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Zimmer Development Agreement

12 Months Ended

Sep. 30, 2022

Zimmer Development Agreement [Abstract]

NOTE 7 – Zimmer Development Agreement

On July 20, 2020, the Company entered into an exclusive development and distribution agreement (the “Development Agreement”) with Zimmer, Inc. (“Zimmer”), pursuant to which the Company granted Zimmer exclusive global rights to distribute the Strip/Grid Products and electrode cable assembly products (the “Electrode Cable Assembly Products”). Additionally, the Company granted Zimmer the exclusive right and license to distribute certain depth electrodes developed by the Company (“SEEG Products”, and together with the Strip/Grid Products and Electrode Cable Assembly Products, the “Products”). The parties have agreed to collaborate with respect to development activities under the Development Agreement through a joint development committee composed of an equal number of representatives of Zimmer and the Company.

Under the terms of the Development Agreement, the Company is responsible for all costs and expenses related to developing the Products, and Zimmer is responsible for all costs and expenses related to the commercialization of the Products. In addition to the Development Agreement, Zimmer and the Company have entered into a Manufacturing and Supply Agreement (the “MS Agreement”) and a supplier quality agreement (the “Quality Agreement”) with respect to the manufacturing and supply of the Products.

Except as otherwise provided in the Development Agreement, the Company is responsible for performing all development activities, including non-clinical and clinical studies directed at obtaining regulatory approval of each Product. Zimmer has agreed to use commercially reasonable efforts to promote, market and sell each Product following the “Product Availability Date” (as defined in the Development Agreement) for such Product.

Pursuant to the Development Agreement, Zimmer made an upfront initial exclusivity fee payment of $2.0 million (the “Initial Exclusivity Fee”) to the Company in fiscal year 2020.

On August 2, 2022, the Company entered into a Third Amendment to Exclusive Development and Distribution Agreement (the “Amendment”) with Zimmer. Pursuant to the terms and conditions of the Amendment, Zimmer made a $3.5 million payment to the Company. In consideration of the mutual covenants and agreements contained in the Development Agreement, the fee and milestone payment provisions in the Development Agreement were replaced with the following below:

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$1.5 million for the SEEG Exclusivity Maintenance Fee; and

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$2.0 million for satisfaction of each of the milestone events related to the design of SEEG products set forth in the Development Agreement even though the satisfaction was after the deadlines originally identified.

In addition, in connection with the Amendment, the Company issued Zimmer a warrant to purchase common stock (the “2022 Zimmer Warrant”). The 2022 Zimmer Warrant is exercisable for up to an aggregate of 350,000 shares of the Company’s common stock. The 2022 Zimmer Warrant has an exercise price of $3.00 per share, will be exercisable commencing six months from the issuance date, and will expire on August 2, 2027. The fair value of the 2022 Zimmer Warrant of $0.1 million was based on the Black-Scholes pricing model. Input assumptions used were as follows: a risk-free interest rate of 2.9%; expected volatility of 53.5%; expected life of 5 years; expected dividend yield of 0%; and the underlying fair market of the common stock. The 2022 Zimmer Warrant was classified in stockholders’ equity as the number of shares were fixed and determinable, no cash settlement was required and no other provisions precluded equity treatment.

The Development Agreement will expire on the tenth anniversary of the date of the first commercial sale of the last Products to achieve a first commercial sale (the “Term”), unless terminated earlier pursuant to its terms. Either party may terminate the Development Agreement (x) with written notice for the other party’s material breach following a cure period or (y) if the other party becomes subject to certain insolvency proceedings. In addition, Zimmer may terminate the Development Agreement for any reason with 90 days’ written notice, and the Company may terminate the Development Agreement if Zimmer acquires or directly or indirectly owns a controlling interest in certain competitors of the Company. The license rights granted to Zimmer under the Strip/Grid Distribution License and SEEG Distribution License shall be exclusive from the Effective Date of the Amendment until the end of the Term.

The Zimmer Development Agreement and Amendment were accounted for under the provisions of ASC 606. In accordance with the provisions under ASC 606, the Company identified five performance obligations under the Zimmer Development Agreement and Amendment: (1) the Company’s obligation to grant Zimmer access to its intellectual property; (2) completion SEEG Product development; (3) completion of Strip/Grid Product development; (4) the provision of SEEG exclusivity maintenance; and (5) completion of SEEG design modifications as requested by Zimmer. All performance obligations under the Development Agreement and Amendment, outside of the SEEG exclusivity maintenance obligation, were met as of September 30, 2022.

The aggregate transaction price associated with the Development Agreement and Amendment was $5.4 million comprising the Initial Exclusivity Fee of $2.0 million and the $3.5 million payment under the Amendment, less the fair value 2022 Zimmer Warrant of $0.1 million. The transaction price was allocated between performance obligations based on their relative standalone selling prices. The Company used a market based valuation approach and an expected cost plus margin approach with regard to estimating the standalone selling price for the performance obligations. The Company recognized revenue in the amount of $1,948,872 and $64,812 during the years ended September 30, 2022 and 2021, respectively, in connection with the Development Agreement and Amendment.

A reconciliation of the closing balance of deferred revenue related to the Zimmer Development Agreement and Amendment is as follows as of September 30, 2022 and 2021:

Deferred Revenue
Balance as of September 30, 2020	$	73,434
Revenue recognized		(64,812	)
Balance as of September 30, 2021		8,622
Zimmer agreement amendment related to SEEG exclusivity maintenance		1,455,188
Revenue recognized		(8,622	)
Balance as of September 30, 2022	$	1,455,188

The remaining performance obligation in deferred revenue as of September 30, 2022 attributed to sEEG exclusivity maintenance was completed in first quarter of fiscal year 2023. The achievement of the level of sales required to earn royalty payments under the Development Agreement from Zimmer is uncertain and was considered constrained for revenue recognition purposes as of September 30, 2022.

Product Revenue

In December 2020, the Company commenced commercial sales of its Strip/Grid Products and Electrode Cable Assembly Products in connection with the Development Agreement. Product revenue recognized during the years ended September 30, 2022 and 2021 was $171,169 and $178,146, respectively.

Advertising Expense

Advertising expense is charged to selling, general and administrative expenses during the period that it is incurred. Total advertising expense amounted to $270,612 and $338,837 for the years ended September 30, 2022 and 2021, respectively.