Note: New offer for Veriphi 2018

Introduction - 25 October 2016

This document has been prepared as an update for Veriphi shareholders and potential new investors.

Before and following our AGM on 21 September, we received inquiries from shareholders about further opportunities to invest. We canvassed all shareholders to seek expressions of interest, and received indicative commitment for $170,000.

The directors have decided to open up the opportunity to current shareholders and selected new investors on the same terms as the last offer, i.e. $2.75 per share. We have set a maximum of $600,000 at a pre-money valuation of $8,734,000, as the total amount of funds we wish to accept at this time. This is within the maximum NZ$2m offer made in April 2016.

More investment will simply give Veriphi a longer runway to achieve its goals. We don’t expect a material change in the speed of development towards the commercial trial.

Achievements Since the Capital Raise

Key objectives set out in the April 2016 offer were:

1. Follow on testing from the successful 15 drug trials in multiple prototype containers.
2. Consumable development for hospital trials.
3. New commercial prototype for hospital trials, including simplified electronics, higher optical resolution, and faster analysis.

All of these objectives are mostly complete, with the new analyser currently being commissioned.

We have also:

• Expanded our in-house technical team from one employee to two full time employees and three (part time) interns.
• Employed a part time in-house IP manager.
• Redesigned our analyser, hardware, software, and consumable.
• Completed the build of our first new analyser.
• Built and successfully tested new consumable prototypes.
• Converted our concentration algorithm to code and successfully conducted concentration tests.
• Secured USPTO approval for one more US patent and have another one about to be granted.
• Made our first formal submission to the US Food and Drug Administration.
• Reached agreement in principle for validation trials at Auckland City Hospital (ACH).
• LinkedIn with over 400 clinicians as part of our capital raise.
• Been voted the Best Start-Up Opportunity at the 2016 Healthtech Innovation and Investment Workshop.

Technical Progress

Funds have been used to expand our in-house technical team from one full time employee to five (two full time, three part time) and provide them with the resources to accelerate the development project, moving away from our historical reliance on outside contractors.

Our two full time engineering recruits are Kyle Pennington, a PHD graduate in Electronic Engineering from Waikato University, and Elliot Thompson-Bean, a Mechanical Engineering Masters graduate from Auckland University. We had over 150 applicants for each role, allowing us to choose these two outstanding candidates. The same could be said for our three engineering interns from Auckland University; Jerome Swannack, Lilian Lim, and Helen Roh.

The energy and talent of our young team, supported by more experienced advisers, has been a critical part of our recent success.

The major objective for this next step, and use of the funds being raised, is to successfully complete validation trials at Auckland City Hospital, which would enable us to commence commercial sales and generate revenue for the first time.

The technical milestones required to address this include:

• Redesign the electronics to improve the analyser resolution.
• Rewrite the firmware (software) for the electronics.
• Develop a commercial consumable and test cell.
• Shorten the verification time to less than 10 seconds from the hardware and software redesign.
• Optimise the performance of the concentration algorithm.

At time of writing the following progress on these milestones has been made:

• Electronics build for the new analysers is complete.
• One analyser has been assembled.
• Firmware is being installed and tested.
• Initial tests on a new prototype consumable and test cell show good repeatability.
• Reduction in testing time is on track. The hardware and software changes are made and about to be tested.
• Initial test results on recently collected data using the new concentration algorithm software have been very encouraging.

The analyser build is behind the schedule described in the IM, but this build work is now complete, with commissioning underway. We are pulling other parts of the project forward, such as IP protection compliance and cost reduction activities to be commercially ready sooner.

Our goal is to conduct first blind tests at Auckland City Hospital before Christmas 2016.

Clinical Progress

Following a successful meeting with senior hospital staff on 1 September 2016, it was agreed to draft a memorandum of understanding (MOU) allowing Veriphi to conduct trials at Auckland City Hospital (ACH). The MOU will cover the research plan, but also create the opportunity for a commercial relationship beyond a successful trial. ACH are very supportive of Veriphi and are enthusiastic about the upcoming trials. They have expressed interest in a broader programme of tests beyond the pharmacy to other clinical areas.

Our next meeting is scheduled for 8 November to finalise the MOU and details of the trial plan.

One of the unexpected successes of Veriphi’s capital raise has been our social media campaign to clinicians. Over 400 healthcare professionals, primarily anaesthetists and pharmacists, responded to our LinkedIn approaches around the capital raise. A number of these people invested in Veriphi. Pharmacists and other clinicians continue to connect with us through LinkedIn months after the original Snowball Effect capital raise.

Commercialisation

Veriphi is targeting first revenues from ACH by the last quarter of 2017. We will have a clearer picture if we are on target once we have completed the tests before Christmas. The company plans to expand to other hospitals within the ADHB and further afield within the Health Alliance (the four Northernmost DHB’s) once first revenues are established with ACH.

We have been very encouraged by the supportive stance towards Veriphi taken by procurement and clinical staff from both ACH and Health Alliance. They appear to be genuinely excited about the opportunity.

Beyond Australasia, our plan is to partner with major global healthcare companies.

In preparation for these approaches we have:

• IP – Intensified our IP efforts with the recruitment of a part time in-house IP manager Natalee Taylor.
• We have received approval for one US patent since the last capital raise, and have another about to be granted.
• Compliance – Made our first submission to the US Food and Drug Administration (FDA) for guidance on classification. We have a teleconference with the FDA on 14 December.
• Clinical – Made arrangements to conduct trials with leading hospitals in Australia (Alfred, Melbourne) and the USA (Stonybrook, Long Island NY).

Funding

Veriphi currently has $325,000 in the bank.

We are anticipating an R&D loss tax credit of $48,000.

We have applied for project grant funding from Callaghan Innovation of a minimum of $367,000 to support our R&D spend and believe our chances of success are high.

Our forecast cash expenditure until the end of the financial year is approximately $50,000 per month.

Our current cash balance assuming we receive grant funding and the benefit of the R&D loss tax credit is forecast to last until September 2017. We expect further investment to extend this by one month for approximately every $60,000 raised.

Summary

Veriphi is poised to commence testing its new analyser and consumable design as a precursor to commencement of hospital validation trials.

The evidence of rapid progress on multiple fronts since the April capital raise has generated requests from current shareholders to invest more funds into the company.

The enthusiasm of the wider Veriphi team is shared by our clinical collaborators who view our solution as a potential “game changer”.

We are excited about the year ahead.

- Greg Shanahan (CEO)

Investment Highlights

• A revolutionary solution for intravenous medication safety.
• Laser verification of intravenous drugs, using analyser and consumables.
• Intravenous most common and most dangerous of hospital medications errors.
• 100% success for Veriphi analyser across 40 blind trials of 10 drugs in four containers with data measured across three temperatures.
• Seven patent families, three approved US patents, one additional US patent about to be granted.
• Imminent validation trial at Auckland City Hospital.
• Trials planned for other New Zealand hospitals and internationally in Melbourne and New York.
• Advisory team of some of New Zealand’s leaders in anaesthesia and medication safety.
• Long established relationships with potential global partners in IV medication delivery.
• Over NZ$6.7m invested to date.
• Highly experienced board and executive team.

Welcome to Veriphi

Veriphi is an exciting New Zealand medical device company that is seeking up to $600,000 to commercialise its revolutionary intravenous (IV) drug verification technology.

Medication error is the most common cause of patient harm in the hospital system, costing billions of dollars and thousands of lives globally. IV medication errors are more common, harmful and costly than errors from oral or other medications.

To be able to verify the actual contents of an IV bag or syringe prior to administration is the holy grail of medication safety, providing a level of safety beyond manual checks or bar-codes. Veriphi’s analyser uses lasers to do precisely this, confirming, prior to administration, that the drug and concentration inside the syringe, IV bag or IV line, is the one the patient is supposed to receive.

The company’s revenue will come from the sale of analysers and consumables that allow the laser beam to pass through the drug for verification. Exponential growth will come as a result of recurring revenue, where Veriphi consumables are used every time a drug is verified across a rapidly expanding footprint of analysers.

Market entry will be initially focused on hospital pharmacies and medication rooms, where drugs are stored or compounded before being delivered to patients. The money raised will be used to translate existing analyser and consumable prototype designs into a commercial format for a trial on 15 oncology drugs at Auckland City Hospital. This clinical validation will lead to early sales in New Zealand and further planned trials in the United States and Australia. We anticipate globalization in partnership with a large multinational. Exit options are most likely to come from a trade sale or consolidation of shares by a significant new private investor.

The Problem

Medication errors are among the most common medical errors, harming millions of people globally every year. In New Zealand hospitals medication error causes an estimated 150 patient deaths¹ and potentially contributes to up to 2,500 in total², costing an estimated NZ $158–$411 million per annum³.

In US Hospitals, medication error injures 400,000- 700,000⁴ people and causes an estimated 7,000 deaths at a cost of US$3.5B-$5.6B per annum.

Intravenous medication errors account for over half of this total and are twice as likely to cause harm than from drugs administered via other routes⁵. Examples include a 33 year old mother in Sydney in 2010, left paralysed from the waist down⁶ when injected epidurally with a cleaning agent. In 2012 a Wairarapa patient was unintentionally administered two doses of adrenaline causing heart arrhythmia requiring defibrillation.

The Solution

Veriphi has developed a highly innovative laser based analyser to verify intravenous (IV) drugs to prevent medication error in hospitals.

The Veriphi medication safety solution, developed over the past 7 years, will be arguably the simplest and safest way to prevent such tragedies occurring.

The system works by placing Veriphi’s consumable containing the drug in the beam path of the analyser. The consumable has optical windows that allow the laser beam passage through the drug and consumable walls to a detector. The optical information received by the detector is compared against a library of known signatures for specific drugs. The Veriphi system then alerts the clinician if the drug presented is not the one intended to be administered.

The Benefit

To be able to simply and quickly verify the correct identity and concentration of IV drugs in non destructive testing is widely acknowledged in New Zealand and abroad as the holy grail of IV medication safety. As such, a solution that does this would be a “game changer”. This is particularly the case since recent overhaul of pharmacovigilance legislation in the EU and USA. The objective of the changes was to tighten up on drug traceability and verification as part of Good Manufacturing Practice. The US changes were sparked by a major tragedy due to non compliant preparation of sterile drugs in a single Boston pharmacy that caused the death of over 60 people across the United States in 2012 and 2013.

[1] Extrapolated from David et al study 2001.
[2] Extrapolated from Seddon et al IHI Trigger Tool Study 2013.
[3] Briant, Ali, Lay-Yee, Davis, New Zealand Med J 2004; Brown, McArthur, Newby et al, J Health Serv Res Policy 2002; Kunac, Kennedy, Austin et al 2009; Extrapolation Harvard Medical Practice Studyy, N Eng J Med 1991.
[4] Institute of Medicine 2000, 2006. Agency for Healthcare Research and Quality Report, 2002,2008.
[5] American Journal of Health-System Pharmacy 2008.
[6] http://www.sbs.com.au/news/article/2011/06/29/epidural-tragedy-mum-speaks-out.

Technology Status

Veriphi has two working proof of concept bench top prototypes, involved in ongoing tests at its facilities. The technology achieved 100 % success recently across 40 blind trials of 10 drugs in 4 containers with data measured across three temperatures. The ability to repeatedly and accurately verify drugs using data collected from multiple drugs in multiple containers across temperatures is a major milestone.

Veriphi is currently testing its new next generation analyser with expected higher resolution and faster verification times for hospital validation trials

IP Status

Veriphi’s intellectual property is protected by seven patent families including three approved US patents with a fourth US approval likely in the next 4 months. A eighth patent application is imminent.

Resources and Partners

Veriphi’s technical team has developed its novel solution working closely with industry stakeholders - notably, Auckland District Health Board, Callaghan Innovation and a range of technology contractors.

As the company moves into its commercialisation phase it has appointed an impressive clinical advisory team of some of New Zealand’s leading clinicians. We have also established relationships with other hospitals in New Zealand as well as Alfred Hospital/ Monash University, Victoria, Australia and Stony Brook University in Long Island NY, USA, for hospital trials following the successful completion of trials at the Auckland City Hospital.

Commercialisation

Veriphi’s revenue will come from the sale of analysers and consumables. The business model is to expand the population of analysers in hospitals to maximize recurring revenue from consumable sales. The consumable initially will be an IV connector with optical windows that allow the transmission of laser light at the required wavelengths. The connector will attach to other IV consumables such as syringes, IV bags and IV lines.

As the cost and size of the hardware is reduced the technology will become more widely dispersed beyond pharmacies and medication rooms to bedside use.

Fundraising

We are raising up to $600,000 for up to 6.41% of Veriphi Limited.

This funding will be used to:

• Translate current prototype design into a commercial format for trials at Auckland City Hospital.
• Conduct validation trials at Auckland City Hospital.
• Achieve first revenues.
• Secure a deal with a global partner.