On January 12, 2017, Novan, Inc. entered into a license agreement with Sato Pharmaceutical Co. Ltd. relating to SB204, lead drug candidate for the treatment of acne vulgaris. Pursuant to the license agreement, The company granted to Sato an exclusive, royalty-bearing, non-transferable license under certain of intellectual property rights, with the right to sublicense with Novan's prior written consent, to develop, use and sell products in Japan that incorporate SB204 for the treatment of acne vulgaris in humans. The rights granted to Sato do not include the right to manufacture the active pharmaceutical ingredient of SB204, which it will supply to Sato. During a specified time period, Sato has an exclusive option to negotiate the terms under which its license would be expanded to include certain additional territories within Asia, subject to Sato's payment of a specified option exercise fee. Sato has granted it an exclusive, fully paid-up, royalty-free license, with the limited right to grant sublicenses, under certain of Sato's intellectual property rights, to develop and commercialize the licensed product outside the licensed territory and to make the licensed product within the licensed territory for sale outside of the licensed territory. In exchange for the licenses granted to Sato, Sato agreed to pay it an upfront payment of JPY 4.0 billion, payable in equal annual installments over 15 years. Sato also agreed to pay us up to an aggregate of JPY 0.9 billion in milestone payments, upon the achievement of various commercial milestones. Under the terms of the license agreement, Sato must also pay us a royalty equal to a mid-single digit percentage of net sales of licensed products in the licensed territory, subject to a reduction in the royalty payments in certain circumstances. The term of the license agreement expires, on a licensed product-by-licensed product basis, on the tenth anniversary of the first commercial sale of a licensed product in the licensed territory. The license agreement may be terminated by Sato without cause upon 120 days' advance written notice to us; by either party in the event of the other party's uncured material breach upon 60 days' advance written notice; by either party in the event of the other party's dissolution, liquidation, bankruptcy or insolvency; and by it immediately upon written notice if Sato challenges the validity, patentability, or enforceability of any of it patents or patent applications licensed to Sato under the license agreement.