Exhibit 99.2





LOGO





Annual Report 2013

Novadaq
Technologies, Inc.



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Table of Content





|                                                                                   |  |  |    | 
|---------------------------------------------------------------------------------- |  |  | -- | 
|                                                                                   | 
|Letter to Shareholders                                                             |  |  | 2  | 
|                                                                                   | 
|Managements Discussion & Analysis of Financial Conditions & Results of Operations |  |  | 4  | 
|                                                                                   | 
|Auditors Report                                                                   |  |  | 26 | 
|                                                                                   | 
|Financial Statements                                                               |  |  | 27 | 
|                                                                                   | 
|Notes to Consolidated Financial Statements                                         |  |  | 31 | 
|                                                                                   | 
|Corporate Information                                                              |  |  | 66 | 
|                                                                                   | 
|Shareholder Information                                                            |  |  | 67 | 



| 1 |



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Dear Shareholders,

The past year was another year of growth and transformation as we began to realize the promise of selling our Novadaq® ecosystem of clinically relevant point of care imaging solutions across hospital inpatient and outpatient departments. Our achievements in 2013 have moved us even closer to realizing the goal of
having Novadaq imaging products used upon patient admission and throughout the continuum of patient care. For example, in a few hospitals already today, a wound care specialist in a clinic will decide, on the basis of a LUNA image, that a
patient suffering from a non-healing diabetic foot ulcer, must be referred to a surgeon for further treatment. Once the referral has been made, the LUNA images will be transferred along the chain of care so that each medical specialist can use them
to plan their intra-operative and post-operative treatment strategies. During the actual surgery, the surgeon can then use SPY Elite®in real-time to assist in making critical
intra-operative decisions. Similar scenarios exist for PINPOINT® and / or Firefly.

Novadaqs key accomplishments in 2013 included the following:



| |  |  | We achieved our financial performance goals.
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| |  |  | More than 13 new journal articles were published, bringing the total number of articles validating the benefits of our technology in our lead applications and new applications to more than 88.
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| |  |  | We established the infrastructure to market and directly sell our two newest imaging systems, PINPOINT and LUNA, to hospitals and clinics in the United States.
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| |  |  | We initiated our presence in international markets and as part of that strategy, appointed Swissray and CHC Healthcare Group as our exclusive distributors for the Asia Pacific region and China.
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| |  |  | We completed the acquisition of the surgical radiopharmaceutical imaging system to further expand our capability to visualize clinically relevant anatomy in oncological surgical procedures.
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Our goal of leading and dominating the fluorescence-imaging ecosystem is on track as we now provide imaging solutions for open surgery, robotic surgery,
minimally invasive surgery, and wound care. The U.S. installed base of SPY technology systems exceeded 1,200 as of December 31, 2013 and we estimate that the 2013 annualized procedure run rate for our SPY Imaging technology was in the range of
25,000. As a result of our 2013 accomplishments, Novadaqs total revenues grew to $35 million in 2013 representing an increase of 52% compared to 2012.

Early metrics for the newly established Novadaq direct U.S. sales team throughout 2013 are positive. That team, which was comprised of 50 professionals by
year-end, sold, rented or placed for evaluation or clinical study more than 90 combined PINPOINT and LUNA systems. Most of the evaluation systems are being used in key opinion leading U.S. centers, and although we are at an early stage of
commercialization, end-user customer feedback with respect to clinical and economic value has been positive.

In addition in 2013, Novadaq initiated
efforts to commercialize our products globally, and in November, signed an international distribution agreement with Swissray Asia, a leading distributor for radiation oncology and medical imaging equipment in Southeast Asia. Pursuant to the
agreement, Swissray Asia also became the exclusive distributor of Novadaqs imaging systems for the regions of Australia, Indonesia, New Zealand and certain Southeast Asian countries. Novadaq subsequently entered into an expanded distribution
agreement with Swissray Asias parent company, CHC Healthcare Group, for the region of Greater China, which includes Hong Kong and Taiwan.

We added
8 patents to our SPY Imaging technology intellectual property portfolio in 2013, and also added another point-of-care imaging technology to our development pipeline through the acquisition of the surgical radiopharmaceutical imaging system. We
expect to take this technology into the clinic in Q4-2014.

Novadaq remains a company driven by clinical value, and demonstrations of benefit using one of
our imaging systems are often relevant to the other devices in our SPY ecosystem. During 2013, large studies evaluating SPY Elite in breast reconstruction and PINPOINT in low anterior colon resection surgery generated clinical study data



| 2 |



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that strongly support the clinical value of our imaging technology. In April, interim clinical results for the PILLAR II multi-center, prospective study of up to 150 patients undergoing
laparoscopic left anterior resection of the colon were reported during the SAGES conference in Baltimore, Maryland. Among the 66 patients included in the interim data analysis, investigators, based on PINPOINT images, made revisions to their
operative plan in 9% of cases, and achieved a post-operative leak rate of zero percent. We expect that final results of PILLAR-II will be published later this quarter, and that PILLAR-III, a multi-center, randomized study in colorectal surgery
patients, will begin in Q3-2014. At the 2013 Plastic Surgery Research Council meeting held in Santa Monica, California in May, results from a 207-patient comparative study run at the MD Anderson Cancer Center were reported, demonstrating that SPY
Imaging was associated with an approximate three-fold reduction in the likelihood of developing skin flap necrosis and postoperative complications in women undergoing breast reconstruction surgery. Already in 2014, another large comparative study
has been published in the Aesthetic Surgery Journal. This study compared the necrosis complication rates, as well as the rates and costs associated with unexpected perfusion-related reoperations for 184 patients at Emory University, who
underwent breast reconstruction surgery with SPY Imaging, versus 184 patients who were reconstructed without SPY Imaging. Mastectomy skin necrosis rates were lower (13% vs 23%) with SPY Imaging, with the biggest reduction being severe necrotic
complications. As a result, reoperation rates were lower (5.9% vs 14.1%), and the calculated cost savings due to the lower reoperation rate averaged a little more than $610 per patient.

Going forward, Novadaqs commitment to supporting clinical studies will continue. Currently, Novadaq is supporting more than 15 clinical studies of our
technologies in applications including lymph node mapping, cholecystectomy, endometriosis resection, esophagectomy, and wound care. Looking ahead into 2014, we expect that data will become available from at least four of these studies as the year
progresses.

Novadaq remains steadfast in our application of SPY Imaging technology to complex procedures that typically cost the healthcare system
$25,000 or more, and those with complication rates that exceed 10 percent. It is here that we believe, SPY Imaging technology adds the most value. By leveraging our core SPY Imaging technology, we will continue to innovate by developing new devices,
accessories and imaging agents, which cater to the needs of specific types of surgeries and other procedures and the physicians who performs them. The year 2013 was also about introducing SPY Imaging technology into wound care clinics, a high value
outpatient diagnostic setting. With chronic wounds, each patient visit costs substantially less than $25,000, but as patients require ongoing care, the overall economic and personal burden is substantially higher. As we stated in our fourth quarter
2013 results call, Novadaqs goal has been to create a long-term sustainable growth business, and we think the Company is positioned to achieve this goal. In 2014, we expect that LUNA and PINPOINT will become major drivers of our growth as our
partnered products, SPY Elite and FireFly, mature on a larger revenue base.

On behalf of the management team and our board of directors, I
thank you for your confidence in Novadaq. I look forward to updating you on our progress in the months and years to come.

Best Regards,



LOGO

Arun Menawat, Ph.D., MBA

Chief Executive Officer



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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Managements Discussion and Analysis [MD&A] for Novadaq®
Technologies Inc. [Novadaq or the Company] should be read in in conjunction with the audited consolidated financial statements for the year ended December 31, 2013, which have been prepared in accordance with
International Financial Reporting Standards [IFRS] as issued by the International Accounting Standards Board [IASB]. All of the amounts in the audited consolidated financial statements and comparative information are
expressed in United States [U.S.] dollars unless otherwise indicated. References to Novadaq or the Company mean Novadaq and/or its management.

Forward-Looking Information

This MD&A
contains certain information that may constitute forward-looking information within the meaning of Canadian securities laws and forward-looking statements within the meaning of U.S. federal securities laws, both of which we refer to as
forward-looking information. In some cases, forward-looking information can be identified by the use of terms such as may, will, should, expect, plan, anticipate,
believe, intend, estimate, predict, potential, continue or other similar expressions concerning matters that are not statements about the present or historical facts.
Forward-looking information may relate to managements future outlook and anticipated events or results, and may include statements or information regarding the future financial position, business strategy and strategic goals, research and
development activities, projected costs and capital expenditures, financial results, research and clinical testing outcomes, taxes and plans and objectives of, or involving, Novadaq®. Without
limitation, information regarding future sales and marketing activities, SPY®, SPY Elite®, PINPOINT®, Firefly and LUNA Imaging System sales, placements and utilization rates, reimbursement for SPY [SPY], SPY Elite, PINPOINT (as defined herein),
Firefly and LUNA procedures, future revenues arising from the sales of the Companys products, the sales and marketing arrangements with LifeCell Corporation, the license and supply agreements with Intuitive Surgical®, Inc. [Intuitive], the distribution agreement with MAQUET Cardiovascular and future potential partnerships, research and development activities, the Companys plans to seek
further regulatory clearances for additional indications, as well as the Companys plans for development of a surgical lymph node and tumor margin scintigraphy imaging system is forward-looking information.

Forward-looking information is based on certain factors and assumptions regarding, among other things, market acceptance and the rate of market penetration of
Novadaqs products, the success of Novadaqs partnerships, the effect of reimbursement codes for procedures involving use of the SPY, SPY Elite, LUNA and Firefly Imaging System and/or PINPOINT Endoscopic Fluorescence Imaging System
[PINPOINT] and the clinical results of the use of SPY, SPY Elite, Firefly, LUNA and/or PINPOINT Imaging Systems or the CO2 Heart Laser System for Transmyocardial Revascularization. While the Company considers these assumptions to
be reasonable based on information currently available to it, they may prove to be incorrect.

Forward-looking information is subject to certain factors,
including risks and uncertainties, which could cause actual results to differ materially from what we currently expect. These factors include: risks relating to the transition from research and development activities to commercial activities; market
acceptance and adoption of the Companys products; the risk that a recently implemented reimbursement code will not affect acceptance or usage of SPY imaging technology systems; risks related to third-party contractual performance; dependence
on key suppliers for components of the Companys products; regulatory and clinical risks; risks relating to the protection of intellectual property; risks inherent in the conduct of research and development activities, including the risk of
unfavourable or inconclusive clinical trial outcomes; potential product liability, competition and the risks posed by potential technological advances; and risks relating to fluctuations in the exchange rate between the U.S. and the Canadian dollar.
The Company has also included important factors in the cautionary statements included in the Companys MD&A for the year ending December 31, 2012 and its Annual Information Form [AIF] for the year ending December 31,
2012. Novadaq believes that these factors could cause actual results or events to differ materially from the forward-looking statements that it makes.

Certain of the risks and uncertainties affecting the Company are included in greater detail in the Risks and Uncertainties section within this
MD&A. Additionally, a detailed but non-exhaustive list of the risks and uncertainties affecting the Company can also be found in the Risk and Uncertainties section in the MD&A for the year ending December 31, 2012 as well as
in the Risk Factors section in the Companys AIF for the year ending December 31, 2012, both of which are filed on SEDAR at www.sedar.com and on EDGAR. Prospective investors



MD&A | 4 |



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should give careful consideration to such risks and uncertainties.

Undue importance should not be
placed on forward-looking information, nor should reliance be placed upon this information as of any other date. Unless required by law, Novadaq does not undertake to update this information at any particular time. These forward-looking statements
are made as of the date of this MD&A. Unless otherwise indicated, this MD&A was prepared by management from information available through February 5, 2014.

COMPANY OVERVIEW

Novadaq (TSX: NDQ; NASDAQ: NVDQ)
primarily develops, manufactures and markets real-time fluorescence imaging products that are designed for use by surgeons in the operating room and other clinical settings where open and minimally invasive surgery or interventional procedures are
performed. Having been founded in 2000, the Company has a limited operating history. Historically, the focus of its operations had been on research and development. However, in mid-2005, the Company shifted its focus towards commercialization with
the commercial launch of its system for use during cardiac surgery. In 2009 through 2012, the Company formed certain alliances with four market leading companies for the broad commercialization of Novadaqs leading products. The successful
commercialization of any one of Novadaqs products will depend on a number of financial, logistical, technical, legal, regulatory, competitive, economic and other factors, the outcome of which cannot be predicted, and some of which will be out
of the Companys control. In addition, despite the Companys current focus on the commercialization of its products, the Company continues to invest in additional research and development in order to expand the applications of its imaging
platform, and these activities may require significant cash commitments which may in turn affect the profitability of the Company.

The Companys SPY
Imaging core technology platform provides clinically relevant anatomic and physiologic images of blood flow in vessels and micro-vessels during a wide variety of complex surgical procedures performed in the operating room and outpatient surgery
centres without exposing the patient or the surgery staff to radiation. The SPY technology platform is flexible and can be used to develop unique imaging devices specifically designed to meet the needs of different surgeons and the specialty
procedures they perform. SPY images enable surgeons treating life-threatening illnesses, such as breast, head and neck, colon, kidney and other cancers, complex hernias, diabetes and certain cardiovascular diseases, to effectively visualize blood
flow in vessels, co-joined vessels and micro-vessels and to visually assess the quality of blood perfusion in tissue, such as skin and organs. More than 80 peer-reviewed publications report experiences using SPY Imaging technologies in open, robotic
and endoscopic surgeries, as well as wound care. Published literature supports that the use of SPY Imaging enhances surgical decision-making and enables surgeons to repair or remove tissue that could, otherwise, lead to post-operative complications,
which increase overall treatment costs if not addressed during the surgical procedure.

The Companys SPY, SPY Elite, LUNA and PINPOINT
Imaging Systems are based upon the Companys core SPY fluorescence technology. SPY and SPY Elite are 510(k) cleared by the U.S. Food and Drug Administration [FDA] for the visualization of blood flow in vessels and tissue
perfusion during a variety of open surgery applications. The LUNA system is also FDA 510(k) cleared for use in vascular applications such as assessment of blood flow and perfusion in patients suffering from complex wounds caused by vascular diseases
being treated in the outpatient clinic. The SPY Elite and LUNA Systems are also Conformité Européenne (CE Marked) for sale in Europe, are licensed by Health Canada, and have regulatory authority approval for sale in Japan and
certain other markets outside of the United States. The Company also markets the SPY Analysis Toolkit [SPY-Q], companion post-processing software designed to allow surgeons to enhance and apply objective analysis tools to SPY
Elite and LUNA images. SPY-Q is also 510(k) cleared by the FDA.

PINPOINT is FDA 510(k) cleared, CE Marked and licensed by Health Canada and
approved by several other regulatory authorities outside of the U.S., for use in minimally invasive surgical procedures. PINPOINT combines the capabilities of SPY imaging with state-of-the-art high definition visible light visualization offered by
conventional endoscopes. PINPOINT provides surgeons with better visualization of important information related to anatomic structures and tissue perfusion during complex minimally invasive procedures.

In addition to marketing SPY Imaging technology products, Novadaq acquired and now manufactures and markets the FDA Premarket Approval [PMA]
approved CO2 Heart Laser System [TMR Laser System] for Transmyocardial Revascularization [TMR]. TMR is a procedure aimed at improving blood flow to areas of the heart that cannot be successfully treated by alternative
standard revascularization techniques and is often performed



MD&A | 5 |



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adjunctively with coronary artery bypass graft surgery. The CO2 Heart Laser line of products is distributed through MAQUET and contributes positive cash flow

Novadaqs intellectual property consists of 49 patent families representing 128 granted or allowed patents and 90 pending applications in various stages
of review and prosecution. Over the years, the Company has incurred recurring operating losses, having invested significantly in its research and development activities, as well as supporting its general and administrative expenses. The Company has
financed its operations through different sources including the issuance of common shares and shareholder warrants, the formation of strategic alliances with licensee partners and research and development grants awarded by governmental agencies. The
Company expects to continue to incur losses and may require significant capital to fulfill its future obligations. See section on Liquidity and Capital Resources below.

While the Companys industry is highly competitive and subject to rapid and significant technological change, the Company believes that there currently
is no alternative practical method of routinely visually assessing blood flow in vessels and micro vessels and tissue perfusion during the course of complex open, robotic or minimally invasive operative procedures. The Company is not currently aware
of any parties in the U.S. market with competing perfusion assessment products. Likewise, the Company is not aware of any visually assessment technology in the outpatient wound care environment. The Company believes that its market position, the
ongoing advancement of its technology, the quality of its direct sales and marketing infrastructure as well as the market leadership position of its partners will allow it to operate profitably in the future. The Company would vigorously defend its
patent estate if infringement is deemed to occur in the future.

The Company is authorized to issue an unlimited number of common shares and an unlimited
number of preferred shares, issuable in series. As at the date of this MD&A, there are a total of 54,901,538 common shares outstanding, no preferred shares outstanding, 2,703,444 stock options outstanding under the Companys employee stock
option plan, and 1,955,388 shareholder warrants outstanding. Each shareholder warrant has a five-year term and is exercisable for one common share of the Company at an exercise price of CDN$3.00.

RECENT DEVELOPMENTS 2013



| |  |  | On November 7, 2013 Novadaq signed an international distribution agreement with Swissray Asia, a leading distributor for radiation oncology and medical imaging equipment in Southeast Asia, pursuant to which
Swissray Asia became the exclusive distributor of Novadaq imaging systems for the regions of Australia, Indonesia, New Zealand and certain southeast Asian countries. Subsequently Novadaq entered into an expanded distribution agreement with Swissray
Asias parent company, CHC Healthcare Group, for the region of Greater China ( including China Hong Kong and Taiwan).
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| |  |  | On October 29, 2013, Novadaq closed a public offering of 6,250,000 common shares, on a bought deal basis, at a price to the public of $16.75 per common share, pursuant to a base shelf prospectus and an underwriting
agreement. Gross proceeds from the offering were approximately $104,700,000. After the underwriting commissions and other offering expenses, the Company received net proceeds of approximately $99,600,000. The common shares described above were sold
by the Company in the United States pursuant to the Companys effective shelf registration statement filed with the U.S. Securities and Exchange Commission and were not offered for sale or distributed in any province or territory in Canada.
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| |  |  | In August 2013, Novadaq acquired surgical scintigraphy imaging technology which is being developed for perioperative imaging of sentinel lymph nodes and tumor margins. The Company acquired inventory and patents from
Digirad Corporation (Digirad) related to the Trapper Surgical Imaging System for consideration of $2,000,000 and up to an additional $1,000,000 upon the achievement of specific regulatory and commercial milestones. In
addition, a royalty on sales will be paid for a period of five years from the date of the first commercial sale. Of the initial consideration, approximately $147,000 has been allocated to inventory, with the remainder allocated to the patents.
During 2014 the Company expects to invest in clinical and product development of this technology and it is not expected to generate revenues during 2014. In addition, three other patents were acquired for $664,853, resulting in total additions
of $2,517,267. All patents acquired are considered to have finite useful lives varying from 13  21 years and will be amortized using the straight line method.
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MD&A | 6 |



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| |  |  | On May 7, 2013, Novadaq announced the closing of its public offering of 4,485,000 common shares, on a bought deal basis, at a price to the public of $12.90 per common share. Gross proceeds from the offering were
approximately $57,857,000, resulting in cash proceeds of $54,675,000, net of transaction costs.
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| |  |  | On April 18, 2013, during a surgeons event at the Society of American Gastrointestinal and Endoscopic Surgeons (SAGES) conference in Baltimore, MD, Dr. Michael Stamos, Chairman, Department of Surgery,
University of California, Irvine, reported interim clinical results for the PILLAR II multi-center, prospective study of patients undergoing laparoscopic left anterior resection of the colon during which PINPOINT imaging is performed. The study is
intended to evaluate the clinical impact of PINPOINT real-time visual perfusion assessment on the surgical decision-making process and on surgical outcomes of laparoscopic colon resection surgery in up to 150 patients. Dr. Stamos reported that
among the 66 patients included in the interim data analysis, investigators, based on PINPOINT images, made seven revisions to their operative plan in six patients (representing 9.1%), and that the post-operative leak rate was zero percent.
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| |  |  | On March 26, 2013, Fairfax Financial Holdings Limited [Fairfax] exercised its right to convert its debentures with principal value of $5,149,009 in exchange for 2,772,151 common shares of the Company in
accordance with the terms of the debentures.
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| |  |  | On March 15, 2013, Novadaq terminated its Marketing and Sales Distribution Alliance Agreements with KCI USA Inc. and KCI Medical Resources Limited [KCI]. Novadaq also amended and restated its
distribution agreements with LifeCell Corporation and LifeCell Medical Resources Limited [LifeCell], subsidiaries of KCI, to reflect the termination of the KCI agreements, without material modifications. The KCI distribution agreements
had granted KCI exclusive rights to market and distribute the SPY Imaging System, which includes the LUNA Imaging System for use in surgical and wound care procedures.
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| |  |  | In January 2013, the Company hired a Vice President of Sales as part of the Companys objective to build a direct sales team to sell both the PINPOINT and LUNA products. As of December 31, 2013, the
Companys direct sales team comprised 51 staff members.
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MD&A | 7 |



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SELECTED ANNUAL INFORMATION

The table below summarizes information regarding Novadaqs revenues, loss from operations and other financial information for the years presented and is
taken from Novadaqs audited consolidated annual financial statements for each year presented, which were prepared in accordance with IFRS. It should be read in conjunction with the audited consolidated financial statements and related notes
for the years ended December 31, 2013, 2012 and 2011. The consolidated financial statements for the year ended December 31, 2011 were the first annual financial statements the Company prepared in accordance with IFRS, as it previously
presented its financial statements in accordance with Canadian Generally Accepted Accounting Principles.



|                                                             |  |                                 |         |   |        |  |         |        |  |  |         |  
|------------------------------------------------------------ |  | ------------------------------- | ------- | - | ------ |  | ------- | ------ |  |  | ------- | -
|                                                             |  | Twelve months ended December 31 |        
|                                                             |  | 2013                            |         |   | 2012   |  |         | 2011   | 
|                                                             |  | $000s                          |         |   | $000s |  |         | $000s | 
|Revenues                                                     |  |                                 |         |   |        |  |         |        |  |  |         |  
|Product sales                                                |  |                                 | 31,020  |   |        |  | 19,037  |        |  |  | 12,926  |  
|Royalty revenue                                              |  |                                 | 1,889   |   |        |  | 1,850   |        |  |  | 395     |  
|Partnership fee revenue                                      |  |                                 | 1,300   |   |        |  | 1,300   |        |  |  | 842     |  
|Service revenue                                              |  |                                 | 812     |   |        |  | 802     |        |  |  | 1,129   |  
|                                                             |  |                                 |         |   |        |  |         |        |  |  |         |  
|Total revenues                                               |  |                                 | 35,021  |   |        |  | 22,989  |        |  |  | 15,292  |  
|Cost of sales                                                |  |                                 | 12,933  |   |        |  | 8,537   |        |  |  | 6,634   |  
|                                                             |  |                                 |         |   |        |  |         |        |  |  |         |  
|Gross profit                                                 |  |                                 | 22,088  |   |        |  | 14,452  |        |  |  | 8,658   |  
|Gross profit percentage                                      |  |                                 | 63      | % |        |  | 63      | %      |  |  | 57      | %
|Operating expenses                                           |  |                                 |         |   |        |  |         |        |  |  |         |  
|Selling and distribution expenses                            |  |                                 | 14,061  |   |        |  | 4,926   |        |  |  | 5,375   |  
|Research and development expenses                            |  |                                 | 7,974   |   |        |  | 5,959   |        |  |  | 4,611   |  
|Administrative expenses                                      |  |                                 | 7,234   |   |        |  | 6,573   |        |  |  | 4,551   |  
|Write-down of equipment                                      |  |                                 | 26      |   |        |  |        |        |  |  | 314     |  
|Write-down of inventory                                      |  |                                 | 31      |   |        |  | 58      |        |  |  | 15      |  
|                                                             |  |                                 |         |   |        |  |         |        |  |  |         |  
|Total operating expenses                                     |  |                                 | 29,326  |   |        |  | 17,516  |        |  |  | 14,866  |  
|                                                             |  |                                 |         |   |        |  |         |        |  |  |         |  
|Loss from operations before the following                    |  |                                 | (7,238  | ) |        |  | (3,064  | )      |  |  | (6,208  | )
|Interest expense                                             |  |                                 | (74     | ) |        |  | (274    | )      |  |  | (281    | )
|Imputed interest expense                                     |  |                                 | (109    | ) |        |  | (433    | )      |  |  | (398    | )
|Finance income                                               |  |                                 | 109     |   |        |  | 61      |        |  |  | 15      |  
|Warrant revaluation adjustment                               |  |                                 | (15,015 | ) |        |  | (8,558  | )      |  |  | (3,306  | )
|Gain on investment                                           |  |                                 | 25      |   |        |  | 25      |        |  |  | 25      |  
|                                                             |  |                                 |         |   |        |  |         |        |  |  |         |  
|Loss from operations before income taxes                     |  |                                 | (22,302 | ) |        |  | (12,243 | )      |  |  | (10,153 | )
|                                                             |  |                                 |         |   |        |  |         |        |  |  |         |  
|Income tax expense                                           |  |                                 |        |   |        |  | (101    | )      |  |  |        |  
|                                                             |  |                                 |         |   |        |  |         |        |  |  |         |  
|Net loss and comprehensive loss for the period               |  |                                 | (22,302 | ) |        |  | (12,344 | )      |  |  | (10,153 | )
|                                                             |  |                                 |         |   |        |  |         |        |  |  |         |  
|Basic loss and comprehensive loss per share for the period   |  |                                 | (0.47   | ) |        |  | (0.32   | )      |  |  | (0.32   | )
|                                                             |  |                                 |         |   |        |  |         |        |  |  |         |  
|Diluted loss and comprehensive loss per share for the period |  |                                 | (0.47   | ) |        |  | (0.32   | )      |  |  | (0.32   | )
|                                                             |  |                                 |         |   |        |  |         |        |  |  |         |  



MD&A | 8 |



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Balance Sheet Data



|                              |  |                   |         |  |                   |  |        |                   |  |  |        | 
|----------------------------- |  | ----------------- | ------- |  | ----------------- |  | ------ | ----------------- |  |  | ------ | 
|                              |  | As at December 31 |         |  | As at December 31 |  |        | As at December 31 | 
|                              |  | 2013              |         |  | 2012              |  |        | 2011              | 
|                              |  | $000s            |         |  | $000s            |  |        | $000s            | 
|Cash and cash equivalents     |  |                   | 182,330 |  |                   |  | 38,954 |                   |  |  | 9,634  | 
|Working capital               |  |                   | 186,701 |  |                   |  | 39,944 |                   |  |  | 9,226  | 
|                              |  |                   |        
|Total assets                  |  |                   | 212,374 |  |                   |  | 57,587 |                   |  |  | 22,793 | 
|Total non-current liabilities |  |                   | 28,251  |  |                   |  | 21,284 |                   |  |  | 17,745 | 
|Total liabilities             |  |                   | 37,260  |  |                   |  | 26,917 |                   |  |  | 22,167 | 
|Shareholders equity          |  |                   | 175,115 |  |                   |  | 30,670 |                   |  |  | 626    | 

DISCUSSION OF OPERATIONS

Revenues

The majority of Novadaqs current
revenues come from strategic alliances formed with leading companies in relevant markets where SPY Imaging and the SPY technology platform have demonstrated improved clinical outcomes in open and robotic surgery applications. Surgeons performing
imaging procedures using SPY technologies are currently reimbursed through the use of existing current procedural terminology codes. Facilities where procedures are performed using SPY technology in the outpatient environment are reimbursed through
the use of Ambulatory Payment Classification [APC] codes. During the fourth quarter of 2013, Novadaq shipped 143 SPY technology systems. Shipments to hospitals and wound care clinics by the Company and its partners totalled 157 systems
during the quarter, and the installed base of SPY technology increased to more than 1,200 systems. Novadaq estimates that SPY imaging was used in more than 6,400 procedures in the United States during the fourth quarter. Concurrent with the
performance of Novadaqs partnered commercial businesses, the Company continued to build a direct sales and marketing team for PINPOINT and LUNA.

On
November 29, 2011, the Company and each of LifeCell Corporation, LifeCell, KCI USA, Inc. and KCI signed exclusive multi-year marketing and sales distribution alliance agreements for the commercialization of Novadaqs SPY imaging system for
additional surgical and wound care applications in North American and certain other markets. As part of the agreements, Novadaq received $3,000,000 on December 1, 2011 from LifeCell; however, there were no further contract payments received in
connection thereto in 2012 or 2013. The Company amortizes this cash received rateably and records it as deferred partnership fee revenue over the life of the agreements.

On March 12, 2013, Novadaq and KCI mutually agreed to terminate the two distribution agreements signed with KCI on November 29, 2011, while the two
agreements signed with LifeCell on November 29, 2011 remained materially intact. Under the terms of the termination agreements, Novadaq and KCI provided each other with full mutual releases from the agreements, except for provisions relating to
confidentiality. Neither party has an obligation to compensate the other in connection with the termination. The termination of the KCI agreements did not affect the deferred license revenue, as the funds received related to agreements entered into
with LifeCell in September 2010 and November 2011.

Revenues of $35,021,000 exceeded the previous years revenues by $12,032,000, an increase of 52%.
SPY product revenues increased by $12,253,000 which comprised SPY capital growth of 115% and recurring revenue growth of 40%. Royalty revenue comprised an increase of $39,000 which was comparative to the previous year. Partnerships with LifeCell and
Intuitive, and direct sales of PINPOINT and LUNA products contributed to the increases. TMR product revenues and services were lower by $262,000.

Gross Profit

Gross profit of $22,088,000 exceeded
last years gross profit by $7,636,000, a 53% increase. The gross profit increase was due to our SPY product sales growth from our partnership agreements and increased direct sales of LUNA and PINPOINT products.



MD&A | 9 |



---

Operating Expenses

Selling and distribution expenses of $14,061,000 were $9,135,000 higher than last year due to the build-up of our direct sales team and promotional expense in
support of our PINPOINT and LUNA programs.

Research and development expenses of $7,974,000 were $2,015,000 higher than the same period last year.
Increases in expenses were mainly comprised of salaries and benefits in the amount of $748,000 to support expanded operations for both Open SPY, PINPOINT and LUNA; non-cash stock option expense in the amount of $192,000; patent and trademark expense
in the amount of $395,000 to secure new and existing patents; product design expense in the amount of $378,000 for continued PINPOINT and other product development; higher amortization expenses in the amount of $627,000 due to increase assets
utilized in clinical trials and higher intangible amortization due to the Digirad and TauTona marker asset purchases. Offsetting these costs were decreases in clinical trial disbursements in the amount of $261,000 and a decrease in the amount of
$64,000 for all other expenses combined.

Administration expenses of $7,234,000 were $661,000 higher than the same period last year. The increases
comprise higher professional and listing fees in the amount of $530,000 due to audit, tax planning and mergers and acquisition activity; increased salaries and benefits in the amount of $299,000; non-cash option expenses in the amount of $326,000;
increased insurance coverage cost in the amount of $236,000; increased bad debt expense accrual in the amount of $68,000; and increased consulting expense in the amount of $83,000, which was offset by lower amortization of intangibles in the amount
of $837,000 due to the PLC manufacturing license being fully amortized; decreased foreign exchange expense of $104,000. All other expenses increased in the amount of $60,000.

Inventory write-downs of $31,000 were for obsolete parts.

Equipment write-downs of $26,000 were for equipment returned from clinical trials.

Interest Expense

A combined interest expense and
non-cash imputed interest expense of $183,000 was $524,000 lower than the same period last year due to the conversion of Fairfaxs debentures with a principal value of $5,149,009 and of two management members debentures with a principal
value of $71,323 into 2,772,151 and 37,961 common shares of the Company, respectively, all in accordance to the terms of such debentures.

Finance
Income

Finance income of $109,000 increased by $48,000 due to the on-hand cash balances from the Companys April 2013 and October 2013 equity
offerings.

Warrant Revaluation

Warrant
revaluation non-cash expense of $15,015,000 exceeded the previous years expense of $8,558,000 due to the incremental increase in the market share price offset by a slight reduction of expenses for warrants exercised. At December 31, 2013,
the share price closed at $16.49, an increase from $8.88 as at December 31,2012,and previously an increase from $4.91 as at December 31, 2011.

Income Tax Expense

Income tax for the year is
estimated to be nil in comparison to $101,000 in 2012.

Net Income (Loss)

Net loss of $22,302,000 increased from a net loss of $12,344,000 for the same period last year. The increase in net loss of $9,958,000 comprises an increase in
the non-cash warrant revaluation adjustment in the amount of $6,457,000 due to an increase in the Companys share price and an increase in operating expenses in the amount of $11,810,000. Offsetting was an increase in gross profit in the amount
of $7,636,000 resulting from an increase in revenue from our partnership agreements and a reduction in both imputed and cash paid interest expense in the amount of $524,000 as debt converted to shares. Taxes, gain on investments and finance income
netted a combined decrease to net loss by $149,000.



MD&A | 10 |



---

The Company has incurred substantial losses since its inception in 2000 and continues to incur losses and
experience negative cash flows. The Company cannot predict if or when it will operate profitably, generate positive cash flows or if it will be able to implement its business strategy successfully. Pursuing its strategy requires the Company to incur
significant expenditures for research and product development, marketing and general administrative activities. As a result, the Company needs to continue to grow its revenues and gross margins to achieve and sustain profitability and positive
operating cash flows, and it may need to raise additional capital.



MD&A | 11 |



---

SUMMARY OF QUARTERLY RESULTS

The following table sets forth information regarding Novadaqs revenues, loss from operations and other information for the periods presented, which were
prepared in accordance to IFRS, and should be read in conjunction with the corresponding audited condensed consolidated financial statements and related notes.



|                                                                             |  |        |        |   |        |  |        |        |  |  |        |   |  |        |       |   |        |  |        |        |  |  |        |   |  |  |        |   |  |  |        |  
|---------------------------------------------------------------------------- |  | ------ | ------ | - | ------ |  | ------ | ------ |  |  | ------ | - |  | ------ | ----- | - | ------ |  | ------ | ------ |  |  | ------ | - |  |  | ------ | - |  |  | ------ | -
|                                                                             |  | Q1     |        |   | Q2     |  |        | Q3     |  |  | Q4     |   |  | Q1     |       |   | Q2     |  |        | Q3     |  |  | Q4     |  
|                                                                             |  | 2012   |        |   | 2012   |  |        | 2012   |  |  | 2012   |   |  | 2013   |       |   | 2013   |  |        | 2013   |  |  | 2013   |  
|                                                                             |  | $000s |        |   | $000s |  |        | $000s |  |  | $000s |   |  | $000s |       |   | $000s |  |        | $000s |  |  | $000s |  
|Revenues                                                                     |  |        |        |   |        |  |        |        |  |  |        |   |  |        |       |   |        |  |        |        |  |  |        |   |  |  |        |   |  |  |        |  
|Product sales                                                                |  |        | 3,654  |   |        |  | 4,512  |        |  |  | 5,101  |   |  |        | 5,770 |   |        |  | 6,299  |        |  |  | 7,076  |   |  |  | 8,000  |   |  |  | 9,643  |  
|Royalty revenue                                                              |  |        | 608    |   |        |  | 346    |        |  |  | 350    |   |  |        | 546   |   |        |  | 441    |        |  |  | 468    |   |  |  | 365    |   |  |  | 616    |  
|Partnership fee revenue                                                      |  |        | 325    |   |        |  | 325    |        |  |  | 325    |   |  |        | 325   |   |        |  | 325    |        |  |  | 325    |   |  |  | 325    |   |  |  | 325    |  
|Service revenue                                                              |  |        | 180    |   |        |  | 209    |        |  |  | 208    |   |  |        | 205   |   |        |  | 213    |        |  |  | 229    |   |  |  | 206    |   |  |  | 164    |  
|                                                                             |  |        |        |   |        |  |        |        |  |  |        |   |  |        |       |   |        |  |        |        |  |  |        |   |  |  |        |   |  |  |        |  
|Total revenues                                                               |  |        | 4,767  |   |        |  | 5,392  |        |  |  | 5,984  |   |  |        | 6,846 |   |        |  | 7,278  |        |  |  | 8,098  |   |  |  | 8,896  |   |  |  | 10,748 |  
|Cost of sales                                                                |  |        | 2,045  |   |        |  | 2,088  |        |  |  | 2,123  |   |  |        | 2,281 |   |        |  | 2,732  |        |  |  | 3,043  |   |  |  | 3,154  |   |  |  | 4,004  |  
|                                                                             |  |        |        |   |        |  |        |        |  |  |        |   |  |        |       |   |        |  |        |        |  |  |        |   |  |  |        |   |  |  |        |  
|Gross profit                                                                 |  |        | 2,722  |   |        |  | 3,304  |        |  |  | 3,861  |   |  |        | 4,565 |   |        |  | 4,546  |        |  |  | 5,055  |   |  |  | 5,742  |   |  |  | 6,744  |  
|Gross profit percentage                                                      |  |        | 57     | % |        |  | 61     | %      |  |  | 65     | % |  |        | 67    | % |        |  | 63     | %      |  |  | 62     | % |  |  | 65     | % |  |  | 63     | %
|Operating expenses                                                           |  |        |        |   |        |  |        |        |  |  |        |   |  |        |       |   |        |  |        |        |  |  |        |   |  |  |        |   |  |  |        |  
|Selling and distribution expenses                                            |  |        | 1,063  |   |        |  | 1,217  |        |  |  | 1,289  |   |  |        | 1,357 |   |        |  | 2,348  |        |  |  | 3,513  |   |  |  | 3,337  |   |  |  | 4,863  |  
|Research and development expenses                                            |  |        | 1,162  |   |        |  | 1,378  |        |  |  | 1,778  |   |  |        | 1,640 |   |        |  | 1,487  |        |  |  | 2,046  |   |  |  | 2,159  |   |  |  | 2,282  |  
|Administrative expenses                                                      |  |        | 1,471  |   |        |  | 1,638  |        |  |  | 1,863  |   |  |        | 1,602 |   |        |  | 1,361  |        |  |  | 1,742  |   |  |  | 1,264  |   |  |  | 2,867  |  
|Write-down of equipment                                                      |  |        |       |   |        |  |       |        |  |  |       |   |  |        |      |   |        |  |       |        |  |  |       |   |  |  | 26     |   |  |  |       |  
|Write-down of inventory                                                      |  |        |       |   |        |  |       |        |  |  | 58     |   |  |        |      |   |        |  |       |        |  |  | 31     |   |  |  |       |   |  |  |       |  
|                                                                             |  |        |        |   |        |  |        |        |  |  |        |   |  |        |       |   |        |  |        |        |  |  |        |   |  |  |        |   |  |  |        |  
|Total operating expenses                                                     |  |        | 3,696  |   |        |  | 4,233  |        |  |  | 4,988  |   |  |        | 4,599 |   |        |  | 5,196  |        |  |  | 7,332  |   |  |  | 6,786  |   |  |  | 10,012 |  
|                                                                             |  |        |        |   |        |  |        |        |  |  |        |   |  |        |       |   |        |  |        |        |  |  |        |   |  |  |        |   |  |  |        |  
|Loss from operations before the following                                    |  |        | (974   | ) |        |  | (929   | )      |  |  | (1,127 | ) |  |        | (34   | ) |        |  | (650   | )      |  |  | (2,277 | ) |  |  | (1,044 | ) |  |  | (3,268 | )
|Interest expense                                                             |  |        | (69    | ) |        |  | (69    | )      |  |  | (68    | ) |  |        | (68   | ) |        |  | (63    | )      |  |  | (3     | ) |  |  | (3     | ) |  |  | (3     | )
|Imputed interest expense                                                     |  |        | (104   | ) |        |  | (106   | )      |  |  | (111   | ) |  |        | (112  | ) |        |  | (108   | )      |  |  | (2     | ) |  |  |       |   |  |  |       |  
|Finance income                                                               |  |        | 1      |   |        |  | 14     |        |  |  | 26     |   |  |        | 20    |   |        |  | 15     |        |  |  | 18     |   |  |  | 34     |   |  |  | 42     |  
|Warrant revaluation adjustment                                               |  |        | (3,598 | ) |        |  | (311   | )      |  |  | (8,038 | ) |  |        | 3,389 |   |        |  | (2,106 | )      |  |  | (7,473 | ) |  |  | (5,881 | ) |  |  | 445    |  
|Gain on investment                                                           |  |        |       |   |        |  |       |        |  |  | 25     |   |  |        |      |   |        |  |       |        |  |  | 25     |   |  |  |       |   |  |  |       |  
|                                                                             |  |        |        |   |        |  |        |        |  |  |        |   |  |        |       |   |        |  |        |        |  |  |        |   |  |  |        |   |  |  |        |  
|(Loss) income from operations before income taxes                            |  |        | (4,744 | ) |        |  | (1,401 | )      |  |  | (9,293 | ) |  |        | 3,195 |   |        |  | (2,912 | )      |  |  | (9,712 | ) |  |  | (6,894 | ) |  |  | (2,784 | )
|                                                                             |  |        |        |   |        |  |        |        |  |  |        |   |  |        |       |   |        |  |        |        |  |  |        |   |  |  |        |   |  |  |        |  
|Income tax recovery (expense)                                                |  |        |       |   |        |  |       |        |  |  |       |   |  |        | (101  | ) |        |  | (20    | )      |  |  | (25    | ) |  |  | (23    | ) |  |  | 68     |  
|                                                                             |  |        |        |   |        |  |        |        |  |  |        |   |  |        |       |   |        |  |        |        |  |  |        |   |  |  |        |   |  |  |        |  
|Net (loss) income and comprehensive (loss) income for the period             |  |        | (4,744 | ) |        |  | (1,401 | )      |  |  | (9,293 | ) |  |        | 3,094 |   |        |  | (2,932 | )      |  |  | (9,737 | ) |  |  | (6,917 | ) |  |  | (2,716 | )
|                                                                             |  |        |        |   |        |  |        |        |  |  |        |   |  |        |       |   |        |  |        |        |  |  |        |   |  |  |        |   |  |  |        |  
|Basic (loss) income and comprehensive (loss) income per share for the period |  |        | (0.15  | ) |        |  | (0.04  | )      |  |  | (0.23  | ) |  |        | 0.08  |   |        |  | (0.07  | )      |  |  | (0.21  | ) |  |  | (0.14  | ) |  |  | (0.05  | )
|                                                                             |  |        |        |   |        |  |        |        |  |  |        |   |  |        |       |   |        |  |        |        |  |  |        |   |  |  |        |   |  |  |        |  
|Diluted loss and comprehensive loss per share for the period                 |  |        | (0.15  | ) |        |  | (0.04  | )      |  |  | (0.23  | ) |  |        | (0.00 | ) |        |  | (0.07  | )      |  |  | (0.21  | ) |  |  | (0.14  | ) |  |  | (0.05  | )
|                                                                             |  |        |        |   |        |  |        |        |  |  |        |   |  |        |       |   |        |  |        |        |  |  |        |   |  |  |        |   |  |  |        |  



MD&A | 12 |



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Revenues

Q4-2013 revenues of $10,748,000 exceeded Q4-2012 revenues by $3,902,000, a 57% increase. SPY product sales increased by $4,102,000, due to a 37% increase in
SPY recurring sales and a 128% increase in SPY capital equipment sales. TMR product sales and services decreased $269,000 mainly due to reduced capital laser sales. Royalty revenue increased in the amount of $70,000 in comparison to the same period
last year due to increased unit sales by our partner. In comparison to Q3-2013, revenues increased in the amount of $1,852,000 due to $1,734,000 increase in SPY products, an increase in royalty revenue in the amount of $251,000, offset by a decrease
in TMR and service revenue of $133,000.

Quarterly revenues have been generated mainly through our partnership agreements with LifeCell, Intuitive and
MAQUET.

Gross Profit

Gross profit of
$6,744,000 in Q4-2013 increased from $4,565,000 for the same period last year due to increased sales from alliances with our partners as well as direct sales of PINPOINT and LUNA products. In comparison to Q3-2013, gross profit is higher by
$1,002,000 mainly due to increased SPY products and royalties.

Operating Expenses

Selling and distribution expenses of $4,863,000 for Q4-2013 were $3,506,000 higher than Q4-2012 as the Company continued to hire direct sales force personnel
and increase promotional spending to support our PINPOINT and LUNA sales program. In comparison to Q3-2013, expenses increased by $1,526,000 due to increased hiring of sales staff and travel and promotional expenses related to PINPOINT and LUNA.

Research and development expenses of $2,282,000 in Q4-2013 were $642,000 higher than Q4-2012 expenses of $1,640,000 due to higher salaries and fringes in
the amount of $168,000 to support expanded operations; higher non-cash stock option expense in the amount of $55,000 due to new grants at an increased fair value; higher office and travel costs in the amount of $94,000; higher patents and trademarks
expenses in the amount of $194,000 to secure new and existing patents; and higher amortization expense in the amount of $264,000 related to the acquisition of Digirad, TauTona and other patents. Offsetting were decreases in expenses for product
design costs in the amount of $120,000 and clinical trials in the amount of $30,000. Other costs netted a combined increase of $17,000. In comparison to Q3-2013, research and development expenses were $123,000 higher due to increased salaries and
fringes $26,000; increased patent and trademark expenses in the amount of $78,000; increased office and travel in the amount of $42,000; and increased amortizations in the amount of $94,000 due to the acquisitions, Offsetting were decreases in
product designs expenses of $74,000 and clinical trial expenses of $68,000. All other expenses increased by $25,000.

Administrative expenses of
$2,867,000 in Q4-2013 were $1,265,000 higher than Q4-2012 expenses. The expense increases mainly related to salaries and benefits in the amount of $77,000; non-cash stock options expense in the amount of $109,000; insurance coverage in the amount
$56,000; professional fees in the amount of $1,125,000 due to audit, tax planning and mergers and acquisition activity; investor relations fees in the amount of $24,000; listing fees in the amount of $43,000; and director fees in the amount of
$45,000. Offsetting were lower amortization expense of $236,000 due to PLC manufacturing license being fully amortized. All other expenses netted for a combined increase of $22,000. In comparison to Q3-2013, expenses are higher by $1,603,000 due to
higher professional fees in the amount of $1,352,000; higher salaries and fringe expenses in the amount of $164,000; and higher non-cash stock option costs in the amount of $128,000. Offsetting were lower consulting fees by $75,000. All other costs
combined for an increase of $34,000.

There was no inventory write-down in Q4-2013 which was similar to Q4-2012 but $26,000 less than Q3-2013 due to an
inventory write-down for product change outs.

Interest Expense

Interest expense and imputed interest expense of $3,000 for Q4-2013 was less than Q4-2012 expenses of $180,000, as convertible debt was fully converted. In
comparison to Q3-2013, interest expense remained at $3,000, reflecting interest paid on the repayable government assistance.



MD&A | 13 |



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Finance Income

Finance income of $42,000 is higher than income of $20,000 in Q4-2012 and also higher than income of $34,000 in Q3-2013 due to increased cash on hand from the
Companys equity offerings in Q2-2013 and Q4-2013.

Warrant Revaluation

Q4-2013 warrant revaluation expense reversal of $445,000 was lower than Q4-2012 warrant revaluation expense reversal of $3,389,000 due to a lower change in
quarterly decrease in the Companys share price. For Q4-2013 the share price decrease was $0.09, compared to $1.46 decrease in Q4-2012. In comparison to Q3-2013 warrant revaluation expense decreased by $6,325,000 as Q3-2013 share price
increased by $3.12 in comparison to the decrease in Q4-2013.

Income Tax Expense

Income tax expense reversal of $68,000 compared to income tax expense of $101,000 in Q4-2012 and $23,000 Q3-2013.

Net Income (Loss)

Net loss of $2,716,000 in
Q4-2013 was $5,810,000 lower than the net profit of $3,094,000 in Q4-2012. The change resulted from higher operating costs in the amount of $5,413,000; lower warrant revaluation adjustment in the amount of $2,944,000 due to change in share price;
offset by higher gross margins in the amount of $2,179,000; lower interest expense and imputed interest expense in the amount of $177,000; higher finance income in the amount of $22,000 and lower taxes in the amount of $169,000. In comparison to
Q3-2013, net loss decreased by $4,201,000 due to higher gross profit by $1,002,000; lower non-cash warrant revaluation expense by $6,326,000; higher finance income by $8,000, and lower taxes by $91,000 offset by higher operating expenses in the
amount of $3,226,000.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, Novadaq has financed its cash requirements primarily through the issuance of securities and convertible debt, strategic alliances,
licensing and development fees, investment tax credits and government funding and interest income. Given the Companys history of continuing losses and its accumulated deficit, revenues will need to continue to increase over a sustained period.
The Company does not yet generate sufficient operational cash flows to meet the Companys planned growth and to fund development activities. The Company relies on funding from outside sources to execute its current and future business
development plans which include but not limited to potential acquisitions, design and development and clinical trials, the investment required for the revenue generating assets utilized in the placement and rental models and the required funding for
the recruitment and development of the direct sales team .The Company is dependent on the willingness of investors or strategic partners to continue to invest in the Company or to enter into strategic relationships to continue further development of
the Companys products. There can be no assurance, however, that Novadaq will be successful in securing partnerships or its financing on terms favourable to the Company, or at all.

Based on the cash on hand in the amount of $177,339,000 as at the date of this MD&A, the capacity to borrow funds from its revolver loan (as further
described below) and the sales and margins which the Company anticipates to generate from operations in the upcoming 12 months, the Company expects to have sufficient funds to support its 2014 cash requirements. The Company invests its cash and cash
equivalents in daily interest accounts at the Companys chartered bank in Canada.

Operating Activities

In 2013, cash used in operating activities was $5.3 million which included working capital utilization of $3,164,000, decrease in long-term deferred revenue of
$1,300,000 and cash expenditure (cash burn) before changes in working capital of $838,000. Based on the cash expenditure which included research and development activities, Novadaq believes it has met its research and development responsibilities
required in the LifeCell five year marketing and sales distribution alliance agreement.



MD&A | 14 |



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Financing Activities

Revolver Loan

On August 26, 2011, the Company
executed a revolving credit agreement with a Canadian chartered bank, entitling the Company to borrow up to a maximum limit of $2,500,000, subject to a borrowing base formula, certain financial covenants and certain reporting requirements. The
credit facility is secured by a general security agreement constituting a first-ranking security interest in all personal property of the Company with a conventional rate of interest. Currently, the Company has no committed sources of capital other
than this revolving credit loan. Since its inception and as at December 31, 2013, the Company has not utilized its credit facility.

Public
Offerings

On October 29, 2013, the Company announced the sale of 6,250,000 common shares, on a bought deal basis, at a price to the public of
$16.75 per common share, pursuant to a base shelf prospectus and an underwriting agreement. Gross proceeds from the offering were approximately $104,700,000. After the underwriting commissions and other offering expenses, the Company received net
proceeds of approximately $99,600,000. The common shares described above were sold by the Company in the United States pursuant to the Companys effective shelf registration statement filed with the U.S. Securities and Exchange Commission and
were not offered for sale or distributed in any province or territory in Canada.

On May 7, 2013, the Company announced the closing of its public
offering of 4,485,000 common shares, on a bought deal basis, at a price to the public of $12.90 per common share. Gross proceeds from the offering were approximately $57,857,000, resulting in cash proceeds of $54,675,000, net of transaction costs.

Investing Activities

The Companys 2013
investing activities in the amount of $8,529,000 comprised additions to revenue generating fixed assets in the amount of $6,037,000, which were primarily utilized in the placement and rental models and acquisition of patent technology in the amount
of $2,517,000 which included Digirad technology for $1,853,000.

Contractual Obligations

The Companys short-term and long-term contractual obligations are as follows:



|                                          |  |           |           |  |            |  |         |                |  |  |   | 
|----------------------------------------- |  | --------- | --------- |  | ---------- |  | ------- | -------------- |  |  | - | 
|                                          |  | 0-1 year$ |           |  | 2-5 years$ |  |         | After 5 years$ | 
|Operating leases                          |  |           | 427,000   |  |            |  | 425,000 |                |  |  |  | 
|Purchase Obligation (product development) |  |           | 1,914,000 |  |            |  |        |                |  |  |  | 

The long-term operating lease commitments are for premises located in: Mississauga, ON; Taunton, MA and Richmond, BC.

The Company has an outstanding $1,914,000 purchase order commitment in support of a specific product development activity.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The
preparation of the consolidated financial statements requires the use of estimates and assumptions to be made in applying the accounting policies that affect the reported amounts of assets, liabilities, revenue, expenses and the disclosure of
contingent assets and liabilities. The estimates and related assumptions are based on previous experience and other factors considered reasonable under the circumstances, the results of which form the basis of making the assumptions about carrying
values of assets and liabilities that are not readily apparent from other sources.

The estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the



MD&A | 15 |



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revision and future periods if the revision affects both current and future periods. Judgments made by management in the application of IFRS that have a significant effect on the consolidated
financial statements relate to the following:

Revenue Recognition

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured,
regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The Company assesses its revenue
arrangements with all of its customers and partners against specific criteria to determine if it is acting as principal or agent and has concluded that it is acting as a principal in all of its revenue arrangements. The specific recognition criteria
described below must also be met before revenue is recognized.

Product sales to customers and under partnership agreements

Revenue from the sale of medical devices and consumables is recognized when significant risks and rewards of ownership of the products have passed or
transferred to the customer, usually when the products are picked up by the shipper for delivery, collection of the related receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.

Revenue is recognized on sale of capital devices or consumable products when they are picked up by the shipper for delivery to the partners, as at that
point-of-time the Company has transferred all relevant risks of ownership to the partners (including inventory risks for the delivered products, credit risk for the transaction with the end customer and price risk for the transaction with the end
customer), who maintains the business relationship with the end customer. Under the current partnership agreements, the Company shares on-going revenues from its partners sales to end customers, net of contracted minimum pricing retained by
the Company upon initial shipments to its partners, related to the SPY imaging system and the disposable products required to perform the SPY imaging procedure. The Company records any additional amounts when its partners sell to the end customer.

For revenues earned under partnership agreements which are dependent upon the partners sales to end customers, the Company receives quarterly
reporting from its partners and assesses the quantity and price to the end customer in order to determine the accuracy of certain amounts recorded in revenue.

Multiple element arrangements

The Company may
enter into arrangements in which it commits to provide multiple products and services to its customers occurring at different points in time. Revenue recognition for these arrangements is determined based on evaluation of the individual elements of
the arrangements. If the element delivered has stand-alone value to the customer and the fair value associated with the element can be measured reliably, the amount recognized as revenue for that element is the fair value of the element in relation
to the fair value of the arrangement as a whole. Otherwise, the entire arrangement is treated as one unit of accounting and revenue is deferred and recognized ratably over the remaining term of the arrangements, commencing when all elements are
delivered.

Royalty revenue

The Company earns
and recognizes royalties upon sale of its products to the end user by its partner.

Partnership fee revenue

Partnership fee revenue relates to upfront payments received from partners for exclusive sales and marketing rights. Upfront payments are deferred and
recognized on a straight-line basis over the exclusive sales and marketing terms.



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Service revenue

Service revenue primarily relates to extended warranty services agreements in connection with capital sales. Revenue from these agreements are deferred and
recognized on a straight-line basis over the extended warranty services term.

Rental income

Rental income arising from the rental of capital devices is recognized on a straight-line basis over the lease terms and included in product sales.

Impairment of Non-Financial Assets

The Company
assesses at each reporting date whether there is an indication that an asset may be impaired. If such an indication exists, the Company estimates the assets recoverable amount. The recoverable amount is the higher of an assets or cash-generating units [CGU] fair value less costs to sell and its value-in-use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is
written down to its recoverable amount.

Value-in-use is determined by discounting estimated future cash flows using a pre-tax discount rate that reflects
the current market assessment of the time value of money and the specific risks of the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified,
an appropriate valuation model has to be used. The recoverable amount of assets that do not generate independent cash flows is determined based on the CGU to which the asset belongs.

The Company bases its impairment calculation on detailed budgets and forecast calculations which are prepared separately for each of the Companys CGUs
to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of three to five years.

An impairment loss
is recognized in the consolidated statements of loss and comprehensive loss if an assets carrying amount or that of the CGU to which it is allocated is higher than its recoverable amount. Impairment losses of CGUs are charged against the
carrying value of assets in a CGU, in proportion to their carrying amount. In the consolidated statements of loss and comprehensive loss, the impairment losses are recognized in the expense categories consistent with the function of the impaired
asset.

An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer
exist or may have decreased. For purposes of impairment testing, the Company determined that it has two CGUs, namely the SPY Imaging Technology business and the TMR business.

The calculation of value-in-use for the CGU would be most sensitive to the following assumptions:



| |  |  | Gross margins based on historical and forecasted values;
| | - |  | --------------------------------------------------------



| |  |  | Discount rates reflecting current market assessment of the risks specific to each CGU. The discount rate was estimated based on the average percentage of a weighted average cost of capital for the medical device
industry;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Price development for the consumables and medical devices based on estimates are obtained from published forecasts about the future development of applicable procedures in North America during the detailed forecast
period, as well as managements own judgments; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Market share assumptions, based on the Companys product applicability in specific fields of medical indications.
| | - |  | -----------------------------------------------------------------------------------------------------------------



MD&A | 17 |



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Intangible Assets

The Company owns intangible assets consisting of licenses, SPY software and patent rights.

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair
value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and impairment losses, if any. The useful lives of intangible assets are assessed as either finite or indefinite.
The Company currently does not hold any intangible assets with indefinite lives.

Intangible assets with finite useful lives are amortized over the useful
economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization method and amortization period of an intangible asset with a finite useful life is reviewed at least annually.
Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting
estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated statements of loss and comprehensive loss in the expense category consistent with the function of the intangible assets.

Internally generated intangible assets, such as deferred development costs, are capitalized when the product or process is technically and commercially
feasible and the Company has sufficient resources to complete development. The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating
in the manner intended by management. Amortization of the internally generated intangible assets begins when the development is complete and the asset is available for use. It is amortized over the period of expected future benefit. Amortization is
recorded in cost of sales.

Intangible assets are amortized on a straight-line basis over the lesser of their useful lives and the life of the patents, or
the term of the patent rights:



|                          |  |            
|------------------------- |  | -----------
|TMR manufacturing license |  | 2 years    
|SPY software              |  | 2 years    
|Patent rights             |  | 13-21 years

Shareholder Warrants

In
determining the fair value of the shareholder warrants, the Company used the Black-Scholes option pricing model with the following assumptions: average volatility rate; market price as at the reporting date; risk-free interest rate; the remaining
expected life of the warrant; and an exchange rate as at the reporting date. The inputs used in the Black-Scholes model are taken from observable markets. In particular, changes in estimates of the fair value of the shareholder warrants can have a
material impact on the reported loss and comprehensive loss for a given period.

Common Share Warrants Derivatives

The Companys common share warrants are considered to be derivative liabilities due to the warrants being exercisable in a currency (Canadian dollar)
other than the functional currency of the Company (U.S. dollar). Accordingly, the warrants are measured at fair value at each reporting date, with changes in fair value included in the statement of loss and comprehensive loss for the applicable
reporting period. A change in the inputs utilized to calculate the fair value such as the Companys share price, volatility, remaining life and interest rate can have a material impact on the reported loss and comprehensive loss for the period.

Stock-Based Compensation Plan

Employees of the
Company, including senior executives and members of the board of directors [the Board], receive remuneration in the form of stock options. In situations where stock options are issued and some or all of the goods or services received by
the entity as consideration cannot be specifically identified, the unidentified goods or services received are measured as the difference between the fair value of the share-based compensation transaction



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and the fair value of any identifiable goods or services received at the grant date. This is then capitalized or expensed as appropriate. The cost of equity-settled transactions with employees is
measured by reference to the fair value at the date on which they are granted. The cost of stock option transactions is recognized, together with a corresponding increase in contributed surplus, over the period in which the performance and/or
service conditions are fulfilled.

The cumulative expense recognized for share-based compensation transactions at each reporting date until the vesting
date reflects the extent to which this vesting period has expired and the Companys best estimate of the number of shares that will ultimately vest. The expense or credit recognized for a period represents the movement in cumulative expense
recognized as at the beginning and end of that period and is recognized in the consolidated statements of loss and comprehensive loss in the respective function line. When options are exercised, the amounts previously credited to contributed surplus
are reversed and credited to shareholders equity. The amount of cash, if any, received from participants is also credited in share capital in shareholders equity. Where the terms of stock options are modified, the minimum expense
recognized is the expense as if the terms had not been modified, if the original terms of the award are met. An additional expense is recognized for any modification that increases the total fair value of the share-based compensation transaction, or
is otherwise beneficial to the employee as measured at the date of modification. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of diluted loss per share.

Fair Value of Financial Instruments

Where the fair value
of financial assets and financial liabilities recorded in the consolidated statements of financial position cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flow models. The inputs
to these models are taken from observable markets. Changes in input from observable market factors could affect the reported fair value of financial instruments.

STANDARDS ISSUED BUT NOT YET EFFECTIVE

Standards
issued but not yet effective up to the date of issuance of the Companys consolidated financial statements are listed below. This listing is of standards and interpretations issued, which the Company reasonably expects to be applicable at a
future date. The Company intends to adopt those standards when they become effective.

IFRS 9 Financial Instruments: Classification
and Measurement

In November 2009, the IASB issued IFRS 9, which covers classification and measurement as the first part of its project to replace
IAS 39. In October 2010, the Board also incorporated new accounting requirements for liabilities. The standard introduces new requirements for measurement and eliminates the current classification of loans and receivables, available-for-sale and
held-to-maturity, currently in IAS 39. There are new requirements for the accounting of financial liabilities as well as a carryover of requirements from IAS 39. The standard is effective for annual periods beginning on or after January 1,
2015. The Company does not anticipate early adoption and will adopt the standard when it is mandated by the IASB. The Company is in the process of reviewing the standard to determine the impact on the consolidated financial statements.

IAS 32 Financial Instruments: Presentationand IFRS 7 Financial Instruments: Disclosures

In December 2011, the IASB amended both IAS 32- Financial Instruments: Presentationand IFRS 7  Financial Instruments: Disclosures by
moving the disclosure requirements in IAS 32 to IFRS 7 and enhancing the disclosures about offsetting financial assets and liabilities. The effective date of the amendments is for annual periods beginning on or after January 1, 2013. Earlier
adoption is permitted but must be applied together with IFRS 9. The Company has assessed the impact of these standards and there is no impact on its consolidated financial statements.

IFRIC 21  Levies

In May 2013,
the IFRS Interpretations Committee (IFRIC), with the approval of the IASB, issued IFRIC 21  Levies. IFRIC 21 provides guidance on when to recognize a liability to pay a levy imposed by government that is accounted for in accordance with IAS 37
 Provisions, Contingent Liabilities and Contingent Assets. IFRIC 21 is effective for annual periods beginning on or after January 1, 2014, and is to be applied retrospectively. The Company has assessed the impact of this standard and
there is no impact on its consolidated financial statements.



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NEW STANDARDS, INTERPRETATIONS & AMENDMENTS ADOPTED BY THE COMPANY

IFRS 10Consolidated Financial Statements and IAS 27 Separate Financial Statements

IFRS 10 establishes a single control model that applies to all entities including special purpose entities. IFRS 10 replaces the parts of previously existing
IAS 27 Consolidated and Separate Financial Statements that dealt with consolidated financial statements and SIC-12 Consolidation  Special Purpose Entities. IFRS 10 changes the definition of control such that an investor controls an investee
when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. To meet the definition of control in IFRS 10, all three criteria must be
met, including: (a) an investor has power over an investee; (b) the investor has exposure, or rights, to variable returns from its involvement with the investee; and (c) the investor has the ability to use its power over the investee
to affect the amount of the investors returns. IFRS 10 had no impact on the consolidation of investments held by the Company.

IFRS 11Joint
Arrangements

IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities  Non-monetary Contributions by
Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture under IFRS 11 must be accounted for using the equity method. IFRS 11
had no impact on the Company.

IFRS 12Disclosure of Interests in Other Entities

IFRS 12 sets out the requirements for disclosures relating to an entitys interests in subsidiaries, joint arrangements, associates and structured
entities. None of these disclosure requirements are applicable for interim condensed consolidated financial statements, unless significant events and transactions in the interim period requires that they are provided. Accordingly, the Company has
not made such disclosures.

IFRS 13Fair Value Measurement

IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair
value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The application of IFRS 13 has not materially impacted the fair value measurements carried out by the Company.

IFRS 13 also requires additional disclosures where required, are provided in the individual notes relating to the assets and liabilities whose fair values
were determined. Fair value hierarchy is provided in Note 19 in the annual consolidated financial statements.

DISCLOSURE CONTROLS AND PROCEDURES

The Chief Executive Officer [CEO] and Chief Financial Officer [CFO] designed such disclosure controls and procedures, or
caused them to be designed under their supervision, to provide reasonable assurance that material information relating to the Company, including its consolidated subsidiaries, is made known to them by others within those entities, particularly
during the period in which the disclosures are being prepared and in accordance with rules of the Securities Act (Ontario) [the Act] and the Canadian Securities Administrators [CSA] as at December 31, 2013. Due to
inherent limitations in control systems and procedures no matter how well conceived or operated, their evaluation can provide only reasonable, not absolute, assurance that such disclosure controls and procedures are operating effectively.

The CEO and CFO have evaluated the effectiveness of the Companys disclosure controls and procedures as defined in the rules of the Act and the CSA, as
at December 31, 2013, and have concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under teh Act and Canadian securities
laws is: (i) recorded, processed, summarized and reported within the time periods specified in the Acts rules and forms and Canadian securities laws; and (ii) accumulated and communicated to the Companys management, including
its CEO and CFO.

Internal Control Over Financial Reporting

In accordance with the United States Jumpstart Our Business Startup Act [JOBS Act] enacted on April 5, 2012, the Company qualifies as an
emerging growth company [EGC], which entitles the Company to take advantage



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of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs. Specifically, the JOBS Act defers the requirement to have the
Companys independent auditor assess the Companys internal controls over financial reporting [ICFR] under Section 404(b) of the Sarbanes-Oxley Act. The JOBS Act does not defer compliance with, and Novadaq currently
complies with, the requirement of Section 404(a) of the Sarbanes-Oxley Act that management assess its ICFR. The Company will remain an emerging growth company until the earliest of (a) the last day of the first fiscal year in
which its annual gross revenues exceed $1.0 billion, (b) the date that it becomes a large accelerated filer as defined in Rule 12b-2 under the United States Securities Exchange Act of 1934, as amended, which would occur if the
market value of the Companys common shares that are held by non-affiliates exceeds $700 million as of the last business day of its most recently completed second fiscal quarter, (c) the date on which the Company has issued more than $1.0
billion in non-convertible debt during the preceding three-year period or (d) the last day of the Companys fiscal year containing the fifth anniversary of the date on which its shares become publicly traded in the United States (currently
December 31, 2017).

The CEO and the CFO have designed such internal controls over financial reporting, or caused it to be designed under their
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS, rules of the Act and the CSA, as at December 31, 2013.

The Company, under the supervision of the CEO and CFO, has performed control self-assessments as of December 31, 2013 to evaluate the effectiveness of
the Companys internal control reporting.

As at December 31, 2013, the CEO and CFO assessed the effectiveness of the Companys internal
control over financial reporting and concluded that such internal control over financial reporting is effective and that there are no materials weaknesses in the Companys internal control over financial reporting that have been identified by
management.

Changes in Internal Control over Financial Reporting

There have been no material changes in the Companys internal control over financial reporting that occurred during the quarter ended December 31,
2013, which have materially affected, or are reasonably likely to affect, the Companys internal control over financial reporting.

FINANCIAL
INSTRUMENTS AND OTHER INSTRUMENTS

The Companys financial instruments are comprised of the following as at December 31, 2013: cash and
cash equivalents of $182,330,000; accounts receivable of $8,502,000; accounts payable and accrued liabilities and provisions of $7,311,000; and shareholder warrants of $26,066,000. The Company invested its cash and cash equivalents in daily interest
savings accounts. Accounts receivable of $8,502,000 (net of $231,000 bad debts reserves), based in the United States, Canada and Asia are subject to minimal credit risk based on the nature of the Companys customers and letters of credit
securing international sales. The receivables are being carried at amortized cost. Accounts payable and accrued liabilities and provisions of $7,311,000 are carried at amortized cost, and are comprised of short-term obligations owing to suppliers
relative to the Companys operations. The shareholder warrants are re-valued quarterly utilizing the Black-Scholes model to determine fair value. The repayable government assistance comprises of an Industrial Research and Assistance Program
loan, received from the National Research Council, with principal repayment terms over 30 months, which commenced in August 2011.

Fair Value

Fair value is the estimated amount that the Company would pay or receive to dispose of the financial instrument contracts in an arms length
transaction between knowledgeable, willing parties who are under no compulsion to act. The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices, without any
deduction for transaction costs. For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques that are recognized by market participants. Such techniques may include using recent
arms length market transactions, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis or other valuation models.



MD&A | 21 |



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RISKS AND UNCERTAINTIES

The results of operations and financial condition of the Company are subject to a number of risks and uncertainties, and are affected by a number of factors
outside of the control of management. For a detailed discussion regarding the relevant risks and uncertainties, see the Companys annual MD&A and AIF for the year ended December 31, 2012, both of which are filed on SEDAR and EDGAR.
There have been no changes during the twelve months period ended December 31, 2013.

The Company attempts to mitigate these risks through a
combination of sound risk-management practices, insurance and systems of internal control. The risks and uncertainties outlined below do not constitute an exhaustive list. Additional risks and uncertainties not presently known to the Company or that
the Company believes to be immaterial may also adversely affect the Companys business.

Potential Fluctuations in the Companys Financial
Results Make Financial Forecasting Difficult

The Company expects its revenues and results of operation to continue to vary significantly from quarter
to quarter. Revenues and gross margins may be lower than anticipated due to timing of orders and deliveries, unexpected delays in the Companys supply chain, general economic and market-related factors, product quality, performance and
competitive factors. The current economic environment also makes projecting financial results more difficult. In addition, due to the Companys early stage of commercialization on some products, it cannot accurately predict its future revenues
or results of operations or the timing of its current research and development programs. The Company is also subject to normal operating risks such as credit risks, foreign currency risks and global and regional economic conditions. As a result,
quarter to quarter comparisons of the Companys revenues and results of operation may not be meaningful. It is likely that in one or more future quarters the Companys results of operation will fall below the expectations of securities
analysts and investors. If this happens, the trading price of the Companys common shares might be materially and adversely affected.

Clinical
Trials May be Unsuccessful and New Regulatory Approvals May Not be Obtained

The Company continues to explore the use of the products in new
applications and clinical trials and to develop new products. There is no assurance that the Company will receive additional regulatory approvals for the products in new applications or for any new products, which would limit the Companys

Market Competition and Technological Advancements

Industrial technology in medical diagnostics and therapeutics is evolving rapidly and competition is intense. In addition to products currently in the market,
additional products may be introduced to compete with those of the Company. Some of these products may use entirely different approaches or means to obtain diagnostic information or achieve therapeutic results and could be found to be more
clinically effective or less expensive than those products being developed and/or commercialized by Novadaq. Moreover, many competitors, both current and potential, may have considerably greater resources at their disposal than Novadaq in terms of
technology, manufacturing, product development, marketing, distribution, sales, capital and human resources. Many competitors may also have more experience in conducting clinical trials and in obtaining domestic and foreign regulatory approvals.
Therefore, there can be no assurance that the Company can successfully compete with present or potential competitors or that such intense competition will not have a materially adverse effect on Novadaqs business and financial condition.

Additionally, since the Companys products are designed to diagnose and treat specific medical conditions, it is possible that medical or scientific
advances with respect to the treatment of these conditions could render the Companys products obsolete future sales and marketing opportunities in other markets obsolete.

Third-Party Intellectual Property Infringement Claims

Patent applications which may relate or affect the Companys business may have been filed by other health care, medical device, biopharmaceutical
companies and universities. Such patent applications or patents may conflict with the Companys technologies or patent applications, and such conflict could reduce the scope of patent protection which the Company could otherwise obtain or lead
to a refusal of a patent application of the Company. Novadaq could also become involved in interference proceedings in connection with one or more of its patents or



MD&A | 22 |



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patent applications to determine priority of invention.

It is not possible for the Company to be
certain that it is the creator of inventions covered by pending patent applications or that it was the first to file patent applications for any such inventions. No assurance can be given that the Companys patents, once issued, would not be
declared by a court to be valid or enforceable, or that a competitors technology or product would not be found to infringe the Companys products. In the event that a court was to find the Company to be infringing upon a valid patent of a
third party, the Company might be required to pay license fees and/or damages and might be enjoined from conducting certain activities.

There is no
assurance that the Company could enter into licensing arrangements at a reasonable cost, or develop or obtain alternative technology in respect of patents issued to third parties that incidentally cover the Companys products. Any inability to
secure licenses or alternative technology could result in delays in the introduction of some of the Companys products or even lead to prohibition of the development, manufacture or sale of certain products.

Research and Development Risk

A principal component of
Novadaqs business strategy is to expand its product offering to fully exploit its underlying imaging platform. As such, Novadaqs organic growth and long-term success is partially dependent on its ability to successfully develop and
market new products. Accordingly, Novadaq will likely incur significant research and development expenditures. However, there is no certainty that any investment in research and development will yield technically feasible or commercially viable
products. Failure to introduce new products, or failure or delays in obtaining regulatory approval could materially and adversely affect Novadaqs business and financial condition.

Successful Commercialization of the Products

The
Companys future success will depend in large part on its own ability to commercialize PINPOINT and the ability of its partners to market and sell SPY Elite, Firefly and LUNA for use in wound care, and TMR Laser System [together, the
Products]. Successful commercialization of the Products will depend on a number of factors, including achieving widespread adoption of the Products among the targeted surgeons and hospitals, maintaining the Companys relationships
with its suppliers and partners, obtaining sufficient quantities of components for the Products, including fluorescence agent, the performance of Novadaqs partnering sales organization, the ability of the Company and its partners to
successfully market the Products at projected selling prices, and the ability of the Company and its partners to commercially launch Products that are currently in development phase, in a timely manner. There can be no assurance that the Company
will be successful in these endeavors.

Implementation of Business Models

The Companys current business plan is predicated upon the successful execution of a placement, rental or capital sales model for the SPY
Eliteand LUNA, and a capital sales model for PINPOINT. The hospitals and clinics that are expected to be the end-users of the SPY Elite and LUNA Imaging System and PINPOINT Endoscopic Imaging System may
resist such models or request alternate cost models that may not maximize returns on the Companys investment. A failure to implement these models or to achieve the anticipated pricing for procedures could adversely affect the Companys
business and financial condition.

Dependence on Relationships with Strategic Partners

Execution of the Companys current strategy is dependent on cooperation with strategic partners for sales and marketing and research and development. The
Company can offer no guarantee that existing partnership agreements will be renewed or that its strategic partners will not seek to renegotiate or amend those agreements before or after a product has been commercialized. In addition, there can be no
assurance of the commercial success of any joint ventures in which the Company is, or will become involved.

Dependence on Suppliers

The Company is dependent on its suppliers to manufacture the Products, including components such as the fluorescence agent used with certain Products, in
accordance with the FDA and other regulatory requirements. The



MD&A | 23 |



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Company does not control the manufacturing processes of its suppliers. If current manufacturing processes are modified, or the source or location of its product supply is changed, voluntarily or
involuntarily, the FDA and other regulatory bodies will require the Company to demonstrate that the products produced from the modified or new process or facility are equivalent to the products previously cleared or approved. Any such modifications
to the manufacturing process or supply may not achieve or maintain compliance with the applicable regulatory requirements. In many cases, approval or clearance by regulatory authorities may be required prior to any changes being made, which may
adversely affect the Companys business.

Regulatory Matters

Products intended for diagnostic and therapeutic use for humans are governed by a wide array of regulatory agencies. For most of these products, applicable
regulations require testing and government review and approval prior to marketing the product. This procedure can take a number of years and involves the expenditure of substantial resources. Any failure or delay by the Company to obtain regulatory
approvals or clearances could adversely affect the marketing of any products it developed and its ability to generate product revenue. There can be no assurance that any of the Companys planned products will be approved by any regulatory
agency on a timely basis, or at all.

With the acquisition of the PMA for the Onco-Life system from Xillix and the PMA for the TMR Laser System from PLC,
Novadaq is now in a position for a higher level of regulatory scrutiny from the FDA given that the product is a Class III device. In 2011, Novadaq passed an FDA inspection on its Richmond facility. Future successful review by a health authority
inspector is not guaranteed however. A negative inspection can hinder the Companys ability to carry on business. In such circumstances, the Companys business or financial condition may be adversely affected.

In addition, the Company must comply with federal and state health care anti-kickback laws and other health care fraud and abuse laws that affect the
marketing of devices and pharmaceuticals. Failure to comply with applicable laws and regulations could subject the Company to administrative or judicial enforcement actions including, but not limited to, product seizures, recalls, injunctions, civil
penalties, criminal prosecution, refusals to approve new products or withdrawal of existing approvals, as well as increased product liability exposure, any of which could have a material adverse effect on the Companys business or financial
condition.

Patent Protection and Trade Secrets

The
Companys success depends, in part, on its ability to secure and protect its patents, trade secrets, trademarks and other intellectual property [IP] rights and to operate without infringing on the proprietary rights of others or
having third parties circumvent the rights that it owns or licenses. In particular, Company owned and licensed patents may not be valid, and the Company may not be able to successfully obtain and enforce patents and maintain trade secret protection
for its technology. The extent to which it is unable to do so could materially harm its business.

Patents issued or licensed to the Company may be
infringed by the products or processes of others. The cost of enforcing patent rights against infringers, if such infringement is required, could be significant, and the time demands could interfere with the Companys normal operations. There
has been substantial litigation and other proceedings regarding patent and other IP rights in the pharmaceutical, biotechnology and medical technology industries. The Company may become a party to patent litigation and other proceedings and the cost
to the Company of any patent litigation, even if resolved in its favour, could be substantial.

Unpatented trade secrets, technological innovation and
confidential know-how are important to Novadaqs commercial success. Although the Company seeks to protect its proprietary information through confidentiality agreements and other appropriate means, these measures may not effectively prevent
disclosure of the Companys proprietary information, and in any event, the Company cannot provide assurances that others will not independently develop or gain access to the same or similar information.



MD&A | 24 |



---

Reliance on Key Personnel

The Company is dependent on certain members of its management and staff, and the loss of the services of one or more of these individuals could
adversely affect the Company. In addition, Novadaq will need to continue to expand its management and employee base as it continues to support its partners in the commercialization of SPY Elite,LUNA and Firefly and the direct
U.S. launch of PINPOINT. The Companys future financial performance, its ability to support commercialization of the SPY Elite, LUNA, Firefly and PINPOINT Imaging Systems and to compete effectively will depend, in part, on
its ability to manage any future growth effectively. The Companys ability to manage growth will require it to continue to implement and improve its administrative, accounting and management systems, and to recruit, integrate and train new
employees, including additional management, administrative, distribution, sales and marketing and potentially manufacturing personnel. Although the Company has done so in the past and expects to be able to do so in the future, there can be no
assurance that the Company will successfully be able to attract and retain skilled and experienced personnel.

Foreign Exchange Fluctuations

The Company generates its sales in U.S. dollars and reports its operations in U.S. dollars, but a portion of the Companys expenses are
denominated in Canadian dollars. As such, the Company is exposed to fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar as a result of the translation into U.S. dollars of its expenses denominated in Canadian dollars.

A significant part of the Companys manufacturing and home office operations is located in Canada which results in purchases of approximately
$16,930,000 in Canadian dollars annually. As the exchange rate between Canada and the United States becomes volatile, a strengthening in the Canadian currency can expose the Company to an exchange loss while a strengthening in the U.S. currency can
result in an exchange gain. For the twelve month reporting period ending December 31, 2013, the exchange rate commenced at par and closed at $1.06 favouring the U.S. currency which also represented the high and low for the year. The Company
monitors the exchange rates and manages its cash holdings to address the Companys Canadian currency spending requirements which are mainly period related. To minimize exchange exposure, the Company has the ability to purchase futures
contracts.

ADDITIONAL INFORMATION

Additional
information concerning the Company, including the most recently filed AIF, is available on both EDGAR and SEDAR at www.sedar.com.



MD&A | 25 |



---

INDEPENDENT AUDITORS REPORT

To the Shareholders of

Novadaq Technologies Inc.,

We have audited the accompanying consolidated financial statements of Novadaq Technologies Inc. (the Company), which comprise the
consolidated statements of financial position as at December 31, 2013 and 2012 and the consolidated statements of loss and comprehensive loss, changes in shareholders equity and cash flows for the years ended December 31, 2013 and
2012, and a summary of significant accounting policies and other explanatory information.

Managements responsibility for the consolidated
financial statements

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

Auditors responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian
generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures
selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements, evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.

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

Opinion

In
our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Novadaq Technologies Inc. as at December 31, 2013 and 2012 and the consolidated statements of loss and
comprehensive loss, changes in shareholders equity and cash flows for the years ended December 31, 2013 and 2012 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

/s/ Ernst & Young LLP

|                 |  |                            
|---------------- |  | ---------------------------
|Toronto, Canada  |  | Chartered Accountants      
|February 5, 2014 |  | Licensed Public Accountants





26



---

Novadaq Technologies Inc.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

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



|                                           |  |        |  |                        |              |   |                        |   |              |  
|------------------------------------------ |  | ------ |  | ---------------------- | ------------ | - | ---------------------- | - | ------------ | -
|                                           |  | Notes  |  | As at December 31,2013 |              |   | As at December 31,2012 |  
|ASSETS                                     |  |        |  |                        |              |   |                        |   |              |  
|Current assets                             |  |        |  |                        |              |   |                        |   |              |  
|Cash and cash equivalents                  |  | 19     |  | $                      | 182,329,782  |   |                        | $ | 38,954,181   |  
|Accounts receivable                        |  | 19     |  |                        | 8,502,095    |   |                        |   | 4,056,954    |  
|Prepaid expenses and other assets          |  |        |  |                        | 1,032,431    |   |                        |   | 852,674      |  
|Inventories                                |  | 7      |  |                        | 3,845,695    |   |                        |   | 1,713,577    |  
|                                           |  |        | 
|Non-current assets                         |  |        |  |                        |              |   |                        |   |              |  
|Property and equipment, net                |  | 9      |  |                        | 13,360,833   |   |                        |   | 10,717,661   |  
|Deferred tax assets                        |  | 15     |  |                        |             |   |                        |   | 170,442      |  
|Intangible assets, net                     |  | 10     |  |                        | 3,303,647    |   |                        |   | 1,121,808    |  
|                                           |  |        |  |                        |              |   |                        |   |              |  
|Total Assets                               |  |        |  | $                      | 212,374,483  |   |                        | $ | 57,587,297   |  
|                                           |  |        |  |                        |              |   |                        |   |              |  
|LIABILITIES AND SHAREHOLDERS EQUITY       |  |        |  |                        |              |   |                        |   |              |  
|Current liabilities                        |  |        |  |                        |              |   |                        |   |              |  
|Accounts payable and accrued liabilities   |  |        |  | $                      | 7,123,563    |   |                        | $ | 3,407,329    |  
|Provisions                                 |  | 13     |  |                        | 187,080      |   |                        |   | 85,260       |  
|Deferred revenue                           |  |        |  |                        | 380,325      |   |                        |   | 637,864      |  
|Deferred partnership fee revenue           |  | 16     |  |                        | 1,300,000    |   |                        |   | 1,300,000    |  
|Repayable government assistance            |  | 12, 14 |  |                        | 17,587       |   |                        |   | 203,148      |  
|                                           |  |        | 
|Non-current liabilities                    |  |        |  |                        |              |   |                        |   |              |  
|Deferred tax liabilities                   |  | 15     |  |                        |             |   |                        |   | 170,442      |  
|Convertible debentures                     |  | 12     |  |                        |             |   |                        |   | 4,656,746    |  
|Deferred revenue                           |  |        |  |                        | 193,626      |   |                        |   | 144,204      |  
|Deferred partnership fee revenue           |  | 16     |  |                        | 1,991,666    |   |                        |   | 3,291,666    |  
|Repayable government assistance            |  | 12, 14 |  |                        |             |   |                        |   | 17,946       |  
|Shareholder warrants                       |  | 11     |  |                        | 26,065,994   |   |                        |   | 13,002,930   |  
|                                           |  |        |  |                        |              |   |                        |   |              |  
|Total Liabilities                          |  |        |  | $                      | 37,259,841   |   |                        | $ | 26,917,535   |  
|                                           |  |        |  |                        |              |   |                        |   |              |  
|Shareholders Equity                       |  |        |  |                        |              |   |                        |   |              |  
|Share capital                              |  | 21     |  | $                      | 307,103,074  |   |                        | $ | 139,946,563  |  
|Contributed surplus                        |  |        |  |                        | 8,953,041    |   |                        |   | 7,908,224    |  
|Equity component of convertible debentures |  | 12     |  |                        |             |   |                        |   | 1,454,353    |  
|Deficit                                    |  |        |  |                        | (140,941,473 | ) |                        |   | (118,639,378 | )
|                                           |  |        |  |                        |              |   |                        |   |              |  
|Total Shareholders Equity                 |  |        |  | $                      | 175,114,642  |   |                        | $ | 30,669,762   |  
|                                           |  |        |  |                        |              |   |                        |   |              |  
|Total Liabilities and Shareholders Equity |  |        |  | $                      | 212,374,483  |   |                        | $ | 57,587,297   |  
|                                           |  |        |  |                        |              |   |                        |   |              |  
|Total number of common shares outstanding  |  | 21     |  |                        | 54,894,038   |   |                        |   | 40,226,243   |  
|                                           |  |        |  |                        |              |   |                        |   |              |  
|Commitments and contingencies              |  | 23     |  |                        |              |   |                        |   |              |  

These consolidated financial statements are authorized for issue by the Board of Directors on February 5, 2014. They are
signed on the Companys behalf by:

On behalf of the Board:

|                                |  |                                
|------------------------------- |  | -------------------------------
|/s/ Anthony Griffiths, Director |  | /s/ William Mackinnon, Director

See accompanying notes to the consolidated financial statements



27



---

Novadaq Technologies Inc.

CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

FOR THE YEARS ENDED

(expressed in U.S. dollars, except
per share amounts)



|                                                                     |  |       |  |                  |             |   |                  |    |             |  
|-------------------------------------------------------------------- |  | ----- |  | ---------------- | ----------- | - | ---------------- | -- | ----------- | -
|                                                                     |  | Notes |  | December 31,2013 |             |   | December 31,2012 |   
|Product sales                                                        |  |       |  | $                | 31,019,451  |   |                  | $  | 19,037,096  |  
|Royalty revenue                                                      |  | 8     |  |                  | 1,889,404   |   |                  |    | 1,849,668   |  
|Partnership fee revenue                                              |  | 16    |  |                  | 1,300,000   |   |                  |    | 1,300,000   |  
|Service revenue                                                      |  |       |  |                  | 811,683     |   |                  |    | 802,296     |  
|                                                                     |  |       |  |                  |             |   |                  |    |             |  
|Total revenues                                                       |  | 24    |  |                  | 35,020,538  |   |                  |    | 22,989,060  |  
|Cost of sales                                                        |  |       |  |                  | 12,932,695  |   |                  |    | 8,537,408   |  
|                                                                     |  |       |  |                  |             |   |                  |    |             |  
|Gross profit                                                         |  |       |  |                  | 22,087,843  |   |                  |    | 14,451,652  |  
|                                                                     |  |       |  |                  |             |   |                  |    |             |  
|Selling and distribution expenses                                    |  |       |  |                  | 14,060,861  |   |                  |    | 4,926,376   |  
|Research and development expenses                                    |  |       |  |                  | 7,974,455   |   |                  |    | 5,958,499   |  
|Administrative expenses                                              |  |       |  |                  | 7,233,570   |   |                  |    | 6,573,484   |  
|Write-down of equipment                                              |  | 9     |  |                  | 25,488      |   |                  |    |            |  
|Write-down of inventory                                              |  | 7     |  |                  | 31,285      |   |                  |    | 57,540      |  
|                                                                     |  |       |  |                  |             |   |                  |    |             |  
|Total operating expenses                                             |  |       |  |                  | 29,325,659  |   |                  |    | 17,515,899  |  
|                                                                     |  |       |  |                  |             |   |                  |    |             |  
|Loss from operations                                                 |  |       |  |                  | (7,237,816  | ) |                  |    | (3,064,247  | )
|                                                                     |  |       | 
|Finance costs                                                        |  | 17    |  |                  | (182,896    | ) |                  |    | (707,500    | )
|Finance income                                                       |  |       |  |                  | 109,089     |   |                  |    | 61,798      |  
|Warrants revaluation adjustment                                      |  | 11    |  |                  | (15,015,472 | ) |                  |    | (8,558,323  | )
|Gain on investment                                                   |  | 19    |  |                  | 25,000      |   |                  |    | 25,000      |  
|                                                                     |  |       |  |                  |             |   |                  |    |             |  
|Loss from operations before income taxes                             |  |       |  |                  | (22,302,095 | ) |                  |    | (12,243,272 | )
|Income tax expense                                                   |  |       |  |                  |            |   |                  |    | (100,861    | )
|                                                                     |  |       |  |                  |             |   |                  |    |             |  
|Net loss and comprehensive loss for the year                         |  | 22    |  | ($               | 22,302,095  | ) |                  | ($ | 12,344,133  | )
|                                                                     |  |       |  |                  |             |   |                  |    |             |  
|Basic and diluted loss and comprehensive loss per share for the year |  | 22    |  | ($               | 0.47        | ) |                  | ($ | 0.32        | )
|                                                                     |  |       |  |                  |             |   |                  |    |             |  

See accompanying notes to the consolidated financial statements



28



---

Novadaq Technologies Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

(expressed in U.S. dollars)



|                                             |  |               |             |  |                    |   |            |                                          |  |   |            |   |  |       |             |   |  |   |             |  
|-------------------------------------------- |  | ------------- | ----------- |  | ------------------ | - | ---------- | ---------------------------------------- |  | - | ---------- | - |  | ----- | ----------- | - |  | - | ----------- | -
|                                             |  | Share capital |             |  | Contributedsurplus |   |            | Equity componentof convertibledebentures |  |   | Deficit    |   |  | Total |            
|As at December 31, 2012                      |  | $             | 139,946,563 |  |                    | $ | 7,908,224  |                                          |  | $ | 1,454,353  |   |  | ($    | 118,639,378 | ) |  | $ | 30,669,762  |  
|Net loss and comprehensive loss for the year |  |               |            |  |                    |   |           |                                          |  |   |           |   |  |       | (22,302,095 | ) |  |   | (22,302,095 | )
|Public offering, net                         |  |               | 154,318,327 |  |                    |   |           |                                          |  |   |           |   |  |       |            |   |  |   | 154,318,327 |  
|Exercise of convertible debentures           |  |               | 6,280,155   |  |                    |   |           |                                          |  |   | (1,454,353 | ) |  |       |            |   |  |   | 4,825,802   |  
|Exercise of options                          |  |               | 3,960,668   |  |                    |   | (1,476,115 | )                                        |  |   |           |   |  |       |            |   |  |   | 2,484,553   |  
|Exercise of warrants                         |  |               | 2,597,361   |  |                    |   | (23,052    | )                                        |  |   |           |   |  |       |            |   |  |   | 2,574,309   |  
|Share-based compensation                     |  |               |            |  |                    |   | 2,543,984  |                                          |  |   |           |   |  |       |            |   |  |   | 2,543,984   |  
|                                             |  |               |             |  |                    |   |            |                                          |  |   |            |   |  |       |             |   |  |   |             |  
|As at December 31, 2013                      |  | $             | 307,103,074 |  |                    | $ | 8,953,041  |                                          |  |   |           |   |  | ($    | 140,941,473 | ) |  | $ | 175,114,642 |  
|                                             |  |               |             |  |                    |   |            |                                          |  |   |            |   |  |       |             |   |  |   |             |  



|                                             |  |               |             |  |                    |   |           |                                          |  |   |           |  |  |       |             |   |  |   |             |  
|-------------------------------------------- |  | ------------- | ----------- |  | ------------------ | - | --------- | ---------------------------------------- |  | - | --------- |  |  | ----- | ----------- | - |  | - | ----------- | -
|                                             |  | Share capital |             |  | Contributedsurplus |   |           | Equity componentof convertibledebentures |  |   | Deficit   |  |  | Total |            
|As at December 31, 2011                      |  | $             | 98,695,023  |  |                    | $ | 6,772,298 |                                          |  | $ | 1,454,353 |  |  | ($    | 106,295,245 | ) |  | $ | 626,429     |  
|Net loss and comprehensive loss for the year |  |               |            |  |                    |   |          |                                          |  |   |          |  |  |       | (12,344,133 | ) |  |   | (12,344,133 | )
|Public offering, net                         |  |               | 36,946,898  |  |                    |   |          |                                          |  |   |          |  |  |       |            |   |  |   | 36,946,898  |  
|Exercise of options                          |  |               | 137,622     |  |                    |   | (50,130   | )                                        |  |   |          |  |  |       |            |   |  |   | 87,492      |  
|Exercise of warrants                         |  |               | 4,167,020   |  |                    |   | (130,627  | )                                        |  |   |          |  |  |       |            |   |  |   | 4,036,393   |  
|Share-based compensation                     |  |               |            |  |                    |   | 1,316,683 |                                          |  |   |          |  |  |       |            |   |  |   | 1,316,683   |  
|                                             |  |               |             |  |                    |   |           |                                          |  |   |           |  |  |       |             |   |  |   |             |  
|As at December 31, 2012                      |  | $             | 139,946,563 |  |                    | $ | 7,908,224 |                                          |  | $ | 1,454,353 |  |  | ($    | 118,639,378 | ) |  | $ | 30,669,762  |  
|                                             |  |               |             |  |                    |   |           |                                          |  |   |           |  |  |       |             |   |  |   |             |  

See accompanying notes to the consolidated financial statements



29



---

Novadaq Technologies Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS
ENDED

(expressed in U.S. dollars)



|                                                                      |  |       |  |                  |             |   |                  |    |            |  
|--------------------------------------------------------------------- |  | ----- |  | ---------------- | ----------- | - | ---------------- | -- | ---------- | -
|                                                                      |  | Notes |  | December 31,2013 |             |   | December 31,2012 |   
|OPERATING ACTIVITIES                                                  |  |       |  |                  |             |   |                  |    |            |  
|Net loss and comprehensive loss for the year                          |  |       |  | ($               | 22,302,095  | ) |                  | ($ | 12,344,133 | )
|Items not affecting cash                                              |  |       |  |                  |             |   |                  |    |            |  
|Depreciation of property and equipment                                |  | 9,17  |  |                  | 3,368,165   |   |                  |    | 2,142,633  |  
|Amortization of intangible assets                                     |  | 10    |  |                  | 335,428     |   |                  |    | 1,150,626  |  
|Stock-based compensation                                              |  | 18    |  |                  | 2,543,984   |   |                  |    | 1,316,683  |  
|Imputed interest on convertible debentures                            |  |       |  |                  | 169,056     |   |                  |    | 433,292    |  
|Warrants revaluation adjustment                                       |  | 11    |  |                  | 15,015,472  |   |                  |    | 8,558,323  |  
|Write-down of equipment                                               |  | 9     |  |                  | 25,488      |   |                  |    |           |  
|Write-down of inventory                                               |  | 7     |  |                  | 31,285      |   |                  |    | 57,540     |  
|Gain on investment                                                    |  | 19    |  |                  | (25,000     | ) |                  |    | (25,000    | )
|                                                                      |  |       |  |                  |             |   |                  |    |            |  
|                                                                      |  |       |  |                  | (838,217    | ) |                  |    | 1,289,964  |  
|Changes in non-cash working capital                                   |  |       |  |                  |             |   |                  |    |            |  
|Increase in accounts receivable                                       |  |       |  |                  | (4,445,141  | ) |                  |    | (2,038,172 | )
|Increase in inventories                                               |  | 7     |  |                  | (2,163,403  | ) |                  |    | (604,700   | )
|(Increase) decrease in prepaid expenses and other assets              |  |       |  |                  | (9,315      | ) |                  |    | 55,149     |  
|Increase in accounts payable                                          |  |       |  |                  | 3,670,558   |   |                  |    | 839,696    |  
|(Decrease) increase in deferred revenue                               |  |       |  |                  | (216,240    | ) |                  |    | 263,336    |  
|                                                                      |  |       |  |                  |             |   |                  |    |            |  
|Net change in non-cash working capital balances related to operations |  |       |  |                  | (3,163,541  | ) |                  |    | (1,484,691 | )
|                                                                      |  |       | 
|Decrease in long-term deferred revenue                                |  |       |  |                  | (1,300,000  | ) |                  |    | (1,325,602 | )
|                                                                      |  |       |  |                  |             |   |                  |    |            |  
|Cash used in operating activities                                     |  |       |  |                  | (5,301,758  | ) |                  |    | (1,520,329 | )
|                                                                      |  |       |  |                  |             |   |                  |    |            |  
|INVESTING ACTIVITIES                                                  |  |       |  |                  |             |   |                  |    |            |  
|Purchase of property and equipment                                    |  | 9     |  |                  | (6,424,498  | ) |                  |    | (6,511,829 | )
|Purchase of intangible assets                                         |  | 10    |  |                  | (2,517,267  | ) |                  |    |           |  
|Disposal of property and equipment                                    |  | 9     |  |                  | 387,673     |   |                  |    | 275,521    |  
|Redemption of long-term investment                                    |  | 19    |  |                  | 25,000      |   |                  |    | 25,000     |  
|                                                                      |  |       |  |                  |             |   |                  |    |            |  
|Cash used in investing activities                                     |  |       |  |                  | (8,529,092  | ) |                  |    | (6,211,308 | )
|                                                                      |  |       |  |                  |             |   |                  |    |            |  
|FINANCING ACTIVITIES                                                  |  |       |  |                  |             |   |                  |    |            |  
|Proceeds from issuance of common shares                               |  | 21    |  |                  | 162,544,000 |   |                  |    | 40,336,250 |  
|Transaction costs paid relating to issuance of common shares          |  | 21    |  |                  | (8,225,673  | ) |                  |    | (3,389,352 | )
|Repayable government assistance                                       |  |       |  |                  | (203,507    | ) |                  |    | (191,068   | )
|Proceeds from exercise of options                                     |  |       |  |                  | 2,484,553   |   |                  |    | 87,492     |  
|Proceeds from exercise of warrants                                    |  |       |  |                  | 621,912     |   |                  |    | 202,895    |  
|                                                                      |  |       |  |                  |             |   |                  |    |            |  
|Cash provided by financing activities                                 |  |       |  |                  | 157,221,285 |   |                  |    | 37,046,217 |  
|                                                                      |  |       |  |                  |             |   |                  |    |            |  
|Net increase in cash and cash equivalents                             |  |       |  |                  | 143,390,435 |   |                  |    | 29,314,580 |  
|Net foreign exchange difference                                       |  |       |  |                  | (14,834     | ) |                  |    | 5,993      |  
|Cash and cash equivalents at beginning of year                        |  |       |  |                  | 38,954,181  |   |                  |    | 9,633,608  |  
|                                                                      |  |       |  |                  |             |   |                  |    |            |  
|Cash and cash equivalents at end of year                              |  |       |  | $                | 182,329,782 |   |                  | $  | 38,954,181 |  
|                                                                      |  |       |  |                  |             |   |                  |    |            |  

See accompanying notes to the consolidated financial statements



30



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



|1. | ORGANIZATION
|-- | ------------

The consolidated financial statements of Novadaq Technologies Inc. [the
Company] for the year ended December 31, 2013 were authorized for issuance in accordance with a resolution by the directors on February 5, 2014. 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 is located at 5090 Explorer Drive, Suite 202, Mississauga, Ontario, Canada.



|2. | OPERATIONS
|-- | ----------

The Company was incorporated under the Canada Business Corporations Act on
April 14, 2000. Novadaq Corp. was incorporated in the State of Delaware in June 2005 as a wholly owned subsidiary of the Company. The consolidated financial statements include the accounts of the Company and its subsidiary. 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.



|3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------



| | [a] | Basis of preparation
| | --- | --------------------

The consolidated financial statements are presented in the
currency of United States dollars [U.S. dollars]. They are prepared on the historical cost basis except for derivative financial instruments and
available-for-sale financial instruments, which are measured at fair value. The accounting policies set out below have been applied consistently to all periods presented
in these consolidated financial statements.



| | [b] | Statement of compliance
| | --- | -----------------------

These consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards [IFRS] as issued by the International Accounting Standards Board [IASB].



| | [c] | Basis of consolidation
| | --- | ----------------------

The consolidated financial statements include the accounts of
the Company and its directly owned subsidiary Novadaq Corp. as at December 31, 2013 and 2012. The subsidiary is fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continues to be
consolidated until the date that such control ceases. The financial statements of the subsidiary are prepared for the same reporting period as the Company, using consistent accounting policies. All intra-company balances, income and expenses and
unrealized gains and losses resulting from intra-company transactions are eliminated in full.



31



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



| | [d] | Business combinations and goodwill
| | --- | ----------------------------------

Business combinations are accounted for using the
purchase method. The cost of an acquisition is measured as the fair value of the assets given, equity instruments and liabilities incurred or assumed at the date of exchange. Acquisition costs for business combinations incurred subsequent to
January 1, 2010 are expensed and included in administrative expenses. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at fair value at the date of acquisition.

Goodwill is initially measured at cost, being the excess of the cost of the business combination over the Companys share in the net fair
value of the acquirees identifiable assets, liabilities and contingent liabilities. Any negative difference is recognized directly in the consolidated statements of loss and comprehensive loss. If the fair values of the assets, liabilities and
contingent liabilities can only be calculated on a provisional basis, the business combination is recognized using provisional values. Any adjustments resulting from the completion of the measurement process are recognized within 12 months of the
date of acquisition.



| | [e] | Cash and cash equivalents
| | --- | -------------------------

Cash and cash equivalents comprise cash on hand and highly
liquid investments that are readily convertible to cash with maturities of less than 90 days at the time of purchase. For the purpose of the consolidated statements of cash flows, cash and cash equivalents consist of cash and highly liquid
investments as defined above, net of outstanding bank overdrafts, if any.



| | [f] | Inventories
| | --- | -----------

Inventories are valued at the lower of cost and net realizable value. Net
realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Cost is determined on a first-in, first-out basis.



| | [g] | Property and equipment
| | --- | ----------------------

Property and equipment are stated at cost, net of accumulated
depreciation and any impairment losses determined. Cost includes the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary and, where relevant, the present value of all dismantling and removal
costs. All repair and maintenance costs are recognized in the consolidated statements of loss and comprehensive loss as an expense when incurred. Depreciation is provided over the estimated useful lives of the assets as follows:



|                       |  |                           
|---------------------- |  | --------------------------
|Medical devices        |  | 2 to 5 years              
|Furniture and fixtures |  | 3 years                   
|Computer equipment     |  | 2 years                   
|Leasehold improvements |  | Over the term of the lease



32



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



An item of property and equipment and any significant part initially recognized is
derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on de-recognition of the asset is included in the consolidated statements of loss and comprehensive loss when the asset is
derecognized.

The assets useful lives and methods of depreciation are reviewed at each financial year-end, and adjusted
prospectively, if appropriate. No depreciation is taken on construction in progress until the asset is ready for managements intended use.



| | [h] | Intangible assets
| | --- | -----------------

The Company owns intangible assets consisting of licenses, SPY
software and patent rights.

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible
assets acquired in a business combination is its fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and impairment losses, if any. The useful lives of intangible
assets are assessed as either finite or indefinite.

The Company currently does not hold any intangible assets with indefinite lives.

Intangible assets with finite useful lives are amortized over the useful economic life and assessed for impairment whenever there is an
indication that the intangible asset may be impaired. The amortization method and amortization period of an intangible asset with a finite useful life is reviewed at least annually. Changes in the expected useful life or the expected pattern of
consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with
finite lives is recognized in the consolidated statements of loss and comprehensive loss in the expense category consistent with the function of the intangible assets.

Internally generated intangible assets, such as deferred development costs, are capitalized when the product or process is technically and
commercially feasible and the Company has sufficient resources to complete development. The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce and prepare the asset to be capable
of operating in the manner intended by management. Amortization of the internally generated intangible assets begins when the development is complete and the asset is available for use. It is amortized over the period of expected future benefit.
Amortization is recorded in cost of sales.

Intangible assets are amortized on a straight-line basis over the lesser of their useful lives
and the life of the patents, or the term of the patent rights:



|                          |  |               
|------------------------- |  | --------------
|TMR manufacturing license |  | 2 years       
|SPY software              |  | 2 years       
|Patent rights             |  | 13 to 21 years



33



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



| | [i] | Impairment of non-financial assets
| | --- | ----------------------------------

The Company assesses at each reporting date whether
there is an indication that an asset may be impaired. If such an indication exists, the Company estimates the assets recoverable amount. The recoverable amount is the higher of an assets or
cash-generating units [CGU] fair value less costs to sell and its value-in-use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired
and is written down to its recoverable amount.

Value-in-use is determined by discounting estimated future cash flows using a pre-tax
discount rate that reflects the current market assessment of the time value of money and the specific risks of the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such
transactions can be identified, an appropriate valuation model has to be used. The recoverable amount of assets that do not generate independent cash flows is determined based on the CGU to which the asset belongs.

The Company bases its impairment calculation on detailed budgets and forecast calculations which are prepared separately for each of the
Companys CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of three to five years.

An impairment loss is recognized in the consolidated statements of loss and comprehensive loss if an assets carrying amount or that of
the CGU to which it is allocated is higher than its recoverable amount. Impairment losses of CGUs are charged against the carrying value of assets in a CGU, in proportion to their carrying amount. In the consolidated statements of loss and
comprehensive loss, the impairment losses are recognized in the expense categories consistent with the function of the impaired asset.

An
assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. For purposes of impairment testing, the Company determined that it has two CGUs,
namely the SPY Imaging Technology business and the TMR business.

The calculation of value-in-use for the CGU would be most sensitive to
the following assumptions:



| |  |  | Gross margins;
| | - |  | --------------



| |  |  | Discount rates;
| | - |  | ---------------



| |  |  | Price development for the consumables and medical devices; and
| | - |  | --------------------------------------------------------------



| |  |  | Market share assumptions.
| | - |  | -------------------------

Gross margins - Gross margins are based on historical and
forecasted values.

Discount rates - Discount rates reflect the current market assessment of the risks specific to each CGU. The
discount rate was estimated based on the average percentage of a weighted average cost of capital for the medical device industry.



34



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



Price development for the consumables and medical devices - Estimates are obtained
from published forecasts about the future development of applicable procedures in North America during the detailed forecast period, as well as managements own judgments.

Market share assumptions - These assumptions are important because management assesses how the CGUs position, relative to its
competitors, might change over the budget period.



| | [j] | Leased assets
| | --- | -------------

Leased assets are depreciated over the useful life of the asset. However,
if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.

Operating lease payments are recognized as an expense in the consolidated statements of loss and comprehensive loss on a straight-line basis over the lease term.



| | [k] | Financial instruments
| | --- | ---------------------

The Company classifies its financial instruments as either [i]
financial assets at fair value through profit or loss, [ii] loans and receivables or [iii] available-for-sale, and its financial liabilities as either [i] financial
liabilities at fair value through profit or loss or [ii] other financial liabilities. Appropriate classification of financial assets and liabilities is determined at the time of initial recognition or when reclassified in the consolidated statements
of financial position.

All financial instruments are recognized initially at fair value plus, in the case of investments and liabilities
not at fair value through profit or loss, directly attributable transaction costs. Financial instruments are recognized on the trade date, which is the date on which the Company commits to purchase or sell the asset.

There are currently no financial instruments classified as
available-for-sale.

Financial assets at fair value
through profit or loss:

Financial assets at fair value through profit or loss include financial assets held for trading and financial
assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term.

Financial assets at fair value through profit or loss are carried at fair value. Related realized and unrealized gains and losses are included
in the consolidated statements of loss and comprehensive loss in finance income or finance costs.

The Company has currently not designated
any financial assets upon initial recognition as at fair value through profit or loss.



35



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



Loans and receivables:

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans
and receivables are initially recognized at fair value plus transaction costs. They are subsequently measured at amortized cost using the effective interest method less any impairment. The losses arising from impairment are recognized in the
consolidated statements of loss and comprehensive loss in finance costs.

Derecognition:

A financial asset is derecognized when the rights to receive cash flows from the asset have expired or when the Company has transferred its
rights to receive cash flows from the asset.

Impairment of financial assets:

The Company assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is
impaired. A financial asset is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset [an incurred loss event] and
that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

For financial assets carried at amortized cost, the Company first assesses individually whether objective evidence of impairment exists
individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed
financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is,
or continues to be, recognized are not included in a collective assessment of impairment.

If there is objective evidence that an
impairment loss has occurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows.

The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in profit or loss.

Loans and receivables together with the associated allowance are written off when there is no realistic prospect of future recovery. If,
in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance
account. If a write-off is later recovered, the recovery is credited to finance costs in profit or loss.

Financial liabilities at fair
value through profit or loss:

Financial liabilities at fair value through profit or loss include financial liabilities held for
trading and financial liabilities designated upon initial recognition at fair value through profit or loss.



36



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



Because the Companys shareholder warrants are denominated in Canadian dollars [a
currency different from the Companys functional currency] they are recognized as a financial liability and are remeasured at fair value through profit or loss.

Other financial liabilities:

Financial liabilities are measured at amortized cost using the effective interest rate method. Financial liabilities include long-term debt
issued, which is initially measured at fair value, which is the consideration received, net of transaction costs incurred. Transaction costs related to the long-term debt instruments are included in the value of the instruments and amortized using
the effective interest rate method. The effective interest expense is included in finance costs in the consolidated statements of loss and comprehensive loss.

De-recognition:

A
financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires.

When an existing
financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original
liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statements of loss and comprehensive loss.



| | [l] | Offsetting of financial instruments
| | --- | -----------------------------------

Financial assets and financial liabilities are
offset and the net amount reported in the consolidated statements of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize
the assets and settle the liabilities simultaneously.



| | [m] | Fair value of financial instruments
| | --- | -----------------------------------

Fair value is the estimated amount that the Company
would pay or receive to dispose of the financial instrument contracts in an arms length transaction between knowledgeable and willing parties who are under no compulsion to act. The fair value of financial instruments that are traded in active
markets at each reporting date is determined by reference to quoted market prices, without any deduction for transaction costs.

For
financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques that are recognized by market participants. Such techniques may include using recent arms length market transactions,
reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis or other valuation models.



37



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



| | [n] | Common share warrants derivatives
| | --- | ---------------------------------

The Companys common share warrants are
considered to be derivative liabilities due to the warrants being exercisable in a currency (Canadian dollar) other than the functional currency of the Company (U.S. dollar). Accordingly, the warrants are measured at fair value at each reporting
date, with changes in fair value included in the statement of loss and comprehensive loss for the applicable reporting period.



| | [o] | Revenue recognition
| | --- | -------------------

Revenue is recognized to the extent that it is probable that the
economic benefits will flow to the Company and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually
defined terms of payment and excluding taxes or duty. The Company assesses its revenue arrangements with all of its customers and partners against specific criteria to determine if it is acting as principal or agent. The Company has concluded that
it is acting as a principal in all of its revenue arrangements. The specific recognition criteria described below must also be met before revenue is recognized.

Product sales

Product sales to customers

Revenue from the sale of medical devices and consumables is recognized when significant risks and rewards of ownership of the products have
passed or transferred to the customer, usually when the products are picked up by the shipper for delivery, collection of the related receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.

Products sales under partnership agreements

Revenue is recognized on sale of capital devices or consumable products when they are picked up by the shipper for delivery to the partners, as
at that point-of-time the Company has transferred all relevant risks of ownership [inventory risks for the delivered products, credit risk for the transaction with the end customer and price risk for the transaction with the end customer] to the
partners, who maintains the business relationship with the end customer. Under certain partnership agreements, the Company shares ongoing revenues from its partners sales to end customers, net of contracted minimum pricing retained by the
Company upon initial shipments to its partners, related to the SPY imaging system and the disposable products required to perform the SPY imaging procedure. The Company records any additional amounts when its partners sell to the end customer.

Rental income

Rental income arising from the rental of capital devices is recognized on a straight-line basis over the lease terms and included in product
sales.



38



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



Multiple element arrangements

The Company may enter into arrangements in which it commits to provide multiple products and services to its customers occurring at different
points in time. Revenue recognition for these arrangements is determined based on evaluation of the individual elements of the arrangements. If the element delivered has standalone value to the customer and the fair value associated with the element
can be measured reliably, the amount recognized as revenue for that element is the fair value of the element in relation to the fair value of the arrangement as a whole. Otherwise, the entire arrangement is treated as one unit of accounting and
revenue is deferred and recognized ratably over the remaining term of the arrangements, commencing when all elements are delivered.

Royalty revenue

The Company earns and recognizes royalties upon sale of its products to the end user by its partner.

Partnership fee revenue

Partnership fee revenue relates to upfront payments received from partners for exclusive sales and marketing rights. Upfront payments are
deferred and recognized on a straight-line basis over the exclusive sales and marketing terms.

Service revenue

Service revenue primarily relates to extended warranty services agreements in connection with capital sales. Revenue from these agreements are
deferred and recognized on a straight-line basis over the extended warranty services term.



| | [p] | Foreign currency translation
| | --- | ----------------------------

The Companys functional currency is the U.S. dollar.

Transactions in foreign currencies are initially recorded by the Company at their respective functional currency rates prevailing at the
date of the transaction.

Monetary items are translated at the functional currency spot rate as of the reporting date. Exchange differences
from monetary items are recognized in profit or loss. Non-monetary items that are not carried at fair value are translated using the exchange rates as at the dates of the initial transaction. Non-monetary items measured at fair value in a foreign
currency are translated using the exchange rates at the date when the fair value is determined.



| | [q] | Loss per share
| | --- | --------------

The computation of basic loss per share is based on the weighted average
number of common shares outstanding during the year. Diluted loss per share is calculated in a similar way to basic loss per share except that the weighted average number of common shares outstanding are increased to include additional shares
assuming the exercise of stock options, warrants and convertible debenture options, if dilutive.



39



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



| | [r] | Share-based compensation plan
| | --- | -----------------------------

Employees [including senior executives and Board members]
of the Company receive remuneration in the form of stock options.

In situations where stock options are issued and some or all of the
goods or services received by the entity as consideration cannot be specifically identified, the unidentified goods or services received are measured as the difference between the fair value of the share-based
compensation transaction and the fair value of any identifiable goods or services received at the grant date. This is then capitalized or expensed as appropriate.

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted. The
cost of stock option transactions is recognized, together with a corresponding increase in contributed surplus, over the period in which the performance and/or service conditions are fulfilled.

The cumulative expense recognized for share-based compensation transactions at each reporting date until the vesting date reflects the extent
to which this vesting period has expired and the Companys best estimate of the number of shares that will ultimately vest. The expense or credit recognized for a period represents the movement in cumulative expense recognized as at the
beginning and end of that period and is recognized in the consolidated statements of loss and comprehensive loss in the respective function line.

When options are exercised, the amounts previously credited to contributed surplus are reversed and credited to shareholders equity. The
amount of cash, if any, received from participants is also credited in share capital in shareholders equity.

Where the terms of
stock options are modified, the minimum expense recognized is the expense as if the terms had not been modified, if the original terms of the award are met. An additional expense is recognized for any modification that increases the total fair value
of the share-based compensation transaction, or is otherwise beneficial to the employee as measured at the date of modification.

The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of diluted loss per share.



| | [s] | Government contributions and grants
| | --- | -----------------------------------

Government grants are recognized where there is
reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is recognized as income over the period necessary to match the grant on a systemic basis to the
costs that it is intended to compensate. When the grant relates to an asset, it is recognized as deferred revenue and released to income in equal amounts over the expected useful life of the related asset.

Government contributions relating to research and development are recorded as a reduction of expenses when the related expenditures are
incurred.

Where forgivable loans are provided by governments depending on meeting certain criteria by the



40



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



Company, the forgivable loan is recorded as other operating income when there is reasonable assurance that the Company will meet the terms for forgiveness of the loan.



| | [t] | Income taxes
| | --- | ------------

The Company is a taxable entity under the Income Tax Act (Canada). Current
income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively
enacted at the reporting date in the countries where the Company operates and generates taxable income. Current income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statements of loss and
comprehensive loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions, where appropriate.



| | [u] | Provisions
| | --- | ----------

Provisions are recognized when the Company has a present obligation, legal
or constructive, as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating
to any provision is presented in the consolidated statements of loss and comprehensive loss.

Provisions for warranty-related costs for the
standard one year manufacturers warranty are recognized when the product is sold. Initial recognition is based on historical experience and future expected costs. The initial estimate of warranty-related costs is revised annually. The time
value of money is not material.



|4. | SIGNIFICANT ACCOUNTING ESTIMATES AND ASSUMPTIONS
|-- | ------------------------------------------------

The preparation of the consolidated
financial statements requires the use of estimates and assumptions to be made in applying the accounting policies that affect the reported amounts of assets, liabilities, revenue, expenses and the disclosure of contingent assets and liabilities. The
estimates and related assumptions are based on previous experience and other factors considered reasonable under the circumstances, the results of which form the basis of making the assumptions about carrying values of assets and liabilities that
are not readily apparent from other sources.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Judgments made
by management in the application of IFRS that have a significant effect on the consolidated financial statements relate to the following:

Revenue recognition

For
revenues earned under partnership agreements which are dependent upon the partners sales to end customers, the Company receives quarterly reporting from its partners and assesses the quantity and price to the end customer in order to determine
the accuracy of certain amounts recorded in revenue.



41



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



Impairment of non-financial assets

The Companys impairment test is based on value-in-use calculations that use a discounted cash flow model. The cash flows are derived from
the projections for the next three to five years and are sensitive to the discount rate used as well as the expected future cash inflows and the growth rate used for extrapolation purposes.

Development costs

Initial capitalization of costs is based on managements judgment that technical and economical feasibility is confirmed, usually when a
project has reached a defined milestone according to an established project management model.

Useful lives of key property and
equipment and intangible assets

The depreciation method and useful lives reflect the pattern in which management expects the
assets future economic benefits to be consumed by the Company.

Accounts receivable

The Company reviews its individually significant receivables at each reporting date to assess whether an impairment loss should be recorded in
the consolidated statements of loss and comprehensive loss. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the
Company makes judgments about the borrowers financial situation and the net realizable value of collateral, if any. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes
to the allowance.

Fair value of financial instruments

Where the fair value of financial assets and financial liabilities recorded in the consolidated statements of financial position cannot be
derived from active markets, they are determined using valuation techniques including the discounted cash flow models. The inputs to these models are taken from observable markets. Changes in input from observable market factors could affect the
reported fair value of financial instruments.

Share-based compensation

The Company measures the cost of equity-settled transactions with employees by reference to the fair value of equity instruments at the date at
which they are granted. Estimating fair value for share-based compensation requires determining the most appropriate valuation model for a grant of these instruments, which is dependent on the terms and conditions of the grant. This also requires
determining the most appropriate inputs to the valuation model, including the risk-free interest rate expected life of the option, volatility and dividend yield.



42



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



Shareholder warrants

In determining the fair value of the shareholder warrants, the Company used the Black-Scholes option
pricing model with the following assumptions: average volatility rate; market price as at the reporting date; risk-free interest rate; the remaining expected life of the warrant; and an exchange rate as at the reporting date. The inputs used in the
Black-Scholes model are taken from observable markets. In particular, changes in estimates of the fair value of the shareholder warrants can have a material impact on the reported loss and comprehensive loss for a given period.



|5. | STANDARDS ISSUED BUT NOT YET EFFECTIVE
|-- | --------------------------------------

Standards issued but not yet effective up to the
date of issuance of the Companys consolidated financial statements are listed below. This listing is of standards and interpretations issued, which the Company reasonably expects to be applicable at a future date. The Company intends to adopt
those standards when they become effective.

IFRS 9 Financial Instruments: Classification and Measurement

In November 2009, the IASB issued IFRS 9, which covers classification and measurement as the first part of its project to replace IAS 39. In
October 2010, the Board of Directors also incorporated new accounting requirements for liabilities. The standard introduces new requirements for measurement and eliminates the current classification of loans and receivables, available-for-sale and
held-to-maturity, currently in IAS 39. There are new requirements for the accounting of financial liabilities as well as a carryover of requirements from IAS 39. The standard is effective for annual periods beginning on or after January 1,
2015. The Company does not anticipate early adoption and will adopt the standard when it is mandated by the IASB. The Company is in the process of reviewing the standard to determine the impact on the consolidated financial statements.

IAS 32 Financial Instruments: Presentationand IFRS 7 Financial Instruments: Disclosures

In December 2011, the IASB amended both IAS 32- Financial Instruments: Presentationand IFRS 7  Financial Instruments:
Disclosures by moving the disclosure requirements in IAS 32 to IFRS 7 and enhancing the disclosures about offsetting financial assets and liabilities. The effective date of the amendments is for annual periods beginning on or after
January 1, 2013. Earlier adoption is permitted but must be applied together with IFRS 9. The Company has assessed the impact of these standards and there is no impact on its consolidated financial statements.

IFRIC 21  Levies

In May 2013, the IFRS Interpretations Committee (IFRIC), with the approval of the IASB, issued IFRIC 21  Levies. IFRIC 21 provides
guidance on when to recognize a liability to pay a levy imposed by government that is accounted for in accordance with IAS 37  Provisions, Contingent Liabilities and Contingent Assets. IFRIC 21 is effective for annual periods beginning
on or after January 1, 2014, and is to be applied retrospectively. The Company has assessed the impact of this standard and there is no impact on its consolidated financial statements.



43



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



|6. | NEW STANDARDS, INTERPRETATIONS & AMENDMENTS ADOPTED BY THE COMPANY
|-- | ------------------------------------------------------------------

IFRS
10Consolidated Financial Statements and IAS 27 Separate Financial Statements

IFRS 10 establishes a single control model that
applies to all entities including special purpose entities. IFRS 10 replaces the parts of previously existing IAS 27 Consolidated and Separate Financial Statements that dealt with consolidated financial statements and SIC-12 Consolidation 
Special Purpose Entities. IFRS 10 changes the definition of control such that an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee. To meet the definition of control in IFRS 10, all three criteria must be met, including: (a) an investor has power over an investee; (b) the investor has exposure, or rights, to variable returns from
its involvement with the investee; and (c) the investor has the ability to use its power over the investee to affect the amount of the investors returns. IFRS 10 had no impact on the consolidation of investments held by the Company.

IFRS 11Joint Arrangements

IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities  Non-monetary Contributions by Venturers. IFRS
11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture under IFRS 11 must be accounted for using the equity method. IFRS 11 had no impact
on the Company.

IFRS 12Disclosure of Interests in Other Entities

IFRS 12 sets out the requirements for disclosures relating to an entitys interests in subsidiaries, joint arrangements, associates and
structured entities. None of these disclosure requirements are applicable for interim condensed consolidated financial statements, unless significant events and transactions in the interim period requires that they are provided. Accordingly, the
Company has not made such disclosures.

IFRS 13Fair Value Measurement

IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required
to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The application of IFRS 13 has not materially impacted the fair value measurements carried out by the Company.

IFRS 13 also requires additional disclosures where required, are provided in the individual notes relating to the assets and liabilities whose
fair values were determined. Fair value hierarchy is provided in Note 19.



44



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



|7. | INVENTORIES
|-- | -----------

Inventories by category are as follows:



|                                    |  |                  |           |  |                  |  |           | 
|----------------------------------- |  | ---------------- | --------- |  | ---------------- |  | --------- | 
|                                    |  | December 31,2013 |           |  | December 31,2012 | 
|                                    |  | $                |           |  | $                | 
|Raw materials                       |  |                  | 3,099,134 |  |                  |  | 1,168,045 | 
|Medical devices, software and parts |  |                  | 686,545   |  |                  |  | 499,502   | 
|TMR kits                            |  |                  | 60,016    |  |                  |  | 46,030    | 
|                                    |  |                  |           |  |                  |  |           | 
|                                    |  |                  | 3,845,695 |  |                  |  | 1,713,577 | 
|                                    |  |                  |           |  |                  |  |           | 

For the year ended December 31, 2013, the Company wrote down inventory of $31,285 to its net realizable
value [2012 - $57,540] and wrote up inventory of nil [2012 - nil]. Inventories are valued at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis for finished goods and weighted average for raw materials.

For the year ended December 31, 2013, $4,175,885 [2012 - $1,521,412] of inventory has been recognized in cost of sales.



|8. | TECHNOLOGY
|-- | ----------

On January 13, 2009, the Company entered into two agreements with
Intuitive Surgical® Inc. [Intuitive], a License and Development Agreement and a Supply Agreement. Under the License and Development Agreement, the Company and Intuitive integrated
the Companys SPY imaging technology into Intuitives da Vinci® robot surgical system. The Company received an initial $2,000,000 license payment upon execution of the
agreements and received additional amounts totalling $3,000,000 based upon achieving certain predefined development milestones. In August 2010, the Company received the final milestone payment representing the final design review and acceptance of
the integrated technology. The total receipt of $5,000,000 has been recorded as a sale of which $3,958,737 of revenue was recognized in 2010 and $1,041,263 was recognized earlier based on the cost recovery method of revenue recognition. The
associated costs were recognized in the same periods.

Under the Supply Agreement, the Company is also appointed as the exclusive long-term
supplier for key components of the Integrated Product and for the imaging agent used to perform each imaging procedure with the Integrated Product. Supply commenced under this agreement in February 2011, following Intuitives receipt of the
U.S. Food and Drug Administrations 510(k) clearance for the Integrated Product and commercialization activities were initiated.

Additionally, the Company received royalty payments for each surgical robot system sold that included the Companys SPY imaging technology
[the Integrated Product]. The Company has also been paid royalties for systems that have been previously sold and installed in hospitals that were field upgraded to include the Integrated Product. The royalty period commenced in February
2011 based on the first commercial sale of the Integrated Product and is renewable subject to certain terms and conditions. For the year ended December 31, 2013, the Company earned royalties of $1,889,404 [2012 - $1,849,668] through the sales
of the Integrated Product.



45



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



|9. | PROPERTY AND EQUIPMENT
|-- | ----------------------



|                                    |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  
|----------------------------------- |  | -------------- | ---------- | - | --------------------- |  | -------- | ----------------- |  |  | --------------------- | - |  | ----- | -------- | - |  |  | ---------- | -
|                                    |  | Medicaldevices |            |   | Furnitureand fixtures |  |          | Computerequipment |  |  | Leaseholdimprovements |   |  | Total |         
|                                    |  | $              |            |   | $                     |  |          | $                 |  |  | $                     |   |  | $     |         
|Cost:                               |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  
|Balance at January 1, 2013          |  |                | 14,989,715 |   |                       |  | 410,413  |                   |  |  | 1,254,189             |   |  |       | 236,628  |   |  |  | 16,890,945 |  
|Additions                           |  |                | 6,132,863  |   |                       |  | 21,774   |                   |  |  | 221,773               |   |  |       | 48,088   |   |  |  | 6,424,498  |  
|Disposals                           |  |                | (464,573   | ) |                       |  |         |                   |  |  |                      |   |  |       |         |   |  |  | (464,573   | )
|                                    |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  
|Balance at December 31, 2013        |  |                | 20,658,005 |   |                       |  | 432,187  |                   |  |  | 1,475,962             |   |  |       | 284,716  |   |  |  | 22,850,870 |  
|                                    |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  
|Depreciation:                       |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  
|Balance at January 1, 2013          |  |                | (4,471,158 | ) |                       |  | (390,981 | )                 |  |  | (1,180,775            | ) |  |       | (130,370 | ) |  |  | (6,173,284 | )
|Depreciation                        |  |                | (3,174,794 | ) |                       |  | (11,866  | )                 |  |  | (93,070               | ) |  |       | (88,435  | ) |  |  | (3,368,165 | )
|Write-down                          |  |                | (25,488    | ) |                       |  |         |                   |  |  |                      |   |  |       |         |   |  |  | (25,488    | )
|Disposals                           |  |                | 76,900     |   |                       |  |         |                   |  |  |                      |   |  |       |         |   |  |  | 76,900     |  
|                                    |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  
|Balance at December 31, 2013        |  |                | (7,594,540 | ) |                       |  | (402,847 | )                 |  |  | (1,273,845            | ) |  |       | (218,805 | ) |  |  | (9,490,037 | )
|                                    |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  
|Net book value at December 31, 2013 |  |                | 13,063,465 |   |                       |  | 29,340   |                   |  |  | 202,117               |   |  |       | 65,911   |   |  |  | 13,360,833 |  
|                                    |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  
|                                    |  |                |            |   |                      
|                                    |  | Medicaldevices |            |   | Furnitureand fixtures |  |          | Computerequipment |  |  | Leaseholdimprovements |   |  | Total |         
|                                    |  | $              |            |   | $                     |  |          | $                 |  |  | $                     |   |  | $     |         
|Cost:                               |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  
|Balance at January 1, 2012          |  |                | 8,971,551  |   |                       |  | 392,190  |                   |  |  | 1,161,916             |   |  |       | 185,902  |   |  |  | 10,711,559 |  
|Additions                           |  |                | 6,350,607  |   |                       |  | 18,223   |                   |  |  | 92,273                |   |  |       | 50,726   |   |  |  | 6,511,829  |  
|Disposals                           |  |                | (332,443   | ) |                       |  |         |                   |  |  |                      |   |  |       |         |   |  |  | (332,443   | )
|                                    |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  
|Balance at December 31, 2012        |  |                | 14,989,715 |   |                       |  | 410,413  |                   |  |  | 1,254,189             |   |  |       | 236,628  |   |  |  | 16,890,945 |  
|                                    |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  
|Depreciation:                       |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  
|Balance at January 1, 2012          |  |                | (2,488,182 | ) |                       |  | (386,898 | )                 |  |  | (1,121,429            | ) |  |       | (91,064  | ) |  |  | (4,087,573 | )
|Depreciation                        |  |                | (2,039,898 | ) |                       |  | (4,083   | )                 |  |  | (59,346               | ) |  |       | (39,306  | ) |  |  | (2,142,633 | )
|Disposals                           |  |                | 56,922     |   |                       |  |         |                   |  |  |                      |   |  |       |         |   |  |  | 56,922     |  
|                                    |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  
|Balance at December 31, 2012        |  |                | (4,471,158 | ) |                       |  | (390,981 | )                 |  |  | (1,180,775            | ) |  |       | (130,370 | ) |  |  | (6,173,284 | )
|                                    |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  
|Net book value at December 31, 2012 |  |                | 10,518,557 |   |                       |  | 19,432   |                   |  |  | 73,414                |   |  |       | 106,258  |   |  |  | 10,717,661 |  
|                                    |  |                |            |   |                       |  |          |                   |  |  |                       |   |  |       |          |   |  |  |            |  

During the year, the Company recorded a write-down of equipment of $25,488 [2012 - nil] and disposed medical
devices of $387,673 [2012 - $275,521]. As at December 31, 2013, medical devices includes construction-in-progress of $2,689,174 [2012 - $1,188,369], which are not being depreciated. Depreciation will commence when the devices are placed at
medical institutions.

For the year ended December 31, 2013, additions included expenditures of $4,245,102 [2012 - $5,173,349] on SPY
technology imaging systems placed at medical institutions to generate revenue.



46



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



|10. | INTANGIBLE ASSETS
|--- | -----------------

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



|                                           |  |          |            |   |              |  |          |               |  |  |            |   |  |  |            |  
|------------------------------------------ |  | -------- | ---------- | - | ------------ |  | -------- | ------------- |  |  | ---------- | - |  |  | ---------- | -
|                                           |  | Licenses |            |   | SPY
software |  |          | Patent
rights |  |  | Total      |  
|                                           |  | $        |            |   | $            |  |          | $             |  |  | $          |  
|Cost:                                      |  |          |            |   |              |  |          |               |  |  |            |   |  |  |            |  
|Balance at January 1, 2013                 |  |          | 5,913,642  |   |              |  | 405,195  |               |  |  | 2,534,836  |   |  |  | 8,853,673  |  
|Additions                                  |  |          |           |   |              |  |         |               |  |  | 2,517,267  |   |  |  | 2,517,267  |  
|                                           |  |          |            |   |              |  |          |               |  |  |            |   |  |  |            |  
|Balance at December 31, 2013               |  |          | 5,913,642  |   |              |  | 405,195  |               |  |  | 5,052,103  |   |  |  | 11,370,940 |  
|                                           |  |          |            |   |              |  |          |               |  |  |            |   |  |  |            |  
|Amortization:                              |  |          |            |   |              |  |          |               |  |  |            |   |  |  |            |  
|Balance at January 1, 2013                 |  |          | (5,854,324 | ) |              |  | (405,195 | )             |  |  | (1,472,346 | ) |  |  | (7,731,865 | )
|Amortization                               |  |          | (59,318    | ) |              |  |         |               |  |  | (276,110   | ) |  |  | (335,428   | )
|                                           |  |          |            |   |              |  |          |               |  |  |            |   |  |  |            |  
|Balance at December 31, 2013               |  |          | (5,913,642 | ) |              |  | (405,195 | )             |  |  | (1,748,456 | ) |  |  | (8,067,293 | )
|                                           |  |          |            |   |              |  |          |               |  |  |            |   |  |  |            |  
|Net book value at December 31, 2013        |  |          |           |   |              |  |         |               |  |  | 3,303,647  |   |  |  | 3,303,647  |  
|                                           |  |          |            |   |              |  |          |               |  |  |            |   |  |  |            |  
|                                           |  |          |            |  
|                                           |  | Licenses |            |   | SPYsoftware  |  |          | patentrights  |  |  | Total      |  
|                                           |  | $        |            |   | $            |  |          | $             |  |  | $          |  
|Cost:                                      |  |          |            |   |              |  |          |               |  |  |            |   |  |  |            |  
|Balance at January 1 and December 31, 2012 |  |          | 5,913,642  |   |              |  | 405,195  |               |  |  | 2,534,836  |   |  |  | 8,853,673  |  
|                                           |  |          |            |   |              |  |          |               |  |  |            |   |  |  |            |  
|Amortization:                              |  |          |            |   |              |  |          |               |  |  |            |   |  |  |            |  
|Balance at January 1, 2012                 |  |          | (5,142,503 | ) |              |  | (202,597 | )             |  |  | (1,236,139 | ) |  |  | (6,581,239 | )
|Amortization                               |  |          | (711,821   | ) |              |  | (202,598 | )             |  |  | (236,207   | ) |  |  | (1,150,626 | )
|                                           |  |          |            |   |              |  |          |               |  |  |            |   |  |  |            |  
|Balance at December 31, 2012               |  |          | (5,854,324 | ) |              |  | (405,195 | )             |  |  | (1,472,346 | ) |  |  | (7,731,865 | )
|                                           |  |          |            |   |              |  |          |               |  |  |            |   |  |  |            |  
|Net book value at December 31, 2012        |  |          | 59,318     |   |              |  |         |               |  |  | 1,062,490  |   |  |  | 1,121,808  |  
|                                           |  |          |            |   |              |  |          |               |  |  |            |   |  |  |            |  

During the year, the Company acquired inventory and patents from Digirad Corporation related to the TRAPPER
Surgical Imaging System for consideration of $2,000,000 and up to an additional $1,000,000 upon the achievement of specific regulatory and commercial milestones. In addition, a royalty on sales will be paid for a period of five years. Of the initial
consideration, approximately $147,000 has been allocated to inventory, with the remainder allocated to the patents. The Company will record the additional $1,000,000 in contingent consideration upon achievement of the specific milestones.

In addition, three other patents were acquired for $664,853, resulting in total additions of $2,517,267. All patents acquired are considered to
have finite useful lives varying from 13  21 years and will be amortized using the straight line method.



47



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



|11. | WARRANTS
|--- | --------



|                  |  |          |         |   |             |  |         |             |  |  |          |   |  |          |            |   |        |  |           |       |  |  |            |   |  |  |            |  
|----------------- |  | -------- | ------- | - | ----------- |  | ------- | ----------- |  |  | -------- | - |  | -------- | ---------- | - | ------ |  | --------- | ----- |  |  | ---------- | - |  |  | ---------- | -
|                  |  | Broker   |         |   | Shareholder |  |         | Shareholder |  |  |          |  
|                  |  | Warrants |         |   | Amount      |  |         | Warrants    |  |  | Amount   |   |  | Warrants |            |   | Amount |  |           | Total | 
|                  |  | #        |         |   | $           |  |         | #           |  |  | $        |   |  | #        |            |   | $      |  |           | $     | 
|December 31, 2011 |  |          | 78,066  |   |             |  | 93,679  |             |  |  | 609,838  |   |  |          | 1,768,439  |   |        |  | 2,129,339 |       |  |  | 6,509,666  |   |  |  | 8,371,784  |  
|Exercised         |  |          | (58,856 | ) |             |  | (70,627 | )           |  |  | (67,407  | ) |  |          | (437,889   | ) |        |  | (507,493  | )     |  |  | (3,395,609 | ) |  |  | (3,904,125 | )
|Revaluation       |  |          |        |   |             |  |        |             |  |  |         |   |  |          | 1,924,278  |   |        |  |          |       |  |  | 6,634,045  |   |  |  | 8,558,323  |  
|                  |  |          |         |   |             |  |         |             |  |  |          |   |  |          |            |   |        |  |           |       |  |  |            |   |  |  |            |  
|December 31, 2012 |  |          | 19,210  |   |             |  | 23,052  |             |  |  | 542,431  |   |  |          | 3,254,828  |   |        |  | 1,621,846 |       |  |  | 9,748,102  |   |  |  | 13,025,982 |  
|                  |  |          |         |   |             |  |         |             |  |  |          |   |  |          |            |   |        |  |           |       |  |  |            |   |  |  |            |  
|Exercised         |  |          | (19,210 | ) |             |  | (23,052 | )           |  |  | (148,558 | ) |  |          | (1,316,698 | ) |        |  | (60,331   | )     |  |  | (635,709   | ) |  |  | (1,975,459 | )
|Revaluation       |  |          |        |   |             |  |        |             |  |  |         |   |  |          | 3,353,734  |   |        |  |          |       |  |  | 11,661,737 |   |  |  | 15,015,471 |  
|                  |  |          |         |   |             |  |         |             |  |  |          |   |  |          |            |   |        |  |           |       |  |  |            |   |  |  |            |  
|December 31, 2013 |  |          |        |   |             |  |        |             |  |  | 393,873  |   |  |          | 5,291,864  |   |        |  | 1,561,515 |       |  |  | 20,774,130 |   |  |  | 26,065,994 |  
|                  |  |          |         |   |             |  |         |             |  |  |          |   |  |          |            |   |        |  |           |       |  |  |            |   |  |  |            |  

On March 24, 2011, the Company closed a private placement of U.S. $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 for one
common share at an exercise price of CDN $3.18 per share. 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 fair value of the warrants, the Company used the Black-Scholes option pricing model with the following assumptions: 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: average 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, 2012 were valued at U.S. $6.01 per warrant.

As at December 31, 2013, the warrants were revalued at U.S. $13.30 per warrant utilizing the following assumptions: volatility rate of
42%; risk-free interest rate of 1.00%; expected life of 2.23 years; and an exchange rate of 0.9402.

In February 2010, the Company closed a
private placement of U.S. $6,610,157, net of cash 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 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. Broker cashless warrants of 128,066 were also issued as part of broker compensation which are exercisable for one common share at CDN $2.82 over a three-year term. Such broker warrants represented
compensation provided to the brokers in connection with the private placement and were accounted for as non-cash transaction costs. The fair value of broker compensation for the services provided approximated the fair value of those warrants. In
determining the fair value of the warrants, the Company used the Black-Scholes option pricing model with the following assumptions: average volatility rate of 69%; risk-free interest rate of 1.88%; and
expected life of five years for shareholder warrants and three years for broker warrants. Shareholder warrants were initially established at U.S. $1.47 and at December 31, 2012 were valued at U.S. $6.00 per warrant.



48



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



As at December 31, 2013, the warrants were revalued at U.S. $13.44 per warrant utilizing
the following assumptions: volatility rate of 44%; risk-free interest rate of 0.80%; expected life of 1.14 years; and an exchange rate of 0.9402.



|12. | INTEREST-BEARING LOANS AND BORROWINGS
|--- | -------------------------------------



|                                            |  |            |  |                  |        |  |                  |  |           | 
|------------------------------------------- |  | ---------- |  | ---------------- | ------ |  | ---------------- |  | --------- | 
|                                            |  |            |  | December 31,2013 |        |  | December 31,2012 | 
|                                            |  | Maturity   |  | $                |        |  | $                | 
|Repayable government assistance             |  | 31/01/2014 |  |                  | 17,587 |  |                  |  | 221,094   | 
|Convertible debentures                      |  | 18/02/2014 |  |                  |       |  |                  |  | 4,656,746 | 
|                                            |  |            |  |                  |        |  |                  |  |           | 
|Total interest-bearing loans and borrowings |  |            |  |                  | 17,587 |  |                  |  | 4,877,840 | 
|                                            |  |            |  |                  |        |  |                  |  |           | 

On February 18, 2009, the Company completed a private placement in the amount of $5,150,000 of senior,
unsecured, convertible debentures maturing on February 18, 2014 [the Debentures]. Fairfax Financial Holdings Limited and certain of its subsidiaries subscribed for $5,000,000 and certain members of management of the Company
subscribed for $150,000. The Debentures are convertible, at the option of the holder, at any time prior to maturity, into common shares of the Company at a conversion price of CDN $2.33 [U.S. $1.87] per share, subject to anti-dilution
adjustments.

The Debentures bear an interest rate of 5% per annum on the full amount, payable in arrears, in equal, semi-annual
instalments, in cash, or at the option of the Company, in additional debentures. The effective interest rate is 9.9%. On maturity of the Debentures, the Company has the option of repaying the principal in cash or in common shares at a conversion
rate equal to 95% of the weighted average trading price of the common shares on the Toronto Stock Exchange for the 20 trading days preceding the maturity date. In the event a Fundamental Change occurs [defined as the occurrence of a Change of
Control or a Termination of Trading] following the original issuance of the Debentures, it may result in the Company repurchasing the Debentures at 110% of the Debenture amount, plus accrued and unpaid interest, subject to
repurchasing terms in the Debenture Agreement.

On December 31, 2009, the Company and debenture holders executed the First Amending
Agreement to the original Debenture Agreement permitting flexible interest rate revisions. The Company exercised its right to issue payment-in-kind [PIK] debentures for $153,478 in lieu of six months cash interest payment due on
December 31, 2009. The PIK debentures are convertible into common shares of the Company with a conversion price of CDN $2.62 [U.S. $2.23] per share. All other terms are subject to the terms of the original Debenture Agreement. The
effective interest rate is 6.6%.

The Debentures are required to be classified in their liability and equity components as determined by
their fair values. The Company determined the liability component by discounting the Debentures of February 18, 2009 using a rate of 16.5% based on an assessment of similar companies in the marketplace. Similarly, the PIK debentures of
December 31, 2009 were discounted utilizing a rate of 13.1%.



49



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



In March 2013, Fairfax Financial Holdings Ltd. exercised their right to convert debenture
with principal value of $5,149,009 in exchange for 2,772,151 common shares of the Company in accordance with the terms of the Debentures.

In May 2013, two management members exercised their right to convert debt of $71,323 in exchange for 37,961 common shares of the Company in
accordance with the terms of the Debentures.

As at December 31, 2013, the principal value of the Debentures was nil [2012 -
$5,218,015] and the interest expense paid for the year ended December 31, 2013 was nil [2012 - $260,952].



|13. | PROVISIONS
|--- | ----------

Provisions are recognized for extended warranty claims on products sold
during the last 12 months based on past experience of the level of repairs and returns. It is expected that all of these warranty claims will be incurred in the next financial year. Assumptions used to calculate the provision for warranties were
based on current sales levels and current information available about warranty costs.



|                        |  |                   |          |   |                   |  |         |  
|----------------------- |  | ----------------- | -------- | - | ----------------- |  | ------- | -
|                        |  | December 31,2013$ |          |   | December 31,2012$ | 
|Balance at January 1    |  |                   | 85,260   |   |                   |  | 41,300  |  
|Arising during the year |  |                   | 411,807  |   |                   |  | 115,200 |  
|Utilization of accrual  |  |                   | (309,987 | ) |                   |  | (71,240 | )
|                        |  |                   |          |   |                   |  |         |  
|Balance at December 31  |  |                   | 187,080  |   |                   |  | 85,260  |  
|                        |  |                   |          |   |                   |  |         |  



|14. | GOVERNMENT GRANTS AND CREDITS
|--- | -----------------------------

Repayable government assistance

The Company has received contributions totalling CDN $985,050 from the National Research Council of Canada [NRC] Industrial
Research Assistance Program. The NRC contributed to two separate projects. This contribution was conditionally repayable commencing in 2004 for one project, and commencing in 2005 for the other project. For each project, the Company is obligated to
pay the NRC 1% of its gross revenue. The Companys obligation ceases if 150% of the contribution is repaid within the first three years of the repayment period. The Company is expected to repay its obligation in full by the earlier of February
2014 based on the repayment schedule agreed upon with NRC or by March 2015.

Because the Company has repaid a material portion of the
contributions from the NRC and is expecting to repay the remaining amount, it is not reasonably assured that the Company will meet the terms for forgiveness of the loan. Therefore, the Company has recorded such contribution from the NRC as a
liability at the time when such contributions were made. As at December 31, 2013, the Company has a repayable government assistance totalling $17,587 [2012 - $221,094] representing the outstanding principal balance, repayable in equal monthly
instalments of $17,587 over the next one month.



50



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



Investment tax credits

The Company is eligible to receive refundable Ontario Innovation Tax Credits and non-refundable Federal Investment Tax Credits as a result of
incurring eligible expenditures for Scientific Research and Experimental Development. Such investment tax credits are deducted from the research and development expenses.



|15. | INCOME TAXES
|--- | ------------

The Company offsets tax assets and liabilities if and only if it has a
legally enforceable right to offset the current tax assets and current tax liabilities or deferred tax assets and deferred tax liabilities and they relate to taxes levied by the same tax authority.

The tax benefits of the following unused tax losses and deductible temporary differences have not been recognized in the financial statement
due to the unpredictability of future earnings:



|                                                                 |  |      |              |   |      |  |              |  
|---------------------------------------------------------------- |  | ---- | ------------ | - | ---- |  | ------------ | -
|                                                                 |  | 2013 |              |   | 2012 | 
|Deductible temporary differences                                 |  | $    |              |   | $    | 
|Non-capital losses                                               |  |      | 93,902,000   |   |      |  | 93,181,000   |  
|Investment Tax Credits (ITC)                                   |  |      | 756,000      |   |      |  | 809,000      |  
|Scientific research and experimental development expenses        |  |      | 2,594,000    |   |      |  | 2,773,000    |  
|Accrued warranty and reserves, and accrued inter-company royalty |  |      | 3,595,000    |   |      |  | 3,564,000    |  
|Share issue costs                                                |  |      | 8,365,000    |   |      |  | 3,522,000    |  
|Property and equipment and licenses                              |  |      | 16,580,000   |   |      |  | 16,986,000   |  
|Net unrecognized deductible temporary differences                |  |      | (125,792,000 | ) |      |  | (120,835,000 | )
|                                                                 |  |      |              |   |      |  |              |  
|                                                                 |  |      |             |   |      |  |             |  
|                                                                 |  |      |              |   |      |  |              |  

A reconciliation between the Companys statutory and effective tax rates is presented below:



|                                                          |  |                  |       |   |                  |  |       |  
|--------------------------------------------------------- |  | ---------------- | ----- | - | ---------------- |  | ----- | -
|                                                          |  | December 31,2013 |       |   | December 31,2012 | 
|                                                          |  | %                |       |   | %                | 
|Statutory rate                                            |  |                  | 25.3  |   |                  |  | 25.3  |  
|Permanent differences                                     |  |                  | (3.3  | ) |                  |  | (3.9  | )
|Impact of foreign income tax rate differential            |  |                  | 0.1   |   |                  |  | (1.2  | )
|Change in enacted rates and true up                       |  |                  | (0.1  | ) |                  |  | 2.4   |  
|Unrecognized benefit of current years tax loss and other |  |                  | (22.0 | ) |                  |  | (22.6 | )
|US alternative minimum tax and state tax                  |  |                  | (0.0  | ) |                  |  | (0.8  | )
|                                                          |  |                  |       |   |                  |  |       |  
|Effective tax rate                                        |  |                  | (0.0  | ) |                  |  | (0.8  | )
|                                                          |  |                  |       |   |                  |  |       |  



51



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



The Company has available research and development expenditures for income tax purposes,
which may be carried forward indefinitely to reduce future years taxable income. The potential income tax benefits associated with these expenditures have not been recorded in the consolidated financial statements. The total of such
expenditures accumulated to December 31, 2013 is approximately $2,594,000 [2012 - $2,773,000].

At December 31, 2013, the Company
has $67,729,000 of Canadian non-capital loss carryfowards [2012 - $66,430,000] that will expire from 2014 to 2033, and $26,173,000 of US non-capital losses [2012 - $26,751,000] that will expire from 2014 to 2032.

The Company has unclaimed Canadian scientific research investment tax credits of $756,000 [2012 - $807,000] that will expire from 2020 to 2028.



|16. | MARKETING AND DISTRIBUTION AGREEMENTS
|--- | -------------------------------------

LifeCell Corporation and Kinetics
Concepts Inc.

On November 29, 2011, the Company, LifeCell Corporation [LifeCell] and LifeCells parent
company, Kinetics Concepts Inc. [KCI], signed exclusive multi-year marketing and sales distribution alliance agreements for the commercialization of the Companys SPY imaging system for
additional surgical and wound care applications in North American and certain other markets. As part of the agreements, the Company received $3,000,000 upon executing the agreement and will receive further unrelated milestone payments. These
unrelated milestone payments will consist of $1,000,000 for delivery of a newly designed wound care device for KCI to use in clinical studies and a further $1,000,000 upon delivery of the first commercial sale or rental of a wound care device.
Additionally, KCI or its affiliates, including LifeCell, will pay the Company $1,000,000 upon the first commercial sale or rental of a SPY device in Japan and will also pay the Company $1,000,000 for the first commercial sale or rental of a SPY
device in the Middle East, Europe or Africa. Under the agreements, the Company will equally share ongoing revenues from LifeCells and KCIs sales to end customers related to the SPY imaging system and the disposable products required to
perform the SPY imaging procedure, net of contracted minimum pricing retained by the Company upon initial shipments to LifeCell or KCI. LifeCell and KCI will provide sales and marketing and distribution activities to the end customer. The Company
will continue to be responsible for research and development, manufacturing and field service.

On September 1, 2010, the Company
entered into a five-year agreement with LifeCell, providing exclusive rights to market and distribute the Companys SPY imaging system in the fields of plastic reconstructive, gastrointestinal and head
and neck surgery in North America. Under the terms of the agreement, the Company received $5,000,000 including $1,000,000 from KCI, for which KCI received 281,653 shares of the Companys common stock at a price of CDN $3.75 per share.
Under the agreement, the Company shares ongoing revenues from LifeCells sales to end customers related to the SPY imaging system and the disposable products required to perform the SPY imaging procedure, net of contracted minimum pricing
retained by the Company upon initial shipments to LifeCell. LifeCell will provide market development and commercialization activities, including professional education, clinical support, reimbursement and sales distribution for the SPY imaging
system. The Company will continue to be responsible for research and development, manufacturing and field service.



52



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



As at December 31, 2013, the Companys deferred partnership fee revenues of
$3,291,666 [2012 - $4,591,666] represents the current and long-term portions of deferred partnership fee revenues for both the LifeCell and the LifeCell/KCI agreements.

MAQUET Cardiovascular, LLC

On January 3, 2012, the Company entered into an agreement with MAQUET Cardiovascular, LLC [MAQUET], naming MAQUET as the
exclusive United States distributor of the Companys CO2 Heart Laser System TMR and the procedure kits required to perform the TMR procedure. The agreement provides for a revenue sharing formula with respect to the sales and marketing
services being provided by MAQUET and the Company supplying and supporting the products.



|17. | FINANCE COSTS AND OPERATING EXPENSES
|--- | ------------------------------------

[a] Finance costs



|                                                      |  |                  |         |  |                  |  |         | 
|----------------------------------------------------- |  | ---------------- | ------- |  | ---------------- |  | ------- | 
|                                                      |  | December 31,2013 |         |  | December 31,2012 | 
|                                                      |  | $                |         |  | $                | 
|Cash paid interest on repayable government assistance |  |                  | 13,840  |  |                  |  | 13,256  | 
|Cash paid interest on convertible debentures          |  |                  |        |  |                  |  | 260,952 | 
|Imputed interest on convertible debentures            |  |                  | 169,056 |  |                  |  | 433,292 | 
|                                                      |  |                  |         |  |                  |  |         | 
|                                                      |  |                  | 182,896 |  |                  |  | 707,500 | 
|                                                      |  |                  |         |  |                  |  |         | 

[b] Depreciation and cost of inventories included in the consolidated statements of loss and comprehensive
loss



|                                              |  |                  |           |  |                  |  |           | 
|--------------------------------------------- |  | ---------------- | --------- |  | ---------------- |  | --------- | 
|                                              |  | December 31,2013 |           |  | December 31,2012 | 
|                                              |  | $                |           |  | $                | 
|Included in cost of sales                     |  |                  |           |  |                  |  |           | 
|Depreciation                                  |  |                  | 2,551,934 |  |                  |  | 1,938,294 | 
|Cost of inventories recognized as an expense  |  |                  | 4,175,885 |  |                  |  | 1,521,412 | 
|                                              |  |                 
|Included in administrative expenses           |  |                  |           |  |                  |  |           | 
|Depreciation                                  |  |                  | 112,986   |  |                  |  | 62,687    | 
|                                              |  |                 
|Included in research and development expenses |  |                  |           |  |                  |  |           | 
|Depreciation                                  |  |                  | 728,733   |  |                  |  | 141,652   | 



53



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



[c] Employee and benefits expense



|                               |  |                  |           |  |                  |  |           | 
|------------------------------ |  | ---------------- | --------- |  | ---------------- |  | --------- | 
|                               |  | December 31,2013 |           |  | December 31,2012 | 
|                               |  | $                |           |  | $                | 
|Wages and salaries             |  |                  | 8,833,980 |  |                  |  | 6,007,884 | 
|Benefit and bonus expense      |  |                  | 2,397,946 |  |                  |  | 1,423,972 | 
|Social security costs/benefits |  |                  | 223,079   |  |                  |  | 176,209   | 

[d] Lease payment expense

The Company has recognized $424,777 in lease expense for the year ended December 31, 2013 [2012 - $400,513].



|18. | SHARE-BASED COMPENSATION 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 share-based compensation cost that
has been recognized for the year ended December 31, 2013 and included in the respective function line in the consolidated statements of loss and comprehensive loss is $2,543,984 [2012 - $1,316,683] with a corresponding increase to contributed
surplus.



54



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



A summary of the options outstanding as at December 31, 2013 and 2012 under the Plan are
presented below:



|                                       |  |                   |           |   |                               |  |       |                   |  |  |                               |   |  |  |      | 
|-------------------------------------- |  | ----------------- | --------- | - | ----------------------------- |  | ----- | ----------------- |  |  | ----------------------------- | - |  |  | ---- | 
|                                       |  | December 31, 2013 |           |   | December 31, 2012             | 
|                                       |  | Numberoutstanding |           |   | Weightedaverageexercise price |  |       | Numberoutstanding |  |  | Weightedaverageexercise price |  
|                                       |  | #                 |           |   | $                             |  |       | #                 |  |  | $                             |  
|Options outstanding, beginning of year |  |                   | 3,066,295 |   |                               |  | 3.98  |                   |  |  | 2,589,211                     |   |  |  | 3.18 | 
|Options granted                        |  |                   | 786,500   |   |                               |  | 13.83 |                   |  |  | 518,250                       |   |  |  | 6.77 | 
|Options exercised                      |  |                   | (899,695  | ) |                               |  | 2.74  |                   |  |  | (24,363                       | ) |  |  | 2.79 | 
|Options cancelled                      |  |                   | (66,655   | ) |                               |  | 2.14  |                   |  |  | (7,303                        | ) |  |  | 2.62 | 
|Options forfeited                      |  |                   | (175,501  | ) |                               |  | 12.90 |                   |  |  | (9,500                        | ) |  |  | 5.05 | 
|                                       |  |                   |           |   |                               |  |       |                   |  |  |                               |   |  |  |      | 
|Options outstanding, end of year       |  |                   | 2,710,944 |   |                               |  | 6.72  |                   |  |  | 3,066,295                     |   |  |  | 3.98 | 
|                                       |  |                   |           |   |                               |  |       |                   |  |  |                               |   |  |  |      | 
|Options exercisable, end of year       |  |                   | 1,598,577 |   |                               |  | 4.13  |                   |  |  | 2,192,098                     |   |  |  | 3.35 | 
|                                       |  |                   |           |   |                               |  |       |                   |  |  |                               |   |  |  |      | 

The following table lists the inputs to the Black-Scholes option
pricing model used for the Plan for the years ended December 31, 2013 and 2012.



|                                             |  |                  |           |   |                  |   |           |  
|-------------------------------------------- |  | ---------------- | --------- | - | ---------------- | - | --------- | -
|                                             |  | December 31,2013 |           |   | December 31,2012 |  
|Dividend yield                               |  |                  |          |   |                  |   |          |  
|Expected volatility rate                     |  |                  | 51        | % |                  |   | 63        | %
|Risk-free interest rate                      |  |                  | 1.60      | % |                  |   | 1.80      | %
|Expected life of share options for employees |  |                  | 4.0 years |   |                  |   | 4.0 years |  
|Weighted average share price                 |  | $                | 5.37      |   |                  | $ | 6.77      |  

The expected life of the stock 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 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 years presented in the consolidated financial statements.



55



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



|19. | FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
|--- | ---------------------------------------------------

[a] Fair value

Set out below is a comparison by class of the carrying amounts and fair value of the Companys financial instruments that are carried in
the consolidated financial statements:



|                                                                      |  |                   |             |  |                   |  |             |                |  |  |            |  |  |  |            | 
|--------------------------------------------------------------------- |  | ----------------- | ----------- |  | ----------------- |  | ----------- | -------------- |  |  | ---------- |  |  |  | ---------- | 
|                                                                      |  | December 31, 2013 |             |  | December 31, 2012 | 
|                                                                      |  | Carryingamount    |             |  | Fair value        |  |             | Carryingamount |  |  | Fair value | 
|                                                                      |  | $                 |             |  | $                 |  |             | $              |  |  | $          | 
|Financial assets                                                      |  |                   |             |  |                   |  |             |                |  |  |            |  |  |  |            | 
|Held-for-trading Cash and cash equivalents                            |  |                   | 182,329,782 |  |                   |  | 182,329,782 |                |  |  | 38,954,181 |  |  |  | 38,954,181 | 
|Loans and receivables Accounts receivable                             |  |                   | 8,502,095   |  |                   |  | 8,502,095   |                |  |  | 4,056,954  |  |  |  | 4,056,954  | 
|                                                                      |  |                   |             |  |                   |  |             |                |  |  |            |  |  |  |            | 
|                                                                      |  |                   | 190,831,877 |  |                   |  | 190,831,877 |                |  |  | 43,011,135 |  |  |  | 43,011,135 | 
|                                                                      |  |                   |             |  |                   |  |             |                |  |  |            |  |  |  |            | 
|Financial liabilities                                                 |  |                   |             |  |                   |  |             |                |  |  |            |  |  |  |            | 
|Derivative financial liabilities at fair value through profit or loss |  |                   |             |  |                   |  |             |                |  |  |            |  |  |  |            | 
|Shareholder warrants                                                  |  |                   | 26,065,994  |  |                   |  | 26,065,994  |                |  |  | 13,002,930 |  |  |  | 13,002,930 | 
|Other financial liabilities Convertible debentures                    |  |                   |            |  |                   |  |            |                |  |  | 4,656,746  |  |  |  | 4,656,746  | 
|Repayable government assistance                                       |  |                   | 17,587      |  |                   |  | 17,587      |                |  |  | 221,094    |  |  |  | 221,094    | 
|Accounts payable and accrued liabilities                              |  |                   | 7,123,563   |  |                   |  | 7,123,563   |                |  |  | 3,407,329  |  |  |  | 3,407,329  | 
|                                                                      |  |                   |             |  |                   |  |             |                |  |  |            |  |  |  |            | 
|                                                                      |  |                   | 33,207,144  |  |                   |  | 33,207,144  |                |  |  | 21,288,099 |  |  |  | 21,288,099 | 
|                                                                      |  |                   |             |  |                   |  |             |                |  |  |            |  |  |  |            | 

The fair values of the financial assets and liabilities 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, repayable government assistance, accounts payable and accrued liabilities and provisions approximate their carrying amounts largely due to the short-term maturities of
these instruments.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Convertible debentures are evaluated by the Company based on parameters such as interest rates and the risk characteristics of the instrument.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The fair value of the warrants is estimated using the Black-Scholes option pricing model incorporating various inputs including the underlying price volatility and discount rate.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



56



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



[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 consolidated statements of financial position is as follows:



|                          |  |                   |             |  |                   |  |            |         |  |  |         |  |  |         |            |  |         |  |            |  |  |  |   | 
|------------------------- |  | ----------------- | ----------- |  | ----------------- |  | ---------- | ------- |  |  | ------- |  |  | ------- | ---------- |  | ------- |  | ---------- |  |  |  | - | 
|                          |  | December 31, 2013 |             |  | December 31, 2012 | 
|                          |  | Level 1           |             |  | Level 2           |  |            | Level 3 |  |  | Level 1 |  |  | Level 2 |            |  | Level 3 | 
|                          |  | $                 |             |  | $                 |  |            | $       |  |  | $       |  |  | $       |            |  | $       | 
|Financial assets          |  |                   |             |  |                   |  |            |         |  |  |         |  |  |         |            |  |         |  |            |  |  |  |   | 
|Cash and cash equivalents |  |                   | 182,329,782 |  |                   |  |           |         |  |  |        |  |  |         | 38,954,181 |  |         |  |           |  |  |  |  | 
|                          |  |                   |             |  |                   | 
|Financial liabilities     |  |                   |             |  |                   |  |            |         |  |  |         |  |  |         |            |  |         |  |            |  |  |  |   | 
|Shareholder warrants      |  |                   |            |  |                   |  | 26,065,994 |         |  |  |        |  |  |         |           |  |         |  | 13,002,930 |  |  |  |  | 

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

In April 2010, the brokerage firm administering the Companys investments reported a decrease in the value of this
investment based on a market devaluation of the Auction Rate Securities [ARS] by reputable financial rating firms. In recognition of this market devaluation, the Company wrote down the fair value of the ARS to nil in the first quarter of
2010. During the year, the Company received $25,000 as a recovery on ARS. As at December 31, 2013, the principal value of the ARS is $75,000 [2012 - $100,000] with a fair value of nil [2012 - nil].

[c] Management of risks arising from financial instruments

The Companys principal financial liabilities, other than warrants, comprise loans and borrowings and trade and other payables. The main
purpose of these financial liabilities is to finance the Companys operations and to provide guarantees to support its operations. The Company has trade and other receivables and cash that are derived directly from its operations. The Company
also holds available-for-sale financial instruments and enters into derivative transactions.



57



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



The Companys activities expose it to a variety of financial risks: market risk
[including foreign currency and interest rate risk], credit risk and liquidity risk. The Companys overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the
Companys financial performance. The Company uses to a limited extent derivative financial instruments to mitigate certain risk exposures. The Company does not purchase any derivative financial instruments for speculative purposes. Risk
management is the responsibility of the corporate finance function, which has the appropriate skills, experience and supervision. The Companys domestic and foreign operations, along with the corporate finance function, identify, evaluate and,
where appropriate, mitigate financial risks. Material risks are monitored and are regularly discussed with the Audit Committee of the Board of Directors. The Audit Committee provides assurance to the Companys senior management that the
Companys financial risk-taking activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with the Companys policies
and risk appetite.

The risks associated with the Companys financial instruments are as follows:

[i] Market risk

Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices.
Components of market risk to which the Company is exposed are discussed below. Financial instruments affected by market risk include trade accounts receivable and payable,
available-for-sale financial instruments and derivative financial instruments.

The sensitivity analyses in the following sections relate to the financial position as at December 31, 2013.

The sensitivity analyses have been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt
and derivatives and the proportion of financial instruments in foreign currencies are all constant. The analyses exclude the impact of movements in market variables on the carrying value of provisions and on the non-financial assets and liabilities
of foreign operations.

The following assumptions have been made in calculating the sensitivity analyses:



| |  |  | The consolidated statements of financial position sensitivity relates to warrants.
| | - |  | ----------------------------------------------------------------------------------



| |  |  | The sensitivity of the relevant consolidated statements of loss and comprehensive loss items is the effect of the assumed changes in respective market risks. This is based on the financial assets and financial
liabilities held at December 31, 2013.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Foreign currency risk

Foreign currency risk arises due to fluctuations in the fair value or cash flows of financial instruments due to changes in foreign exchange
rates and exposure.

Since a significant part of the Companys purchases are transacted in Canadian dollars and the Company has
repayable government assistance denominated in Canadian dollars, the Company may experience transaction exposures because of volatility in the exchange rate between the Canadian and U.S. dollar. Based on the Companys Canadian dollar
denominated net inflows and outflows for the year ended December 31, 2013, a weakening (strengthening) of the U.S. dollar of 10% would, everything else being equal, have a positive (negative) effect on net income before income taxes [due to
changes in the fair value of monetary assets and



58



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



liabilities including non-designated foreign currency derivatives] of ($186,369) [2012 - ($158,456)]. The Companys exposure to foreign currency
changes for all other currencies is not material.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
interest rates. The Company does not have exposure to interest rate risk as interest rates for its convertible debentures and repayable government assistance loan are fixed.

[ii] Credit risk

Credit risk is the risk that one party to a financial instrument fails to discharge an obligation and causes financial loss to another party.
The Company is exposed to credit risk from its operating activities [primarily for trade accounts receivable] and from financing activities, including cash deposits with banks and financial institutions.

Accounts receivable are subject to credit risk exposure and the carrying values reflect managements assessment of the associated maximum
exposure to such credit risk. The maximum exposure to credit risk is equal to the carrying value of the financial assets. The objective of managing counterparty credit risk is to prevent losses in financial assets. The Company assesses the credit
quality of the counterparties, taking into account their financial position, past experience and other factors. Credit risk is mitigated by entering into sales contracts with only stable, creditworthy parties and through frequent reviews of
exposures to individual entities. The Company has not experienced any direct material impacts to date of the economic downturn; however, the indirect impact could impact future profitability.

Approximately $7,050,417 or 83% [2012 - $3,617,173 or 84%] of the outstanding accounts receivable, before provisions at December 31, 2013,
is due from five customers [2012 - three customers]. As at December 31, 2013, one customer accounts for $3,081,143 of accounts receivable, before provisions [2012 - $1,939,810].

The Company assesses the credit risk of accounts receivable by evaluating the aging of accounts receivable based on the invoice date. The
carrying amount of accounts receivable is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statements of loss and comprehensive loss. When a receivable balance is considered uncollectible,
it is written off against the allowance for doubtful accounts. Subsequent recoveries of amounts previously written off are credited against operating expenses in the consolidated statements of loss and comprehensive loss. As at December 31,
2013, the Company has made a provision of $231,084 [2012 - $228,454] in respect of accounts which it believes may not be collectible. As at December 31, 2013, the Companys accounts receivable, before provision, were 73% concentrated in
the U.S. and Canada and 27% were concentrated in Europe and Asia [2012  U.S. and Canada - 95%; Europe and Asia - 5%].

The
carrying amount of accounts receivable is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statements of loss and comprehensive loss within operating expenses. When a receivable balance is
considered uncollectible, it is written off against the allowance for accounts receivable. Subsequent recoveries of amounts previously written off are credited against other operating expenses in the consolidated statements of loss and comprehensive
loss. The following table sets forth details of the aging of trade accounts receivable that are not overdue, as well as an analysis of overdue amounts and related allowance for doubtful accounts:



59



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



|                                     |  |                  |           |   |                  |  |           |  
|------------------------------------ |  | ---------------- | --------- | - | ---------------- |  | --------- | -
|                                     |  | December 31,2013 |           |   | December 31,2012 | 
|                                     |  | $                |           |   | $                | 
|Total accounts receivable            |  |                  | 8,733,179 |   |                  |  | 4,285,408 |  
|Less allowance for doubtful accounts |  |                  | (231,084  | ) |                  |  | (228,454  | )
|                                     |  |                  |           |   |                  |  |           |  
|Total accounts receivable, net       |  |                  | 8,502,095 |   |                  |  | 4,056,954 |  
|                                     |  |                  |           |   |                  |  |           |  
|Of which                             |  |                  |           |   |                  |  |           |  
|Current                              |  |                  | 7,954,819 |   |                  |  | 3,505,582 |  
|31 - 60 days                         |  |                  | 474,145   |   |                  |  | 351,024   |  
|61 - 90 days                         |  |                  | 54,101    |   |                  |  |          |  
|Over 90 days                         |  |                  | 250,114   |   |                  |  | 428,802   |  
|Less allowance for doubtful accounts |  |                  | (231,084  | ) |                  |  | (228,454  | )
|                                     |  |                  |           |   |                  |  |           |  
|Total accounts receivable, net       |  |                  | 8,502,095 |   |                  |  | 4,056,954 |  
|                                     |  |                  |           |   |                  |  |           |  

The movement in the Companys allowance for doubtful accounts for the years ended December 31, 2013
and 2012 were as follows:



|                                    |  |                  |         |   |                  |  |          |  
|----------------------------------- |  | ---------------- | ------- | - | ---------------- |  | -------- | -
|                                    |  | December 31,2013 |         |   | December 31,2012 | 
|                                    |  | $                |         |   | $                | 
|Balance, beginning of year          |  |                  | 228,454 |   |                  |  | 583,477  |  
|Additional provision recognized     |  |                  | 15,706  |   |                  |  | 2,598    |  
|Amounts recovered during the year   |  |                  | (10,000 | ) |                  |  | (65,060  | )
|Amounts written off during the year |  |                  | (3,076  | ) |                  |  | (292,561 | )
|                                    |  |                  |         |   |                  |  |          |  
|Balance, end of year                |  |                  | 231,084 |   |                  |  | 228,454  |  
|                                    |  |                  |         |   |                  |  |          |  

Credit risk from balances with banks and financial institutions is managed by the Companys treasury,
responsible in accordance with the Companys policy. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to each counterparty. Counterparty credit limits are reviewed by the Companys
Board of Directors on an annual basis and may be updated throughout the year, subject to approval of the Companys Finance Committee. The limits are set to minimize the concentration of risks and therefore mitigate financial loss through the
counterpartys potential failure. The Companys maximum exposure to credit risk for the components of the consolidated statements of financial position is the carrying amount of cash and cash equivalents and other current financial assets.

[iii] Liquidity risk

Liquidity risk is the potential inability to meet financial obligations as they fall due. The Company manages this risk by monitoring detailed
quarterly cash forecasts for the next 12 months, and annual forecasts for the following one-year period to ensure adequate and efficient use of cash resources. The Company has accounts payable and accrued liabilities and repayable government
assistance that have contractual cash flows approximating their fair value and have maturities of less than one year. The Company attempts to achieve



60



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



this obligation through managing cash from operations and through the availability of funding from strategic alliances or equity placements.

The tables below summarize the maturity profile of the Companys financial liabilities as at December 31, 2013 and 2012 based on
contractual undiscounted payments:

December 31, 2013:



|                                                 |  |       |           |  |                 |  |           |                 |  |  |                 |  |  |            |   |  |  |  |   | 
|------------------------------------------------ |  | ----- | --------- |  | --------------- |  | --------- | --------------- |  |  | --------------- |  |  | ---------- | - |  |  |  | - | 
|                                                 |  | Total |           |  | Less than1 year |  |           | 1 to 3    years |  |  | 4 to 5    years |  |  | Thereafter |  
|                                                 |  | $     |           |  | $               |  |           | $               |  |  | $               |  |  | $          |  
|Convertible debentures                           |  |       |          |  |                 |  |          |                 |  |  |                |  |  |            |  |  |  |  |  | 
|Convertible debentures interest payable          |  |       |          |  |                 |  |          |                 |  |  |                |  |  |            |  |  |  |  |  | 
|Repayable government assistance                  |  |       | 17,587    |  |                 |  | 17,587    |                 |  |  |                |  |  |            |  |  |  |  |  | 
|Repayable government assistance interest payable |  |       | 194       |  |                 |  | 194       |                 |  |  |                |  |  |            |  |  |  |  |  | 
|Accounts payable and accrued liabilities         |  |       | 7,123,563 |  |                 |  | 7,123,563 |                 |  |  |                |  |  |            |  |  |  |  |  | 
|                                                 |  |       |           |  |                 |  |           |                 |  |  |                 |  |  |            |   |  |  |  |   | 
|Total financial liability payments               |  |       | 7,141,344 |  |                 |  | 7,141,344 |                 |  |  |                |  |  |            |  |  |  |  |  | 
|                                                 |  |       |           |  |                 |  |           |                 |  |  |                 |  |  |            |   |  |  |  |   | 

December 31, 2012:



|                                                        |  |       |           |  |                 |  |           |              |  |  |                 |  |  |            |   |  |  |  |   | 
|------------------------------------------------------- |  | ----- | --------- |  | --------------- |  | --------- | ------------ |  |  | --------------- |  |  | ---------- | - |  |  |  | - | 
|                                                        |  | Total |           |  | Less than1 year |  |           | 1 to 3
years |  |  | 4 to 5    years |  |  | Thereafter |  
|                                                        |  | $     |           |  | $               |  |           | $            |  |  | $               |  |  | $          |  
|Convertible debentures                                  |  |       | 5,218,015 |  |                 |  |          |              |  |  | 5,218,015       |  |  |            |  |  |  |  |  | 
|Convertible debentures interest payable                 |  |       | 295,926   |  |                 |  | 260,901   |              |  |  | 35,025          |  |  |            |  |  |  |  |  | 
|Repayable government assistance                         |  |       | 221,094   |  |                 |  | 203,148   |              |  |  | 17,946          |  |  |            |  |  |  |  |  | 
|Repayable government assistance interest payable        |  |       | 28,035    |  |                 |  | 27,833    |              |  |  | 202             |  |  |            |  |  |  |  |  | 
|Accounts payable and accrued liabilities and provisions |  |       | 3,407,329 |  |                 |  | 3,407,329 |              |  |  |                |  |  |            |  |  |  |  |  | 
|                                                        |  |       |           |  |                 |  |           |              |  |  |                 |  |  |            |   |  |  |  |   | 
|Total financial liability payments                      |  |       | 9,170,399 |  |                 |  | 3,899,211 |              |  |  | 5,271,188       |  |  |            |  |  |  |  |  | 
|                                                        |  |       |           |  |                 |  |           |              |  |  |                 |  |  |            |   |  |  |  |   | 

[d] Capital management

Consistent with the Prospectus Supplement filed on October 25, 2013, the Company intends to use such net proceeds for general corporate
purposes, including funding potential future acquisitions, capital expenditures, the investments required to commercialize PINPOINT and LUNA, the procurement of raw material supply and for future research and development of new product hardware and
software and new imaging molecules such as those required for nerve imaging. The Company may use a portion of the net proceeds to acquire or invest in complementary businesses, technologies or assets. The Company currently has no present
understandings, commitments or agreements to enter into any acquisitions or make any investments. The primary objective of the Company is to ensure receipt of sufficient funds from sales, equity offerings, partnership fees and debt instruments to
support the cash requirements for ongoing operations.



61



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



|20. | RELATED PARTY DISCLOSURES
|--- | -------------------------

Fairfax Financial Holdings Limited exercised their right to
convert debenture with principal value of $5,149,009 in exchange for 2,772,151 common shares of the Company. A director of the Company is also a director of Fairfax Financial Holdings Limited.

As at December 31, 2013 and 2012, the Company has no receivable or payable values with key management personnel or directors. The key
management personnel include the President and Chief Executive Officer; Chief Financial Officer; Senior Vice President and General Manager; Senior Vice President, Marketing and Business Development, Open Surgery; Vice President, Operations; and Vice
President, Investor Relations and Corporate Development.

Compensation of key management personnel of the Company



|                                  |  |                  |           |  |                  |  |           | 
|--------------------------------- |  | ---------------- | --------- |  | ---------------- |  | --------- | 
|                                  |  | December 31,2013 |           |  | December 31,2012 | 
|                                  |  | $                |           |  | $                | 
|Wages and salaries                |  |                  | 1,924,959 |  |                  |  | 1,256,144 | 
|Benefits and bonus expense        |  |                  | 896,130   |  |                  |  | 624,152   | 
|Social security costs             |  |                  | 19,853    |  |                  |  | 16,496    | 
|                                  |  |                  |           |  |                  |  |           | 
|Total key management compensation |  |                  | 2,840,942 |  |                  |  | 1,896,792 | 
|                                  |  |                  |           |  |                  |  |           | 

The Company has recognized $2,116,926 [2012  $687,031] in share-based compensation cost for key
management personnel and $245,997 [2012 - $219,890] for Board of Directors for the year ended December 31, 2013.



62



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



|21. | 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 at December 31, 2011                              |  |               | 32,769,462 |  |   |  | 98,695,023  | 
|Public offering                                           |  |               | 7,015,000  |  |   |  | 36,946,898  | 
|Exercise of broker warrants pursuant to private placement |  |               | 25,299     |  |   |  | 130,627     | 
|Exercise of stock options                                 |  |               | 24,363     |  |   |  | 137,622     | 
|Exercise of warrants                                      |  |               | 392,119    |  |   |  | 4,036,393   | 
|                                                          |  |               |            |  |   |  |             | 
|Balance at December 31, 2012                              |  |               | 40,226,243 |  |   |  | 139,946,563 | 
|                                                          |  |               |            |  |   |  |             | 
|Public offering                                           |  |               | 10,735,000 |  |   |  | 154,318,327 | 
|Exercise of broker warrants pursuant to private placement |  |               | 14,099     |  |   |  | 23,052      | 
|Exercise of convertible debt                              |  |               | 2,810,112  |  |   |  | 6,280,155   | 
|Exercise of stock options                                 |  |               | 899,695    |  |   |  | 3,960,668   | 
|Exercise of warrants                                      |  |               | 208,889    |  |   |  | 2,574,309   | 
|                                                          |  |               |            |  |   |  |             | 
|Balance at December 31, 2013                              |  |               | 54,894,038 |  |   |  | 307,103,074 | 
|                                                          |  |               |            |  |   |  |             | 

On May 1, 2013, the Company announced that it had completed the closing of its public offering of
4,485,000 common shares at a price of $12.90 per share. Gross proceeds from the offering were approximately $57,856,500 resulting in cash proceeds of $54,674,930, net of transaction costs. The shares of the Company are registered with the SEC and
listed on the NASDAQ in addition to the TSX.

On October 29, 2013, the Company announced that it had completed the closing of its
public offering of 6,250,000 common shares at a price of $16.75 per share. Gross proceeds from the offering were approximately $104,687,500 resulting in cash proceeds of $99,643,397, net of transaction costs. The shares of the Company are registered
with the SEC and listed on the NASDAQ in addition to the TSX.



|22. | LOSS PER SHARE
|--- | --------------

Basic loss per share amounts are calculated by dividing net loss for the
year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Diluted loss per share amounts are calculated by dividing the net loss attributable to ordinary equity holders
of the parent by the weighted average number of ordinary shares outstanding during the year 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.



63



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



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



|                                                                                                               |  |                  |            |  |                  |  |            | 
|-------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- |  | ---------------- |  | ---------- | 
|                                                                                                               |  | December 31,2013 |            |  | December 31,2012 | 
|                                                                                                               |  | $                |            |  | $                | 
|Net loss and comprehensive loss for the year attributable to shareholders for basic and diluted loss per share |  |                  | 22,302,095 |  |                  |  | 12,344,133 | 
|                                                                                                               |  |                  |            |  |                  |  |            | 
|Weighted average number of common shares for basic and diluted loss per share                                  |  |                  | 47,058,647 |  |                  |  | 38,006,691 | 
|                                                                                                               |  |                  |            |  |                  |  |            | 

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

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



|23. | COMMITMENTS AND CONTINGENCIES
|--- | -----------------------------

Lease commitments

The Company has entered into lease commitments for office premises located in Mississauga, Ontario, Richmond, British Columbia and Taunton,
Massachusetts. The total future minimum annual lease payments, including four months free base rent in Richmond, British Columbia and proportionate operating expenses for three locations, are as follows:



|                                            |  |   |         | 
|------------------------------------------- |  | - | ------- | 
|                                            |  | $ |        
|Within one year                             |  |   | 426,670 | 
|After one year but not more than five years |  |   | 424,999 | 
|More than five years                        |  |   |        | 
|                                            |  |   |         | 
|                                            |  |   | 851,669 | 
|                                            |  |   |         | 

Sales and marketing agreement

On September 1, 2010, the Company entered into a five-year agreement with LifeCell, providing exclusive rights to market and distribute
the SPY Imaging Technology in the fields of plastic reconstructive, gastrointestinal and head and neck surgery in North America. Pursuant to the agreement, the Company has a three-year annual commitment to spend a minimum amount on research and
development which is within normal business operating expenses.



64



---

Novadaq Technologies Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR
THE YEARS ENDED DECEMBER 31, 2012 AND 2011

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



Loan agreement

On August 26, 2011, the Company executed a revolving credit agreement with a Canadian chartered bank entitling the Company to borrow to a
maximum limit of $2,500,000, subject to a borrowing base formula, certain financial covenants and reporting requirements. The credit facility is secured by a General Security Agreement constituting a first ranking security interest in all personal
property of the Company, with a conventional rate of interest. Since its inception and as at December 31, 2013, the Company has not utilized the credit facility. The Company is in compliance with the financial covenants and reporting
requirements at December 31, 2013.



|24. | SEGMENTED INFORMATION
|--- | ---------------------

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

Revenue by region is as follows:



|                      |  |                  |            |  |                  |  |            | 
|--------------------- |  | ---------------- | ---------- |  | ---------------- |  | ---------- | 
|                      |  | December 31,2013 |            |  | December 31,2012 | 
|                      |  | $                |            |  | $                | 
|United States         |  |                  | 30,304,666 |  |                  |  | 22,229,246 | 
|Outside United States |  |                  | 4,715,872  |  |                  |  | 759,814    | 
|                      |  |                  |            |  |                  |  |            | 
|Total                 |  |                  | 35,020,538 |  |                  |  | 22,989,060 | 
|                      |  |                  |            |  |                  |  |            | 

Property and equipment, net is as follows



|              |  |                  |            |  |                  |  |            | 
|------------- |  | ---------------- | ---------- |  | ---------------- |  | ---------- | 
|              |  | December 31,2013 |            |  | December 31,2012 | 
|              |  | $                |            |  | $                | 
|Canada        |  |                  | 5,161,713  |  |                  |  | 2,419,062  | 
|United States |  |                  | 8,199,120  |  |                  |  | 8,298,599  | 
|              |  |                  |            |  |                  |  |            | 
|Total         |  |                  | 13,360,833 |  |                  |  | 10,717,661 | 
|              |  |                  |            |  |                  |  |            | 



65



---

Corporate Information







|                                                    |  |                                                         
|--------------------------------------------------- |  | --------------------------------------------------------
|DIRECTORS                                           |  | OFFICERS                                                
|                                                    | 
|Arun Menawat Ph.D., MBA                             |  | Arun Menawat Ph.D., MBA                                 
|                                                    | 
|President and Chief Executive Officer               |  | President and Chief Executive Officer                   
|                                                    | 
|G. Steven Burrill1*                                 |  | Stephen Purcell                                         
|                                                    | 
|CEO, Burrill & Company                              |  | Chief Financial Officer                                 
|                                                    | 
|Aaron Davidson, MBA2, 3*                            |  | Mary Kay Baggs                                          
|                                                    | 
|Managing Director, H I G Ventures                   |  | Sr Vice President Business Development, Surgical Systems
|                                                    | 
|Anthony F. Griffiths**1, 3                          |  | Roger Deck                                              
|                                                    | 
|Chairman, Director                                  |  | Vice President, Operations                              
|                                                    | 
|Harold O. Koch, Jr., BSc1, 2                        |  |                                                         
|                                                    | 
|Executive Vice President & Chief Scientific Officer |  |                                                         
|Pamlab, Inc.                                        |  |                                                         
|                                                    | 
|William A. Mackinnon, FCA2*, 3                      |  | CORPORATE OFFICES                                       
|                                                    | 
|Corporate Director                                  |  | Novadaq Technologies Inc                                
|                                                    |  | 5090 Explorer Drive, Suite 202                          
|                                                    |  | Mississauga, Ontario                                    
|                                                    |  | L4W 4T9                                                 
|                                                    | 
|                                                    |  | T 905.629.3822                                          
|                                                    |  | T 1.855.NOVADAQ (668.2327)                              
|                                                    |  | F 905.247.0656                                          
|                                                    | 
|                                                    |  | www.novadaq.com                                         



|1 | Governance Committee
|- | --------------------

|2 | Audit Committee
|- | ---------------

|3 | Compensation Committee
|- | ----------------------

|* | Denotes Committee Chair
|- | -----------------------

|** | Denotes Chairman of the Board
|-- | -----------------------------



| 66 |



---

Shareholder Information







|                                                                                                     |  |                                                                                                                                                                                                                           
|---------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|AUDITORS                                                                                             |  | MARKETS                                                                                                                                                                                                                   
|                                                                                                     | 
|Ernst & Young LLP                                                                                    |  | The Companys common shares are listed on the Toronto                                                                                                                                                                     
|Toronto-Dominion Centre                                                                              |  | Stock Exchange (TSX) under the symbol NDQ and                                                                                                                                                                         
|222 Bay Street                                                                                       |  | Nasdaq (NASDAQ) under the symbol NVDQ.                                                                                                                                                                                
|Toronto, Ontario                                                                                     |  |                                                                                                                                                                                                                           
|M5K 1J7                                                                                              |  |                                                                                                                                                                                                                           
|LEGAL COUNSEL
 Stikeman Elliott LLP
5300 Commerce Court West 199 Bay Street
Toronto, Ontario M5L 1B9 |  | ANNUAL MEETING
 Novadaq will hold its Annual Meeting on May 21, 2014
 at 9:30 a.m.
Stikeman Elliott LLP 5300 Commerce Court West
199 Bay Street Toronto, Ontario
M5L 1B9                                                  
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|TRANSFER AGENT                                                                                       |  | ON THE INTERNET                                                                                                                                                                                                           
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|Computershare Trust Company of Canada
100 University Avenue Toronto, Ontario
M5J 2Y1                 |  | Interested investors may browse Novadaqs corporate website at wwwnovadaq.com to obtain regularly updated information, including press releases, webcasts, share trading data, regulatory filings and financial
statements
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|INVESTOR RELATIONS                                                                                   |  |                                                                                                                                                                                                                           
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|Please direct inquiries and shareholder requests to:                                                 |  | TRADEMARKS                                                                                                                                                                                                                
|David C Martin, Ph D, MBA                                                                            |  | NOVADAQ®, SPY®, PINPOINT®, VICTORIA® and SPY PAQ® and are trademarks of Novadaq Technologies
Inc                                                                                                                          
|Vice President Corporate Development & Investor Relations                                            | 
|Office: 905-629-3822, ext 218                                                                        | 
|Fax: 905-247-0656                                                                                    |  |                                                                                                                                                                                                                           
|email: dmartin@novadaq com                                                                           |  |                                                                                                                                                                                                                           



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