes in fair value are recorded through Net and Comprehensive Loss for the year. The fair value of these warrants was determined initially using a comparable warrant quoted in an active market, adjusted for differences in the terms of the warrant. At December 31, 2018, the Warrant Liability of listed warrants was adjusted to fair value measured at the market price of the listed warrants and the unlisted warrants were adjusted to fair value using the Black-Scholes formula.
 
(i)
Fair Value Measurement
The accounting guidance for fair value measurements prioritizes the inputs used in measuring fair value into the following hierarchy:
 
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities;
 
Level 2 – Inputs other than quoted prices included within Level 1 that are directly or indirectly observable:
 
Level 3 – Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
 
The fair value of the listed and unlisted Warrant liability is initially based on level 2 significant observable inputs and at December 31, 2018 and December 31, 2017 is based on level 1, quoted prices (unadjusted) for listed warrants and level 2 for unlisted warrants.
 
(j)
Stock Based Compensation
IFRS  2 requires options granted to employees and others providing similar services to be measured at the fair value of goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the entity shall measure the value and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted, which the Company does using the Black-Scholes option- pricing model. The fair value of the options granted is determined as at the grant date.
 
Stock options granted to non-employees are valued at the fair value of the goods or service received, measured at the date on which the goods are received, or the services rendered.  If the entity cannot estimate reliably the fair value of the goods or services received, the entity shall measure the value and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted, which the Company does using the Black-Scholes option- pricing model. The fair value of the options granted is determined as at the grant date.
7
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(k)
Research and Development Costs
Research and development activities undertaken with the prospect of gaining new scientific or technical knowledge and understanding are expensed as incurred.   The costs of developing new products are capitalized as deferred development costs, if they meet the development capitalization criteria under IFRS. These criteria include the ability to measure development costs reliably, the product is technically, and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset.  To date, all the research and development costs have been expensed as the criteria for capitalization have not yet been met.
 
(l)
Earnings (loss) per Share
Basic earnings (loss) per share are calculated using the weighted-average number of common shares outstanding during the year. Diluted earnings (loss) per share considers the dilutive impact of the exercise of 925,782 outstanding stock options (December 31, 2017 – 591,609) and 13,901,859 warrants, (December 31, 2017– 5,108,588) as if the events had occurred at the beginning of the period or at a time of issuance, if later. Diluted loss per share has not been presented in the accompanying financial statements, as the effect would be anti-dilutive.
 
(m)
 Investment tax credits
As a result of incurring scientific research and development expenditures, management has estimated that there will be non-refundable federal and refundable and non-refundable provincial investment tax credits receivable following the completion of an audit process by tax authorities.  Investment tax credits are recorded when received or when there is reasonable assurance that the credits will be realized.  Upon recognition, amounts will be recorded as a reduction of research and development expenditures.
 
(n)
Financial Instruments
Financial assets include cash and cash equivalents, and amounts receivable which are measured at amortized cost. Amounts receivable include HST recoverable and other receivables.  Financial liabilities include accounts payable and accrued liabilities which are measured at amortized cost.
 
(o)
Short term Employee Benefits
Short-term employee benefit obligations including Company paid medical, dental and life insurance plans, are measured on an undiscounted basis and are expensed as the related service is provided.
 
(p)
Provisions
A provision is recognized, if as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Presently the Company is not aware of the need for any material provisions nor has it recorded any except as otherwise disclosed in the financial statements.
 
(q)
Lease payments
Payments made under operating leases are recognized as an expense on a straight-line basis over the term of the lease. Lease incentives received, if any, are recognized as an integral part of the total lease expense over the term of the lease.
8
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(r)
Standards, Amendments and Interpretations Not yet Effective
      Following is a listing of amendments, revisions and new IFRS standards, which have been issued but not   effective until annual periods beginning after December 31, 2018.

IFRS 16 Leases, to supersede the requirements in IAS 17, IFRIC-15 and SIC-17.  The new standard is effective  for annual periods beginning on or after January 1, 2019.
 
Management believes the new standard, effective January 1, 2019 will not have a material impact on future  results and Financial Position of the Company.
 
        Adoption Of New Accounting Standard
        IFRS 9 Financial Instruments
 
Effective January 1, 2018, the Company adopted IFRS 9 Financial Instruments (IFRS 9) which replaced IAS 39, Financial Instruments: Recognition and Measurement (IAS 39).  IFRS 9 includes revised guidance on the classification and measurement of financial assets and liabilities; new guidance for measuring impairment on financial assets; and new hedge accounting guidance.
 
On adoption of IFRS 9, the Company has classified the financial assets and financial liabilities held at January 1, 2018, based on the new classification requirements and the characteristics of each financial instrument as at the transition date.  The new classification did not require a restatement of prior periods.
 
The following table shows the original classification under IAS 39 and the new classification under IFRS 9 for each of the Company’s financial assets and financial liabilities at January 1, 2018, (there is no change to the carrying amounts of the financial instruments from this change).
 
Financial Instrument
IAS 39 Classification
IFRS 9
  
Financial Asset
      
Cash and cash equivalents
Loans and receivables
Amortized cost
  
Amounts receivable
Loans and receivables
Amortized cost
  
Financial Liabilities
      
Accounts payable and accrued liabilities
Other financial liabilities
Amortized Cost
  

9
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)

3.    FURNITURE AND EQUIPMENT

   
Computer
    
Furniture
    
Leasehold
        
   
Equipment
    
and Fixtures
    
Improvements
    
Total
  
Cost
                        
Balance at December 31, 2017
  
$
83,880
    
$
261,483
    
$
172,601
    
$
517,964
  
Additions
    
–
      
–
      
–
      
–
  
Balance at December 31, 2018
  
$
83,880
    
$
261,483
    
$
172,601
    
$
517,964
  
                                 
Amortization & Impairment Losses
                                
Balance at December 31, 2017
  
$
77,166
    
$
261,483
    
$
172,601
    
$
511,250
  
Amortization for the year
    
6,714
      
–
      
–
      
6,714
  
Balance at December 31, 2018
  
$
83,880
    
$
261,483
    
$
172,601
    
$
517,964
  
                                 
Net Book Value
                                
At December 31, 2017
  
$
6,714
    
$
–
    
$
 –    
$
6,714
  
At December 31, 2018
    
–
    
$
–
    
$
 –    
$
–
  
        


4.   PATENT RIGHTS

Cost
        
Balance at December 31, 2017
  
$
978,126
    
Additions
    
420,587
    
Balance at December 31, 2018
  
$
1,398,713
    
           
Amortization & Impairment Losses
          
Balance at December 31, 2017
  
$
203,901
    
Amortization for the period
    
22,327
    
Balance at December 31, 2018
  
$
226,228
    
           
Net Book Value
          
At December 31, 2017
  
$
774,225
    
At December 31, 2018
  
$
1,172,485
    
 

5.  SHARE CAPITAL

a)                    Authorized:          unlimited number of common shares, no par

                                      Issued:                  21,675,849 (December 31, 2017: 12,686,723)
 
Exercise prices of units, warrants and options are presented in Canadian currency as they are exercisable in     Canadian dollars unless otherwise noted.
 
On June 19, 2018 a share consolidation of 1:30 was completed and the Company’s outstanding common shares were adjusted from 419,888,250 to 13,996,275.  All references to the common shares, warrants and stock options, prior to June 20, 2018, have been updated in the notes to reflect the 1:30 reverse stock split.
 
On August 10, 2018 Titan Completed an offering of securities made pursuant to an agency agreement dated August 7, 2018 between the Company and Bloom Burton Securities Inc. (the “Agent”).  The Company sold 7,679,574 Units under the Offering at a price of US $2.50 per Unit for gross proceeds of approximately $19,198,935 ($17,464,711 net
 
10
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)
 
5.   SHARE CAPITAL (continued)
 
of closing cost including cash commission of $1,343,925). Each Unit consisted of one Common Share of the Company and one Common Share purchase warrant, each warrant entitles the holder thereof to acquire one Common Share of the Company at an exercise price of US $3.20 and expiring August 10, 2023.  The warrants were valued at $6,297,251 based on the value determined by the Black-Scholes model and the balance of $12,901,684 was allocated to common shares.
 
Pursuant to the agency agreement, in addition to the cash commission paid to the Agent, broker warrants were issued to the Agent which entitle the holder to purchase 537,570 Common Shares at a price of USD $2.50 per share prior to expiry on August 10, 2020.
 
On April 10, 2018 Titan completed an offering of securities made pursuant to an agency agreement dated April 3, 2018 between the Company and Bloom Burton Securities Inc.  The Company sold 1,126,664 Units under the Offering at a price of CDN $9.00 per Unit for gross proceeds of approximately $8,035,941 ($7,211,320 net of closing costs including cash commission of $562,516).  Each Unit consisted of one Common Share of the Company and one Common Share purchase warrant, each warrant entitles the holder thereof to acquire one Common Share of the Company at an exercise price of CDN $10.50 and expiring April 10, 2023.  The warrants were valued at $4,553,700 based on the value determined by the Black-Scholes model and the balance of $3,482,241 was allocated to common shares.
 
Pursuant to the agency agreement, in addition to the cash commission paid to the Agent, broker warrants were issued to the Agent which entitle the holder to purchase 78,867 Common Shares at a price of CDN $9.00 per share prior to expiry on April 10, 2020.
 
On May 10, 2018 Titan announced the completion of the over-allotment option granted to Bloom Burton Securities Inc. as agent for its offering at a price of CDN $9.00 per Unit completed on April 10, 2018 was exercised and the Company sold an additional 168,888 Units at the offering price for additional gross proceeds of $1,189,856 ($1,100,238 net of closing costs including cash commission of $76,988).  Each Unit consisted of one Common Share of the Company and one Common Share purchase warrant, each warrant entitles the holder thereof to acquire one Common Share of the Company at an exercise price of CDN $10.50 and expiring April 10, 2023.  The warrants were valued at $658,387 based on the value determined by the Black-Scholes model and the balance of $531,469 was allocated to common shares.
 
Pursuant to the agency agreement, in addition to the cash commission paid to the Agent, broker warrants were issued to the Agent which entitle the holder to purchase 10,928 Common Shares at a price of CDN $9.00 per share prior to expiry on April 10, 2020.
 
During the year ended December 31, 2017, 1,755,141 warrants had been exercised for total proceeds of $9,438,577.  The fair value of the exercised warrants had a value of $7,953,581 which was reclassed from warrant liability to common stock.
 
On December 5, 2017 Titan completed an offering of securities made pursuant to an agency agreement dated November 30, 2017 between the Company and Bloom Burton Securities Inc.  The Company sold 1,533,333 Units under the Offering at a price of CDN $15.00 per Unit for gross proceeds of approximately $18,137,800 ($16,555,875 net of closing costs including cash commission of $1,246,185 paid in accordance with the terms of the agency agreement).  Each Unit consisted of one Common Share of the Company and one Common Share purchase warrant, each warrant entitles the holder thereof to acquire one Common Share of the Company at an exercise price of CDN $18.00 and expiring December 5, 2022. The warrants were valued at $5,223,686 based on the value determined by the Black-Scholes model and the balance of $12,914,114 was allocated to common shares.
 
11
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)
 
5.   SHARE CAPITAL (continued)
 
Pursuant to the agency agreement in addition to the cash commission paid to the Agent, broker warrants were issued to the Agent which entitle the holder to purchase 105,350 Common Shares at a price of CDN $15.00 per share prior to expiry on December 5, 2019.
 
On October 31, 2017 Titan completed the final closing of a private placement led by a group of U.S. robotic surgeons.  446,197 common shares of Titan were issued at a subscription price of CDN $7.50 per Common Share for gross proceeds of $2,677,326.
 
On June 29, 2017 Titan completed an offering of securities made pursuant to an agency agreement dated June 26, 2017 between the Company and Bloom Burton Securities Inc.  The Company sold 1,612,955 Units under the Offering at a price of CDN $4.50 per Unit for gross proceeds of approximately $5,576,357 ($4,838,002 net of closing costs including cash commission of $382,689 paid in accordance with the terms of the agency agreement).  Each Unit consisted of one Common Share of the Company and one Common Share purchase warrant, each warrant entitles the holder thereof to acquire one Common Share of the Company at an exercise price of CDN $6.00 and expiring June 29, 2022. The warrants were valued at $2,788,274 based on the value determined by the Black-Scholes model and the balance of $2,788,083 was allocated to common shares.
 
Pursuant to the agency agreement, in addition to the cash commission paid to the Agent, broker warrants were issued to the Agent which entitle the holder to purchase 109,533 Common Shares at a price of CDN $4.50 per share prior to expiry on June 29, 2019.
 
On July 21, 2017 Titan completed a second closing of an offering of securities made pursuant to an agency agreement dated June 26, 2017 between the Company and Bloom Burton Securities Inc.   The Company sold an additional 370,567 Units under the Offering at a price of CDN $4.50 per Unit for gross proceeds of approximately $1,328,871 ($1,200,788 net of closing costs including cash commission of $93,021 paid in accordance with the terms of the agency agreement).  Each Unit consisted of one Common Share of the Company and one Common Share purchase warrant, each warrant entitles the holder thereof to acquire one Common Share of the Company at an exercise price of CDN $6.00 and expiring June 29, 2022.  The warrants were valued at $575,844 based on the value determined by the Black-Scholes model and the balance of $753,027 was allocated to common shares.
 
Pursuant to the agency agreement in addition to the cash commission paid to the Agent, broker warrants were issued to the Agent which entitle the holder to purchase 25,940 Common Share at a price of CDN $4.50 per share prior to expiry on June 29, 2019.
 
On March 16, 2017 Titan completed an offering of securities made pursuant to an agency agreement dated March 10, 2017 between the Company and Bloom Burton Securities Inc.  The Company sold 715,573 Units under the Offering at a price of CDN $10.50 per Unit for gross proceeds of approximately $5,642,537 ($5,039,817 net of closing costs including cash commission of $394,316 paid in accordance with the terms of the agency agreement). Each Unit consisted of one Common Share of the Company and (i)one-half of one Common Share purchase warrant, each whole warrant entitling the holder thereof to acquire one Common Share of the Company at an exercise price of CDN $12.00 and expiring March 16, 2019, and (ii)one-half of one Common Share purchase warrant, each whole warrant entitling the holder thereof to acquire on Common Share of the Company at an exercise price of CDN $15.00 and expiring March 16, 2021. The warrants were valued at $1,297,810 based on the value determined by the Black-Scholes model and the balance of $4,344,727 was allocated to common shares.
 
Pursuant to the agency agreement, in addition to the cash commission paid to the Agent, broker warrants were issued to the Agent which entitle the holder to purchase 50,005 Common Shares at a price of CDN $10.50 per share prior to expiry on March 16, 2019.
 
12
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)

5.   SHARE CAPITAL (continued)
 
On November 23, 2015 Titan closed a private placement of 143,009 Common Shares to Longtai Medical Inc. at a subscription price of CDN $36.90 per common share for gross proceeds of $4,000,000.  Under the Agreement, Titan granted to Longtai exclusive rights to negotiate an exclusive marketing, sales and distribution agreement for Titan’s SPORT Surgical System in the Asia Pacific region.  Longtai paid to Titan $2,000,000 as a deposit toward the Distributorship Agreement.
 
As the parties were not able to reach consensus as to the Distribution Agreement by the agreed upon date, the deposit became due for repayment to Longtai.  On August 24, 2017 Titan completed a subscription agreement with Longtai for the equity conversion of Longtai’s $2.0 million deposit.  Under the terms of the subscription agreement dated July 31, 2017, Titan issued to Longtai 563,067 Units at an assigned issue price of CDN $4.50 per Unit.  Each Unit consists of one Common Share and one Common Share purchase warrant, with each warrant exercisable for one Common Share at an exercise price of CDN $6.00 per warrant and will expire August 24, 2022. The warrants were valued at $822,372 based on the value determined by the Black-Scholes model.
 
The common shares were valued at $1,887,411 based on the market value on August 24, 2017 of CDN $4.20.  The warrant and the common share were valued at fair value in accordance with International Financial Reporting Interpretations Committee Interpretation #19-Extinguishing Financial Liabilities (“IFRIC 19”).  A loss of $709,782 was incurred on extinguishment which is included in the Gain (Loss) on change in value of warrant liability in the statement of net and comprehensive loss.
 
         b) Warrants, Stock Options and Compensation Options

Titan has reserved and set aside up to 10% of the issued and outstanding shares of Titan for granting of options to employees, officers, consultants and advisors. At December 31, 2018, 1,241,803 common shares (December 31, 2017: 677,063) were available for issue in accordance with the Company’s stock option plan. The terms of these options are determined by the Board of Directors.  A summary of the status of the Company’s outstanding stock options as of December 31, 2018 and December 31, 2017 and changes during the periods ended on those dates is presented in the following table:

   
Year Ended
    
Year Ended
  
   
December 31, 2018
    
December 31, 2017
  
                         
   
Number of
    
Weighted-average
    
Number of
    
Weighted-average
  
   
Stock Options
    
Exercise Price (CDN)
    
Stock Options
    
Exercise Price (CDN)
  
                         
Balance Beginning
    
591,609
    
$
21.30
      
240,075
    
$
33.00
  
Granted
    
372,866
    
$
11.97
      
394,830
    
$
15.60
  
Expired/Forfeited
    
(38,693
)
  
$
24.90
      
(43,296
)
  
$
34.80
  
Balance Ending
    
925,782
    
$
17.32
      
591,609
    
$
21.30
  
13
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)

5.   SHARE CAPITAL (continued)
 
The weighted-average remaining contractual life and weighted-average exercise price of options outstanding and of options exercisable as at December 31, 2018 are as follows:

Options Outstanding

         
Weighted-average
    
 
Exercise
            Number
    
remaining
     Options
  
 
Price (CDN)
       Outstanding
    
contractual life (years)
   Exercisable
  
 
$2.09
         50,349
    
          3.00
  
        50,349
  
 
$3.28
         31,498
    
          6.67
  
        31,498
  
 
$4.50
         18,935
    
          4.54
  
        18,935
  
 
$4.80
           3,040
    
          1.71
  
          3,040
  
 
$7.49
           5,590
    
          6.52
  
          5,590
  
 
$9.00
         11,481
    
          6.52
  
        11,481
  
 
$9.60
           1,105
    
          1.77
  
          1,105
  
 
$11.70
           6,667
    
          1.93
  
          6,667
  
 
$12.00
           1,948
    
          1.93
  
          1,948
  
 
$12.90
         50,000
    
          5.30
  
        12,500
  
 
$14.40
         18,950
    
          5.86
  
          4,737
  
 
$15.00
         16,667
    
          5.11
  
          4,167
  
 
$15.00
       273,948
    
          6.06
  
                -
  
 
$17.10
       277,519
    
          5.05
  
        69,380
  
 
$30.00
       105,719
    
          2.65
  
        81,462
  
 
$30.60
           6,120
    
          1.98
  
          6,120
  
 
$32.40
         18,810
    
          2.08
  
        18,810
  
 
$41.70
               658
    
          0.96
  
              658
  
 
$45.30
               560
    
          1.61
  
              560
  
 
$51.60
         15,371
    
          1.44
  
        15,371
  
 
$58.20
         10,847
    
          0.39
  
        10,847
  
   
       925,782
    
          4.82
  
      355,225
  
                                                                                                
The weighted average exercise price of options outstanding is CDN $17.32 and CDN $18.84 for options that are exercisable.   Since the December 18, 2018 options issued to consultants have an exercise price of USD $1.55, they have been converted at the December 18, 2018 close rate of 1.3461 or CDN $2.09.
14
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)
 
5.    SHARE CAPITAL (continued)
 
      Options are granted to Directors, Officers, Employees and Consultants at various times. Options are to be  settled by physical delivery of shares.

Grant date/Person entitled
Number of Options   Vesting Conditions   Contractual life of Options
January 17, 2017, option grants to
Employees
 277,519
Vest as to ¼ of the total
number of Options granted,
every year from Option Date
 7 years
February 7, 2017 option grants to
Employees
 16,667
Vest as to 1/4 of the total
number of Options granted,
every year from Option Date
 7 years
April 17, 2017, option grants to
Employees
 50,000
Vest as to 1/4 of the total
number of Options granted,
every year from Option Date
 7 years
September 7, 2017, options granted
to Consultants
 6,667
Half vest in 3 months and
the remaining half in 6
months
 3 years
September 7, 2017, options granted
to Directors
 12,269
immediately
 7 years
September 15,2017, options granted
to Consultants
 3,040
immediately
 3 years
October 6, 2017, options granted to
Consultants
 1,105
immediately
 3 years
November 8, 2017 option grants to
Employees
 18,950
Vest as to 1/4 of the total
number of Options granted,
every year from Option Date
 7 years
December 4, 2017, options granted
to Consultants
 1,948
immediately
 3 years
December 4, 2017, options granted
to Consultants
 6,667
Half vest immediately
and the remaining half in 12
months
 3 years
January 19, 2018 option grants to
Employees
 273,948
Options will vest the earlier
of commercialization or 3
years from grant date
 7 years
July 6, 2018, options granted to
Directors
 17,071
immediately
 7 years
August 29, 2018, options granted to
Directors
 31,498
immediately
 7 years
December 18, 2018, options granted
to Consultants
 50,349
immediately
 3 years
 
 Inputs for Measurement of Grant Date Fair Values
 
The grant date fair value of all share-based payment plans was measured based on the Black-Scholes formula. Expected volatility was estimated by considering historic average share price volatility. The inputs used in the measurement of fair values at grant date of the share-based option plan are as follows:

    2018     2017  
Fair Value at grant date (CDN)
  
$
5.99
     $ 8.70  
Share price at grant date (CDN)
  
$
10.79
     $ 14.75  
Exercise price (CDN)
  
$
11.97
     $ 15.52  
Expected Volatility
    
90.12
%
     83.20 %
Option Life
3 years
  3-4 years  
Expected dividends
nil
  nil  
Risk-free interest rate
    
1.90
%
     1.06 %
(based on government bonds)
                

15
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)

5.   SHARE CAPITAL (continued)
 
The following is a summary of outstanding warrants included in Shareholder’s Equity as at December 31, 2018 and December 31, 2017 and changes during the periods then ended.

   
December 31, 2018
    
December 31, 2017
    
   
Number of
          
Number of
          
   
Warrants
    
Amount
    
Warrants
    
Amount
    
Opening Balance
    
175,357
    
$
741,917
      
188,381
    
$
855,800
    
Expired during the year
                                  
Exercise Price CDN $1.25
                                  
Expiry March 18, 2018
    
(175,357
)
    
(741,917
)
    
–
      
–
    
Expired during the year
                                  
Exercise Price CDN $1.77
                                  
Expiry March 14, 2017
    
–
      
–
      
(13,024
)
    
(113,883
)
  
Ending Balance
    
–
    
$
–
      
175,357
    
$
741,917
    
        
 
6.    WARRANT LIABILTY
   
   
December 31, 2018
    
December 31, 2017
  
                         
   
Number of
          
Number of
        
   
Warrants
    
Amount
    
Warrants
    
Amount
  
Opening Balance
    
4,933,231
    
$
17,849,460
      
2,581,703
    
$
2,365,691
  
Issue of warrants expiring, March 16, 2019
    
–
      
–
      
357,787
      
572,326
  
Issue of warrants expiring, March 16, 2021
    
–
      
–
      
357,787
      
725,484
  
Issue of warrants expiring, June 29, 2022
    
–
      
–
      
1,983,521
      
3,364,118
  
Issue of warrants expiring, August 24, 2022
    
–
      
–
      
563,067
      
822,372
  
Issue of warrants expiring, December 5, 2022
    
–
      
–
      
1,533,333
      
5,223,686
  
Issue of warrants expiring, April 10, 2023
    
1,295,554
      
5,212,087
      
–
      
–
  
Issue of warrants expiring, August 10, 2023
    
7,679,574
      
6,297,251
                  
Warrants exercised during the year
    
(6,500
)
    
(28,949
)
    
(1,755,141
)
    
(7,953,581
)
Warrants expired during the year
    
–
              
(688,826
)
    
–
  
Foreign exhange adjustment during the year
            
(984,462
)
    
–
      
305,475
  
Fair value adjustment during the year
            
(17,095,220
)
            
12,423,889
  
Ending Balance
    
13,901,859
    
$
11,250,167
      
4,933,231
    
$
17,849,460
  

In addition to the warrants listed above, at December 31, 2018, the Company has issued, outstanding and exercisable, 786,183 broker unit warrants expiring between March 16, 2019 and August 10, 2020 (2017 – 272,650 broker unit warrants expiring between February 23, 2018 and December 5, 2019).
16
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)
 
7.    INCOME TAXES
 
a)
Current Income Taxes

A reconciliation of combined federal and provincial corporate income taxes at the Company’s effective tax rate of 26.5% (2017 – 26.5%).
 
   
December 31, 2018
    
December 31, 2017
  
             
Net Loss before income taxes
  
$
(22,639,272
)
  
$
(33,586,984
)
                 
Income taxes at statutory rates
  
$
(5,999,407
)
  
$
(8,900,551
)
Tax effect of expenses not deductible for income tax purposes:
                
Tax/FX rate changes and other adjustments
    
–
      
(27,053
)
Permanent differences
    
(4,374,564
)
    
3,975,072
  
Unrecognized share issue costs
    
(354,072
)
    
(554,252
)
Total tax recovery
    
(10,728,043
)
    
(5,506,784
)
                 
Tax recovery not recognized
    
10,728,043
      
5,506,784
  
   
$
–
    
$
-
  


b)
Deferred Income Taxes

Deferred income tax assets and liabilities result primarily form differences in recognition of certain timing differences that give rise to the Company’s future tax assets (liabilities) and are as follows:
 
   
December 31, 2018
    
December 31, 2017
  
             
Non-Capital Losses
  
$
47,679,897
    
$
37,012,271
  
Qualifying Research and
                
Development expenditures
    
1,493,309
      
1,493,309
  
Share issue costs and other
    
1,622,533
      
1,562,116
  
Total tax assets
    
50,795,739
      
40,067,696
  
                 
Tax assets not recognized
    
(50,795,739
)
    
(40,067,696
)
Net deferred tax assets
  
$
–
    
$
–
  
 

In assessing the realizability of deferred tax assets, management considers whether it is probable that some or all the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.  Management, based on IFRS criteria, has determined, at this time, not to recognize its deferred tax assets.
17
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)

  7.  INCOME TAXES (continued)
 
c)
Losses carried forward

The Company has non-capital losses of approximately $179,924,139 available to reduce future income taxes.  The non-capital losses expire approximately as follows:
 
2027
  
$
786,557
    
2028
    
169,954
    
2029
    
186,708
    
2030
    
2,003,594
    
2031
    
12,735,836
    
2032
    
7,260,729
    
2033
    
8,856,497
    
2034
    
15,819,741
    
2035
    
43,934,918
    
2036
    
28,310,254
    
2037
    
19,604,159
    
2038
    
40,255,192
    
   
$
179,924,139
    


 The Company has accumulated Qualifying Research and Development expenses of $5,635,128 from prior years research and development.  These expenditures may be carried forward indefinitely and used to reduce taxable income in future years.
 
As a result of a Canada Revenue Agency (CRA) audit completed in 2017 and 2016, regarding Titan’s 2012 and 2011 SR&ED claim the 2012 loss of $6,517,436 has been adjusted to $7,260,729 and the 2011 loss of $9,423,694 has been adjusted to $12,735,836.  The qualifying SR&ED expenditures has also been adjusted from $9,439,430 to $5,635,128.  CRA concluded that the claimed work did not satisfy the SR&ED criteria.  Titan is appealing this decision by CRA.
 
d)
Investment Tax Credits

At December 31, 2018 the Company has $1,167,560 (2017 - $1,167,560) of unclaimed investment tax credits available to reduce federal income taxes payable in future years.  If not utilized, these investment tax credits will start expiring in 2028.  The amounts have been adjusted to reflect changes due to the CRA audit.
 
At December 31, 2018 the Company has $237,997 (2017 - $237,997) of unclaimed Ontario Research and Development Tax Credit available to reduce Ontario income taxes payable in future years.  If not utilized, this credit will start expiring in 2029.  The amounts have been adjusted to reflect changes due to the CRA audit.
 
8.    COMMITMENTS
 
Effective November 30, 2018 the Company’s Ancaster, Canada lease and sublease which was to expire January 31, 2019 were terminated.  This space was leased at CDN $4,673 per month and sublet for CDN $4,099 per month.
 
The corporate office is located at 170 University Avenue, Toronto, Canada.  Effective October 30, 2017 the Company extended its lease term for a period of 22 months, commencing February 1, 2018 at a monthly rent of CDN $9,969.  On November 12, 2018 the lease was amended to reduce the square footage leased from 2,750 to 1,495, reducing the monthly rent to CDN $5,419.
18
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)

8.    COMMITMENTS (continued)
 
As part of its program of research and development around the SPORT Surgical System, the Company has outsourced certain aspects of the design and development to a U.S. based technology and development company. At December 31, 2018 $12,756,962 in purchase orders remain outstanding ( 2017 - $4,742,928). The Company also has on deposit with this same U.S. supplier $8,541,630 to be applied against future invoices (2017 - $2,172,943).

9.   RELATED PARTY TRANSACATIONS
 
During the year ended December 31, 2018, transactions between the Company directors, officers and other related parties were related to compensation matters in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
 
Compensation to the Executive Officers amounted to $1,552,367 for the year ended December 31, 2018 compared to $1,587,667 for the year ended December 31, 2017.
 
Officers and Directors of the Company control approximately 0.30% of the Company
 
   
December 31, 2018
           
December 31, 2017
        
                         
                         
   
Number of Shares
     %
    
Number of Shares
     %
  
                         
                         
John Barker
    
31,714
      
0.15
      
23,715
      
0.19
  
Martin Bernholtz
    
-
      
-
      
102,383
      
0.81
  
David McNally
    
4,167
      
0.02
      
1,667
      
0.01
  
Stephen Randall
    
21,643
      
0.10
      
11,910
      
0.09
  
John Schellhorn
    
294
      
-
      
294
      
-
  
Bruce Wolff
    
7,610
      
0.03
      
2,010
      
0.02
  
Total
    
65,428
      
0.30
      
141,979
      
1.12
  
                                 
Common Shares Outstanding
    
21,675,849
      
100
%
    
12,686,723
      
100
%

19
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)
 
        10.  FINANCIAL INSTRUMENTS
 
The Company's financial instruments consist of cash and cash equivalents, amounts receivable and accounts payable and accrued liabilities. The fair value of these financial instruments approximates their carrying values, unless otherwise noted, due to the short maturities of these instruments or the discount rate applied.  Warrant liabilities are valued at fair value as described in note 2 (h).
 
The Company's risk exposures and their impact on the Company's financial instruments are summarized below:
 
a)
Credit risk
The Company's credit risk is primarily attributable to cash and cash equivalents and amounts receivable. The Company has no significant concentration of credit risk arising from operations. Cash and cash equivalents are held with reputable financial institutions, from which management believes the risk of loss to be remote. Financial instruments included in amounts receivable consists of HST tax due from the Federal Government of Canada and interest receivable from interest saving account and short-term promissory notes.  Management believes that the credit risk concentration with respect to financial instruments included in amounts receivable is remote.
 
b)
Liquidity risk
The Company's approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due and when appropriate will scale back its operations. As at December 31, 2018, the Company had cash and cash equivalents of $11,471,243 (December 31, 2017 -$26,130,493) to settle current liabilities of $6,447,888 (December 31, 2017 - $2,218,352) excluding warrant liabilities of $11,250,167 (December 31, 2017 – $17,489,460).
 
The Company currently does not generate any revenue or income (other than interest income on its cash balances) and accordingly, it is (and it will be for the foreseeable future) dependent primarily upon equity financing for any additional funding required for development and operating expenses.
 
The ability of the Company to arrange such financing in the future will depend in part upon prevailing capital market conditions and the business success of the Company. There can be no assurance that the Company will be successful in its efforts to arrange additional financing on terms satisfactory to the Company. If additional financing is raised by the issuance of shares or convertible securities from treasury, control of the Company may change, and shareholders may suffer additional dilution.  If adequate funds are not available, or are not available on acceptable terms, the Company may not be able to take advantage of opportunities, or otherwise to continue its technology development program at its current pace.
 
The Company expects that approximately US $45 million, in incremental funding will be required for fiscal 2019 to maintain its currently anticipated pace of product development.  If additional funding is not available, the pace of the Company’s development plan may be reduced.
 
c)
Market risk
Market risk is the risk of loss that may arise from changes in market factors such as interest rates and foreign exchange rates.
 
(i)     Interest rate risk
 
 The Company has cash balances and no interest-bearing debt. The Company’s current policy is to invest excess cash in interest savings accounts and short-term promissory notes. The Company periodically monitors the investments it makes and is satisfied with the credit risk of its bank.
20
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)
 
      10.    FINANCIAL INSTRUMENTS (continued)
 
(ii)  Foreign currency risk
 
The company’s functional currency is the U.S. dollar.  Expenditures transacted in foreign currency are converted to U.S. dollars at the rate in effect when the transaction is initially booked.  The gain or loss on exchange, when the transaction is settled, is booked to the Statement of Net and Comprehensive Loss.  Management acknowledges that there is a foreign exchange risk derived from currency conversion and believes this risk to be low as the Company now maintains a minimum balance of Canadian dollars.
 
d)
Sensitivity analysis

Cash equivalents include cash balances and amounts on deposit in interest savings account and short-term promissory notes.  Sensitivity to a plus or minus 1% change in interest rates could affect annual net loss by $113,711 (December 31,2017 - $257,762) based on the current level of cash invested in cash equivalents.
 
A strengthening of the U.S. dollar at December 31, 2018, as indicated below, against Canadian current assets and accounts payable and accrued liabilities including warrant liability of CDN $277,228 and $5,520,457 respectively (December 31, 2017 - $509,371 and $22,813,047) would result in increased equity and an increased profit for the period of $192,059 (December 31, 2017, increased equity and an increase profit of $888,913) as shown on the chart below.  This analysis is based on foreign currency exchange rate variances that the Company considers to be reasonably possible at the end of the reporting period. The analysis assumes that all other variables, in particular, interest rates, remain constant. The analysis is performed on the same basis for December 31, 2017.
 
December 31, 2018
  
Profit of (Loss)
    
5% strengthening
        
CDN Current assets
  
$
(10,155
)
  
CDN Accounts payable and accrued liabilities
  
$
202,214
    
   
$
192,059
    
December 31, 2017
          
5% strengthening
          
CDN Current assets
  
$
(20,301
)
  
CDN Accounts payable and accrued liabilities
  
$
909,214
    
   
$
888,913
    

 
A weakening of the U.S. dollar against the Canadian dollar at December 31, 2018 and December 31, 2017 would have had the equal but opposite effect on the above currencies to the amount shown above, on the basis that all other variables remain constant.
 
   11.   SEGMENTED REPORTING
 
The Company operates in a single reportable operating segment – the research and development of SPORT,  the next generation of surgical robotic platform.
 
21
TITAN MEDICAL INC.
Notes to the Financial Statements
December 31, 2018 and 2017
(In U.S. Dollars)
 
     12.    CAPITAL MANAGEMENT

The Company’s capital is composed of shareholders’ equity.  The Company manages its capital structure and  makes adjustments to it, based on the funds available to the Company, to support the development of its  SPORT Surgical Platform (SPORT).   The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the SPORT. The Company has further progress to make in the development of the SPORT and anticipates that the cost of completion will exceed its current resources.   Accordingly, the Company will be dependent on external financing to fund a portion of its future activities.   To carry out the completion of the SPORT and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.  There were no changes in the Company's approach to capital management during the year ended December 31, 2018. The Company is not subject to externally imposed capital requirements.
 
13.  EVENTS AFTER THE REPORTING DATE
 
 During the first quarter of 2019, 619,606 warrants had been exercised for gross proceeds of $1,982,739.

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