Novadaq Technologies, Inc. Healthcare- Dia G Nostic Ima G in G June 22, 2012 Company Description: Novadaq Technologies, Inc

Feltl and Company Research Department 2100 LaSalle Plaza 800 LaSalle Avenue Minneapolis, MN 55402 1.866.655.3431

Ben C. Haynor, CFA [email protected] | 612.492.8872

Novadaq Technologies, Inc. Healthcare- Dia g nostic Ima g in g June 22, 2012 Company Description: Novadaq Technologies, Inc. develops, manufactures and markets real-time fluorescence imaging products used by surgeons in open, minimally invasive and interventional surgical procedures to visualize blood flow and assess the quality of blood perfusion. The company was founded in 2000 and is based in Mississauga, Ontario, Canada.

SPY no longer a secret, initiating with STRONG BUY, $8.50 PT (NVDQ - $5.57) STRONG BUY Key Points Financial Summary Novadaq’s proprietary SPY imaging technology revolutionizes blood flow and perfusion assessment. SPY imaging has broad applicability and a potential US consumable revenue opportunity of ~$1.8 billion. Rev(mil) 2011A 2012E 2013E Mar $2.6A $4.8A $8.2E Partnerships with industry leaders validate the strength June $3.6A $4.7E $9.6E of the company’s FDA-approved technology, while Sept $4.3A $5.7E $11.1E Novadaq retains a highly attractive market for itself. Dec $5.0A $7.8E $13.0E

Potential “arms race” developing. FY $15.3A $23.0E $41.8E Initiating with STRONG BUY rating and $8.50 price P/Sales 14.5x 9.6x 5.3x target (7.0x 2013 EV/Sales). Novadaq’s proprietary SPY imaging technology revolutionizes blood flow and perfusion assessment. Their unique technology allows surgeons to visualize blood flow and perfusion in real-time, which greatly enhances the ability to make proper clinical decisions during surgeries. For example, in breast reconstruction surgery and EPS 2011A 2012E 2013E gastrointestinal surgery, which typically register complication rates of over 12%, SPY imaging has been shown to reduce complication rates to 4% or less. The cost of Mar ($0.09)A ($0.14)A ($0.02)E complications that occur in these types of complex surgeries can run well into the six- June ($0.13)A ($0.00)E ($0.02)E figures and be devastating to patient outcomes. Over 50 peer-reviewed publications Sept ($0.04)A ($0.03)E ($0.00)E Dec ($0.06)A ($0.02)E $0.02E support the use of SPY imaging. The company’s SPY imaging technology has broad applicability, with current and FY ($0.32)A ($0.17)E ($0.02)E potential applications in plastic and reconstructive, gastrointestinal, cardiac, P/E NM NM NM cancer, and vascular surgeries (including wound care). We estimate the theoretical addressable market in the US to comprise well over one million procedures per year totaling roughly $1.8 billion in potential consumable sales. Novadaq has partnered with industry leaders, validating the strength of its technology platform, while reserving a highly attractive market for itself. The Price: $5.57 company has formed partnerships with Intuitive Surgical (ISRG – not rated), KCI, 52-Week Range: $7.98-$3.53 LifeCell, and MAQUET Cardiovascular for sales, marketing, and distribution. Each Target: $8.50 company they have partnered with is the market leader in the respective area covered Rating: STRONG BUY by the partnership, yet Novadaq has retained the endoscopic fluorescence imaging market for itself with its FDA-approved PINPOINT system, which will launch in the Shares Outstanding: 39.8 mil second half of this year. We believe the potential recurring revenue for PINPOINT in the Mkt. Capitalization: $222mil US market is ~$400 million per annum. Ave. Volume: 50,000 Instit. Ownership: 24% Due to the fact that SPY imaging is mainly used in complex surgeries (generally BV / Share: $0.8 costing more than $25,000), which are often the most profitable for hospitals, Debt / Tot. Cap.: 12% there is the potential for an “arms race” to develop amongst hospitals in a given Est. LT EPS Growth: 40% locale, whereby one hospital acquires a SPY imaging device causing the complex surgeries in the area to relocate to that hospital and forcing the other hospitals in the locale to purchase the technology as well. This is a similar situation to that which occurred with Intuitive Surgical’s da Vinci surgical robot. Our channel checks suggest this happened early this year in the Twin Cities market, and management has noted that they have seen the same occurrence elsewhere. Initiating coverage of Novadaq with a STRONG BUY rating and $8.50 price target, which represents 7.0x 2013 EV/Sales. Please see important disclosures on pages 20 to 22.

June 22, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer INVESTMENT THESIS

Novadaq offers a unique technology with its SPY imaging; no other technology on the market captures real-time blood flow and perfusion. The company’s technology show incredible promise in improving outcomes and lowering costs and has over 50 clinical publications supporting its use. At present, their solutions are most often used in complex surgical procedures, such as breast reconstruction, that are both expensive and suffer from high complication rates. Complications that develop in these types of procedures generally result in long and expensive hospital stays, which Novadaq’s imaging platform has been shown to drastically reduce, saving hospitals a great deal of time and money. We believe the potential US markets that can be served by Novadaq’s technology total ~$1.8 billion annually and have a compelling need for their products. In addition, it is a green-field opportunity that seldom arises so starkly. As such, we have assigned Novadaq a STRONG BUY rating and $8.50 price target.

Opportunities

Unique imaging modality with strong intellectual property position. Novadaq faces no direct competition from alternative fluorescent angiography systems currently and has a solid intellectual property foundation consisting of 49 patent families representing 52 granted or allowed patents and nearly 80 patent applications. Further, we are unaware of any potential competition on the horizon.

Evidence of superior outcomes and cost savings. The large expenses in the healthcare system are usually generated by hospitalizations and the resulting length of stay. Novadaq’s SPY technology helps improve outcomes and save money by avoiding unnecessarily long hospital stays due to complications. The fact that the company’s products are presently used primarily in complex surgeries (read “expensive”) heightens the potential savings. Numerous studies (over 50) have validated both the superior outcomes and cost savings that result from the application of SPY imaging.

Enviable partnerships with market leaders, yet Novadaq retains a highly attractive market for itself. Novadaq has formed partnerships with leading companies, including KCI, LifeCell, Intuitive Surgical (ISRG – not rated), and MAQUET Cardiovascular. Each company Novadaq has partnered with is a leader in their respective market; we believe this validates Novadaq’s technology and should serve to accelerate adoption of their products as Novadaq’s partners sell into their already well established sales channels. Importantly, Novadaq has retained the endoscopic fluorescence imaging market for itself with their FDA-approved PINPOINT system, which will launch in the second half of this year. We believe the potential recurring revenue for PINPOINT is ~$400 million per annum in the US market.

Hospitals and surgeons beginning to accept Novadaq’s technology. When Novadaq first launched their SPY imaging platform with LifeCell, approximately 80% of the systems were placed in hospitals for evaluation prior to a permanent placement being agreed upon. Now, hospitals accept a permanent placement 80% to 90% of the time without requiring an evaluation. Additionally, Novadaq’s SPY imaging platform is in over 90% of the top 50 cancer surgery hospitals in the US. That said the company has installed systems in just over 400 hospitals to date, or ~12% of US hospitals with over 200 beds. This, to us, signals that leading hospitals view the technology as proven, but placements are still in the early-adopter phase with plenty of room to grow. Surgeons we have spoken to have noted that it improves on clinical judgment and SPY imaging has virtually no learning curve to using (“easier to use than an operating microscope”).

Potential arms race developing. Due to the fact that SPY imaging is mainly used in complex surgeries, which are often the most profitable for hospitals (especially when complications can be successfully reduced), there is the potential for an “arms race” to develop amongst hospitals in a given locale, whereby one hospital acquires a SPY imaging device and the complex surgeries in the area relocate to that hospital, forcing the other hospitals in the locale to purchase the technology as well. This is a similar situation to that which occurred with Intuitive Surgical’s da Vinci surgical robot. Our channel checks suggest this happened early this year in the Twin Cities market, and management has noted that they have seen the same occurrence elsewhere.

Broad application potential. Novadaq’s SPY technology is applicable to numerous types of procedures in open and minimally invasive surgeries. SPY imaging has been used in reconstructive, gastrointestinal (GI), cardiac, cancer and robotic surgeries. We estimate the US recurring revenue opportunity sums to ~$1.8 billion per year.

Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 2 June 22, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer Risks

Potential challenges of selling direct. The company plans to sell the PINPOINT product direct and has indicated that they would start out modestly with ten or so salespeople, and that they would scale up to 80-100 salespeople over time as the sales strategy is proven. Should the sales force struggle at first, Novadaq may slow down the addition of new salespeople and experience slower growth as a result. However, we believe this risk is mitigated somewhat, as Novadaq has experience building sales forces in the past; prior to partnering on SPY and their CO2 Heart Laser system, the company built sales forces dedicated to selling the products then transferred its salespeople to the partner company once the partnership agreement was in place.

Future clinical study results on SPY technology turn out negatively or mixed. Thus far, the clinical studies supporting the use of SPY have been invariably positive, but that is no guarantee that future studies will show the same or similarly positive results in existing or future applications. Should this occur, we would anticipate the large potential market for Novadaq’s technology would shrink.

New technology usurps Novadaq’s edge. We are not presently aware of any technology under development that would compete in the same space as Novadaq, there is always the potential for competition to emerge. However, it is likely that any competition would be at least several years from gaining a position similar to that which Novadaq currently occupies and by that time, Novadaq may have already won the “land grab”.

Thoughts on Valuation

Valuing Novadaq represents somewhat of a challenge due to the uniqueness of its technology and the potential for its broad application. We believe the company’s most similar peer is Intuitive Surgical (ISRG – not rated) in that both companies bring a platform technology that is generally unavailable elsewhere into the hospital. Anecdotal evidence from our channel checks suggest that once Novadaq’s perfusion imaging technology is introduced at one hospital in a given area, other hospitals in the area are more likely to rapidly adopt the technology so as not to lose complex procedures to those hospitals which have previously installed a SPY imaging system. This type of “arms race” is very similar to what occurred with Intuitive Surgical’s robotic surgery capital equipment.

The table that follows details the present multiples for selected high-growth medical technology companies. Novadaq compares favorably in terms of year-over-year sales growth rate versus the comps below, yet trades below both the mean and median 2013 EV/sales multiple of its comps at present. To set our 12-month price target we believe it is valid to use a EV/sales multiple that is inline with the 2012 mean multiple, or 8.0x 2013 sales, based on this comp table. This is roughly inline with the average price-to-sales multiple of ISRG over the past five years (discussed below). We would feel comfortable making the case that Novadaq deserves a premium multiple relative to its comps given its higher projected growth rate over the next several years. However, we have chosen to take a more conservative approach being that the company is still developing the market and sales will still be heavily weighted towards capital sales over the next couple of years, as compared to its peers, who have largely transitioned to a state where recurring revenues dominate capital sales. As such, we believe 7.0x forward EV/sales is an appropriate multiple to place on NVDQ at present, which results in our $8.50 12-month price target.

Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 3 June 22, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer Selected High-Growth Medical Technology Companies EV/SalesSales Sales EV/EBITDA P/E Ticker EV TY NYGrowth TY NY TY NY TY NY HTWR 1,215 10.5 6.2 69%$ 116 $ 195 NM NM NM NM MAKO 1,054 8.7 5.9 49%$ 121 $ 180 NM NM NM NM DXCM 810 8.6 6.4 34%$ 94 $ 126 NM NM NM NM ELGX 893 8.4 6.5 28%$ 107 $ 137 NM 100.2 NM 169.1 PODD 940 4.4 3.5 26%$ 216 $ 271 NM 37.4 NM NM ABMD 932 6.1 5.0 20%$ 153 $ 185 65.6 32.5 91.9 50.1 ISRG 20,676 9.7 8.3 17%$ 2,132 $ 2,493 23.2 20.0 37.0 31.4 Mean 8.0 6.0 35% 44.4 47.5 64.4 83.5 Median 8.6 6.2 28% 44.4 34.9 64.4 50.1 NVDQ 197 8.5 4.9 72%$ 23 $ 40 NM 197.4 NM 410.0

The chart below features Intuitive Surgical’s historical high and low intra-quarter forward price/sales multiples and year- over-year revenue growth rate for its lifetime as a publicly traded company. Over the time frame, ISRG has averaged a high forward quarterly price/sales multiple of 7.6x and a low forward quarterly price/sales multiple of 5.2x. Over the last five years, those metrics have averaged slightly higher at 9.2x and 6.4x respectively. As a frame of reference, Novadaq currently trades at 5.0x 2013 sales and has a revenue run rate that would correspond to ISRG circa 2000. We point this out not to draw a parallel between a potential purchase of ISRG shares in the summer of 2000 and NVDQ today, but to illustrate that even fast-growing medical device firms can experience long stretches of depressed multiples despite accelerating sales growth as was the case with ISRG in 2002-2004.

Intuitive Surgical (ISRG) Price/Sales (NTM) and Y/Y Sales Growth Rate

18x 80%

16x 70%

14x 60% 12x 50% 10x 40% 8x 30% 6x 4x 20% 2x 10% 0x 0% Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

High P/S Low P/S Y/Y Sales Growth

Financial Synopsis

Novadaq and its partners are only beginning to develop the market for SPY and PINPOINT, but we find it encouraging that, despite being early on in the process, the company burns very little cash at present. EBITDA in 2011 was just -$4 million and we estimate this measure will turn positive in the second half of 2013, even as the company spends additional funds to build out its sales force. The company has recently completed a secondary offering which raised their cash level to ~$40 million. We believe this will be more than sufficient to reach profitability, which should occur on a cash basis in late 2013. While the company’s present revenue run rate is relatively low at ~$20 million per year, we estimate that Novadaq will be able to achieve revenue growth rates of ~50%+ over the next several years.

Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 4 June 22, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer Key Model Assumptions

We have attempted to be conservative in our model assumptions for Novadaq being that they are early in their growth trajectory and still in the process of establishing a market. For Novadaq’s PINPOINT product, we believe that our assumptions could prove overly conservative, particularly as the company’s sales force gains experience and additional clinical data is released supporting usage of the product. Key assumptions we have made follow in the bullets below.

Revenue and PINPOINT Assumptions • The company will continue to place ~100 SPY/FireFly units per quarter, slightly lower than the average they have placed over the past several quarters, but inline with managements’ expectations. • The revenue split with LifeCell on SPY disposables is 50/50 and the average selling price of a kit is $1,000 in our estimation. • In terms of FireFly disposable revenue, we have modeled $125 per procedure. • We have modeled a 50% discount to the ASP of kits when a hospital chooses to make a capital purchase of a SPY device instead of relying on their placement or rental sales models. • It is likely the next milestone payment will come from the KCI partnership, but we are unsure when this will occur nor its value. As such, we have not modeled any milestone revenue over the next two years. • No revenue from a wound care application has been modeled; management has stated it will likely be the second half of 2013 before wound care has an impact on numbers. • For PINPOINT, we have assumed the following: o The company will add approximately 7-8 salespeople per quarter starting in Q3 2012. o Each salesperson will sell an average of 1.5 systems per quarter for the remainder of 2012 (to account for low-hanging fruit) and 1 system per salesperson per quarter in 2013. o Kits per installed unit will average 10 per quarter in the second half of 2012 and 12 per quarter in 2013. o We estimate the ASP of the PINPOINT system will be $125,000 and kits will price at $500. o Each additional salesperson added will cost the company $75,000 on a quarterly basis. o All installs are capital purchases as hospitals generally have an endoscope budget already available and the market has already been developed. Margin and Expense Assumptions • We have modeled relatively flat gross margin for the remainder of 2012 and our estimates are below the midpoint of management’s 55% to 60% gross margin guidance. • Selling and distribution costs have been modeled on a per salesperson basis plus a baseline spend. • Research and development spend per quarter increases by $500,000 by the end of 2012 as compared to Q1 2012 to reflect additional clinical studies the company plans on conducting. • Administrative expenses remain relatively flat as compared with Q1 2012. Other Assumptions • We intend upon making an adjustment for warrants revaluation only in the quarter to be reported based upon actual share prices as we are not supremely confident in our abilities to project forward end-of-quarter share price accurately on a consistent basis. • Once the company begins earnings money, we have modeled a 35% tax rate, although it is likely to be lower with the Canadian government lowering the corporate tax rate, R&D tax credits, and ~$100 million in NOLs. • Share count remains unchanged at 39.8 million shares.

Historical High Growth Medical Technology Revenue Ramps

Our assumptions above lead us to the revenue ramp seen in the chart below. The chart details absolute dollar growth for select high-growth medical technology companies who launched products in similarly high-growth markets or pioneered a new technology. Seeing a number of such companies develop in a similar manner, we believe our revenue growth estimates for Novadaq are attainable. We would note that Intuitive Surgical’s revenue ramp occurred in a linear fashion as their system sales overwhelmed disposable sales early on; in 2001, disposable sales made up only 10% of Intuitive Surgical’s revenue, but, by 2005, systems made up 35% of revenue. As Novadaq places SPY and PINPOINT systems over the next several years on a capital equipment basis, we would anticipate the total revenue ramp to be similar in nature to that of Intuitive Surgical due to the much higher ASP of the capital equipment as compared with the disposable kits. In the above section, we mentioned that ISRG suffered from a several year stretch of depressed multiples relative to other periods in its history. We believe this was partially due to the linear ramp in the company’s sales (2000-2003) and investors being unwilling to assign more aggressive multiples to a business that looked like it was experiencing linear rather than exponential growth. During that time, ISRG’s disposable sales were still growing rapidly and by 2004, disposable sales Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 5 June 22, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer began comprising a greater proportion of total sales and exhibiting exponential growth, investors became once again willing to assign more aggressive multiples to the name. We would caution that this could well happen to Novadaq as its systems begin to penetrate the market while consumables still make up a smaller proportion of total sales.

Absolute Revenue Growth for Select High- Growth Med Tech Companies

$180

$160

$140

$120

$100

$80

$60 Revenue (millions) $40

$20

$0 Baseline Year 1 Year 2 Year 3 Year 4

THOR NUV A NXTM HTWR CY BX DXCM MA KO VOLC ISRG NV DQ Average

Source: Company filings, Feltl and Company estimates.

Company Overview

Company Brief

Novadaq develops and manufactures both real-time fluorescence imaging products designed for use in complex surgeries (generally those costing over $25,000) and a transmyocardial laser revascularization (TMR) product known as the CO2 Heart Laser System. The company’s fluorescence imaging products, known broadly as SPY imaging, enable surgeons to visualize blood flow in vessels and assess the quality of blood perfusion in tissue without exposing the patient to radiation. This technology is supported by over 50 peer-reviewed publications that demonstrate reduced complications and lower costs. Novadaq markets its products in partnership with several industry leaders (discussed in the “Partnerships” section below) as well as directly.

Novadaq is headquartered in Mississauga, Ontario, Canada and was spun off from the Institute for Biodiagnostics of Canada’s National Research Council in 2000.

Novadaq’s Imaging Technology

Novadaq’s imaging technology has several components – hardware, software, and a fluorescence imaging agent known as indocyanine green (ICG). ICG is metabolized by the liver, is not nephrotoxic, and has been used for 50 years in more than 5 million patients. The agent works by binding to alpha lipoproteins in the blood plasma, but does not bind to other tissue or vessel walls. This allows high quality visualizations of blood flow and perfusion as the ICG is confined to the intravascular compartment and experiences minimal leakage into the interstitium. When illuminated under a specific wavelength (800- 810nm, 806nm maximum absorption wavelength) near infrared light, ICG emits light at a longer wavelength (830nm peak

Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 6 June 22, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer emission wavelength). This longer wavelength is captured by the SPY camera to form the image while the shorter wavelength is filtered out; forming images that correlate to X-ray. The company’s software allows surgeons to compare images captured at disparate times and compared, enabling the surgeon to make revisions to the procedure and/or confirm the procedure was successful. The components are flexible and can be used to develop unique imaging devices intended for use in various types of procedures.

In addition, Novadaq has imaging technologies in development for imaging nerves which is in the preclinical stage and auto-fluorescence technology to visualize early stage cancers in hollow organs. We do not anticipate these technologies reaching the market prior to 2015.

Product Overview

SPY Imaging System

Novadaq’s SPY imaging hardware, shown below, consists of a workstation with an articulating arm which can be positioned to capture SPY images. The software enables the surgeon or operator to capture still images and/or up to two minutes of video which can be archived on recordable media. The consumable for the SPY Elite system contains either one or two vials of the ICG imaging agent, one or two vials of water for injection (used to dissolve the ICG), and a sterile drape that fits only on the SPY Elite system.

Source: Company marketing materials.

The SPY images below show the difference in vessels experiencing poor or no flow versus those experiencing good flow using SPY imaging. The image on the left with the red arrow pointing to the dark vessel depicts a case of no (or limited) flow, while the image on the right with the green arrow highlights the same vessel experiencing good flow.

Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 7 June 22, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer No Flow (left) versus Good Flow (right)

Source: Medical Technology Watch Canada.

PINPOINT Endoscopic Fluorescence Imaging System

The PINPOINT system combines SPY imaging with HD visible light imaging on a rigid endoscope. Novadaq plans on launching the product, marketing it directly, in the second half of 2012 following completion of a post-marketing study.

Novadaq is currently sponsoring a study of up to 150 patients undergoing laparoscopic left colectomies called PILLAR (Perfusion Assessment in Laparoscopic Left Anterior Resection). The study is designed to assess the clinical impact of visual perfusion assessment using PINPOINT and seeks to demonstrate a reduction in the incidence of postoperative complications as well as the cost of care. Data from the study will likely be available in the summer of 2013 at the SAGES conference. The company anticipates conducting several more trials for other indications (gastrointestinal, thoracic, urological and OB/GYN) over the next several years, with the next study commencing during the second half of 2012.

The images below show how SPY imaging illuminates tissue that is experiencing good perfusion in green. In this case, the surgeon has removed cancerous tissue and is viewing the colon. While the tissue in the image on the left looks alive and viable to the surgeon, SPY imaging shows that perfusion is only taking place in the tissue on the lower right. The surgery shown here was being done under an institutional review board (IRB) evaluation, so the surgeon was not allowed to act on the SPY image. No adjustment was made and, as a result, the patient wound up spending 90 days in the hospital, undergoing three additional surgeries which cost the hospital over $500,000 in unreimbursed expenses.

Source: Company presentation.

FireFly System for Robotic Surgery

The FireFly system integrates 3-D HD SPY imaging into Intuitive Surgical’s da Vinci Surgical Robotic system. The system was cleared for use in February 2011. One may think of FireFly as a robotic version of PINPOINT. Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 8 June 22, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer CO2 Heart Laser System

The CO2 Heart Laser system (shown below) is utilized in transmyocardial laser revascularization (TMR) procedures. It creates small channels in heart tissue in order to stimulate improvements in blood flow to regions of the heart. These procedures are done to relieve angina in the case of diffusely diseased coronary vessels that have poor targets for bypass grafting. The system is synchronized with the heartbeat, acting only when the heart is at rest and consequently at a reduced risk for arrhythmia. SPY imaging may also be used in a TMR procedure to locate regions that are not being adequately perfused. The system consists of the mobile console shown below and disposable hand pieces that are discarded after the procedure.

We believe that the only other competitor in the space is Cardiogenesis, who was acquired by CryoLife (CRY – not rated) in mid-2011 for $22 million or approximately 2x price-to-sales. The companies estimated the potential market for TMR to be greater than $175 million at the time of acquisition.

Source: Company website.

Partnerships

In our view, Novadaq has done a phenomenal job establishing partnerships with industry leaders, validating the strength of the company’s technology. The subsections that follow discuss the four agreements the company has entered into over the past several years. The LifeCell partnership is currently the most important to Novadaq as it represents the largest potential market for products being marketed presently. However, the KCI wound care partnership has the most future potential due to the large addressable market.

LifeCell

In September 2010, Novadaq entered into a 5-year, exclusive agreement with LifeCell for sales and marketing of the SPY Imaging system (branded for LifeCell as the SPY Elite) in open plastic and reconstructive, gastrointestinal, and head and neck surgery. The agreement was expanded in November 2011 to include vascular surgery in North America, Europe, the Middle East and Japan, as well as other markets. Prior to the original agreement, Novadaq had marketed the SPY system directly; post-agreement, they transferred the sales team to LifeCell. Under the agreements, LifeCell is responsible for the professional education, clinical study and reimbursement support in addition to its sales and marketing responsibilities. Novadaq has agreed to spend a minimum annual amount on research and development for three years as part of the agreement.

LifeCell has three separate sales models for the SPY platform: rental, placement, and capital. The application of each is relatively straightforward, with the rental model allowing hospitals access by paying a monthly fee for the system (and consumable fees), the placement model requires a purchase of a minimum consumable supply each month, and the capital

Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 9 June 22, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer model being outright purchase of the SPY system and supplies by the hospital. The majority of system placements thus far have been done under the placement model and Novadaq expects the placement and rental models to be the dominant means of placing systems in the future. We could envision this shifting in the future if hospital budgets begin including a line item for blood flow and perfusion imaging equipment, but until LifeCell fully develops the market to this point, we would agree with Novadaq,

Depending on which sales model is chosen by the customer, Novadaq recognizes differing levels of revenue. Under the rental and placement models, the procedure kit is sold for approximately $1,000 to $1,200, which Novadaq splits with LifeCell (we have taken this literally and assumed a 50/50 revenue split). However, if the customer chooses the capital purchase model, the procedure kit price is reduced by approximately 50%.

Intuitive Surgical

At the beginning of 2009, Novadaq established an alliance with Intuitive Surgical, Inc. (ISRG – not rated) to integrate their SPY technology with the da Vinci Surgical Robotic System. The integrated system became known as the FireFly System. As part of the agreement, Novadaq was named the exclusive supplier of certain hardware components and the fluorescence agent and earns revenue on hardware and consumable sales to Intuitive as well as royalties based upon sales of the FireFly System. Intuitive launched the product in July 2011 after beginning commercialization in February 2011.

Novadaq receives revenue in three ways from Intuitive: a royalty when a da Vinci robot is sold with FireFly included, SPY hardware revenue (sold to Intuitive Surgical for incorporation into the da Vinci), and the ICG imaging agent, which must be exclusively provided by Novadaq to Intuitive Surgical per the partnership agreement. We estimate that Novadaq realizes approximately $125 per procedure on the imaging agent and approximately $15,000 in hardware and royalty revenue as a da Vinci with FireFly is manufactured and placed.

Kinetic Concepts, Inc. (KCI)

Novadaq signed a 7-year, exclusive development, sales, and marketing agreement with KCI in November 2011. This agreement is considered to be in the engineering and market development phase and covers commercialization of Novadaq’s SPY technology for use in wound care applications. The responsibilities of each party are similar to the LifeCell agreement (LifeCell is owned by KCI).

MAQUET Cardiovascular

In January 2012, Novadaq named MAQUET the exclusive US distributor of its TMR Laser System and consumables. MAQUET Cardiovascular is a diversified cardiovascular device company and subsidiary of Getinge AB. The cardiovascular, critical care and workplaces divisions of MAQUET posted combined revenues of approximately $1.5 billion in 2010. It is reported that MAQUET distributed products are used in 75% to 80% of all cardiac surgeries.

Clinical and Economic Benefits of SPY Imaging

Plastic and Reconstructive Surgery

SPY imaging is helpful in many reconstructive procedures, including tissue-sparing mastectomies, autologous and tissue expansion breast reconstruction, facial reconstruction/reanimation, muscle flaps, trauma reconstruction and reattachment of limbs and digits. Potential complications in certain applications are shown in the table below along with the potential benefits of SPY imaging. Use of SPY enables surgeons to assess blood flow, tissue viability and perfusion. It is reported that the majority of complications in reconstructive surgery are due to failed or poor perfusion at the micro or macro circulatory level. Approximately 10% of breast reconstruction surgeries in the US currently utilize SPY imaging (up from ~3% at the beginning of 2011), the remainder rely on clinical judgment.

Procedure Perfusion-related complications 1-4 Potential benefits of the SPY Elite™ System1-4 Mastectomy Skin loss Visualize perfusion of mastectomy skin flaps Necrosis prior to reconstruction. Nipple loss (in nipple-sparing Visualize nipple perfusion after mastectomy, mastectomy) prior to reconstruction, aiding in nipple-sparing mastectomy decision.

Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 10 June 22, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer Tissue Expander / Implant Partial or total mastectomy flap loss Visualize skin flap profusion throughout the Reconstruction procedure. Allows observation of good tissue perfusion while filling the expander. Autologous Wound healing problems Identify perforators prior to committing to flap Reconstruction (free flap, Mild to severe fat necrosis design. pedicle flap and perforator Partial or total flap loss Evaluate flap perfusion throughout the procedure reconstructions) Venous congestion Visualize micro-surgical anastomoses and Anastomotic thrombosis confirm good arterial inflow and venous return. 1 Komorowska-Timek E, Gurtner GC. Intraoperative perfusion mapping with laser-assisted indocyanine green imaging can predict and prevent complications in immediate breast reconstruction. Plast Reconstr Surg. 2010;125:1065-1073. 2 Jones GE. Indocyanine green perfusion imaging of cutaneous blood flow. Plastic Surgery Pulse News. 2009;2(2). http://www.plasticsurgerypulsenews.com/3. Accessed August 31, 2010. 3 Pestana IA, Coan B, Erdmann D, Marcus J, Levin LS, Zenn MR. Early experience with fluorescent angiography in free-tissue transfer reconstruction. Plast Reconstr Surg. 2009;123:1239-1244. 4 Newman MI, Samson MC. The application of laser-assisted indocyanine green fluorescent dye angiography in microsurgical breast reconstruction. J Reconstr Microsurg. 2009;25:21-26. Source: LifeCell website.

Over a dozen publications describe clinical or case studies focused on SPY imaging in reconstructive procedures. For example, in a chapter of Bostwick’s Plastic & Reconstructive Breast Surgery (third edition) by Glyn E. Jones, MD from 2010, the author draws the following conclusion on SPY imaging, “In our own experience, we now have the potential to reduce postoperative morbidity from skin necrosis to almost zero. This represents a real advance, which will improve patient outcomes and contribute to reduced medical costs at a time when health care expenditure is under greater scrutiny.” This compares to reported skin-sparing mastectomy necrosis rates of 12% to 15% in nonsmokers and 25% to 30% in smokers.

Gastrointestinal (GI) Surgery

SPY imaging is used in gastrointestinal (GI) surgery to visualize and analyze perfusion in the upper and lower GI tract. It is particularly useful in determining where to resect a section of the colon. In nearly 20% of GI surgeries, perfusion to tissue can be compromised. Compromised perfusion can lead to the need for repeat surgery, infection, leakage, and death and according to published reports may lead to an average increased patient care cost of over $23,000. A July 2011 clinical study by surgeons at Stanford University on the use of SPY imaging in colorectal surgeries concluded that SPY imaging reduced the leak rate to 4% for pelvic anastomoses versus previous studies of similar surgeries that did not use SPY reported leak rates of 12% to 18%.

Cardiac Surgery

Independent studies conducted by the Centers for Medicare and Medicaid Services (CMS) in 2009 and 2010 showed that across all 4 coronary artery bypass graft (CABG) MS-DRGs, using SPY resulted in a shorter length of stay and costs reductions of $1,973 to $4,628 per patient versus those procedures that had not involved SPY imaging. In addition, the VICTORIA Clinical Registry reported at the 2010 annual meeting of the American Heart Association (AHA) that SPY imaging reduced the length of stay and reduced the reoperation rate by half.

Vascular Surgery

For the past two years, Novadaq had been studying the use of SPY in applications such as lower-limb salvage and amputation. SPY imaging, in this application, allows surgeons to perform perfusion mapping of the legs and feet. This ability may help surgeons to perform a below-the-knee amputation based upon the information gained through SPY imaging as opposed to an above-the-knee amputation. Being able to perform a below-the-knee amputation obviously spares the knee joint, which improves patient recovery times and mobility. Approximately 150,000 lower limb amputations are performed annually in the US at a cost of roughly $45,000 per procedure.

Reimbursement

Novadaq has obtained reimbursement from the Centers for Medicare and Medicaid Services (CMS) and most commercial payors under the Outpatient Perspective Payment System (OPPS) / Ambulatory Services Center (ASC). The current CPT coding allows the physician to collect $100-$200 per imaging sequence (with several sequences generally performed per procedure) while the facility collects $150-$300 per procedure in outpatient settings, in both cases dependent on the payor. Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 11 June 22, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer Both SPY and PINPOINT are identified by ICD-9 codes, however these are currently only tracking codes. We would anticipate that Novadaq’s products receive additional reimbursement decisions in the future which we believe will help sales at the margins; but, we view the ability of SPY to improve outcomes and reduce cost to be the main driver of new installs and usage. In other words, new or increased reimbursement is nice, but for the hospital, making a decision to not use SPY based upon a lack of reimbursement seems shortsighted to us, especially in cases, as discussed in the previous section, where complications (that can be avoided by using SPY) can run into the tens or hundreds of thousands of dollars.

Market Opportunity

The chart below represents Novadaq’s view of the potential market, which they view as a $1-$2 billion market. As we will detail below, we believe the potential market opportunity is likely closer to the higher end of their range. We would note that the light green areas of the pie chart below are the only products currently on the market and that a substantial portion of the opportunity is represented by an FDA-cleared product that has not yet entered the sales channel (PINPOINT for endoscopic surgery) and an indication that has not yet received clearance (Wound Care with KCI).

Novadaq’s Characterization of the Potential Market ($1-$2 billion)

Source: Company presentation.

The table below details our estimates for the addressable US market for Novadaq’s products. We believe the potential Novadaq revenues in markets served by their fluorescence imaging products could be as high as $1.75 billion in over 3.5 million annual procedures. We would note that this understates the total potential market being that in the areas other than endoscopic surgery, Novadaq only recognizes a fraction of the revenue due to its partnership arrangements. If this is taken into account, the total potential US market would likely be closer to $3 billion. Further, it is possible the company will find additional uses for its technology and/or surgeons begin using the product off-label (such as for the delineation of tumor margins). Also, it should be emphasized that this is only an estimate of the potential US market, the worldwide market could double these figures. Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 12 June 22, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer Type of procedure Number of US procedures Novadaq revenue Potential market (thousands) per procedure (millions) SPY and SPY Elite open surgical applications Reconstructive surgery 5,300 Breast reconstruction surgery 93 $500 $47 Other complex reconstruction surgeries 450 $500 $225

Gastrointestinal surgery Colorectal surgeries 600 Colorectal surgeries involving partial excisions of the colon (open) 250 $500 $125

Head and neck surgery Maxillofacial surgeries 87 Maxillofacial surgeries involving use of tissue flaps 52 $500 $26

Cardiac surgery CABG 240 TMR candidates 30 $500 $15

Vascular surgery Lower limb amputations 150 Lower limb amputations performed on diabetics 90 $500 $45

Wound care Diabetics suffering from poorly or non-healing foot ulcers 5,000 Non-diabetics suffering from poorly or non-healing foot ulcers 1,000 Annual evaluations (SALSA) 1,500 $500 $750 Wound care interventional operations 250 $500 $125

FIREFLY Robotic Surgical Imaging System da Vinci procedures performed 360 Hysterectomy procedures 146 Prostatectomy procedures 113 Other procedures 101 Procedures benefitted by SPY 120 $125 $15

PINPOINT Endoscope System Colerectal surgeries 600 Colorectal surgeries involving partial excisions of the colon (minimally invasive) 250 $500 $125

Other minimally invasive surgeries 6,000 Procedures benefited by PINPOINT 500 $500 $250

Total SPY imaging opportunity 3,585 $1,748

Adoption Rate

The graph below shows the theoretical adoption curve of medical technology devices. Typically, for medical technologies, the development of the market takes ~5 years to reach the inflection point that leads to the “acceptance” phase where adoption begins to accelerate as the early majority of adopters begin to use the technology in earnest. Theoretically, the “acceptance” phase begins when penetration reaches 16%.

Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 13 June 22, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer

Intuitive Surgical has provided a near-textbook example of this adoption curve, as seen in the chart below. We would point out that Intuitive Surgical required ~5 years prior to the 16% inflection point being reached. Novadaq has clearly outperformed Intuitive Surgical in this regard; their SPY imaging technology needed just five quarters to increase penetration amongst large US hospitals from 2% to 12%, which took Intuitive Surgical 5 years. While we have not modeled system installs accelerating, we believe that the company may see accelerating installs as it crosses the theoretical 16% threshold at which adoption theoretically accelerates.

Penetration of Large North American Hospitals (> 200 beds)

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Intuitive Surgical Novadaq Theoretical inflection point

Source: Company filings.

The SPY install base, shown in the chart below has steadily marched higher over the past five quarters and we anticipate the installed base will continue to increase at a similar absolute rate going forward. We believe the company has potential to place 5,000 systems in the US at saturation.

Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 14 June 22, 2012 rops Strong, Pricing Weak, Farm Profits Could Suffer Novadaq SPY Install Base by Quarter

Management

Arun Menawat, PhD, MBA - President and Chief Executive Officer

Dr. Menawat has been the President and Chief Executive Officer of Novadaq since 2003. From 1999 to 2003, Dr. Menawat held increasing executive responsibilities including President and Chief Operating Officer of Cedara Software Corporation, a publicly traded medical imaging software company. Prior to joining Cedara, Dr. Menawat was Vice President, Operations at Tenneco Inc., a diversified business conglomerate, now separated into multiple companies.

Rick Mangat, PhD - Senior Vice President and General Manager

Dr. Mangat co-founded Novadaq in April of 2000 and is a co-inventor of the SPY System. The research element of his PhD thesis (Pharmacology and Therapeutics) performed at the National Research Council of Canada (Institute for Biodiagnostics) formed the foundation for SPY Imaging and related IP. Dr. Mangat has led the research, development and commercialization teams at Novadaq from bench-top through clinical use of the SPY System, and is now responsible for the general management of Novadaq’s commercial business unit including Sales and Marketing.

Stephen Purcell - Chief Financial Officer

Mr. Purcell has been Chief Financial Officer since January 12, 2009 after joining Novadaq as Director of Finance in March, 2008. Previous to joining the Company, Mr. Purcell served approximately 5 years as Corporate Controller of Sealy Canada Ltd. In addition, Mr. Purcell has held a number of senior financial management roles, including Chief Financial Officer of Canron Corp.

Mary Kay Baggs - Senior Vice President Business Development Surgical Systems

Ms. Baggs has over 25 years of clinical, sales and marketing experience in the cardiovascular medical device market in start-up, mid-size and large companies, beginning her career at Boston Scientific Corporation. Ms. Baggs first joined Novadaq as Vice President, Marketing in October of 2004. In December 2010, Ms. Baggs assumed the additional role of Sr. Vice President, Business Development, Surgical Systems. From 2002 to 2004, Ms. Baggs served as Vice President of Marketing for Chase Medical, Richardson, Texas. Previously held positions included Director of Marketing at Biocompatibles PLC and Director of Marketing at Cardiothoracic Systems and Guidant Corporation.

Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 15

June 22, 2012

Novadaq Technologies, Inc. (NVDQ) Ben Haynor, CFA [email protected] 612.492.8872 Income Statement (in millions) 2010 Q1 Q2 Q3 Q4 2011 Q1 Q2E Q3E Q4E 2012E Q1E Q2E Q3E Q4E 2013E 2014E SPY revenue 5.5 0.8 2.0 2.7 3.6 9.2 3.1 3.3 4.2 6.2 16.8 6.4 7.7 9.0 10.8 33.9 57.9 TMR revenue 2.8 0.9 1.0 1.0 0.8 3.7 0.5 0.6 0.7 0.8 2.8 0.9 1.0 1.1 1.2 4.4 6.0 Product revenue 8.3 1.7 3.0 3.7 4.4 12.9 3.7 3.9 5.0 7.0 19.6 7.3 8.7 10.2 12.0 38.3 63.9 Royalty revenue - - 0.1 0.1 0.1 0.4 0.6 0.3 0.3 0.3 1.4 0.3 0.3 0.3 0.3 1.0 1.0 Milestone revenue 4.0 ------Deferred license revenue 0.3 0.2 0.2 0.2 0.2 0.8 0.3 0.3 0.3 0.3 1.3 0.3 0.3 0.3 0.3 1.3 1.3 Service revenue 1.3 0.4 0.3 0.2 0.2 1.1 0.2 0.2 0.2 0.2 0.8 0.3 0.3 0.3 0.4 1.2 1.8

Total revenue 13.8 2.3 3.6 4.3 5.0 15.3 4.8 4.7 5.7 7.8 23.0 8.2 9.6 11.1 13.0 41.8 68.0

Cost of sales 5.5 1.3 1.4 1.9 2.1 6.6 2.0 2.1 2.5 3.4 10.0 3.5 4.1 4.6 5.1 17.3 25.6 Gross profit 8.3 1.1 2.2 2.5 2.9 8.7 2.7 2.6 3.2 4.4 13.0 4.6 5.5 6.5 7.9 24.5 42.4 Selling and distribution costs 7.1 1.3 1.4 1.4 1.3 5.4 1.1 1.2 1.7 2.3 6.3 2.9 3.4 3.9 4.4 14.6 19.8 Research and development expenses 4.9 1.0 1.3 1.1 1.2 4.6 1.2 1.4 1.6 1.6 5.7 1.6 1.8 1.8 1.8 7.0 9.0 Administrative expenses 4.1 1.1 1.1 1.1 1.2 4.6 1.5 1.4 1.4 1.4 5.6 1.5 1.5 1.5 1.5 5.9 6.3 Write-down of intangible sales 4.8 ------Write-down of equipment - - - 0.3 - 0.3 ------Write-down of inventory 0.4 - - 0.0 (0.0) 0.0 ------

Total operating expenses 21.3 3.4 3.8 3.9 3.7 14.9 3.7 3.9 4.7 5.3 17.6 5.9 6.7 7.2 7.7 27.5 35.1 Operating income (loss) (13.0) (2.4) (1.6) (1.4) (0.8) (6.2) (1.0) (1.3) (1.5) (0.9) (4.7) (1.3) (1.2) (0.7) 0.2 (2.9) 7.3

EBITDA (11.2) (1.9) (1.1) (0.9) (0.1) (4.0) (0.3) (0.6) (0.8) (0.2) (1.8) (0.6) (0.4) 0.0 0.9 (0.1) 10.2

Finance costs (0.6) (0.2) (0.2) (0.2) (0.2) (0.7) (0.2) (0.2) (0.2) (0.2) (0.7) (0.2) (0.2) (0.2) (0.2) (0.7) (0.7) Finance income 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - - - 0.0 ------Warrants revaluation adjustment (0.5) 0.0 (2.6) 0.3 (1.0) (3.3) (3.6) - - - (3.6) ------Gain (loss) on investment (0.1) 0.0 - - - 0.0 ------

Total other income (loss) (1.2) (0.1) (2.8) 0.2 (1.2) (3.9) (3.8) (0.2) (0.2) (0.2) (4.3) (0.2) (0.2) (0.2) (0.2) (0.7) (0.7)

Income before taxes (14.2) (2.5) (4.4) (1.3) (2.0) (10.2) (4.7) (1.5) (1.7) (1.0) (8.9) (1.5) (1.3) (0.9) 0.0 (3.6) 6.6 Tax expense ------10 - 2,318 Tax rate 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 35.0% 0.0% 35.0% Net income (14.2) (2.5) (4.4) (1.3) (2.0) (10.2) (4.7) (1.5) (1.7) (1.0) (8.9) (1.5) (1.3) (0.9) 0.0 (3.6) 4.3 EPS Basic$ (0.52) $ (0.09) $ (0.13) $ (0.04) $ (0.06) $ (0.32) $ (0.14) $ (0.04) $ (0.04) $ (0.03) $ (0.24) $ (0.04) $ (0.03) $ (0.02) $ 0.00 $ (0.09) $ 0.11 Diluted$ (0.52) $ (0.09) $ (0.13) $ (0.04) $ (0.06) $ (0.32) $ (0.14) $ (0.04) $ (0.04) $ (0.03) $ (0.24) $ (0.04) $ (0.03) $ (0.02) $ 0.00 $ (0.09) $ 0.10 Shares outstanding Basic 27.3 28.3 32.6 32.7 32.8 31.6 32.8 39.8 39.8 39.8 38.1 39.8 39.8 39.8 39.8 39.8 39.8 Diluted 27.3 28.3 32.6 32.7 32.8 31.6 32.8 39.8 39.8 39.8 38.1 39.8 39.8 39.8 45.2 41.2 45.2

Y/Y Growth Analysis 2010 Q1 Q2 Q3 Q4 2011 Q1 Q2E Q3E Q4E 2012E Q1E Q2E Q3E Q4E 2013E 2014E SPY revenue -42.1% 24.8% 82.6% 274.6% 66.6% 273.7% 61.4% 54.1% 71.5% 82.4% 105.6% 133.7% 114.7% 74.4% 101.9% 70.8% Product revenue -15.6% 31.8% 74.1% 143.2% 55.2% 110.5% 29.3% 32.5% 59.7% 51.5% 100.8% 121.9% 105.5% 71.1% 95.6% 66.9% Total revenue -13.8% 39.2% -31.1% 119.3% 10.5% 103.7% 29.3% 32.9% 56.4% 50.5% 71.2% 104.0% 93.0% 66.0% 81.6% 62.7% Operating income 1.9% 50.2% 66.6% 73.4% 52.2% 58.6% 19.1% -4.8% -8.3% 24.9% -32.7% 11.9% 53.0% 123.1% 36.7% 348.0% EBITDA 0.8% 60.1% 77.6% 95.9% 64.1% 86.4% 47.3% 10.3% -55.9% 55.2% -121.9% 26.2% 100.8% 669.4% 94.6% 10533.7% Net income 9.0% -16.1% 71.8% 36.3% 28.6% -91.1% 66.3% -31.3% 47.8% 11.9% 69.1% 10.5% 47.6% 101.8% 59.3% 218.3%

Q/Q Growth Analysis 2010 Q1 Q2 Q3 Q4 2011 Q1 Q2E Q3E Q4E 2012E Q1E Q2E Q3E Q4E 2013E 2014E SPY revenue -13.7% 145.2% 33.9% 32.2% -13.9% 5.9% 27.8% 47.1% 3.2% 20.4% 17.5% 19.5% Product revenue -4.1% 75.4% 22.8% 17.8% -17.0% 7.8% 25.8% 42.0% 4.2% 19.1% 16.5% 18.2% Total revenue 2.8% 55.7% 18.3% 15.8% -4.5% -1.1% 21.6% 36.3% 4.5% 17.8% 15.0% 17.3%

Margin Analysis 2010 Q1 Q2 Q3 Q4 2011 Q1 Q2E Q3E Q4E 2012E Q1E Q2E Q3E Q4E 2013E 2014E Gross margin 60.0% 46.3% 60.2% 57.0% 58.5% 56.6% 57.1% 55.7% 55.9% 56.8% 56.4% 56.9% 57.3% 58.6% 61.0% 58.7% 62.4% Gross margin product revenue 0.0% 27.6% 52.4% 50.4% 52.9% 0.0% 44.0% 47.0% 49.0% 52.0% 0.0% 52.0% 53.0% 55.0% 58.0% 0.0% 0.0% Operating margin -93.9% -100.5% -44.3% -33.3% -16.1% -40.6% -20.4% -27.7% -26.3% -11.2% -20.2% -15.8% -12.0% -6.4% 1.6% -7.1% 10.8% EBITDA margin -81.2% -82.2% -30.9% -20.5% -2.1% -26.4% -5.5% -12.6% -13.8% -2.1% -7.9% -7.1% -4.6% 0.1% 7.1% -0.2% 14.9% Net margin -102.7% -106.1% -120.4% -29.6% -40.1% -66.4% -99.5% -31.4% -29.3% -13.4% -38.9% -18.0% -13.8% -8.0% 0.1% -8.7% 6.3% Selling and distribution expense as % of product revenue 84.9% 73.5% 46.0% 36.2% 30.6% 41.6% 29.1% 30.5% 34.8% 33.0% 32.2% 38.9% 38.6% 38.3% 36.7% 38.0% 31.0% Research and development expense as % of product revenue 59.0% 60.4% 41.7% 29.6% 26.9% 35.7% 31.8% 34.6% 32.5% 22.9% 29.3% 22.0% 20.7% 17.8% 15.0% 18.4% 14.2% Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 16 June 22, 2012

Analyst Certification I, Ben Haynor, CFA, certify that the views expressed in this research report accurately reflect my personal views about the subject company and its securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation related to the specific recommendations expressed in this report.

Important Disclosures:

The analyst or a member of his/her household does not hold a long or short position, options, warrants, rights or futures of this security in their personal account(s).

As of the end of the month preceding the date of publication of this report, Feltl and Company did not beneficially own 1% or more of any class of common equity securities of the subject company.

There is not any actual material conflict of interest that either the analyst or Feltl and Company is aware of.

The analyst has not received any compensation for any investment banking business with this company in the past twelve months and does not expect to receive any in the next three months.

Feltl and Company has not been engaged for investment banking services with the subject company during the past twelve months and does not anticipate receiving compensation for such services in the next three months.

Feltl and Company has not served as a broker, either as agent or principal, buying back stock for the subject company’s account as part of the company’s authorized stock buy-back program in the last twelve months.

No director, officer or employee of Feltl and Company serves as a director, officer or advisory board member to the subject company.

Feltl and Company Rating System: Feltl and Company utilizes a four tier rating system for potential total returns over the next 12 months. Strong Buy: The stock is expected to have total return potential of at least 30%. Catalysts exist to generate higher valuations, and positions should be initiated at current levels. Buy: The stock is expected to have total return potential of at least 15%. Near term catalysts may not exist and the common stock needs further time to develop. Investors requiring time to build positions may consider current levels attractive. Hold: The stock is expected to have total return potential of less than 15%. Fundamental events are not present to make it either a Buy or a Sell. The stock is an acceptable longer-term holding. Sell: Expect a negative total return. Current positions may be used as a source of funds.

6/22/2012 Ratings Distribution for Feltl and Company ------Investment Banking ------Number of Percent Number of Percent of Rating Stocksof Total Stocks Rating category SB/Buy 44 62% 3 7% Hold 26 37% 0 0% Sell 1 1% 0 0% 71 100% 3 4%

The above represents our ratings distribution on the stocks in the Feltl and Company research universe, together with the number in (and percentage of) each category for which Feltl and Company provided investment-banking services in the previous twelve months.

Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 17 June 22, 2012

06/22/12 SB Target: $8.50

Date Nature of Report Rating Price Target 06/22/12 [email protected] StrongBuy $8.50

Feltl and Company does make a market in the subject security at the date of publication of this report. As a market maker, Feltl and Company could act as principal or agent with respect to the purchase or sale of those securities.

Valuation and Price Target Methodology: Our valuation is based upon an EV/sales methodology. We have chosen 7x 2013 EV/sales as the multiple on which to value Novadaq based upon current valuations of high growth medical technology companies and what we consider to be its closest peer, Intuitive Surgical (ISRG – not rated). Based on our 2013 estimates, this results in an enterprise value of $293 million from which we add current net cash of $41.1 million to arrive at $334 million, or ~$8.50 per share based upon 39.8 million shares outstanding at present. Risks to Achievement of Estimates and Price Target: • Potential challenges of selling direct. The company plans to sell the PINPOINT product direct and has indicated that they would start out modestly with ten or so salespeople, and that they would scale up to 80-100 salespeople over time as the sales strategy is proven. Should the sales force struggle at first, Novadaq may slow down the addition of new salespeople and experience slower growth as a result. However, we believe this risk is mitigated somewhat, as Novadaq has experience building sales forces in the past; prior to partnering on SPY and their CO2

Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 18 June 22, 2012

Heart Laser system, the company built sales forces dedicated to selling the products then transferred its salespeople to the partner company once the partnership agreement was in place. • Future clinical study results on SPY technology turn out negatively or mixed. Thus far, the clinical studies supporting the use of SPY have been invariably positive, but that is no guarantee that future studies will show the same or similarly positive results in existing or future applications. Should this occur, we would anticipate the large potential market for Novadaq’s technology would shrink. • New technology usurps Novadaq’s edge. We are not presently aware of any technology under development that would compete in the same space as Novadaq, there is always the potential for competition to emerge. However, it is likely that any competition would be at least several years from gaining a position similar to that which Novadaq currently occupies and by that time, Novadaq may have already won the “land grab”.

Other Disclosures: The information contained in this report is based on sources considered to be reliable, but not guaranteed, to be accurate or complete. Any opinions or estimates expressed herein reflect a judgment made as of this date, and are subject to change without notice. This report has been prepared solely for informative purposes and is not a solicitation or an offer to buy or sell any security. The securities described may not be qualified for purchase in all jurisdictions. Because of individual requirements, advice regarding securities mentioned in this report should not be construed as suitable for all accounts. This report does not take into account the investment objectives, financial situation and needs of any particular client of Feltl and Company. Some securities mentioned herein relate to small speculative companies that may not be suitable for some accounts. Feltl and Company suggests that prior to acting on any of the recommendations herein, the recipient should consider whether such a recommendation is appropriate given their investment objectives and current financial circumstances. Past performance does not guarantee future results. Additional information is available upon request.

Feltl and Company Research Department Novadaq Technologies, Inc. (NVDQ) Page 19 EQUITY CAPITAL MARKETS DIRECTORY

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