Novadaq (NVDQ) 6-K Interim Condensed Consolidated Statements of Financial Position

Exhibit 99.1

Novadaq Technologies Inc.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)

(expressed in U.S. dollars, except common shares outstanding)

	Notes		As at September 30, 2016				As at December 31, 2015
ASSETS
Current assets
Cash and cash equivalents		$		72,242,278		$		106,790,202
Accounts receivable				27,147,891				21,767,746
Prepaid expenses and other assets				5,349,777				3,362,854
Inventories	3			9,841,011				10,680,885
				114,580,957				142,601,687
Non-current assets
Property and equipment, net	4			18,276,931				14,830,114
Intangible assets, net	5			17,270,487				18,539,790
Total Assets		$		150,128,375		$		175,971,591
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities		$		14,705,029		$		12,145,572
Provisions				527,703				454,579
Deferred revenue				1,834,348				1,124,808
Income taxes payable				-				12,500
Distribution rights payable				250,000				250,000
Other liabilities	7			871,915				-
				18,188,995				13,987,459
Non-current liabilities
Deferred revenue				757,143				849,299
Distribution rights payable				1,557,098				1,735,012
Shareholder warrants	6			-				16,437,795
Total Liabilities		$		20,503,236		$		33,009,565
Shareholders' Equity
Share capital	9	$		337,954,002		$		322,687,011
Contributed surplus	7			22,207,281				16,400,830
Deficit				(230,536,144	)			(196,125,815	)
Total Shareholders' Equity		$		129,625,139		$		142,962,026
Total Liabilities and Shareholders' Equity		$		150,128,375		$		175,971,591
Total number of common shares outstanding	9			57,440,151				56,253,327

See accompanying notes to the interim condensed consolidated financial statements

1

Novadaq Technologies Inc.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(Unaudited)

(expressed in U.S. dollars)

			For the three months ended								For the nine months ended
	Notes		September 30, 2016				September 30, 2015				September 30, 2016				September 30, 2015
Product sales		$		20,736,079		$		16,290,455		$		56,563,992		$		41,694,967
Royalty revenue				493,665				442,877				1,544,187				1,435,397
Service revenue				929,159				302,635				1,892,984				663,371
Total revenues				22,158,903				17,035,967				60,001,163				43,793,735
Cost of sales	3			6,267,329				4,476,721				16,980,917				13,077,456
Gross profit				15,891,574				12,559,246				43,020,246				30,716,279
Selling and distribution expenses				19,288,831				13,369,862				53,664,528				41,360,587
Research and development expenses				4,754,669				3,981,417				12,643,600				12,732,661
Administrative expenses	12			2,782,479				1,318,839				12,600,519				6,464,054
Total operating expenses				26,825,979				18,670,118				78,908,647				60,557,302
Loss from operations				(10,934,405	)			(6,110,872	)			(35,888,401	)			(29,841,023	)
Finance costs				(24,028	)			(26,048	)			(72,086	)			(78,144	)
Finance income				69,688				55,935				236,701				165,622
Warrants revaluation adjustment	6			—				2,320,640				1,324,293				8,681,901
Loss before income taxes				(10,888,745	)			(3,760,345	)			(34,399,493	)			(21,071,644	)
Income tax recovery (expense)				(6,991	)			48,163				(10,836	)			48,163
Net loss and comprehensive loss for the period		$		(10,895,736	)	$		(3,712,182	)	$		(34,410,329	)	$		(21,023,481	)
Basic loss and comprehensive loss per share for the period	10	$		(0.19	)	$		(0.07	)	$		(0.60	)	$		(0.38	)
Diluted loss and comprehensive loss per share for the period	10	$		(0.19	)	$		(0.11	)	$		(0.61	)	$		(0.52	)

See accompanying notes to the interim condensed consolidated financial statements

2

Novadaq Technologies Inc.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(expressed in U.S. dollars)

		Share capital			Contributed surplus				Deficit				Total
As at December 31, 2015	$		322,687,011	$		16,400,830		$		(196,125,815	)	$		142,962,026
Net loss and comprehensive loss for the period			—			—				(6,979,734	)			(6,979,734	)
Exercise of options (note 9)			63,649			(26,116	)			—				37,533
Exercise of warrants (note 6)			15,113,502			—				—				15,113,502
Stock-based compensation (note 7)			—			1,047,343				—				1,047,343
As at March 31, 2016	$		337,864,162	$		17,422,057		$		(203,105,549	)	$		152,180,670
Net loss and comprehensive loss for the period			—			—				(16,534,859	)			(16,534,859	)
Exercise of options (note 9)			32,173			(14,840	)			—				17,333
Exercise of restricted stock units (notes 7, 9)			13,319			(13,319	)			—				—
Stock-based compensation (note 7)			—			3,849,150				—				3,849,150
As at June 30, 2016	$		337,909,654	$		21,243,048		$		(219,640,408	)	$		139,512,294
Net loss and comprehensive loss for the period			—			—				(10,895,736	)			(10,895,736	)
Exercise of options (note 9)			41,221			(17,175	)			—				24,046
Exercise of restricted stock units (notes 7, 9)			3,127			(3,127	)			—				—
Stock-based compensation (note 7)			—			984,535				—				984,535
As at September 30, 2016	$		337,954,002	$		22,207,281		$		(230,536,144	)	$		129,625,139
		Share capital			Contributed surplus				Deficit				Total
As at December 31, 2014	$		315,651,455	$		12,134,913		$		(165,295,336	)	$		162,491,032
Net loss and comprehensive loss for the period			—			—				(11,285,391	)			(11,285,391	)
Exercise of options			931,321			(422,380	)			—				508,941
Exercise of warrants			5,113,522			—				—				5,113,522
Stock-based compensation (note 7)			—			1,347,748				—				1,347,748
As at March 31, 2015	$		321,696,298	$		13,060,281		$		(176,580,727	)	$		158,175,852
Net loss and comprehensive loss for the period			—			—				(6,025,908	)			(6,025,908	)
Exercise of options			346,846			(125,082	)			—				221,764
Stock-based compensation (note 7)			—			1,918,040				—				1,918,040
As at June 30, 2015	$		322,043,144	$		14,853,239		$		(182,606,635	)	$		154,289,748
Net loss and comprehensive loss for the period			—			—				(3,712,182	)			(3,712,182	)
Exercise of options			21,775			(10,035	)			—				11,740
Stock-based compensation (note 7)			—			707,335				—				707,335
As at September 30, 2015	$		322,064,919	$		15,550,539		$		(186,318,817	)	$		151,296,641

See accompanying notes to the interim condensed consolidated financial statements

3

Novadaq Technologies Inc.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(expressed in U.S. dollars)

				For the three months ended								For the nine months ended
	Notes			September 30, 2016				September 30, 2015				September 30, 2016				September 30, 2015
OPERATING ACTIVITIES
Net loss and comprehensive loss for the period			$		(10,895,736	)	$		(3,712,182	)	$		(34,410,329	)	$		(21,023,481	)
Items not affecting cash
Depreciation of property and equipment		4			1,710,285				1,332,001				4,417,244				3,829,545
Amortization of intangible assets		5			396,499				423,199				1,269,303				1,286,926
Stock-based compensation		7			1,114,908				707,335				6,752,943				3,973,123
Imputed interest on distribution rights payable					24,028				26,048				72,086				78,144
Shareholder warrants revaluation adjustment		6			—				(2,320,640	)			(1,324,293	)			(8,681,901	)
					(7,650,016	)			(3,544,239	)			(23,223,046	)			(20,537,644	)
Changes in non-cash working capital
Increase in accounts receivable					(3,425,514	)			(3,443,309	)			(5,380,145	)			(5,232,488	)
Decrease (increase) in inventories					1,298,580				(1,543,051	)			839,874				(2,597,980	)
Increase in accounts payable and accrued liabilities and    provisions					573,411				2,340,826				2,617,248				7,861,884
Increase (decrease) in income taxes payable					—				29,341				(12,500	)			29,341
Decrease (increase) in prepaid expenses and other assets					(192,288	)			305,109				(1,986,923	)			(2,215,278	)
Increase in deferred revenue					213,464				326,854				709,540				589,200
Net change in non-cash working capital balances related to operations					(1,532,347	)			(1,984,230	)			(3,212,906	)			(1,565,321	)
Increase (decrease) in non-current deferred revenue					(87,800	)			(138,232	)			(92,156	)			83,083
Cash used in operating activities					(9,270,163	)			(5,666,701	)			(26,528,108	)			(22,019,882	)
INVESTING ACTIVITIES
Addition of property and equipment		4			(4,031,014	)			(2,728,119	)			(10,719,475	)			(5,563,740	)
Disposal of property and equipment		4			1,482,490				415,719				2,855,414				1,168,385
Cash used in investing activities					(2,548,524	)			(2,312,400	)			(7,864,061	)			(4,395,355	)
FINANCING ACTIVITIES
Proceeds from exercise of options		7			24,046				11,740				78,912				742,445
Proceeds from exercise of warrants		6			—				—				—				699,209
Payment of distribution rights payable					—				—				(250,000	)			—
Cash provided by (used in) financing activities					24,046				11,740				(171,088	)			1,441,654
Net decrease in cash and cash equivalents					(11,794,641	)			(7,967,361	)			(34,563,257	)			(24,973,583	)
Net foreign exchange difference					2,261				(23,604	)			15,333				(51,863	)
Cash and cash equivalents at beginning of period					84,034,658				124,413,063				106,790,202				141,447,544
Cash and cash equivalents at end of period			$		72,242,278		$		116,422,098		$		72,242,278		$		116,422,098

See accompanying notes to the interim condensed consolidated financial statements

4

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

(expressed in U.S. dollars, except as otherwise indicated)

1. DESCRIPTION OF THE ENTITY

Novadaq Technologies Inc. [“Novadaq” or the "Company"] was incorporated under the Canada Business Corporations Act on April 14, 2000.  These interim condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  The Company is a listed company incorporated and domiciled in Canada whose shares are publicly traded on the Toronto Stock Exchange ["TSX"] and NASDAQ.  The registered office of the Company is located at 5090 Explorer Drive, Suite 202, Mississauga, Ontario, Canada.  The Company develops and commercializes medical imaging and therapeutic devices for use in the operating room.  The Company's proprietary imaging platform can be used to visualize blood vessels, nerves and the lymphatic system during surgical procedures. The Company is also the exclusive worldwide distributor of DermACELL® tissue products for wound and breast reconstruction surgery.

2. ACCOUNTING POLICIES

These interim condensed consolidated financial statements for the three and nine months ended September 30, 2016 of the Company were prepared in accordance with International Accounting Standard 34, Interim Financial Reporting ["IAS 34"] as issued by the International Accounting Standards Board ["IASB"].

The same accounting policies and methods of computation were followed in the preparation of these interim condensed consolidated financial statements as were followed in the preparation of the annual consolidated financial statements for the year ended December 31, 2015 prepared in accordance with International Financial Reporting Standards ["IFRS"] as issued by the IASB.

The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual consolidated financial statements. Accordingly, these interim condensed consolidated financial statements for the three and nine months ended September 30, 2016 should be read together with the annual consolidated financial statements for the year ended December 31, 2015, which are available on SEDAR at www.sedar.com.

The preparation of interim condensed consolidated financial statements in accordance with IAS 34 requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are consistent with those disclosed in the notes to the annual consolidated financial statements for the year ended December 31, 2015. These interim condensed consolidated financial statements were authorized for issue by the Board of the Directors on November 2, 2016.

New standards, interpretations and amendments adopted by the Company

Disclosure Initiative: Amendments to IAS 1

On December 18, 2014 the IASB issued amendments to IAS 1, Presentation of Financial Statements, as part of its initiative to improve presentation and disclosure in financial reports.  The amendments are effective for annual periods beginning on or after January 1, 2016.  The Company adopted these amendments in its financial statements for the annual period beginning on January 1, 2016.  The adoption of the amendments did not have a material effect on the Company’s interim condensed consolidated financial statements.

New standards, interpretations and amendments not yet adopted by the Company

The IASB has issued the following new standards, which are not yet effective or adopted by the Company:

[a] IFRS 9, Financial instruments (effective January 1, 2018)

[b] IFRS 15, Revenue from contracts with customers (effective January 1, 2018)

[c] IFRS 16, Leases (effective January 1, 2019)

The extent of the impact of adoption of these standards has not yet been determined.

5

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

(expressed in U.S. dollars, except as otherwise indicated)

3. INVENTORIES

Inventories by category are as follows:

	September 30, 2016		December 31, 2015
	$		$
Raw materials		7,879,797		7,943,924
Medical devices, software and parts		1,913,270		2,661,247
TMR kits		47,944		75,714
		9,841,011		10,680,885

During the three and nine months ended September 30, 2016, $4,529,192 and $12,300,006, respectively, of inventory has been recognized in cost of sales [three and nine months ended September 30, 2015 - $3,760,265 and $9,783,732, respectively.]

4. PROPERTY AND EQUIPMENT

	Medical devices			Furniture and fixtures			Computer equipment			Leasehold improvements			Total
	$			$			$			$			$
Cost:
Balance at January 1, 2016		26,737,427			474,573			1,892,522			1,611,150			30,715,672
Additions		2,552,361			14,121			81,742			126,198			2,774,422
Disposals		(1,437,942	)		—			—			—			(1,437,942	)
Balance at March 31, 2016		27,851,846			488,694			1,974,264			1,737,348			32,052,152
Additions		3,732,952			12,029			121,292			47,766			3,914,039
Disposals		(1,561,584	)		(924	)		—			—			(1,562,508	)
Balance at June 30, 2016		30,023,214			499,799			2,095,556			1,785,114			34,403,683
Additions		3,873,665			29,898			126,051			1,400			4,031,014
Disposals		(2,016,371	)		—			—			—			(2,016,371	)
Balance at September 30, 2016		31,880,508			529,697			2,221,607			1,786,514			36,418,326
Depreciation:
Balance at January 1, 2016		(13,522,500	)		(438,942	)		(1,648,587	)		(275,529	)		(15,885,558	)
Depreciation		(1,215,536	)		(5,713	)		(52,168	)		(37,705	)		(1,311,122	)
Disposals		925,346			—			—			—			925,346
Balance at March 31, 2016		(13,812,690	)		(444,655	)		(1,700,755	)		(313,234	)		(16,271,334	)
Depreciation		(1,287,995	)		(6,042	)		(61,672	)		(40,128	)		(1,395,837	)
Disposals		702,180			—			—			—			702,180
Balance at June 30, 2016		(14,398,505	)		(450,697	)		(1,762,427	)		(353,362	)		(16,964,991	)
Depreciation		(1,591,577	)		(7,797	)		(70,056	)		(40,855	)		(1,710,285	)
Disposals		533,881			—			—			—			533,881
Balance at September 30, 2016		(15,456,201	)		(458,494	)		(1,832,483	)		(394,217	)		(18,141,395	)
Net book value at September 30, 2016		16,424,307			71,203			389,124			1,392,297			18,276,931

6

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

(expressed in U.S. dollars, except as otherwise indicated)

	Medical devices			Furniture and fixtures			Computer equipment			Leasehold improvements			Total
	$			$			$			$			$
Cost:
Balance at January 1, 2015		24,913,546			450,791			1,663,792			294,180			27,322,309
Additions		6,488,498			23,782			228,730			1,316,970			8,057,980
Disposals		(4,664,617	)		—			—			—			(4,664,617	)
Balance at December 31, 2015		26,737,427			474,573			1,892,522			1,611,150			30,715,672
Depreciation:
Balance at January 1, 2015		(11,557,846	)		(419,792	)		(1,448,474	)		(248,378	)		(13,674,490	)
Depreciation		(4,888,278	)		(19,150	)		(200,113	)		(27,151	)		(5,134,692	)
Disposals		2,923,624			—			—			—			2,923,624
Balance at December 31, 2015		(13,522,500	)		(438,942	)		(1,648,587	)		(275,529	)		(15,885,558	)
Net book value at December 31, 2015		13,214,927			35,631			243,935			1,335,621			14,830,114

As at September 30, 2016, medical devices includes construction-in-progress of $7,143,733 [December 31, 2015 - $6,136,442] which are not being depreciated.  Depreciation will commence when the devices are placed for use at medical institutions.  

5. INTANGIBLE ASSETS

Intangible assets include licenses, patent rights and distribution rights as summarized below:

	Licenses			Patent rights			Distribution rights			Total
	$			$			$			$
Cost:
Balance at January 1, 2016		5,913,642			14,920,855			7,880,819			28,715,316
Additions		—			—			—			—
Balance at March 31, 2016		5,913,642			14,920,855			7,880,819			28,715,316
Additions		—			—			—			—
Balance at June 30, 2016		5,913,642			14,920,855			7,880,819			28,715,316
Additions		—			—			—			—
Balance at September 30, 2016		5,913,642			14,920,855			7,880,819			28,715,316
Amortization:
Balance at January 1, 2016		(5,913,642	)		(3,426,306	)		(835,578	)		(10,175,526	)
Amortization		—			(239,383	)		(197,019	)		(436,402	)
Balance at March 31, 2016		(5,913,642	)		(3,665,689	)		(1,032,597	)		(10,611,928	)
Amortization		—			(239,383	)		(197,019	)		(436,402	)
Balance at June 30, 2016		(5,913,642	)		(3,905,072	)		(1,229,616	)		(11,048,330	)
Amortization		—			(199,480	)		(197,019	)		(396,499	)
Balance at September 30, 2016		(5,913,642	)		(4,104,552	)		(1,426,635	)		(11,444,829	)
Net book value at September 30, 2016		—			10,816,303			6,454,184			17,270,487

7

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

(expressed in U.S. dollars, except as otherwise indicated)

	Licenses			Patent rights			Distribution rights			Total
	$			$			$			$
Cost:
Balance at January 1, 2015		5,913,642			14,920,855			7,880,819			28,715,316
Additions		—			—			—			—
Balance at December 31, 2015		5,913,642			14,920,855			7,880,819			28,715,316
Amortization:
Balance at January 1, 2015		(5,913,642	)		(2,504,258	)		(47,501	)		(8,465,401	)
Amortization		—			(922,048	)		(788,077	)		(1,710,125	)
Balance at December 31, 2015		(5,913,642	)		(3,426,306	)		(835,578	)		(10,175,526	)
Net book value at December 31, 2015		—			11,494,549			7,045,241			18,539,790

6. SHAREHOLDER WARRANTS

	February  2010						March  2011
	Shareholder Warrants						Shareholder Warrants						Total
	#			$			#			$			$
December 31, 2014		290,089			4,080,925			1,561,515			21,792,160			25,873,085
Exercised		(290,089	)		(4,414,313	)		—			—			(4,414,313	)
Revaluation		—			333,388			—			(5,354,365	)		(5,020,977	)
December 31, 2015		—			—			1,561,515			16,437,795			16,437,795
Exercised		—			—			(1,561,515	)		(15,113,502	)		(15,113,502	)
Revaluation		—			—			—			(1,324,293	)		(1,324,293	)
September 30, 2016		—			—			—			—			—

On March 24, 2011, the Company closed a private placement of $14,280,240, net of transaction costs of $998,207, in exchange for 4,731,864 units at a price of CDN $3.17 per unit.  Each unit consists of one common share and 0.45 of a warrant, representing 2,129,339 warrants.  Each warrant has a five-year term and is exercisable either for one common share at an exercise price of CDN $3.18 or on a cashless basis in accordance with the Warrant Agreement.  Because such warrants were denominated in Canadian dollars [a currency different from the Company's functional currency], they are recognized as a financial liability at fair value through profit or loss.  In determining the initial fair value of the warrants, the Company used the Black‑Scholes option pricing model with the following assumptions: weighted average volatility rate of 66%; risk-free interest rate of 1.98%; expected life of five years; and an exchange rate of 1.026.  The value of $3,695,513, net of transaction costs, was established on March 24, 2011 and subsequently revalued on December 31, 2011 utilizing the Black‑Scholes option pricing model with the following assumptions: volatility rate of 64%; risk‑free interest rate of 1.85%; expected life of 4.23 years; and exchange rate of 0.980. The fair value of the warrants before transaction costs were initially U.S. $1.86 per warrant at issuance and at December 31, 2015 were valued at U.S. $10.53 per warrant.

During the nine months ended September 30, 2016, the remaining warrants of 1,561,515 were exercised on a cashless basis whereby the Company issued 1,166,753 common shares from treasury [see Note 9]. Upon conversion of the warrants to common shares, the warrants were de-recognized and the fair value of the warrants of $15,113,502 was recognized as share capital.

8

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

(expressed in U.S. dollars, except as otherwise indicated)

In February 2010, the Company closed a private placement of U.S. $6,610,157, net of transaction costs of $511,180, in which 3,049,205 units at CDN $2.43 per unit were issued.  Each unit is comprised of one common share and one-fifth of a warrant.  Each warrant has a five-year term and is exercisable for one common share at an exercise price of CDN $3.00.  Because such warrants were denominated in Canadian dollars [a currency different from the Company’s functional currency], they are recognized as a financial liability at fair value through profit or loss.  In determining the initial fair value of the shareholder warrants, the Company used the Black‑Scholes option pricing model with the following assumptions: volatility rate of 69%; risk-free interest rate of 1.88%; expected life of 5 years for shareholder warrants and 3 years for broker warrants; and exchange rate of 0.960. Shareholder warrants were initially valued at U.S. $1.47 and revalued at December 31, 2014 at U.S. $14.07 per warrant.

During the nine months ended September 30, 2015, the remaining warrants of 290,089 were exercised [see Note 9] for cash consideration of $699,209.

7. STOCK-BASED COMPENSATION PLAN

Stock Option Plan

On March 29, 2005, the Company established an amended stock option plan [the "Plan"] for the employees, directors, senior officers and consultants of the Company and any affiliate of the Company which governs all options issued under its previously existing stock option plans and future option grants made under the Plan.  On May 15, 2008, the shareholders at the annual and special meeting approved the "Second Amended and Restated Stock Option Plan", which was an amendment to the Plan.

Under the Plan, options to purchase common shares of the Company may be granted by the Board of Directors.  Options granted under the Plan will have an exercise price of not less than the volume-weighted average trading price of the common shares for the five trading days preceding the date on which the options are granted.  The maximum aggregate number of common shares which may be subject to options under the Plan is 10% of the common shares of the Company outstanding from time to time.

Options granted under the Plan will generally vest over a three-year period and may be exercised in whole or in part at any time as follows:  33% on or after the first anniversary of the grant date, 67% on or after the second anniversary of the grant date and 100% on or after the third anniversary of the grant date.  Options expire on the tenth anniversary of the grant date.  Any options not exercised prior to the expiry date will become null and void.  In connection with certain change of control transactions, including a take-over bid, merger or other structured acquisition, the Board of Directors may accelerate the vesting date of all unvested options such that all optionees will be entitled to exercise their full allocation of options and in certain circumstances, where such optionee's employment is terminated in connection with such transaction, such accelerated vesting will be automatic.  Options granted under the Plan will terminate on the earlier of the expiration of the option or 180 days following the death of the optionee or termination of the optionee's employment because of permanent disability, as a result of termination of the optionee's employment because of retirement of an optionee or as a result of such optionee ceasing to be a director, or 30 days following termination of an optionee.

The stock‑based compensation cost, related to options, that has been recognized for the three and nine months ended September 30, 2016 and included in the respective function line in the interim condensed consolidated statements of loss and comprehensive loss is $768,730 and $5,205,803, respectively [three and nine months ended September 30, 2015 - $675,349 and $3,937,059, respectively] with a corresponding increase to contributed surplus [see note 12].

9

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

(expressed in U.S. dollars, except as otherwise indicated)

A summary of the options outstanding as at September 30, 2016 and December 31, 2015 under the Plan are presented below (all weighted average exercise prices expressed in CDN dollars):

	For the nine months ended					For the year ended
	September 30, 2016					December 31, 2015
	Number outstanding			Weighted average exercise price		Number outstanding			Weighted average exercise price
	#			$		#			$
Options outstanding, beginning of period		3,894,805			12.25		3,691,962			11.32
Options granted		1,132,010			12.62		1,085,000			14.17
Options exercised		(18,551	)		5.56		(390,670	)		3.68
Options cancelled		(117,148	)		15.46		(95,932	)		12.24
Options forfeited		(205,996	)		16.01		(395,555	)		17.58
Options outstanding, end of period		4,685,120			12.12		3,894,805			12.25
Options exercisable, end of period		2,541,061			10.41		1,944,472			8.88

The Company uses the Black-Scholes option pricing model to determine the fair value of options. On February 17, 2016, the Company issued 134,500 options and on May 18, 2016 the Company issued 997,510 options under the Plan. For the three and nine months ended September 30, 2016, the Company used the following assumptions to determine the fair value of each of the options granted:

	February 17, 2016 Grant		May 18, 2016 Grant
	Employees			Management		Employees
Weighted average volatility rate		52%			50%		53%
Expected dividend yield	Nil			Nil		Nil
Weighted average expected life (in years)		3.7			6.6		3.7
Weighted average interest rate	0.57%			1.14%		0.79%
Exchange rate		0.7297			0.7679		0.7679
Fair value per option	$	3.55		$	4.97	$	3.96

The expected life of the options is based on historical data and current expectations and is not necessarily indicative of exercise patterns that may occur.  The expected volatility reflects the assumption that the historical volatility over a period similar to the expected life of the options is indicative of future trends, which may also not necessarily be the actual outcome.

There have been no modifications to the Plan during the periods presented in the interim condensed consolidated financial statements.

Long-Term Incentive Plan

On April 7, 2015 the Company established a long-term incentive plan comprised of Restricted Share Units (RSUs) and Deferred Share Units (DSUs).    

In connection with certain change of control transactions, including a take-over bid, merger or other structured acquisition, the Board of Directors may accelerate the vesting date of all unvested RSUs and DSUs such that all participants will be entitled to settle their full allocation of RSUs and/or DSUs and in certain circumstances, where such participant's employment is terminated in connection with such transaction, such accelerated vesting will be automatic.    

10

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

(expressed in U.S. dollars, except as otherwise indicated)

RSUs

RSUs granted under the plan will generally vest over a three-year period and may be settled in whole or in part at any time as follows:  one-third on or after the first anniversary of the grant date, one third on or after the second anniversary of the grant date, one third on or after the third anniversary of the grant date, and in certain cases, if specified performance objectives are met as determined by the Board of Directors.  RSUs granted under the plan will expire upon the termination of the participant’s employment, retirement, permanent disability or death.  RSUs must be settled no later than December 31 of the third calendar year following the year in which the services giving rise to the award were rendered.  RSUs may be settled for their cash equivalent or by the issuance of the Company’s common shares, subject to discretion of the Board of Directors. Each RSU is the equivalent of one Novadaq common share. The fair value for each RSU granted, which approximates the market value of a Novadaq common share at the date of grant, is recognized over the term of the vesting period, with a corresponding increase to contributed surplus based on the number of RSUs expected to vest.

The table below is a summary of the RSUs outstanding as at September 30, 2016 and December 31, 2015:

	For the nine months ended			For the year ended
	September 30, 2016			December 31, 2015
	Number outstanding			Number outstanding
	#			#
RSU's outstanding, beginning of period		29,302			-
RSU's granted		220,700			30,302
RSU's exercised		(1,520	)		-
RSU's cancelled		(167	)		-
RSU's forfeited		(2,860	)		(1,000	)
RSU's outstanding, end of period		245,455			29,302

The stock‑based compensation cost that has been recognized for the three and nine months ended September 30, 2016 and included in the respective function lines in the interim condensed consolidated statements of loss and comprehensive loss is $215,805 and $675,225 respectively [three and nine months ended September 30, 2015 - $31,986 and $36,064, respectively] with a corresponding increase to contributed surplus [see Note 12].

DSUs

DSUs granted under the plan may be settled when the participant ceases to be a member of the Board of Directors.  The participant may elect to settle DSUs for their cash equivalent or for the issuance of the Company’s common shares. Outstanding DSUs are initially recorded as a liability on the statement of financial position, measured at the awards’ fair value on the date of grant based on the market price of the Company’s common shares, with a corresponding charge to administrative expenses.  If an award’s fair value changes after it has been granted and before the settlement date, the resulting change in the liability is recorded in administrative expenses in the period that the change occurs.  

On May 18, 2016, the Company issued 75,360 DSUs under the plan. The initial fair value of $736,667 was recorded in other liabilities with the corresponding stock-based compensation cost recognized for the three and nine months ended September 30, 2016 and included in administrative expenses in the interim condensed consolidated statements of loss and comprehensive loss. The liability related to the DSUs was re-measured to its fair value as at September 30, 2016, resulting in an increase to stock based compensation expense for the three and nine months ended September 30, 2016 of $130,373 and $135,248, respectively.  The stock-based compensation cost that has been recognized for the three and nine months ended September 30, 2016 is $130,373 and $871,915, respectively.

There have been no modifications to the long-term incentive plan during the three and nine months ended September 30, 2016 and September 30, 2015.

11

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

(expressed in U.S. dollars, except as otherwise indicated)

8. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

[a] Fair value

Set out below is a comparison by type of the carrying amounts and fair values of the Company's recognized financial instruments that are recorded in the interim condensed consolidated statements of financial position:

	September 30, 2016				December 31, 2015
	Carrying amount		Fair value		Carrying amount		Fair value
	$		$		$		$
Financial assets
Held-for-trading
Cash and cash equivalents		72,242,278		72,242,278		106,790,202		106,790,202
Loans and receivables
Accounts receivable		27,147,891		27,147,891		21,767,746		21,767,746
		99,390,169		99,390,169		128,557,948		128,557,948

Financial liabilities
Derivative financial liabilities at fair value through profit or    loss
Shareholder warrants	-	-	16,437,795	16,437,795
Other financial liabilities
Accounts payable and accrued liabilities	14,705,029	14,705,029	12,145,572	12,145,572
Distribution rights payable	1,807,098	1,807,098	1,985,012	1,985,012
Other liabilities	871,915	871,915	-	-
	17,384,042	17,384,042	30,568,379	30,568,379

The following methods and assumptions were used to estimate the fair values:

• cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments.

• the fair value of the distribution rights payable is estimated by discounting the future contractual payments;

• the fair value of shareholder warrants is estimated using the Black‑Scholes option pricing model incorporating various inputs including the underlying price volatility and discount rate; and,

• the fair value of the other liabilities is estimated based on the market price of the Company’s common shares.

[b] Fair value hierarchy

The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

• Level 1 - Inputs to the valuation methodology are quoted prices [unadjusted] for identical assets or liabilities in active markets.

• Level 2 - Inputs to valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

12

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

(expressed in U.S. dollars, except as otherwise indicated)

The fair value hierarchy of financial instruments measured at fair value on the interim condensed consolidated statements of financial position is as follows:

	September 30, 2016						December 31, 2015
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
	$		$		$		$		$		$
Financial assets
Cash and cash equivalents		72,242,278		-		-		106,790,202		-		-
Financial liabilities
Shareholder warrants		-		-		-		-		16,437,795		-

During the reporting periods, there were no transfers between Level 1 and Level 2 fair value measurements.

[c] Management of risks arising from financial instruments

As at September 30, 2016, one customer had an accounts receivable balance exceeding 10% of total accounts receivable [December 31, 2015 – one customer]. Concentration of this customer comprised 45% of total accounts receivable as at September 30, 2016 as compared to 21% as at December 31, 2015.

9. SHARE CAPITAL

The Company has authorized share capital as follows: common shares - unlimited, no par value; preference shares - unlimited, no par value, issuable in one or more series.

Issued and outstanding

	Common shares
	#		$
Balance as at December 31, 2014		55,572,568		315,651,455
Exercise of stock options		390,670		1,922,034
Exercise of shareholder warrants		290,089		5,113,522
Balance as at December 31, 2015		56,253,327		322,687,011
Exercise of stock options		11,334		63,649
Exercise of shareholder warrants		1,166,753		15,113,502
Balance as at March 31, 2016		57,431,414		337,864,162
Exercise of stock options		2,800		32,173
Exercise of RSUs		1,231		13,319
Balance as at June 30, 2016		57,435,445		337,909,654
Exercise of stock options		4,417		41,221
Exercise of RSUs		289		3,127
Balance as at September 30, 2016		57,440,151		337,954,002

13

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

(expressed in U.S. dollars, except as otherwise indicated)

10. LOSS PER SHARE

Basic loss per share amounts are calculated by dividing net loss for the period attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period.  Diluted loss per share amounts are calculated by dividing the net loss attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on conversion of all of the dilutive potential ordinary shares into ordinary shares.

The following reflects the loss and share data used in the basic and diluted loss per share computations:

	For the three months ended						For the nine months ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Net loss and comprehensive loss    attributable to shareholders for basic loss per share		(10,895,736	)		(3,712,182	)		(34,410,329	)		(21,023,481	)
Net loss and comprehensive loss    attributable to shareholders for diluted loss per    share		(10,895,736	)		(6,032,822	)		(35,734,622	)		(29,705,382	)
Weighted average number of shares for basic loss    per share		57,442,427			56,197,250			57,115,733			56,053,981
Weighted average number of shares for diluted loss    per share		57,442,427			57,429,707			58,161,654			57,308,812

There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these interim condensed consolidated financial statements.

The conversion of outstanding stock options and RSUs has not been included in the determination of basic and diluted loss per share as to do so would have been anti‑dilutive.

11. SEGMENTED INFORMATION

The Company’s business activities are conducted through one segment which consists of medical devices and related products and services. Segment performance is based on gross margin and is measured consistently with the gross margin of the interim condensed consolidated financial statements since there is only one segment.  

Revenue by region is as follows:

	For the three months ended				For the nine months ended
	September 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015
	$		$		$		$
United States		19,305,404		15,313,179		52,700,563		38,943,683
Outside United States		2,853,499		1,722,788		7,300,600		4,850,052
Total		22,158,903		17,035,967		60,001,163		43,793,735

For the three and nine months ended September 30, 2016, there were sales to one customer that exceeded 10% of total revenue [three and nine months ended September 30, 2015 - one]. For the three and nine months ended September 30, 2016, concentration of this customer comprised of 37% and 32% of total revenue, respectively. For the three and nine months ended September 30, 2015, concentration of this customer comprised of 12% and 13% of total revenue, respectively.

14

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

(expressed in U.S. dollars, except as otherwise indicated)

Property and equipment, net are domiciled as follows:

	September 30, 2016		December 31, 2015
	$		$
Canada		9,187,000		7,955,468
United States		6,418,656		5,765,396
Outside North America		2,671,275		1,109,250
Total		18,276,931		14,830,114

Intangible assets are domiciled as follows:

	September 30, 2016		December 31, 2015
	$		$
Canada		2,553,626		2,733,434
Outside Canada		14,716,861		15,806,356
Total		17,270,487		18,539,790

12. ADMINISTRATIVE EXPENSES

As a result of the resignation of the Company’s former CEO, the Company has recognized and included in stock-based compensation a cost of $1,853,128 during the nine months ended September 30, 2016 relating to the stock options and RSUs granted to the CEO, which had not yet vested at the time of the resignation and which were not cancelled subsequently.  In addition, the Company provided cash compensation in the amount of $1,852,874 for the costs related to the resignation.  These costs were recorded in administrative expenses in the interim consolidated statements of loss and comprehensive loss for the nine months ended September 30, 2016. As at September 30, 2016, $879,619 related to cash compensation, is included in accounts payable and accrued liabilities.

15