Item 2.05. Costs Associated with Exit or Disposal Activities.
On May 31, 2023, Novan, Inc. (the “Company”) commenced a restructuring of the Company’s commercial segment, resulting in a reduction in force of approximately 50% of employees, primarily among its field sales representatives. The Company took these steps in order to focus its resources on pursuing the regulatory approval for the Company’s SB206 product candidate.
The Company estimates that it will incur approximately $0.9 million in charges related to the reduction in force, substantially all of which are cash expenditures for one-time termination benefits and associated costs. The Company expects to record the charges in the second quarter of 2023 and to make substantially all of the related payments over a period of twelve months.
After taking into account the reduction in force described above, the Company believes that its existing cash and cash equivalents as of March 31, 2023, plus expected receipts associated with product sales from its commercial product portfolio, will provide it with liquidity to fund its planned operating needs into late June of 2023. Notwithstanding the initiatives described in this Form 8-K, the Company does not currently have sufficient funds to complete commercialization of any of its product candidates that are under development, and its funding needs will largely be determined by its commercialization strategy for SB206, subject to the regulatory approval process and outcome, and the operating performance of its commercial product portfolio, including the impacts of the reduction in force described herein. The inability of the Company to generate sufficient net revenues to fund its operations or obtain significant additional funding on acceptable terms in the near term, could have a material adverse effect on the Company’s business and cause the Company to alter or reduce its planned operating activities, including, but not limited to, delaying, reducing, terminating or eliminating planned product candidate development activities and preparations for potential commercialization activities, furloughing employees or further reducing the size of the workforce, to conserve its cash and cash equivalents. The Company has pursued and is continuing to pursue additional capital through equity or debt financings or from other sources, including partnerships, collaborations, licensing, grants or other strategic relationships. The Company’s anticipated expenditure levels may change as it adjusts its current operating plan to conserve cash. Such actions could delay development timelines and have a material adverse effect on its business, results of operations, financial condition and market valuation. The Company is also exploring the potential for additional strategic transactions, such as sales, out-licenses or divestitures of some of its assets, or other potential strategic transactions, which could include a sale of the Company. If the Company were to pursue such a transaction, it may not be able to complete the transaction on a timely basis or at all or on terms that are favorable to the Company. Alternatively, if the Company is unable to obtain significant additional funding on acceptable terms or progress with a strategic transaction, it could instead determine to dissolve and liquidate its assets or seek protection under the bankruptcy laws. If the Company decides to dissolve and liquidate its assets or to seek protection under the bankruptcy laws, it is unclear to what extent the Company would be able to pay its obligations, and, accordingly, it is further unclear whether and to what extent any resources would be available for distributions to stockholders.