NOTE 13. LICENSE, COLLABORATION AND DISTRIBUTION AGREEMENTS

Virbac Agreement

In April 2012, the Company entered into a feasibility and option agreement with Virbac, a global animal health company, for the development and potential commercialization of Aganocides for a number of veterinary uses for companion animals. Under the terms of the agreement, the Company received an upfront payment and is entitled to additional support for research and development. Virbac conducted veterinary studies using the Company’s Aganocide compounds to assess feasibility for treating several veterinary indications.

In April 2013, the option was exercised, and the Company entered into a collaboration and license agreement with Virbac. Under this agreement, Virbac acquired exclusive worldwide rights to develop the Company’s proprietary Aganocide compound, auriclosene (NVC-422), for global veterinary markets for companion animals. The Company received an option exercise fee and may receive future development and pre-commercial milestone payments as a result of the collaboration. The Company also expects to receive royalties on the sale of any commercial products in the companion animal field. Virbac’s option exercise follows its extensive testing of auriclosene for veterinary uses during the 12-month option period. The Company is recognizing the option exercise fee over its expected performance period of 10 years based on actual sales during this period.

The Company did not recognize any revenue under the Virbac agreement during the three and six months ended June 30, 2016 and 2015, respectively.

The Company had a deferred revenue balance of $246 thousand at both June 30, 2016 and December 31, 2015 related to this agreement, which consisted of the unamortized balances on the upfront technology access fee and option fee and the support for ongoing research and development.

NeutroPhase Distribution Agreements

In January 2012, the Company entered into a distribution agreement with Pioneer Pharma Co., Ltd. (“Pioneer”), a Shanghai-based company that markets high-end pharmaceutical products in China, for the commercialization of NeutroPhase in this territory. Under the terms of the agreement, the Company received an upfront payment of $313 thousand. NovaBay also received $313 thousand in January 2013, related to the submission of the first marketing approval for the product to the China Food and Drug Administration (“CFDA”) (formerly the SFDA, State Food and Drug Administration), which was submitted in December 2012. The distribution agreement provides that Pioneer is entitled to receive cumulative purchase discounts of up to $500 thousand upon the purchase of the NeutroPhase product. The deferred revenue will be recognized as the purchase discounts are earned, with the remaining deferred revenue recognized ratably over the product distribution period. During the year ended December 31, 2014, NovaBay received $625 thousand upon receipt of marketing approval for NeutroPhase from the CFDA.

In September 2012, the Company entered into two agreements with Pioneer: (1) an international distribution agreement (the “Distribution Agreement”) and (2) a unit purchase agreement (the “Pioneer 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, Pioneer has the right to distribute NeutroPhase, upon receiving 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. Pioneer is also obligated to make certain additional payments to the Company upon receipt of marketing approval. The Distribution Agreement further provides that Pioneer is entitled to a cumulative purchase discount not to exceed $500 thousand upon the purchase of the NeutroPhase product, payable in the Company’s unregistered restricted common stock.

Pursuant to the Pioneer Purchase Agreement, the Company also received $2.5 million from 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: (1) 32,000 units in September 2012; and (2) 48,000 units in October 2012, with both tranches at a purchase price of $31.25 per share. 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 thousand from deferred revenue to stockholders’ equity as consideration for the purchase of the units.

In December 2013, the Company announced it had expanded its NeutroPhase commercial partnership agreement with Pioneer. The expanded agreement includes licensing rights to two new products, Avenova and CelleRx, both developed internally by NovaBay. The expanded partnership agreement covers the commercialization and distribution of these products in China and 11 countries in Southeast Asia.

During the three and six months ended June 30, 2016, the Company had three other smaller distribution agreements and continues to seek additional distribution agreements.

Revenue has been recognized under these agreements as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2016		2015		2016		2015
Amortization of Upfront Technology Access Fee	$	6	$	7	$	57	$	13
Product revenue		-		118		236		144
Total revenue recognized	$	6	$	135	$	293	$	157

The Company had a deferred revenue balance of $1,447 thousand and $1,499 thousand at June 30, 2016 and December 31, 2015, respectively, related to these agreements, which consisted of the unamortized balances on the upfront technology access fee and the support for ongoing research and development.

Avenova Distribution Agreements

In 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 nationwide distribution agreement with AmerisourceBergen to market Avenova. In December 2015 the Company also signed a nationwide distribution agreement with Willow Pharmacy to market Avenova.

During the three months ended June 30, 2016 and June 30, 2015, the Company earned $2,578 thousand and $122 thousand

respectively, in sales revenue for its Avenova product from its distribution agreements.

During the six months ended June 30, 2016 and June 30, 2015, the Company earned $3,943 thousand and $161 thousand respectively, in sales revenue for its Avenova product from its distribution agreements.

The Company had a deferred revenue balance of $1,403 thousand and $24 thousand at June 30, 2016 and December 31, 2015, respectively, for its Avenova product from its distribution agreements.