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 March 31, 2017				As at December 31, 2016
ASSETS
Current assets
Cash and cash equivalents		$		56,139,164		$		62,382,649
Accounts receivable				28,430,680				27,791,574
Prepaid expenses and other assets				5,767,149				5,776,463
Inventories	3			4,644,628				4,295,565
				94,981,621				100,246,251
Non-current assets
Long-term receivables				961,341				298,073
Other assets	9			398,676				-
Investments	4			289,284				-
Property and equipment, net	5			19,627,354				19,508,471
Intangible assets, net	6			16,665,216				16,847,287
Total Assets		$		132,923,492		$		136,900,082
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities		$		17,373,654		$		19,223,889
Provisions				438,121				510,203
Deferred revenue				2,837,372				2,156,096
Income taxes payable				24,033				24,433
Distribution rights payable				250,000				250,000
Other liabilities	8			489,212				445,252
				21,412,392				22,609,873
Non-current liabilities
Deferred revenue				617,538				729,209
Distribution rights payable				1,353,025				1,581,127
Long-term debt	9			9,617,245				-
Total Liabilities		$		33,000,200		$		24,920,209
Shareholders' Equity
Share capital	11	$		340,224,517		$		337,974,247
Contributed surplus	8			22,842,855				23,042,165
Deficit				(263,144,080	)			(249,036,539	)
Total Shareholders' Equity		$		99,923,292		$		111,979,873
Total Liabilities and Shareholders' Equity		$		132,923,492		$		136,900,082
Total number of common shares outstanding	11			57,802,861				57,445,151

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
	Notes		March 31, 2017				March 31, 2016
Product sales		$		19,167,044		$		16,779,708
Royalty revenue				525,750				495,250
Service revenue				1,382,459				451,113
Total revenues				21,075,253				17,726,071
Cost of sales	4			6,849,840				5,068,043
Gross profit				14,225,413				12,658,028
Selling and distribution expenses				21,264,284				15,308,081
Research and development expenses				3,924,099				3,163,368
Administrative expenses				2,911,640				2,556,259
Total operating expenses				28,100,023				21,027,708
Loss from operations				(13,874,610	)			(8,369,680	)
Finance costs	9			(285,922	)			(24,028	)
Finance income				52,991				89,681
Warrants revaluation adjustment	7			—				1,324,293
Net loss and comprehensive loss for the period		$		(14,107,541	)	$		(6,979,734	)
Basic loss and comprehensive loss per share for the period	12	$		(0.24	)	$		(0.12	)
Diluted loss and comprehensive loss per share for the period	12	$		(0.24	)	$		(0.14	)

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)

Three months ended March 31, 2017		Share capital			Contributed surplus				Deficit				Total
As at December 31, 2016	$		337,974,247	$		23,042,165		$		(249,036,539	)	$		111,979,873
Net loss and comprehensive loss for the period			—			—				(14,107,541	)			(14,107,541	)
Exercise of options (note 11)			2,209,490			(981,764	)			—				1,227,726
Exercise of restricted stock units (note 11)			40,780			(40,780	)			—				—
Stock-based compensation (note 8)			—			823,234				—				823,234
As at March 31, 2017	$		340,224,517	$		22,842,855		$		(263,144,080	)	$		99,923,292
Three months ended March 31, 2016		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 11)			63,649			(26,116	)			—				37,533
Exercise of warrants (note 7)			15,113,502			—				—				15,113,502
Stock-based compensation (note 8)			—			1,047,343				—				1,047,343
As at March 31, 2016	$		337,864,162	$		17,422,057		$		(203,105,549	)	$		152,180,670

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
	Notes			March 31, 2017				March 31, 2016
OPERATING ACTIVITIES
Net loss and comprehensive loss for the period			$		(14,107,541	)	$		(6,979,734	)
Items not affecting cash
Depreciation of property and equipment		5			2,054,049				1,311,122
Amortization of intangible assets		6			423,199				436,402
Stock-based compensation		8			867,194				1,047,343
Amortization of deferred financing costs					41,126				—
Imputed interest on distribution rights payable					21,898				24,028
Imputed interest on long-term receivables					(22,342	)			—
Shareholder warrants revaluation adjustment		7			—				(1,324,293	)
					(10,722,417	)			(5,485,132	)
Changes in non-cash working capital
Increase in accounts receivable					(639,106	)			(8,083	)
Increase in inventories					(349,063	)			(1,013,329	)
Decrease in accounts payable and accrued liabilities and    provisions					(1,929,033	)			(1,951,375	)
Decrease in income taxes payable					(400	)			(10,900	)
Decrease in prepaid expenses and other assets					9,314				336,598
Increase in deferred revenue					681,276				367,683
Net change in non-cash working capital balances related to operations					(2,227,012	)			(2,279,406	)
Increase in long-term receivables					(640,926	)			—
(Decrease) increase in non-current deferred revenue					(111,671	)			50,666
Cash used in operating activities					(13,702,026	)			(7,713,872	)
INVESTING ACTIVITIES
Addition of property and equipment		5			(2,977,036	)			(2,774,422	)
Purchase of intangible assets		6			(241,128	)			—
Disposal of property and equipment		5			804,104				512,596
Purchase of investments					(289,284	)			—
Cash used in investing activities					(2,703,344	)			(2,261,826	)
FINANCING ACTIVITIES
Net proceeds from the issuance of debt		9			9,177,443				—
Proceeds from exercise of options		11			1,227,726				37,533
Payment of distribution rights payable					(250,000	)			(250,000	)
Cash provided by (used in) financing activities					10,155,169				(212,467	)
Net decrease in cash and cash equivalents					(6,250,201	)			(10,188,165	)
Net foreign exchange difference					6,716				5,951
Cash and cash equivalents at beginning of period					62,382,649				106,790,202
Cash and cash equivalents at end of period			$		56,139,164		$		96,607,988

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 MONTHS ENDED MARCH 31, 2017

(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 months ended March 31, 2017 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, 2016 prepared in accordance with International Financial Reporting Standards ["IFRS"] as issued by the IASB.

Certain comparative figures have been reclassified to conform to the current period’s presentation.

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 months ended March 31, 2017 should be read together with the annual consolidated financial statements for the year ended December 31, 2016, 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, 2016. These interim condensed consolidated financial statements were authorized for issue by the Board of the Directors on May 2, 2017.

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 MONTHS ENDED MARCH 31, 2017

(Unaudited)

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

3. INVENTORIES

Inventories by category are as follows:

	March 31, 2017		December 31, 2016
	$		$
Raw materials and parts		2,017,010		2,080,839
Consignment inventory		1,382,170		1,152,004
Medical devices		1,235,674		1,045,028
TMR kits		9,774		17,694
		4,644,628		4,295,565

During the three months ended March 31, 2017, $4,981,943 of inventory has been recognized in cost of sales [three months ended March 31, 2016 - $3,817,087]

4. INVESTMENTS

The Company has investments in guaranteed investment certificates that are held as collateral for letters of credit it has issued and which remain outstanding as at March 31, 2017.

5. PROPERTY AND EQUIPMENT

	Medical devices			Furniture and fixtures			Computer equipment			Leasehold improvements			Total
	$			$			$			$			$
Cost:
Balance at January 1, 2017		34,601,636			532,373			2,273,629			1,791,900			39,199,538
Additions		2,937,086			5,258			34,692			—			2,977,036
Disposals		(1,188,597	)		—			—			—			(1,188,597	)
Balance at March 31, 2017		36,350,125			537,631			2,308,321			1,791,900			40,987,977
Depreciation:
Balance at January 1, 2017		(16,869,392	)		(468,230	)		(1,918,375	)		(435,070	)		(19,691,067	)
Depreciation		(1,931,643	)		(8,871	)		(72,499	)		(41,036	)		(2,054,049	)
Disposals		384,493			—			—			—			384,493
Balance at March 31, 2017		(18,416,542	)		(477,101	)		(1,990,874	)		(476,106	)		(21,360,623	)
Net book value at March 31, 2017		17,933,583			60,530			317,447			1,315,794			19,627,354

6

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2017

(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, 2016		26,737,427			474,573			1,892,522			1,611,150			30,715,672
Additions		14,458,829			58,724			381,107			180,750			15,079,410
Disposals		(6,594,620	)		(924	)		—			—			(6,595,544	)
Balance at December 31, 2016		34,601,636			532,373			2,273,629			1,791,900			39,199,538
Depreciation:
Balance at January 1, 2016		(13,522,500	)		(438,942	)		(1,648,587	)		(275,529	)		(15,885,558	)
Depreciation		(5,931,638	)		(29,288	)		(269,788	)		(159,541	)		(6,390,255	)
Disposals		2,584,746			—			—			—			2,584,746
Balance at December 31, 2016		(16,869,392	)		(468,230	)		(1,918,375	)		(435,070	)		(19,691,067	)
Net book value at December 31, 2016		17,732,244			64,143			355,254			1,356,830			19,508,471

As at March 31, 2017, medical devices includes construction-in-progress of $6,522,871 [December 31, 2016 - $6,768,295] which are not being depreciated.  Depreciation will commence when the devices are placed for use at medical institutions.  

6. INTANGIBLE ASSETS

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

	Licenses			Patent rights			Distribution rights			Software		Total
	$			$			$			$		$
Cost:
Balance at January 1, 2017		5,913,642			14,920,855			7,880,819			—		28,715,316
Additions		—			—			—			241,128		241,128
Balance at March 31, 2017		5,913,642			14,920,855			7,880,819			241,128		28,956,444
Amortization:
Balance at January 1, 2017		(5,913,642	)		(4,330,731	)		(1,623,656	)		—		(11,868,029	)
Amortization		—			(226,179	)		(197,020	)		—		(423,199	)
Balance at March 31, 2017		(5,913,642	)		(4,556,910	)		(1,820,676	)		—		(12,291,228	)
Net book value at March 31, 2017		—			10,363,945			6,060,143			241,128		16,665,216

7

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2017

(Unaudited)

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

	Licenses			Patent rights			Distribution rights			Software		Total
	$			$			$			$		$
Cost:
Balance at January 1, 2016		5,913,642			14,920,855			7,880,819			—		28,715,316
Additions		—			—			—			—		—
Balance at December 31, 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		—			(904,425	)		(788,078	)		—		(1,692,503	)
Balance at December 31, 2016		(5,913,642	)		(4,330,731	)		(1,623,656	)		—		(11,868,029	)
Net book value at December 31, 2016		—			10,590,124			6,257,163			—		16,847,287

During the three months ended March 31, 2017, the Company purchased software to support operational initiatives in the amount of $241,128. Amortization will commence when the software is available for use and will be amortized over its estimated useful life of three years.

7. SHAREHOLDER WARRANTS

	March 2011
	Shareholder Warrants
	#			$
December 31, 2015		1,561,515			16,437,795
Exercised		(1,561,515	)		(15,113,502	)
Revaluation		—			(1,324,293	)
December 31, 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 consisted of one common share and 0.45 of a warrant, representing 2,129,339 warrants.  Each warrant had a five-year term and was 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 were recognized as a financial liability at fair value through profit or loss.  The Company used the Black-Scholes option pricing model to determine the fair value of the warrants.

During the three months ended March 31, 2016, the remaining outstanding warrants of 1,561,515 were exercised on a cashless basis whereby the Company issued 1,166,753 common shares from treasury [see Note 11]. 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 MONTHS ENDED MARCH 31, 2017

(Unaudited)

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

8. 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 months ended March 31, 2017 and included in the respective function line in the interim condensed consolidated statements of loss and comprehensive loss is $620,364 [three months ended March 31, 2016 - $1,016,256] with a corresponding increase to contributed surplus.

A summary of the options outstanding as at March 31, 2017 and December 31, 2016 under the Plan are presented below (all weighted average exercise prices expressed in CDN dollars):

	Three months ended					Year ended
	March 31, 2017					December 31, 2016
	Number outstanding			Weighted average exercise price		Number outstanding			Weighted average exercise price
	#			$		#			$
Options outstanding, beginning of period		4,608,064			12.06		3,894,805			12.25
Options granted		-			-		1,132,010			12.62
Options exercised		(353,941	)		4.55		(23,551	)		5.03
Options cancelled		(120,560	)		11.83		(132,815	)		15.79
Options forfeited		(85,334	)		14.67		(262,385	)		15.89
Options outstanding, end of period		4,048,229			12.67		4,608,064			12.06
Options exercisable, end of period		2,229,469			11.86		2,616,132			10.11

The Company uses the Black-Scholes option pricing model to determine the fair value of options. There were no options granted under the plan during the three months ended March 31, 2017 (three months ended March 31, 2016 – 134,500 options).

9

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2017

(Unaudited)

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

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.    

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 March 31, 2017 and December 31, 2016:

	Three months ended			Year ended
	March 31, 2017			December 31, 2016
	Number outstanding			Number outstanding
	#			#
RSU's outstanding, beginning of period		245,455			29,302
RSU's granted		-			220,700
RSU's exercised		(3,769	)		(1,520	)
RSU's cancelled		-			(167	)
RSU's forfeited		(500	)		(2,860	)
RSU's outstanding, end of period		241,186			245,455

There were no RSUs granted during the three months ended March 31, 2017 and 2016.

The stock‑based compensation cost that has been recognized for the three months ended March 31, 2017 and included in the respective function lines in the interim condensed consolidated statements of loss and comprehensive loss is $202,870 [three months ended March 31, 2016 - $31,087] with a corresponding increase to contributed surplus.

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

10

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2017

(Unaudited)

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

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 year ended December 31, 2016 and included in administrative expenses in the condensed consolidated statements of loss and comprehensive loss. The liability related to the DSUs was re-measured to its fair value as at December 31, 2016. The stock-based compensation cost that has been recognized for the three months ended March 31, 2017 is $43,960 (three months ended March 31, 2016 – nil).

	Three months ended		Year ended
	March 31, 2017		December 31, 2016
	Number outstanding		Number outstanding
	#		#
DSU's outstanding, beginning of period		62,800		-
DSU's granted		-		75,360
DSU's exercised		-		(12,560	)
DSU's outstanding, end of period		62,800		62,800

There were no DSUs granted during the three months ended March 31, 2017 and 2016.

There have been no modifications to the long-term incentive plan during the periods presented in the consolidated financial statements.

9. LONG-TERM DEBT  

On January 6, 2017, the Company entered into a credit facility consisting of a term and revolving loan providing the Company with new financing of up to $60,000,000. Under the terms of the credit facility, up to $30,000,000 is available under a term loan agreement in three equal tranches of $10,000,000 between January 6, 2017 and December 31, 2018, with principal repayments commencing on February 1, 2019 payable in equal monthly payments over a period of 36 months.  The term loan bears interest at LIBOR plus 7.20%, with LIBOR being set at a minimum of 0.5%.  The Company has the option to make voluntary principal repayments, subject to a prepayment fee equal to the total amount drawn under the term loan facility multiplied by 3% if paid in the first year, 2% if paid in the second year and 1% if paid in the third year and thereafter.

In addition, the Company has the option to borrow up to $30,000,000 through a revolving loan for a term of up to 60 months, with an additional $15,000,000 to be committed if certain conditions are met.  The borrowings available under the revolving loan is subject to a borrowing base formula. The Company is required to maintain a minimum balance equal to 30% of the borrowing base during the term of the revolving loan agreement, which will be drawn once certain conditions have been met.  The revolving loan bears interest at LIBOR plus 4.25%, with LIBOR being set at a minimum of 0.5%.  The Company has the option to make voluntary repayments, subject to a prepayment fee equal to the total committed under the revolving loan facility multiplied by 3% if paid in the first year, 2% if paid in the second year and 1% if paid in the third year and thereafter.

The interest rate floor and prepayment option for the term and revolving loans are embedded derivatives which are considered closely related to the host contract and are not required to be bifurcated from the debt instruments.

The credit facility is subject to certain financial covenants and reporting requirements and is secured by a General Security Agreement constituting a first ranking security interest in all personal property of the Company.  

11

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2017

(Unaudited)

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

During the three months ended March 31, 2017, the Company received proceeds of $9,413,458 under the credit facility for the first tranche of the term loan, net of transaction costs for professional and legal fees in the amount of $586,542. In addition, the Company incurred $235,975 of transaction costs related to the debt issuance. As at March 31, 2017, there has been no amount drawn under the revolving loan facility.  Transaction costs are amortized and included in finance costs in the interim condensed consolidated statements of loss and comprehensive loss using the effective interest method.  As at March 31, 2017, the long-term debt balance is comprised of $10,000,000 drawn under the term loan less unamortized deferred financing costs of $382,755.Deferred financing costs related to the revolving loan are included in other assets in the interim condensed consolidated statements of financial position.

The following table summarizes the principal repayments for the term loan due over the next five years and thereafter as at March 31, 2017:

	$
2019		3,055,556
2020		3,333,333
2021		3,333,333
2022		277,778
Total long-term debt		10,000,000

10. 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:

	March 31, 2017				December 31, 2016
	Carrying amount		Fair value		Carrying amount		Fair value
	$		$		$		$
Financial assets
Held-for-trading
Cash and cash equivalents		56,139,164		56,139,164		62,382,649		62,382,649
Investments		289,284		289,284		-		-
Loans and receivables
Accounts receivable		28,430,680		28,430,680		27,791,574		27,791,574
Long-term receivables		961,341		961,341		298,073		298,073
		85,820,469		85,820,469		90,472,296		90,472,296

Financial liabilities
Other financial liabilities
Accounts payable and accrued liabilities	17,373,654	17,373,654	19,223,889	19,223,889
Distribution rights payable	1,603,025	1,603,025	1,831,127	1,831,127
Other liabilities	489,212	489,212	445,252	445,252
Long-term debt	9,617,245	10,000,000	-	-
	29,083,136	29,465,891	21,500,268	21,500,268

12

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2017

(Unaudited)

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

The fair values of the financial assets are shown at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

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

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

• the fair value of the long-term receivables and distribution rights payable is estimated by discounting the future contractual payments.

• the carrying amounts of investments approximate their cash equivalent values.

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

• the fair value of long-term debt is estimated by using a discounted cash flows approach using market interest rates, considering credit risk.

[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.

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

	March 31, 2017						December 31, 2016
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
	$		$		$		$		$		$
Financial assets
Cash and cash equivalents		56,139,164		-		-		62,382,649		-		-
Investments		289,284		-		-		-		-		-

During the reporting periods, there were no transfers between levels of fair value measurements.

[c] Management of risks arising from financial instruments

As at March 31, 2017, two customers had an accounts receivable balance exceeding 10% of total accounts receivable [December 31, 2016 – one customer]. Concentration of these customers comprised 26% and 11%, respectively, of total accounts receivable as at March 31, 2017 [December 31, 2016 – 30%].

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Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2017

(Unaudited)

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

11. 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, 2015		56,253,327		322,687,011
Exercise of stock options		23,551		157,288
Exercise of RSUs		1,520		16,446
Exercise of shareholder warrants		1,166,753		15,113,502
Balance as at December 31, 2016		57,445,151		337,974,247
Exercise of stock options		353,941		2,209,490
Exercise of RSUs		3,769		40,780
Balance as at March 31, 2017		57,802,861		340,224,517

12. 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:

		March 31, 2017				March 31, 2016
Net loss and comprehensive loss    attributable to shareholders for basic loss per share	$		(14,107,541	)	$		(6,979,734	)
Net loss and comprehensive loss    attributable to shareholders for diluted loss per    share	$		(14,107,541	)	$		(8,304,027	)
Weighted average number of shares for basic loss    per share			57,725,905				56,464,036
Weighted average number of shares for diluted loss    per share			57,725,905				57,474,701

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.

14

Novadaq Technologies Inc.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2017

(Unaudited)

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

13. 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:

	March 31, 2017		March 31, 2016
	$		$
United States		15,557,552		15,760,357
Outside United States		5,517,701		1,965,714
Total		21,075,253		17,726,071

For the three months ended March 31, 2017, there were sales to one customer that exceeded 10% of total revenue [three months ended March 31, 2016 - one]. For the three months ended March 31, 2017, concentration of this customer comprised of 16% of total revenue. For the three months ended March 31, 2016, concentration of the one customer comprised of 29% of total revenue.

Property and equipment, net are domiciled as follows:

	March 31, 2017		December 31, 2016
	$		$
Canada		8,464,090		8,603,929
United States		8,504,904		8,744,038
Outside North America		2,658,360		2,160,504
Total		19,627,354		19,508,471

Intangible assets are domiciled as follows:

	March 31, 2017		December 31, 2016
	$		$
Canada		2,674,402		2,493,307
Outside Canada		13,990,814		14,353,980
Total		16,665,216		16,847,287

15