Item 1.02. Termination of a Material Definitive Agreement.
Termination of Lease
As part of its previously announced broader strategic plan to shift its operating cost structure characteristics from fixed to variable and its efforts to reduce or offset its remaining fixed lease obligation, on July 16, 2020, Novan, Inc. (the “Company”) entered into a Lease Termination Agreement (the “Termination Agreement”) with Durham Hopson, LLC (as successor-in-interest to Durham Hopson Road, LLC) (the “Landlord”), which provides for the early termination of the existing lease, as amended, whereby the Company leased 51,350 square feet for the Company’s corporate headquarters (the “Lease”), subject to certain conditions. The initial term of the Lease was scheduled to expire in 2026, and as disclosed in the Form 10-Q for the quarterly period ended March 31, 2020, the Company had approximately $8.2 million in remaining minimum lease payments under the Lease as of such date. Pursuant to the terms of the Termination Agreement, the Lease was terminated in connection with the Landlord entering into a lease with a new tenant (the “New Tenant”) for the premises in the building covered by the Lease (the “New Tenant Lease”), which commenced on July 16, 2020. As consideration for the early termination of the Lease pursuant to the Termination Agreement, the Company will pay $600,000 to the Landlord, $539,172 of which will be paid through the Company forfeiting an existing security deposit under the Lease to the Landlord and $60,828 of which will be paid in cash.
In connection with the termination of the Lease pursuant to the Termination Agreement, the Company entered into a sublease agreement, which was effective upon the termination of the Lease and the commencement of the New Tenant Lease, through which the Company will sublease from the New Tenant approximately 12,000 square feet (to be reduced to approximately 10,000 square feet after August 31, 2020) in the building that was covered by the Lease (the “Sublease”). The New Tenant and the Landlord entering into the New Tenant Lease was a condition precedent to the effectiveness of the termination of the Lease pursuant to the Termination Agreement, and, in connection with the termination of the Lease, the Landlord consented to the Sublease. The Sublease will expire on March 31, 2021, if not earlier terminated, and is terminable, in part or in whole, by the Company upon 30 days’ written notice with no penalty.
The facility underlying the Lease served as the Company’s corporate headquarters and its sole research, development and manufacturing facility. While the Company currently expects to operate its corporate headquarters, research and development laboratories and pilot scale cGMP manufacturing activities within the facility pursuant to the Sublease, the Company has decommissioned the areas within the facility, as well as the associated equipment, that supported the Company’s large scale cGMP drug manufacturing capability in preparation for execution of the Termination Agreement.
The foregoing description of the Termination Agreement is a summary, is not complete and is qualified in its entirety by the terms and conditions of the Termination Agreement, which will be filed as an exhibit to a subsequent filing with the Securities and Exchange Commission (the “Commission”), as permitted by the rules of the Commission.