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ERGORESEARCH ERGORESEARCH ERGORESEARCH ERGORESEARCH LTDLTDLTDLTD 2016 annual 2016 annual 2016 annual 2016 annual REPORTREPORTREPORTREPORT ....

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www.ergoreseach.comwww.ergoreseach.comwww.ergoreseach.comwww.ergoreseach.com


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ERGORESEARCH LTD ANNUAL REPORT JUNE 30, 2016 SCOPE OF ANALYSIS The following management discussion and analysis (“MD&A”) dated October 25, 2016 is intended to assist readers in understanding the business environment, strategies, performance and risk factors of Ergoresearch Ltd. This MD&A provides the reader with a view and analysis, from the perspective of management, of the Corporation’s financial results for the fourth quarter and the fiscal year ended JUNE 30, 2016. Throughout this document, the terms “we”, “us”, “Corporation”, and “Ergoresearch” refer to Ergoresearch Ltd. The MD&A has been prepared in accordance with National Instrument 51-102, Continuous Disclosure Requirements, and should be read in conjunction with the Corporation’s consolidated fiscal year-end financial statements, and their accompanying notes. The consolidated financial statements and the MD&A have been reviewed by the Corporation’s Audit Committee and approved by its Board of Directors. The following information takes into account all material events that took place up until October 25, 2016, the date on which the Corporation’s Board of Directors approved this MD&A. Unless otherwise indicated, the functional and reporting currency is the Canadian dollar and are based on financial statements established in accordance with the International Financial Reporting Standards ("IFRS"). Reporting Periods All references to “Fiscal 2015” are to the Corporation’s fiscal year ended June 30, 2015 while “Fiscal 2016” refers to the Corporation’s fiscal year ended June 30, 2016. Compliance with International Financial Reporting Standards The Corporation’s financial statements have been prepared in accordance with IFRS. However, the Corporation uses non-IFRS such as EBITDA and adjusted EBITDA, as these measures allow to analyze the liquidities generated by the operations of the Company excluding the financing and investment decisions. EBITDA means earnings before interest, income taxes, depreciation and amortization (“EBITDA”) while adjusted EBITDA means earnings before interest, income taxes, depreciation and amortization deducting other items for the year ended June 2016. Although management, investors and analysts use these measures to evaluate the Corporation’s financial and operating performance, they have no standardized definition in accordance with IFRS and should not be Management’s Report regarded as an alternative to financial information prepared in accordance with IFRS. These measures may therefore not be comparable to similar measures reported by other companies. Additional information The following management discussion and analysis and its financial statements are available at all times on the Corporation’s website at www.ergoresearch.com. All


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documents are published separately and are available on the SEDAR website (www.sedar.com). Ergorersearch shares are listed on the TSX Venture Exchange under the TSX-V Symbol: ERG. The number of common shares outstanding on October 25, 2016 was 72,509,040 with 1,591,667 stock options outstanding.


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MESSAGE FROM THE PRESIDENT Efforts in 2016 were dedicated to improving the Company’s efficiency and to prepare the Company’s next growth phase. The net profit for this fiscal year amounted to $111,733 compared to a net loss of $(7,023,218) last year. The earnings before income taxes amounted to $97,419 for Fiscal 2016 compared to $(642,637) for Fiscal 2015. This improvement in the result is related to efficiency gains that have helped to improve our gross margin, reduce our supplying costs and reduce our selling and administrative expenses. Revenues reached $14,326,767 this year, a decrease of 7.6% from last year. After the decline in sales observed in the previous three quarters, we noticed a recovery of the situation for the 4th quarter. The revenues this year were negatively affected by the discontinued sales of the "home care" product line in January, the evolution of the market, and changes in the organization of health care in Quebec. Concerning the balance sheet, the Company proceeded to pay during the year, amounts totaling $1,526,581 towards its long-term debt. Also according to what was announced in November 2015, the Company redeemed for cancellation 5% of its share capital (3,813,633 common shares) totaling an amount of $732,965. The Company still has a cash equivalent of more than $8 million that the Company plans to use over the next few years. Development and perspectives Our current priorities and development plans include the following objectives:

• Strengthened by our cash position, pursue the exploration of potential acquisitions or partnership in Quebec and across Canada.

• Deploy the "Equilibre" brand in a multidisciplinary and interdisciplinary concept through the opening or designation of the super-clinics in Quebec.

• Continue to develop the marketing of our technology platform and derivative orthotic related specialty products.

• Continuing our investments in Research and Development (R&D)

I would like to thank all of our employees for their dedication and their ongoing desire to improve. Progress, the desire to excel and commitment are values that we all share, which reveals a bright future.

Sylvain Boucher President and CEO. Ergoresearch Ltd


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PRICES and RECOGNITION

• Ranked on PROFIT 500; the prestigious list of companies with the highest five-year growth in Canada by PROFIT magazine. (2011, 2012, 2013, 2014, 2015 and 2016)

Organization Chart June 30, 2016

ERGORESEARCH LTD TSX-V: ERG

Laboratoire Victhom inc 9378782 Canada inc. 100% subsidiary 100% subsidiary Division Head for: Health practice holding company

• Clinique du Pied Équilibre • Laboratoire Langelier • LL custom • Ergorecherche • Victhom human bionics • Orthoconcept (2008) inc. • Laboratoire Podotech


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SELECTED CONSOLIDATED FINANCIAL INFORMATION

Selected consolidated financial information as of June 30, 2016 and June 30, 2015 were derived from our audited consolidated financial statements and related notes. Audited consolidated financial statements were prepared in accordance with the IFRS. The financial information for the 3-month periods ended June 30, 2016 and June 30, 2015 is unaudited. BUSINESS PROFILE

Ergoresearch operates in the healthcare sector, a market that is in full expansion owing to aging populations. It develops innovative orthopedic solutions and products with high ranging effect on pain that are affordable and often reimbursed by third party payers. Non-invasive and non-toxic, these biomechanical devices feature patient benefits that are supported by extensive clinical proof and convincing scientific data.

Ergoresearch is a Canadian company that designs and manufactures cutting edge technologies for the orthopedic industry. The Corporation is a trend-setter in creating custom orthotics and speciality orthotics for the orthopedics market and holds a portfolio of patents in the orthopedics field and in human bionics. The mission of our banner "Équilibre orthèses et biomécanique" is to keep people active and moving. "ÉQUILIBRE", driven by its proprietary technologies and the expertise of its professionals, offers a range of products, treatments and services in order to relieve pain, restore motor function and optimize performance.

PRODUCT OVERVIEW PRODUCTS - Proprietary Technologies Expert-fit Technology - The Corporation was notably the first to develop and market the Expert-Fit™ technology on a large scale. Patented and exclusive to Ergoresearch, it is comprised of an expert clinical software, a manufacturing software, a podo-barometric sensor pad system (proprietary technology) and an optical scanning system. This technology also allows the mass production of custom fit 3D orthotics by using numerically controlled machine tools, and computer assisted manufacturing and design software (CAM/CAD)

Expert-Fit™ technology has several advantages. It is fast, and it offers a top quality precision-cut finished product with minimal re-makes and adjustments. In addition, owing to


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the fact that it is mobile and linked to a robotized manufacturing plant, it generates additional revenues and interesting savings on labor costs.

Scanner technology:

More accurate than traditional cast-making methods that rely on plaster bandaging, this technology means orthotists will no longer resort to plaster when applying casts.

This developed technology is easy to use and very safe. Now any body part can be scanned in both 3D and in real time. Scanned files are transferred by Internet to Ergoresearch’s computing platforms, where the data is used to manufacture custom fit medical orthotics. FINANCIAL ADVANTAGES OF THE NEW SCANNING TECHNOLOGY If practical, ecological and clinical benefits are obvious, financial benefits are major. Scanners generate substantial savings:

• Plaster costs • Shipping costs • Increased productivity


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OdrA - Orthotic distraction device that relieves pain associated with knee osteoarthritis:

Ergoresearch exclusively launched the OdrA orthotic device on the Canadian market. The OdrA is the first distraction orthotic device of its kind. World-patented and developed in collaboration with Proteor – an Ergoresearch partner and France’s leading orthopedics provider – the OdrA’s Distraction and Rotation mechanism for Knee osteo-arthritis (OdrA) improves knee mobility and lessens intra-articular pressure that provokes pain. This condition affects close to 300,000 Quebecers/1.2 million Canadians. Manufacturing Ergoresearch assembles and manufactures its foot and specialty orthotics at two manufacturing plants located in Laval and Beloeil, QC. To craft its custom foot orthotics, Ergoresearch uses numerical control machine tools (NC or CNC) requiring no human intervention other than at the finishing stage. Operations are carried out via a series of coded instructions received by computer, using computer assisted design and manufacturing software (CAD/CAM). Machine tool cut, they deliver premium quality orthotic devices with remarkable precision and reproducibility.


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LICENSED TECHNOLOGIES AND ROYALTIES The Company in its past activities has developed sophisticated products, which are marketed today by world-class licensees. These products do not require additional development efforts. The maintaining of intellectual property and its marketing do not require further investment from the Company. Royalties are and will be received on future sales of these products or on the products of intellectual property, under the terms of licenses granted. POWER KNEE - Worldwide license granted to Ossur

The Power Knee is the world’s first motorized prosthetic device destined for above-knee amputees. The Corporation has a licensing agreement with Össur pertaining to the Power Knee’s marketing and promotion. Neuro-stimulation: Sleep apnea component (license granted to a non-disclosed manufacturing company)

The technology, based on the neurostimulation platform developed by Victhom Human Bionics, is an implantable medical device for recording and stimulation of peripheral nerves for treatment of obstructive sleep apnea. It can detect sleep apnea and deliver therapy only when necessary. Sleep apnea has severe consequences on quality of life, being strongly associated with high blood pressure, heart failure, diabetes and stroke. According to the National Sleep Foundation, Sleep apnea affects 18 million Americans. The Gold Standard Therapy, CPAP¹, is often rejected by patients.²

The monetization transaction which was completed in 2014 in collaboration with its German partner, Otto Bock Healthcare, represents a strong validation of the potential of the sleep apnea technology. Under the confidentiality agreement executed, the sleep apnea technology could eventually generate additional royalties on future sales should this technology be commercialized.

¹ CPAP: Continuous Positive Air Pressure ² Weaver and Grunstein, 2008


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TARGET MARKET Ergoresearch is focused on healthcare, with a vested interest in orthopedics and the musculoskeletal system. In coming years, the orthopedics sector will be in full effervescence owing to the following factors: • An aging population and its related joint problems; • High incidence of diabetes (foot); • High incidence of obesity (increased joint pressure).

The High Stakes of Healthcare

• Healthcare costs in Canada soared from $37B in 1984, to over $192B in 2010. The public sector pays close to 70% of expenses;

• Retiring baby-boomers, higher life expectancy rates and the addition of new services, products and technologies have caused healthcare costs to soar nationwide. In turn, the public system is burdened with enormous economic pressure;

• Rapid increase in pathologies linked to aging; • Referring physicians and specialists request conclusive data before prescribing new

devices or treatment plans to their patients; • Technology is key to market differentiation and to implementing new expertise to the

benefit of patients. Orthopedic Laboratories and Foot Orthotics Markets

Markets serving these fields of activities are highly fragmented. This is partially due to the current assessment protocols and artisan manufacturing practices of the vast majority of laboratories. Without more objective assessment, manufacturing and measurement tools, a consolidation is near to impossible. Developing and integrating these technologies and protocols are the raison d’être for the Research and Development Department at Ergoresearch. The North-American foot orthotics market is estimated at US$1B+ per annum. Add to this another US$1B, if one takes into consideration orthopedic footwear and other foot care products: • $2.7B is currently spent on absenteeism, decreased productivity, insurance refunds; • $1.3B is currently spent on over-the-counter | mail-order foot product purchases. The Osteoarthritis Market

Osteoarthritis is the most common form of arthritis, and one of the leading causes of functional impairment. This disease can occur at any age. However, aging is one of its leading risk factors. The occurrence of osteoarthritis (OA) generally appears around age 50, and its prevalence increases with time. All current treatments aim to slow the progression of the disease and relieve pain, but no cure has been put forward to date. For the time being, surgery alone has provided good results. It is nevertheless very expensive (over $40,000), invasive and rehabilitation is often quite lengthy. Orthopedic surgeons generally recommend surgery only when


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mechanical and metabolic treatments (anti-inflammatories, corticosteroids, etc.) no longer offer functional improvement or pain relief. An arsenal of non-pharmacological treatments is also available: physiotherapy, weight loss, viscosupplementation, walking aids, foot and knee orthotics. Despite the thirty or so available treatments, not one provides results above the 0.8 mark – the threshold beyond which pain relief is rated as significant. Consequences are tragic for patients who must turn to a number of healthcare professionals for additional advice and treatment. Steps are complex, long and generally inconclusive and further aggravate an already taxed healthcare system. To properly assess sales potential on the osteoarthritis market, please read a few fast facts about OA: • 30 million+ OA sufferers in the United States; • 3 million+ adult OA sufferers in Canada (10%); • Economic impact of OA per annum: US$65B; • 50% of individuals 65+ are occasional sufferers; 80% of individuals 75+ are confirmed

sufferers; • Total knee replacement surgery is estimated to cost over $40,000. With a 2.25 result,

surgery has been the only method to date to present a decrease in average pain intensity, scoring well above the 0.8 pain relief threshold.

Our exclusive orthotics, featuring a unique Ergoresearch design enjoys a clear advantage over the spectrum of other efficient treatments available today. Growth Strategy

Ergoresearch has established a growth strategy that rests on three principal pillars: Innovation, conquering the Canadian market via acquisitions and deployment at an international level by way of partnerships, licenses or manufacturing agencies.

• Innovation at every level – products, services and marketing – is the driving force behind the Ergoresearch strategy. It is also the basis for quality relationships with clients, be they orthopedic professionals or patients. The Ergoresearch approach is unique: vested in innovation and research, it stays at the cutting edge of orthopedics.

• Our growth strategy is chiefly built around acquisitions or partnerships.


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RESULTS OF OPERATIONS Comparison between Fiscal 2016 and Fiscal 2015 Revenues Total revenues for the year ended June 30, 2016 decreased by 7.6%, going from $15,498,000 to $14,326,767. The decrease in revenues amounts to $1,171,233 and is mainly due to the following elements: • The evolution of the market, the organization of care and increased competition

has negatively affected our products last year. • The Company proceeded to discontinue the sales of the "home care" product line.

These mobility products (electric scooters) where only present at the Laval branch. • The decline in sales in pre-manufactured shoes. The Company had to apply sales

tax to the consumption of these products, even when these were sold under prescription. This policy change due to a new interpretation of the Ministry of Revenue of Quebec has significantly slowed sales in this category last year. However, starting from August 1st 2016, the consumer taxes on footwear products under medical prescription no longer apply.

OPERATING EXPENSES Costs of Goods Sold, Selling and Operating Expenses went from $15,612,511 (100.7% of revenues) in 2015 to $14,215,228 (99.2% of revenues) in Fiscal 2016. This improvement in operating margins was due to the following changes:

Costs of Goods Sold, selling and operating expenses

These expenses went from $11,718,512 (75.6% of revenues) in 2015 to $10,504,244 (73.3% of revenues) in Fiscal 2016. These charges have decreased because of the following elements:

• An improvement in gross margin:

o A product mix that includes more high-margin products o A reduction in supply costs o Efficiency gains related to the implementation of the ERP software in the

manufacturing plant has reduced the time of the direct labor. • Reducing our staff numbers related to the last term of the implementation of the

ERP software which generated efficiency gains. • Important sums related to support and initiate the unification of our new trade brand

"Équilibre" were deployed last year


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Administrative Expenses

Administrative expenses decreased by $231,205 and totaled $3,302,054 (23.0% of revenues) for Fiscal 2016 compared to $3,533,259 (or 22.8% of revenues) for Fiscal 2015. The last term of the implementation of the ERP software allows us to generate efficiency gains.

Research and Development Costs, net of tax credits

Research and Development costs amounted to $408,930 in the past year (2.9% of revenues), as compared to $360,740 (2.3% of revenues) in 2015, an increase of $48,190 representing a growth of 13%. Related tax credits provisioned for this year are $52,190. The Company invests heavily in R & D and seeks to obtain as much as possible direct subsidies instead of resorting to the Tax Credit program. The amounts are net of refundable tax credits and grants received.

Other items Other items amounted to $(170,393) (-1.2% of revenues) compared to $339,912 (2.2% of revenues) in 2015 and are explained by the following element: • In 2015, the Quebec government in its interpretation of the laws on consumer

taxes, issued contribution projects for all companies facing the GST - QST on orthopedic shoes with a medical prescription for the fiscal years 2011 to 2015. Given the asymmetrical application in Canada and jurisprudence, government authorities have decided not to demand payment for a moratorium period of indefinite duration. Management considers it more likely that the government authorities will move forward with its new interpretation. Therefore, management has provisioned the entire amounts that totaled $170,393. However, in 2016, the Company which had opposed this treatment by government authorities during the previous year won his case during the exercise. Following the written confirmation from the Ministry of Revenue of Quebec, there has been reversal of the provision recorded for this purpose.

o Since August 1st 2016, the Company ceased to charge consumer taxes on footwear products under medical prescription.

• During the acquisition of Victhom Human Bionics in 2013, tax credit receivables for

the year ended in 2008 were still on the balance sheet of the acquired company. These tax credits (R & D) were, since then, the subject of a refusal by the government and the Company will incur costs to challenge the decision. In this context, management decided, as of June 30, 2015, to reverse this entire asset amounting to $169,519.

Products and Financial Expenses Interest and bank charges amounted to $199,555 (or 1.4% of revenues) for Fiscal 2016 compared to $222,125 (or 1.4% of revenues) in 2015.


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Interest on long-term debt/Interest income for their part went from $(14,399) in 2015 to $(31,950) in 2016. Net Profit The Corporation’s net profit amounted to $111,733 this year compared to a net loss of ($7,023,218) last year. The share of non-controlling interest was nil for Fiscal 2016 compared to ($41,763) in 2015. The income tax expense (recovered) amounted to $(14,314) for Fiscal 2016 and has been recorded as recovered tax. In Fiscal 2015, there was a reversal of the deferred income taxes and tax credits appearing as assets in the amount of $6,387,319. Ergoresearch’s statutory tax rate is 26.90%. ADJUSTED EBITDA1

Adjusted EBITDA of the Company amounted to $894,531 in 2016 compared to $665,601 for the year ended June 30, 2015.

1 Earnings before interest, taxes and depreciation (EBITDA) is a performance measure that is not established according to generally accepted accounting principles (“GAAP”) in Canada, and is not a substitute for net profit. Because the EBITDA may not be calculated the same manner by every corporation, it may well be that the Company’s results cannot be directly compared to similar measures used by other firms.


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SUMMARY OF QUARTERLY RESULTS

Analysis of Fourth Quarter Results Fiscal 2016 Revenues Revenues in the fourth quarter went from $3,965,783 to $3,820,770, down by 3.7% in relation to last year. Decline occurring in this quarter is mainly attributed to the following:

• The discontinued sales of the "home care" product line. • The decrease in revenues from pre-manufactured shoes under medical

prescription. OPERATIONAL CHARGES The operational charges decreased from $4,264,649 (107.5% of revenues) in the fourth quarter of 2015 to $3,708,738 (97.1% of revenues) for this quarter. This improvement in operating margins can be attributed to the following:


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Costs of Goods Sold, Selling and Operating Expenses

Cost of goods sold, selling and operating expenses for the fourth quarter of 2016 amounted to $2,701,651 (70.7% of revenues), compared to $3,240,905 (81.7% of revenues) for the same period last year. These charges have decreased compared to 2015, because of the following elements:

• An improvement in gross margin:

o A product mix that includes more high-margin products o Through the "Équilibre" network, the implementation of the ERP software

has enabled standardization of the manufacturing method of orthotics, optimizing manufacturing time, reducing the time of the direct labor and reducing the supply costs.

• Important sums related to support and initiate the unification of our new trade brand "Équilibre" were deployed last year.

Administrative Costs

Ergoresearch Ltd’s administrative costs were $876,234 (22.1% of revenues) in 2015 and amounted to $881,310 (23.1% of revenues) in the fourth quarter of Fiscal 2016.

Research and Development Costs, net of tax credits

Research and Development costs amounted to $125,777 for the fourth quarter (3.3% of revenues), compared to $147,510 (3.7% of revenues) for the same quarter last year.

Other items Other items that can be found only in the last quarter of 2016 amounted to $(170,393) (-4.5% of revenues) and are explained by the following element:

• As previously explained, this is a reversal of the provision recorded last year, and follows the case that was won during the exercise regarding the tax treatment applied to sales taxes on orthopedic shoes with a medical prescription.

Financial Income and Expenses Interest and bank charges were $49,444 (1.3% of revenues) in the fourth quarter of Fiscal 2016, compared to $54,099 (1.4% of revenues) in 2015. Interest on long-term debt/Interest income went from $(8,855) in 2015 to $(9,349) in the fourth quarter of Fiscal 2016. Net Profit In the fourth quarter of Fiscal 2016, the Corporation’s net profit totaled $238,875 compared to a net loss of $(7,053,108) for the same quarter last year. These are the non-recurring items that explain some of this increase:


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• The element that can be found under "other items" from note number 16 of the Corporation’s consolidated fiscal year-end financial statements totaling $(170,393) in 2016 and $339,912 in 2015.

• The reversal in 2015 of deferred income taxes and tax credits in the amount of $6,387,319 due to the situation most unlikely than likely that the Company may use its tax benefits before the expiry period thereof .

The share of non-controlling interest is nil in the fourth quarter of Fiscal 2016 compared to $16,267 in 2015.


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Cash position and financing activities

Cash Flows from Operating Activities

Cash flows from operating activities were $694,301 in Fiscal 2016, compared to $1,335,207 in Fiscal 2015. This variation is mainly explained by a decrease in non-cash working capital items including, among other things, a decrease in trade and other payables. Cash Flows - Investment Activities

Cash flows related to investing activities in Fiscal 2016 totalled $1,491,908 compared to $(383,676) in Fiscal 2015. This variation is mainly due to the disposal of some temporary investments. The Company also acquired fixed assets in the amount of $377,206. These fixed assets were affected to the relocation of our administrative offices in Quebec City, to the relocation of the St-Nicolas clinic (Quebec City area), to the renovations of the Granby laboratory and in the renovations made necessary by the planned sale of its "Home Care" division at the Laval branch. Cash Flows - Financing Activities Cash flows related for financing activities in Fiscal 2016 totaled $(2,252,046) compared to $(1,571,618) in Fiscal 2015. During the exercise, 3,813,633 common shares totaling an amount of $732,965 were redeemed in the normal course of business for cancellation by the Company. Finally, the Company repaid its long-term debt for an amount totaling $1,526,581 in 2016. An amount totaling $1,579,118 had been applied to the long-term debt balance in the year 2015. As of June 30, 2016, Ergoresearch Ltd possessed a cash amount of $2,009,178 in addition to the short-term investments of $6,006,792 Liquidities will be sufficient to meet the Corporation’s obligations, to pursue its marketing efforts, to maintain its technologies current and to maintain its internal growth after June 30, 2016.


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COMMITMENTS

Future minimum payments due under leases for company premises and for an advertising contract are as follows:

Rental expense for the period ended June 30, 2016 were $1,324,484 ($1,349,073 in 2015).

OFF-BALANCE-SHEET TRANSACTIONS The Corporation has no commitments that are not disclosed in its consolidated financials, other than business rental contracts regarding leaseholds, as described in the above chart under “Commitments ”. SHARES ISSUED The Corporation issued 50,000 common shares resulting from the exercise of stock options for a gross amount of $7,500 in Fiscal year 2016. NORMAL COURSE ISSUER BID Ergoresearch announced on November 4, 2015, that it obtained the approval of the TSX Venture Exchange to proceed with a public offer to redeem shares in the normal course of business. Thus, for the period of 12 months starting November 11, 2015, and ending November 10, 2016 Ergoresearch has been authorized to redeem for cancellation from time to time and as it deems fit, a maximum of 3,813,633 common shares, representing approximately 5% of the issued and outstanding common shares.


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As of June 30, 2016, all of the 3,813,633 common shares were redeemed for cancellation, totalling an amount of $732,965. RELATED PARTY TRANSACTIONS - FISCAL 2016

The following is a list of expenses on the compensation of key management personnel, as well as the other related party transactions that the Company has incurred during the year:

FINANCIAL POSITION Assets

Cash and short term investments amounted to $8,015,970 for fiscal year ended June 30, 2016 compared to $10,003,923 as of June 30, 2015. Trade and accounts receivables amounted to $705,330 this year compared to $684,669 last year, an increase of $20,661. The Company has no income taxes receivable for Fiscal 2016 compared to Fiscal 2015 for which there was a balance of $27,424 that was recorded in the current assets. Inventories totaled $2,018,875 compared to $2,237,581 as of June 30, 2015. This decrease is explained by the liquidation of the stock in the "Home Care" product line and by lower purchases of raw materials at the end of 2016. Investment tax credits receivables for Fiscal 2014 and 2015 were received during Fiscal 2016. Investment tax credits for Fiscal 2016 were recorded. The short term investment tax credits receivable amount to $52,190 compared to $120,158 as of June 30, 2015. Property, plant and equipment were adjusted based on acquisitions of equipment assets, net of depreciation for the Fiscal year 2016. Intangible assets include a number of elements (patient’s file, software, license and patents, non-compete provisions, etc...) of which intangible assets from:


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• Orthoconcept, acquired in October 2008 • Clinique du pied Équilibre inc., acquired in 2005 • Laboratoire Podotech, acquired in 2012 • Laboratoire Langelier, acquired in 2013 • Victhom Human Bionics, acquired in 2013

Intangible assets were adjusted in relationship to the acquisition of intangible assets in Fiscal 2016. The acquisition of intangible assets amounted to $53,001 and follows suit to acquisitions and the customization of the new ERP-health software that took place during the year. Goodwill recorded in the balance sheet comes from

• the acquisition of Clinique du pied .Équilibre (March 2005) $545,912 • the acquisition of Laboratoire Podotech (October 2012) $169,946 • the acquisition of Laboratoire Langelier (January 2013) : $1,976,509

• The Goodwill recorded on the balance sheet is justified by the overall cash flow

generated by the different divisions because they are considered as a single cash generating unit.

No change in deferred income taxes and taxes credits because the estimated future profitability expectatives that are supporting this asset are not significantly different from those established in 2015. The Company also has unrecognized tax attributes similar to Fiscal 2015. These tax attributes will be recognized when it is considered likely that the Company will be able to recover them. Liabilities The Corporation and its subsidiaries have a line of credit in the approximate amount of $550,000. As of June 30, 2016 the Corporation was not using this line of credit. Trade and other payables went from $1,663,403 as of June 30, 2015 to $1,045,937 as of June 30, 2016. This decrease is explained by the payment of a shipment of raw materials made during the fiscal year 2016 but which appeared to be payable as of June 30, 2015. In addition, the reversal of the provision for sales tax on orthopedic shoes with a medical prescription explained in Note 16 "Other items" of the Corporation’s consolidated fiscal year-end financial statements ending June 30 2016 will explain some of this variation.

Deferred revenues decreased by $76,666 and amounted to $292,363. These deferred revenues are mostly deposits made by patients with regard to the purchase of customized products as well as deferred revenues associated to our customer loyalty program. The decline is explained by the reduction of 33% of the promotional loyalty offer program and by the improvement of the delivery times of customized products. Long-term debt due within next year amounts to $360,626 corresponding to the entire long-term debt since it will be fully paid within a year. In October 2015, the Company exercised its right to pay an amount of $ 500,000 on the loan without penalty. Deferred lease obligations consist of free rent periods granted by landlords to the Corporation and subsidiaries. All payments due during the term of the leases were


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consolidated and are amortized on a straight line basis over the term of the respective leases. As of June 30, 2016, deferred lease obligations amounted to $60,463 down by $13,818 as compared to June 30, 2015. INFORMATION ON SHAREHOLDER’S EQUITY Information on the outstanding capital stock as of June 30, 2016 for Ergoresearch Ltd

The authorized share capital of the Company consists of the following:

An unlimited number of common shares, voting and participating, without par value An unlimited number of preferred shares, issuable in series, rights, privileges and conditions to be determined when issued, without par value

Ordinary shares issued and outstanding are as follows:

Number Dollars

Balance as of June, 30 2015 76,272,673 $14,931,187 Exercise of stock option 50,000 13,495 Common shares were redeemed for cancellation, (3,813,633) (746,744)

Balance as of June, 30 2016 72,509,040 $14,197,938

Stock options outstanding as of June 30, 2016 – 1,591,667 at an average exercise price per share of $0.21.

50,000 stock options were exercised in Fiscal 2016, for a cash consideration of $7,500

500 000 shares of the capital stock of the Corporation are under escrow.

As part of the normal course issuer bid announced on November 4, 2015, the Company has repurchased 3,813,633 common shares representing 5% of the issued and outstanding common shares for a cash consideration of $732,965.


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LEGAL AFFAIRS The Corporation is facing no significant litigation at present time. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below were consistently applied to all the periods presented in these consolidated financial statements unless otherwise noted.

(a) Statement of compliance:

The consolidated financial statements for the year ended June 30, 2016 and 2015 have been prepared in accordance with Canadian generally accepted accounting principles, as they are set out in Part 1 of the CPA Canada Handbook, which includes the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

(b) Basis of measurement:

The consolidated financial statements have been prepared on a historical cost basis except for the share-based compensation which is measured at fair value at the date of grant. The consolidated financial statements have been prepared on a going concern basis.

(c) Functional and presentation currency:

The items of the financial statements of each entity of the Company are measured by using the currency of the primary economic environment in which the entity operates (the "functional currency").

The consolidated financial statements are presented in Canadian dollars, the functional currency of Ergoresearch Ltd. All subsidiaries of the Company also use the Canadian dollar as their functional currency. All financial information presented in Canadian dollars has been rounded to the nearest dollar, except for per share data.

(d) Approval of consolidated financial statements:

The consolidated financial statements were approved on October 25, 2016 by the Board of Directors who also approved their publication.

(e) New accounting standards and interpretations not yet adopted as described under note number 2 of the Corporation’s consolidated fiscal year-end financial statements:

• Disclosure Initiative: Amendements to IAS 1

• IFRS 15, Revenue from Contracts with Customers

• IFRS 9, Financial Instruments

• IFRS 16 Leases

• Disclosure Initiative (Amendments to IAS 7)

• Recognition of Deferred Tax Assets for Unrealized Losses (Amendments to IAS 12)

• Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2)


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MANAGEMENT’S KEY SOURCES OF ESTIMATION UNCERTAINTY AND CRITICAL

ACCOUNTING JUDGMENTS:

The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. The amounts and disclosures in the notes reflect the best estimate of management as to the overall economic conditions and the most likely guidelines of the Company. The estimates are reviewed periodically and adjustments are made as necessary to the net income of the period in which they become known. Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements are as follows:

Goodwill recoverability Goodwill is not subject to amortization and is tested for impairment annually or more frequently if events or circumstances indicate that these assets have suffered an impairment loss. Impairment is assessed by comparing the recoverable amount of the CGU group to which goodwill is allocated and its carrying amount. If the carrying value of the CGU exceeds its recoverable amount, an impairment loss is recognized in the consolidated statement of comprehensive income. For the purposes of impairment testing, the goodwill is allocated to a single cash generating unit, being the Company as a whole, which represents the lowest level at which the goodwill is monitored for internal management purposes. The recoverable amount of the CGU group is established by calculating the fair value less costs to sell. This value is determined using the price of the shares on the active market. The fair value of the CGU group is classified as Level 3 in the fair value hierarchy.

Impairment tests were performed as of June 30, 2016 and June 30, 2015 by comparing the carrying amount of goodwill with the recoverable amount of the CGU group to which goodwill has been allocated. Management has determined that no impairment loss had occurred. In addition, as of June 30, 2016, no events or circumstances suggest that those assets have suffered an impairment loss. Income tax The Company recognizes tax expenses according to the deferred tax asset and liabilities method. Deferred tax assets and liabilities are determined in respect to the difference between the tax bases of the assets and liabilities and their carrying amounts. Deferred tax assets also include non-refundable deferred tax credits related to business acquisitions that can only be claimed against future income taxes payable. Any change in the net amount of deferred tax assets and liabilities is recorded in net income. Deferred tax assets and liabilities are determined using tax rates and laws that have been enacted or substantively enacted and are expected to apply to taxable income in the years in which the assets and liabilities will be recovered or settled. Deferred tax assets are recognized to the extent that their realization is probable.


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In estimating the probability of realization of deferred tax assets, management considers whether it is more likely than not that a portion or all of the deferred tax assets will be realized. Ultimately, the realization of deferred tax assets depends upon the generation of future taxable income. If the Company determines that it can realize its tax assets, it will adjust the amount and adjust the income for the year in which it comes to this conclusion. As of June 30, 2015 and June 30, 2016, the Company recorded respectively $4,454,519 and $4,454,519 in deferred tax assets.

RISKS AND UNCERTAINTIES Monitoring and improving its operations are constant concerns at the Corporation. In view of this, understanding and managing risks are important parts of the Corporation's strategic planning process. The Board of Directors requires that the Corporation's senior management identify and properly manage the principal risks related to the Corporation's business operations. Ergoresearch operates in an industry subject to various risks and uncertainties that could have an adverse effect on its business, operating results and financial position. The risks and uncertainties discussed below are significant, but are not the only factors that could have an impact on the Corporation. Insurance coverage for orthopaedic products Orthopaedic products are often covered by insurance plans (personal or governmental). Ergoresearch’s sales would be affected, should this coverage change or be abolished. Difficulty of Integrating Acquired Businesses Ergoresearch may pursue growth through acquisitions. These acquisitions involve the commitment of capital and other resources, and large acquisitions will have a major financial impact in the year of acquisition and beyond. The speed and effectiveness with which Ergoresearch integrates acquired companies into its existing businesses can have a significant short-term impact on Ergoresearch’s ability to achieve its growth and profitability targets. There is no assurance that it will be able to acquire businesses on satisfactory terms, or at all. The successful integration and management of acquired businesses involves numerous risks that could adversely affect Ergoresearch’s growth and profitability, including that: (a) Ergoresearch’s management may not be able to successfully manage the acquired operations and the integration may place significant demands on its management, thereby diverting their attention from existing operations; (b) Ergoresearch’s operational, financial and management systems may be incompatible with or inadequate to integrate effectively and to manage acquired systems; (c) Acquisitions may require substantial financial resources that could otherwise be used in the development of other aspects of the business of Ergoresearch;


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(d) Acquisitions may result in liabilities and contingencies which could be significant to the operations of Ergoresearch; and (e) Employees from Ergoresearch’s acquisitions and its existing businesses may not be able to work together successfully, thereby impacting negatively its existing business. There is no assurance that Ergoresearch will be able to successfully integrate its acquisitions and its failure to do so could adversely affect the business, operating results and financial condition of Ergoresearch. Finally, the payment of an acquisition may lead to the depletion of our cash. In addition, there is a risk that our valuation assumptions, our customer loyalty and our related forecasting models related to the acquisition of a product or a company either erroneous or inappropriate due to unforeseen circumstances or not ensuring that we overvalue the acquisition target. There is also a risk that the anticipated benefits of an acquisition may not materialize as planned or within the period or the expected extent. Technological Change and Obsolescence O&P technology is undergoing development and change. New technologies may be developed, or existing technologies refined, which could render Ergoresearch’s existing equipment technologically or economically obsolete. Due to cost factors, competitive considerations or other constraints, there can be no assurance that Ergoresearch will be able to acquire or have access to any new or improved equipment that Ergoresearch may need in order to serve its clients and customers. Any inability of Ergoresearch to provide state-of-the-art technologies may adversely affect Ergoresearch’s ability to attract customers, and, accordingly, its business, financial condition and results of operations. Dependence on Computer Assisted Production Equipment and Information Technology Systems Ergoresearch’s business depends on the continued and uninterrupted performance of Ergoresearch’s information technology systems and computer assisted production equipment. Sustained system failures or interruptions could disrupt Ergoresearch’s ability to operate effectively. Ergoresearch’s business, results of operations and financial condition could be adversely affected by a system failure. Ergoresearch computer systems are exposed to various sources of damage, including telecommunications failures, malicious acts and natural disasters. Furthermore, despite the measures implemented to protect the network, some servers Ergoresearch are potentially vulnerable to break-ins, computer hacking, computer viruses and similar hazards. Despite the precautions taken by the Company, unforeseen problems could cause failure of its information technology systems and insurance coverage may be insufficient to adequately compensate for losses.


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Dependence on key personnel The Corporation relies heavily on its senior officers. The loss of their services would have a material adverse effect on the Corporation’s business. However, these officers are shareholders of the Corporation, which makes their departure unlikely. The Corporation has nonetheless subscribed, and is a beneficiary to, life insurance policies on the lives of Sylvain Boucher and Danielle Boucher to cover the financial risk. Uncertainty regarding penetration of the target market The commercial success of the Corporation’s products as compared with those of its competitors depends on their acceptance by potential users and their caregivers, the medical community and distributors. Given that the technology is relatively new, there is no way to accurately assess the total market for Expert-fit, Odra and Power Knee. Acceptance will largely depend on the Corporation’s reputation, its marketing strategy, after sales service and product performance. The Corporation’s success will depend on its ability to maintain and expand its sales network. Growth management As a result of the rapid growth of the field in which it operates, there will be significant pressure on the Corporation’s management, operations and technical resources. There can be no assurance that the Corporation will be able to manage the growth of its business. The Corporation’s inability to implement coherent management systems, add economical resources or adequately manage its expansion would have a significant and unforeseeable impact on its operations and operating results. Risks related to production activities Production activities are subject to a number of unforeseeable technological problems and delays. Ergoresearch operates two production sites. Any important damage to these sites would have a significant impact on its operations. Licences, patents and proprietary rights Ergoresearch’s performance and ability to compete are dependent to a significant degree on its intellectual property (trade secrets and process secrets). Ergoresearch relies on trade secrets and process secrets, as well as confidentiality agreements and technical measures to establish and protect its proprietary rights. While Ergoresearch has endeavoured to protect its intellectual property, there can be no assurance that the steps taken by the Corporation will prevent misappropriation of Ergoresearch’s intellectual property or that agreements entered into for that purpose will be enforceable. Ergoresearch’s strategies to deter misappropriation could be inadequate in light of the following risks:

a) Undetected misappropriation of its proprietary information or materials; and b) Development of similar applications by its competitors;

If any of these risks materialize, Ergoresearch could be required to spend significant amounts to defend and protect its rights, and its managerial resources could be diverted. In addition, its proprietary rights may decline in value or not be enforceable;


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Provisions for Income Taxes may not be Sufficient The computation of the provision for income taxes involves tax interpretations regarding matters such as the deductibility of expenses and the calculation of tax credits. Tax filings are subject to audit by taxation authorities. There is no assurance that the tax filings by Ergoresearch will not be disputed by taxation authorities. Disagreements with applicable taxation authorities could have a material adverse effect on Ergoresearch. See “Risks Relating to the Acquisition of Victhom Human Bionic” below for more specific comments on income tax related risks. Risks Relating to the Acquisition of Victhom Human Bionic Laboratoire Victhom inc. is a corporation resulting from the amalgamation of Ergorecherche inc. and Victhom Human bionic inc.; As such, Laboratoire Victhom inc. may also be responsible for the obligations of Victhom Human bionic existing before the amalgamation. The taxation authorities may also dispute certain tax attributes. Capital needs The Corporation expects its available funds to be sufficient to meet its cash requirements, as it assesses them at this time. Should the Corporation’s plans change, should its assumptions be modified or prove inaccurate or should revenues not allow all of its needs to be met as originally anticipated, additional funding may be required. There is no guarantee that additional funds will be available on terms and conditions that would be acceptable to the Corporation and that would allow for cost-effective marketing of the Corporation’s products. Current global financial situation The current global financial situation is volatile and characterized by increased volatility, while many financial institutions went bankrupt or were taken over by the government authorities. This helped to reduce the liquidity of financial institutions and thus the supply of credit available to them and to the issuers who borrow from them. These factors may affect the Company's ability to obtain equity or debt financing on terms that are favorable to it. Thus, the volatility and increased and ongoing market turbulence may sound on the activities of the Company and affect the price of ordinary shares of the latter. Additional financing and dilution The Corporation does not exclude raising additional funds by equity financing. The exercise of warrants and share purchase options, as well as the possibility of new equity financings, represent dilution factors for present and future shareholders. Market Liquidity There is currently limited active trading in the Corporation’s common shares, which could result in a lack of liquidity for those shares. The market price for the common shares of the Corporation could consequently be subject to wide fluctuations. Factors such as the announcement of the signature of important contracts, technological innovations, new commercial products, patents, a change in regulations, quarterly financial results, future sales of common shares by the Corporation or current shareholders, and many other


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factors could have considerable repercussions on the price of the Corporation’s common shares. In addition, the financial markets may experience significant price and value fluctuations that affect the market prices of equity securities of companies that sometimes are unrelated to the operating performance of these companies. Broad market fluctuations, as well as economic conditions generally may adversely affect the market price of the Corporation’s common shares. Risks Arising From Financial Instruments and Risk Management The Corporation is exposed to a variety of financial risks including credit risk, liquidity risk, and market risk (including foreign exchange and interest rate). The Corporation's overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Corporation's financial performance. Credit Risk Credit risk results from the possibility that a loss may occur from the failure of another party to perform according to the terms of the contract. The Corporation regularly monitors the credit risk exposure and takes steps to mitigate the likelihood of these exposures from resulting in actual loss. The Corporation, in the normal course of business, monitors the financial condition of its customers. As of June 30, 2016, the Corporation has no significant exposure in accounts receivable. The Corporation establishes an allowance for doubtful accounts that corresponds to the credit risk of its specific customers, historical trends and economic circumstances. The Corporation does not believe it is exposed to an unusual level of customer credit risk. In addition, financial instruments that potentially subject the Corporation to significant concentrations of credit risk consist of deposits in the form of cash, cash equivalents, restricted cash and short-term investment. The Corporation invests with major North American financial institutions. The Corporation has investment policies that are designed to provide for the safety and preservation of principal, the Corporation's liquidity needs and yields that are appropriate. Liquidity Risk Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they become due. The Corporation’s approach in managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Corporation’s reputation. The Corporation also manages liquidity risk by continuously monitoring actual and budgeted cash flows. Foreign Exchange Risk The Corporation generates less than 1% of revenues in foreign currency and 11% of its purchases are made in euros. Therefore, the currency fluctuations have no major impact on the Corporation's income. Interest Rate Risk


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The Corporation is subject to interest rate risk on its cash and short-term investment. The risk that the Corporation will realize a loss as a result of the decline in the fair value of its short-term investment is limited because these investments have short-term maturities and are generally held to maturity. Sensitivity to variation of more or less 1% interest rate would have no effect. FORWARD-LOOKING STATEMENTS AND CAUTION Securities laws encourage Corporations to present forward-looking information to provide investors with a better understanding of the Corporation's future prospects and to help them make informed decisions. The present MD&A of Ergoresearch contains forward-looking statements about the Corporation's objectives, strategies, financial position, results of operations, cash flows and activities, which are based on management's current expectations, estimates and assumptions about the markets in which it operates. Statements based on Management's current expectations contain known and unknown risks and uncertainties. Forward-looking statements may include verbs such as "believe," "anticipate," "estimate," "expect," "target" and "assess" or related expressions. These statements represent Ergoresearch’s intentions, plans, expectations or beliefs and are subject to risks, uncertainties and other factors, many of which are beyond the Corporation's control. Actual results may vary materially from forecasts. The reader is cautioned not to place undue faith in any forward-looking statement. Please note that the forward-looking statements contained in this MD&A describe our expectations as of October 25, 2016. Additional information on the risk factors to which the Corporation is exposed is available in the Risks and uncertainties section in the present MD&A. This section addresses the risks, uncertainties and other factors that could affect financial results. Forward-looking statements do not take into account the effect that transactions or nonrecurring or other special items announced or occurring after the statements are made may have on our activities. We disclaim any intention and assume no obligation to update any forward-looking statements even if new information becomes available as a result of future events or for any other reason unless required to do so by applicable securities regulations. DISCLOSURE CONTROLS AND PROCEDURES (“DC&P”) AND INTERNAL CONTROLS OVER FINANCIAL REPORTING (“ICFR”)

Management of the Company is responsible for establishing and maintaining appropriate information systems, procedures and controls to ensure that information used internally and disclosed externally is complete, reliable and timely. Management is also responsible for establishing adequate internal controls over financial reporting to provide sufficient knowledge to support the representations made in this MD&A and the Company’s financial statements for the year ended June 30, 2016 (together the “Annual Filings”). Management of the Company has filed the Venture Issuer Basic Certificate with the Annual Filings on SEDAR at www.sedar.com. In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”), the venture issuer basic certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (“DC&P”) and


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internal control over financial reporting (“ICFR”), as defined in NI 52-109. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency, and timeliness of interim and annual filings and other reports provided under securities legislation.


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CORPORATE INFORMATION Listing: TSX Venture Ticker: ERG Management Sylvain Boucher, President & Chief Executive Officer Danielle Boucher, Vice-President Clinique du pied Équilibre Laboratory Director Benoit De Villiers Vice-President Executive Louis Desrosiers Vice-President Research and Development Dominique Boudreau, CPA, CMA, MBA Vice-President Finance Board of Directors Michel Pierron, Catherine Chamouton, ca President Groupe Proteor Financial Director, Groupe Proteor François Tellier, Consultant V-P Corporate Development at Groupe Forget, audioprothésistes Gilles Laporte Administrator Sylvain Boucher Danielle Boucher President & C.E.O. Vice-President Clinique du pied Équilibre Auditors KPMG LLP Investor Relations [email protected]

Notice of Annual Meeting of Shareholders The annual meeting of shareholders will take place on Friday December 23, 2016 at 10am, in the conference room of the ERGO complex located at 2101 boul. Le Carrefour suite 200, Laval (Quebec), H7S 2J7.

new ergoresearch ergoresearch ergoresearch … · 2017. 9. 22. · according to the national sleep...

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