NOTE

14.

LICENSE, COLLABORATION AND DISTRIBUTION AGREEMENTS

Transactions under the Company’s major distribution agreements are recognized upon transfer of control to its major distribution partners at the amount of consideration that the Company expects to be entitled to. The Company records contract liabilities for the invoiced amounts that are estimated to be subject to significant reversal, including product revenue allowances for cash consideration paid to customers for services, discounts, rebate programs, chargebacks, and product returns.

Milestone payments are included in the estimated transaction price when they are considered probable of being achieved. For license and collaboration revenue, the transaction price under license and collaboration arrangements, including upfront fees and milestone payments, are allocated differently to each performance obligation and

may

be recognized at earlier points in time or with a different pattern of performance over time.

The following table presents changes in the Company's contract assets and liabilities for the

three

months ended

March 31, 2020 (

in thousands):

	Balance at Beginning of the Period		Additions		Deductions			Balance at the end of the Period
Contract Liabilities: Deferred Revenue	$	—	$	559	$	—		$	559
Contract Liabilities: Accrued Liabilities		434		568		(691	)		311
Total	$	434	$	1,127	$	(691	)	$	870

During the

three

months ended

March 31, 2020

and

2019,

the Company recognized the following revenue (in thousands):

	Three Months Ended March 31,
	2020		2019
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period:
Performance obligations satisfied	$	434	$	1,444
New activities in the period:
Performance obligations satisfied		1,458		47

	$	1,892	$	1,491

License, Collaboration and Distribution Agreements

January 2012,

the Company entered into a distribution agreement with China Pioneer Pharma Holdings Limited (“China Pioneer”), a Shanghai-based company that markets high-end pharmaceutical products into China and

one

of the Company’s largest stockholders, for the commercialization of NeutroPhase in this territory. Under the terms of the agreement, NovaBay received an upfront payment of

$312,500.

NovaBay also received

$312,500

January 2013,

related to the submission of the

first

marketing approval for the product to the Chinese Food and Drug Administration (the “CFDA”). The deferred revenue was recognized as the purchase discounts were earned, with the remaining deferred revenue recognized ratably over the product distribution period. During the year ended

December 31, 2014,

NovaBay received

$625,000

upon receipt of a marketing approval of the product from the CFDA.

September 2012,

the Company entered into

two

agreements with China Pioneer: (

) an international distribution agreement (“Distribution Agreement”) and (

) a unit purchase agreement (“Purchase Agreement”). These agreements were combined and accounted for as

one

arrangement with

one

unit of accounting for revenue recognition purposes.

Pursuant to the terms of the Distribution Agreement, China Pioneer has the right to distribute NeutroPhase, upon a marketing approval from a Regulatory Authority, in certain territories in Asia (other than China). Upon execution of the Distribution Agreement, the Company received an upfront payment, which was recorded as deferred revenue. China Pioneer is also obligated to make certain additional payments to the Company upon receipt of the marketing approval. The Distribution Agreement further provides that China Pioneer is entitled to a cumulative purchase discount

not

to exceed

$500,000

upon the purchase of NeutroPhase product, payable in NovaBay unregistered restricted common stock.

Pursuant to the Purchase Agreement, we also received

$2.5

million from China Pioneer for the purchase of restricted units (comprising

one

share of common stock and a warrant for the purchase of

one

share of common stock). The unit purchase was completed in

two

tranches: (

)

800,000

units in

September 2012;

and (

)

1,200,000

units in

October 2012,

with both tranches at a purchase price of

$1.25

per unit. The fair value of the total units sold was

$3.5

million, based upon the trading price of our common stock on the dates the units were purchased and the fair value of the warrants based on the Black-Scholes Merton option pricing model. Because the aggregate fair value of the units on the dates of purchase exceeded the

$2.5

million in proceeds received from the unit purchase by approximately

$1.0

million, we reallocated

$600,000

from deferred revenue to stockholders’ equity as consideration for the purchase of the units.

December 2013,

the Company announced it had expanded its NeutroPhase commercial partnership agreement with China Pioneer. The expanded agreement includes licensing rights to Avenova and CelleRx, which were developed internally by NovaBay. The expanded partnership agreement covers the commercialization and distribution of these products in China and

countries in Southeast Asia.

The Distribution Agreement and the Purchase Agreement expired on

December 31, 2019.

The Company did

not

renew the agreement with China Pioneer.

During the

three

months ended

March 31, 2020,

the Company earned

in licensing revenue related to the distribution agreement with Pioneer China. During the

three

months ended

March 31, 2019,

the Company earned

$41

thousand in revenue due to the Company being relieved of contract liability as a result of changes in contract terms associated with the distribution agreement with Pioneer China.

During the

three

months ended

March 31, 2020,

the Company earned

$173

thousand for sales of NeutroPhase to China Pioneer, which is recorded in the product sales in the unaudited condensed consolidated statements of operations and comprehensive loss. During the

three

months ended

March 31, 2019,

the Company earned

for sales of NeutroPhase to China Pioneer.

Avenova Distribution Agreements

November 2014,

the Company signed a nationwide distribution agreement for its Avenova product with McKesson Corporation (“McKesson”) as part of the Company’s commercialization strategy. McKesson makes Avenova widely available in local pharmacies and major retail chains across the U.S., such as Wal-Mart, Costco, CVS and Target. In

January 2015,

the Company signed a nationwide distribution agreement with Cardinal Health. In

April 2015,

the Company also signed a distribution agreement with AmerisourceBergen to distribute Avenova nationwide.

During the

three

months ended

March 31, 2020

and

2019,

the Company earned

$0.6

million and

$1.2

million,

respectively, in product revenue under the Avenova distribution agreements.

Under the Avenova product distribution arrangements, the Company had a contract liability balance of

$0.3

million and

$0.4

million at

March 31, 2020

and

December 31, 2019,

respectively. The contract liability is included in accrued liabilities in the condensed consolidated balance sheets. The contract liability as of

March 31, 2020

and

December 31, 2019

included a prepayment of

$0.3

million and

$0.4

million rebate, respectively, that is recorded in the prepaid expenses and other current assets in the condensed consolidated balance sheets (see Note

“Prepaid Expenses and Other Current Assets”).

During

2019,

the number of pharmacies in our Partner Pharmacy Program increased from

14,

placing us on track to increase Avenova sales through retail pharmacies from

one

-quarter to

one

-half of all sales. Our partner pharmacies provide patients with a quality experience that includes a relatively short time between receiving the initial prescription and filling it, fast refills and home delivery. The combination of a pre-negotiated price along with a reduction in coupon and rebate usage improves our gross-to-net and per-script profitability. During the

three

months ended

March 31, 2020

and

2019,

the revenue generated from these pharmacies comprised

12%

and

25%

of our total product revenue, respectively.

Avenova Direct

In an effort to improve patient access, Avenova Direct was launched on

June 1, 2019

to U.S. customers exclusively on Amazon.com. Avenova Direct is the same strength hypochlorous formulation as Avenova Rx, but comes in a

20mL

size. This channel offers the Company with stable gross-to-net pricing and provides customers with easy access to our product. This model capitalizes on a trend to sell pharmaceutical products directly to consumers in response to high-deductible health plans, allowing customers to forego a time-consuming doctor visit and trip to the pharmacy. We are promoting this program through complementary social media marketing to target consumers in specific demographics, as well as to ophthalmologists, optometrists, and current and former Avenova patients. During the

three

months ended

March 31, 2020,

the revenue generated from Avenova Direct was

$0.8

million.

KN95

Masks

In light of the shortage of protective masks since the outbreak of COVID-

19,

the Company launched its sale of

KN95

disposable air filter masks on the Company’s website in

March 2020.

During the

three

months ended

March 31, 2020,

the revenue generated from the sale of such protective masks was

$0.2

million.

$18

thousand revenue was deferred from online sales as the Company had

not

fulfilled its obligations as of

March 31, 2020.

The Company also received

two

deposits totaling

$0.6

million for bulk orders that were arranged to be shipped directly out of a manufacturer in China. As the orders had

not

been delivered to the

two

customers as of

March 31, 2020,

the revenue was deferred. The Company had

$0.6

million and

deferred revenue at

March 31, 2020

and

December 31, 2019,

respectively.