SUPPLY AND LICENSE AGREEMENT

Exhibit 10.02

SUPPLY AND LICENSE AGREEMENT

THIS SUPPLY AND LICENSE AGREEMENT (“Agreement”) entered into as of January 1, 2004 (the “Effective Date”) by and between NOVARTIS CONSUMER HEALTH, INC ., 200 Kimball Drive, Parsippany, NJ 07054, a Delaware corporation (“Novartis”) and LECTEC CORPORATION , 10701 Red Circle Drive, Minnetonka, MN 55343, a Minnesota corporation (“LecTec”).

Recitals

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be bound, hereby agree as follows:

Article 1
Inventory Requirements and Other Obligations

1.1 Production and Sale of Product Inventory . From the Effective Date until February 5, 2005 or such earlier or later date as the parties may mutually agree upon (the “Manufacturing Period”), LecTec shall manufacture, sell and cause to be delivered to Novartis, Products in the quantities set forth in the Purchase Order and Novartis shall purchase such Products in the quantities and at the prices set forth in the Purchase Order. As used herein, “Purchase Order” shall mean the order by Novartis for Products at the prices and upon the delivery schedule to be purchased by Novartis during the Manufacturing Period as set forth in Exhibit 1.1 hereto and made a part hereof.

1.2 Exclusivity . LecTec shall manufacture and sell the Products exclusively to Novartis, provided, however, that the term “exclusively” as used herein shall be limited to mean that LecTec may not manufacture the Products or any other Vapor Patches (collectively, “Comparable Products”) for sale to any other customers for pediatric use (the “Field of Use”) in the United States, Canada or Mexico (the “Territory”). Novartis shall have the option until March 31, 2005 to extend the Territory and the exclusive Field of Use to the adult cough/cold category at no additional cost and under the same terms and conditions set forth in this Agreement.

1.3 Regulatory Compliance . As set forth below, LecTec shall be responsible for regulatory compliance in the manufacture of the Products and supply of same to Novartis. Novartis shall be responsible for regulatory compliance in the proper labeling, promotion, and advertising of the Products and the sale of same to end users according to existing OTC monograph requirements, directly or indirectly, which shall be under the exclusive control of Novartis. The parties shall cooperate in good faith to achieve such regulatory compliance.

1.4 Production Standards . All Products sold and delivered to Novartis hereunder shall (a) conform in all material respects with the specifications set forth in that certain Quality Assurance Agreement by and between Novartis and LecTec, dated as of May 5, 2000 (the “QA Agreement”), and with such further specifications as shall be agreed to by all parties in writing (the “Specifications”); (b) be manufactured, packaged and sold to Novartis without any material deviation from or breach of (i) the QA Agreement, and (ii) any applicable laws, regulations, and requirements of any government or governmental agency; and (iii) be subject to the warranties set forth in this Agreement.

1.5 Brand Name . Novartis intends to market the Products under the proprietary names “Vapor Patch” or “VaporPatch” (as selected by Novartis in its own discretion). LecTec hereby acknowledges that it has no objection to Novartis seeking to register such names at its own expense and risk with the United States Trademark Office, or with other authorities, and shall file its consent thereto, as requested in writing by Novartis, but LecTec does not warrant or imply that such marks are otherwise available or will be granted. LecTec shall give commercially reasonable cooperation to Novartis to manufacture and label the Products with such name or names or other names as Novartis, in its sole discretion, may designate from time to time during the term of this Agreement. However, subject to the foregoing, nothing herein shall be deemed to authorize the use of any LecTec trade name or trademark or any other mark that would dilute or reasonably tend to dilute any such LecTec trade name or trademark.

1.6 Amendment of Purchase Order . LecTec shall use its commercially reasonable efforts to accommodate any Novartis requests for delivery of Products in excess of the quantities described in the Purchase Order, or for delivery of Products sooner than that allowed or specified in the Purchase Order. If Novartis’ business conditions necessitate reduction or delay in its requirements for Products, then LecTec shall use its commercially reasonable efforts to implement such requested changes. Notwithstanding the foregoing, LecTec shall not take any action in response to any such requests which would result in charges to Novartis in addition to those set forth in the respective purchase order without Novartis’ prior written consent.

Article 2
Payment

2.1 Prices . In consideration of the satisfactory manufacture and delivery to Novartis of the ordered quantities of Products, Novartis shall pay LecTec for the Products in accordance with the prices set forth in Exhibit 2.1 . Subject to the provisions of Section. 2.5 hereof, Novartis shall make such payments within thirty (30) days of the date of each LecTec invoice issued upon shipment of the Products. Such payments shall be without prejudice to the inspection and credit rights of Novartis under Article 3 of this Agreement.

2.2 Taxes . Novartis shall bear the cost of taxes of any kind, nature or description whatsoever applicable to the sale of any Products by LecTec to Novartis (other than taxes based upon the income of LecTec or LecTec’s employees or due to the fact that LecTec conducts business or otherwise is present in a particular tax jurisdiction), unless Novartis is exempt therefrom and provides to LecTec tax exemption certificates or permits acceptable to the appropriate taxing authorities.

2.3 Shipment . Shipping terms for the Products are F.O.B., LecTec’s manufacturing facilities in either Minnetonka or Edina, Minnesota. Novartis shall designate in writing the carrier(s) it selects to take delivery of the Products at such facilities and shall provide LecTec with commercially reasonable shipping and packing instructions as Novartis deems appropriate. Risk of loss of any Products shall pass to Novartis upon delivery to the carrier designated by Novartis.

2.4 Late Delivery Discount . Subject to Section 12.11, if LecTec fails to deliver the Products in the quantities ordered within seven (7) days of the any delivery date specified in the Purchase Order, then Novartis shall be entitled to a discount of five percent (5%) of the price of the late-delivered Products for each week that delivery is delayed, up to a maximum discount of twenty percent (20%); provided, however, that if such delay in delivery is caused by Novartis’ batch record review or release of a releasable Batch (as used in this Agreement, “Batch” shall mean 525 cases of the Products as provided to Novartis for subsequent packaging for retail sale), Novartis shall not be entitled to any discount hereunder. For purposes of this Agreement, delivery of a shipment of Products shall occur when LecTec tenders such shipment to Novartis’ designated carrier at LecTec’s facility, and any delay incurred thereafter by Novartis’ designated carrier shall be deemed beyond LecTec’s control or responsibility.

2.5 Advance Payments . In order to provide LecTec with working capital funds necessary to enable it to manufacture and deliver Products to Novartis pursuant to this Agreement, Novartis shall advance funds (each such advance, an “Advance Payment” and, collectively, the “Advance Payments”) to LecTec for use by LecTec (a) to pay current accounts payable and expenses not exceeding $2,000,000.00 in the aggregate and thereafter (b) exclusively for the manufacture and delivery of Products. Subject to the full and timely performance by LecTec of the Product shipment requirements set forth in the Purchase Order and all other obligations of LecTec under this Agreement, Novartis shall disburse the Advance Payments to LecTec in installments in accordance with the schedule designated as “LecTec Payments” in Exhibit 2.5.

Novartis shall have no obligation to disburse any Advance Payment (x) if LecTec shall fail to make any delivery of Products to Novartis in strict compliance with the provisions of the Purchase Order, time being of the essence or (y) if such Advance Payment would cause the unpaid principal balance of the New Advance Payment Note, as defined in Section 2.5.1 to exceed $2,000,000.00 In the event that Novartis shall withhold any Advance Payment by reason of clause (y) in the preceding sentence, Novartis shall thereafter disburse the withheld Advance Payment, in whole or in part, from time to time at the request of LecTec at such time or times as the making of such disbursement will not cause the unpaid principal balance of the New Advance Payment Note to exceed $2,000,000.00, provided that Novartis shall have no obligation to disburse such withheld Advance Payment unless LecTec shall be in compliance with its obligations under this Agreement at the time of its request therefore.

2.5.1 The Advance Payments disbursed to LecTec as provided in Section 2.5 together with the outstanding balance of advances made by Novartis to LecTec on and after the date of the Prior Agreement, including such amounts advanced subsequent to December 31, 2003, as set forth in Schedule 2.5.1 (“Schedule of Inventory Payments”) annexed hereto and made a part of this Agreement shall be deemed to be a loan from Novartis to LecTec. On the Effective Date, LecTec shall execute and deliver to Novartis (a) a promissory note in the principal amount of $2,000,000.00 in the form attached hereto as Exhibit 2.5.1(a) (the “New Advance Payment Note”), (b) a security agreement in the form attached hereto as Exhibit 2.5.1(b) (“New Security Agreement”), and (c) such other documents as shall reasonably be deemed necessary by Novartis to perfect its security interests in the assets of LecTec as provided in the Security Agreement.

2.5.2 Unless otherwise prepaid in accordance with the terms of the Advance Payment Note, LecTec shall repay the principal amount of the New Advance Payment Note (or so much thereof as shall actually have been disbursed to it in accordance with the provisions of Section 2.5) in monthly installments equal to the aggregate purchase price of all Products delivered by LecTec to Novartis during such calendar month pursuant to the Purchase Order. Novartis shall credit the aggregate purchase price of Products delivered, determined as provided in this Agreement, against the payment obligations of LecTec under or by reason of (a) first, the outstanding balance as of the Effective Date of advances made to LecTec until such balance and all obligations of LecTec under the Advance Payment Note shall have been fully satisfied and (b) second, the New Advance Payment Note, and such credits shall constitute full payment by Novartis of the purchase price of such Products until such time as all of LecTec’s obligations under Section 2.5.1 shall have been paid in full.

2.5.3 Notwithstanding the provisions of Section 10.2 of this Agreement, LecTec shall be deemed to be in default of its obligations under Section 2.5.2: (a) if, during the Manufacturing Period, two consecutive Batches, as defined in Section 2.4 or any three Batches, as so defined, are rejected by Novartis based upon a commercially reasonable determination by Novartis, made without regard to the procedures set forth in Article 3 of this Agreement, that such Batches, as so defined, fail to comply with the Product quality provisions of Section 8.1 of this Agreement, or (b) if LecTec shall fail to deliver any Batch, as so defined, by the later of (i) the thirty (30) day period commencing upon Novartis’ QA release or rejection and (ii) thirty (30) days following the date specified for delivery in the Purchase Order, unless such failure to make timely delivery is attributable exclusively to changes ordered by Novartis in Product specifications or Product packaging specifications.

Article 3
Inspections and Acceptance

3.1 Inspection; Right of Rejection . Novartis shall accept any delivery of Products hereunder if, in Novartis’ sole and reasonable discretion, Novartis determines that the delivery complies fully with the Purchase Order, the Specifications and the requirements of this Agreement. Novartis shall have the right to inspect all Products delivered hereunder within thirty (30) days of its receipt of the Products and all required documentation. Novartis shall provide LecTec with written notice of its acceptance or rejection of the shipment within sixty (60) days of receipt of the Products and all required documentation. Any notice of rejection shall specify the reason(s) therefor. Except in the event of any investigation, corrective action or retesting of a shipment, if Novartis fails to provide LecTec with written notice of its acceptance or rejection of the shipment within sixty (60) days of receipt of the Products and all required documentation, then the shipment shall be deemed to have been accepted by Novartis. Novartis’ prior payment of any invoice for a shipment which is timely rejected under this Section 3.1 shall not prejudice Novartis’ right under Section 3.2 to seek replacement Products or a credit or refund, as Novartis may deem appropriate, with respect to any such rejected Products.

3.2 Replacements . If Novartis notifies LecTec that any Products, or any part thereof, are rejected pursuant to Section 3.1, then, at Novartis’ option, (a) LecTec shall, at no additional charge, deliver replacement Products to Novartis as soon as reasonably practicable thereafter (but, in any event, within ninety (90) days after the initial notification by Novartis); or (b) the quantity of Products so rejected shall be deemed to have been deleted from the Purchase Order, and Novartis shall not be obligated to make any payments to LecTec with respect to such quantity or the rejected shipment (or, if payment has already been made for such Products, then Novartis shall be entitled to a credit in such amount). Novartis shall give commercially reasonable cooperation to LecTec to determine the nature and extent of any problem giving rise to a rejection of Products, including, without limitation, prompt samples of any allegedly non-conforming Products.

3.3 Returns . Novartis shall not return any rejected Products to LecTec except upon a return material authorization (“RMA”) from LecTec. LecTec shall pay the freight to deliver replacement Products to Novartis for rightfully rejected Products, and LecTec shall pay the freight to return to LecTec or its designee rejected Products for which LecTec has provided to Novartis an RMA.

Article 4
Documentation and Information

4.1 Confirmation . LecTec shall submit to Novartis the batch manufacturing and testing documents relating to any Products ordered hereunder, within ten (10) days of the completion of the manufacturing process with respect to any particular batch of Products. LecTec shall provide such documentation as reasonably requested by Novartis solely (a) to assist Novartis in determining whether any manufactured or delivered Products comply fully with the Specifications and the requirements of this Agreement; (b) to assist Novartis in obtaining any and all regulatory approvals necessary to market the Products in the Territory; or (c) to enable Novartis to comply with any statutory or regulatory requirements or with a request by any governmental or regulatory authority in the Territory. Such records and reports shall be subject to the confidentiality provisions of Article 7 of this Agreement, shall be deemed LecTec’s Confidential Information, and shall be subject to the requirements of Section 1.3 of the QA Agreement.

4.2 Certificate of Analysis . Every shipment of the Products to Novartis shall be accompanied by a Certificate of Analysis from LecTec to certify the active ingredients therein. LecTec shall warrant the accuracy of each such Certificate of Analysis to a reasonable degree of scientific certainty.

4.3 Books and Records . During the Manufacturing Period, LecTec shall keep on file all books and records in connection with the manufacture and testing of the Products, including, but not limited to, those books and records relating to cross-over cleaning, process validation, installation qualification, operational qualification and cleaning validation for a period of seven (7) years, plus the active year, from the time of generation of such documents.

Article 5
Production Procedures

5.1 No Reworked Products . LecTec shall not rework or reprocess any non-conforming Products without the prior written approval of Novartis.

5.2 Product Packaging . The Products shall be delivered to Novartis packaged in accordance with the Specifications and the production schedule set forth in Exhibit 1.1. At a time designated by Novartis, it shall have the Products packaged with another packager and the cost of the Products from LecTec shall be reduced as set forth in Exhibit 2.1 . Notwithstanding the foregoing, Novartis shall have the right to require any special or varied packing that it believes is reasonably necessary to meet customs or regulatory requirements. Reasonable incremental costs which result directly from any packing changes required by Novartis will be borne by Novartis.

5.3 Production Procedures . LecTec’s production procedures for the Products (“Production Procedures”) have previously been approved by the parties. Such Production Procedures include the manufacturing site, manufacturing equipment, manufacturing process, manufacturing conditions and testing procedures for the manufacture of the Products. If LecTec wishes to make any material change in any of the Production Procedures so documented and approved, LecTec shall provide notice thereof to a designated Novartis employee, and shall permit such designated Novartis employee to review such proposed changes at LecTec’s facility, at least thirty (30) days prior to its first production run under such revised Production Procedures. All such changes to the Production Procedures must be approved in writing by Novartis prior to being implemented, which approval shall not unreasonably be withheld.

5.4 Waste Disposal . LecTec represents and warrants, to the best of its knowledge, and shall take all commercially reasonable actions necessary to ensure, that all facilities, equipment and practices used to perform LecTec’s responsibilities under this Agreement by or on behalf of LecTec, or by any of LecTec’s contractors of any rank (including, without limitation, environmental or safety and health consultants or waste management or disposal firms) (each a “LecTec Contractor”) will be during the term of this Agreement, in full compliance with all health, safety and environmental laws, statutes, ordinances, regulations, rules, permits and pronouncements. LecTec assumes responsibility for disposing of any and all waste generated during the performance of its responsibilities under this Agreement (including, without limitation, during any manufacturing, storage and transportation activities) in accordance with all legal and professional standards.

5.4.1 LecTec shall Dispose or arrange for the Disposal of Waste and at an Approved Disposal Facility. Novartis shall have the right to unilaterally modify any designation of any Approved Disposal Facility at any time based upon audit and inspection results. LecTec shall only transport Waste to an Approved Disposal Facility by means of a transporter lawfully permitted to transport the particular types of Waste at issue. LecTec shall be solely responsible for the proper Disposal of Waste. For purposes of this Section 5.4.1,

5.4.1.1 “Dispose” or “Disposal” shall mean any discharge, deposit, injection, dumping, spilling, leaking, or placing of any Waste into or on any land or water and the arrangement of any of the foregoing, and shall include any storage, pretreatment, treatment (including incineration), any other actual disposal, use, sale, sampling or other transfer or application of Waste of any kind or nature whatsoever;

5.4.1.2 “Waste” shall mean, for purposes of this Agreement only, all materials that are produced or generated in connection with the manufacture of any chemical compounds pursuant to this Agreement and for which Disposal is required, including but not limited to materials that are Hazardous Waste, co-product, by-product, chemical compounds that fail to conform to the requirements of this Agreement, wastewaters, residues, wastes, bottoms and other remainders and materials, packaging of, or components of the chemical compounds, and components of any chemical compounds that are not used in the manufacture of the chemical compounds;

5.4.1.3 “Hazardous Waste” shall mean (a) any material or substance defined as or containing materials defined as a “hazardous substance” pursuant to any applicable laws or regulations, including the Comprehensive Environmental Response, Compensation and Liability Act, as amended, the Resource Conservation and Recovery Act, as amended, and any similar successor or supplementary legislation, and the regulations promulgated thereunder, or (b) any material or substance that is radioactive; and

5.4.1.4 “Approved Disposal Facility” shall mean a disposal facility approved by Novartis, which approval shall not be unreasonably withheld.

5.4.2 Notwithstanding anything to the contrary herein, (i) if LecTec and/or any LecTec Contractor fails to comply with the obligations set forth in this Section 5.4, then LecTec shall be responsible for any claims, suits, or liabilities resulting therefrom (including, without limitation, those based on strict liability and joint and several liability), and LecTec shall indemnify, defend and save Novartis (including officers, directors, employees and agents of Novartis) harmless from and against any and all such claims, suits, and liabilities; and (ii) LecTec shall indemnify, defend and save Novartis (including officers, directors, employees and agents of Novartis) harmless from and against any and all claims, suits, and liabilities which arise directly or indirectly from the storage, release, transportation or disposal of chemicals, raw materials, product, waste or any other substance by LecTec and/or any LecTec Contractor.

Article 6
Ownership, Patent and License Provisions

6.1 Novartis Property . All materials, inventions, know-how, trademarks, information, data, writings and other property, in any form whatsoever, which is provided to LecTec by and/or on behalf of Novartis, or which is used by LecTec with respect to the performance of its obligations hereunder, and which was owned by Novartis prior to being provided to LecTec, shall remain the property of Novartis (the “Novartis Property”). LecTec shall have a royalty-free license to use any Novartis Property supplied to it solely to the extent necessary to enable LecTec to perform its obligations hereunder. LecTec shall not acquire any other right, title or interest in the Novartis Property as a result of its performance hereunder. Without limiting the foregoing, Novartis Property shall include the copyrights and trademarks used in the packaging of the Products (“Packaging IP Rights”).

6.2 License to Novartis .

6.2.1 A promissory note issued by LecTec to Novartis to evidence the Recall Debt of LecTec to Novartis in the amount of $250,000 (the “Recall Debt Note”) became due and payable, by its terms, on December 31, 2003.

6.2.2 Upon the signing of this Agreement by both parties, Novartis shall release the Recall Debt and forgive and relinquish any claim for payment of any of the obligations of LecTec under the Recall Debt Note in partial consideration of the sale by LecTec to Novartis of the license described in Section 6.2.3.

6.2.3 On the Effective Date, LecTec shall grant to Novartis, and Novartis shall accept, a license (the “License”) to all of the intellectual property of LecTec used or useful in the production of the Products including, without limitation, the trade name “Triaminic Vapor Patch,” the Licensed Patents listed in Exhibit C, designs, bills of material, manufacturing procedures, and know-how associated with the Products, together with copies of any documentary materials embodying the know-how used in the design, packaging, testing and production of the Products (collectively, the “Intellectual Property”). For the sake of clarity, the Intellectual Property shall not include any other LecTec trade names and shall not extend to the foregoing materials used in the design and production of Comparable Products (as such term is defined in Section 1.2 hereof) to the extent such Intellectual Property is not also used or useful in the design and production of the Products. The License shall give Novartis the exclusive right to manufacture and sell the Products for the Field of Use within the Territory. The term of the License shall be co-terminous with the duration of any patents included in the Intellectual Property and, with respect to all other elements of the Intellectual Property, shall be for the maximum duration permitted under applicable law, and shall continue beyond the end of the Manufacturing Period of Section 1.1 and Exhibit 1.1. All terms, conditions and obligations of this Agreement that are required, or relate to, or are appropriate for this License, including but not limited to the Royalties of Section 6.2.3.1 shall continue in full force and effect beyond the Manufacturing Period and until the term of this License expires. Upon the expiration of the patents included in the Intellectual Property, Novartis shall have a non-revocable, perpetual, fully paid-up, royalty-free license to the Intellectual Property.

The License shall include the right of Novartis to grant sublicenses to any Novartis Affiliate or any other third party contract manufacturer of the Products, provided, in each case (i) such sublicensee shall manufacture the Products only for Novartis; (ii) Novartis shall give written notice to LecTec of the grant of such sublicense at least ten (10) days prior to the effective date of such sublicense; (iii) such sublicense shall terminate when the License terminates; and (iv) Novartis shall give prompt written notice to LecTec if Novartis becomes aware that there has been a material breach of any of the foregoing terms by a sublicensee. The License shall be assignable by Novartis to any Novartis Affiliate or to any entity that is a successor to Novartis by merger or sale of all or substantially all of the assets of Novartis or to any entity that acquires from Novartis the rights to manufacture, distribute or sell the Product so long as (i) such acquiror or successor in interest agrees in writing to be bound by all the terms and conditions hereof; and (ii) Novartis shall first give LecTec written notice of any such assignment. Any purported assignment, transfer, or attempt to assign or transfer any interest or right hereunder except in compliance with this Section 6.2.3 shall be null, void and of no effect. Any such assignment shall be subject to the limitations on duration and scope of the License set forth in Article 6.

6.2.3.1 Licensing Fee and License Royalty Rate . The Licensing Fee for the License described in Section 6.2.3 shall be $ 1,065,000.00. This amount shall be paid to Lectec by (i) forgiveness of the Recall Debt Note as stated under Section 6.2.2, (ii) payment of $407,500.00 in cash within ten (10) days of execution of this Agreement and (iii) payment of $407,500.00 in cash on October 1, 2004. Commencing on January 1, 2005 Novartis shall pay Royalties to LecTec based on net semi-annual sales of Products by Novartis for each year the license is in effect. The term “net sales” as used in Section 6.2.3.1 shall mean gross revenues from the arms-length sale to unaffiliated third-parties of Products manufactured by or on behalf of Novartis pursuant to the License less transportation charges to customers, including insurance; sales, excise and taxes and duties paid or allowed and any other governmental charges imposed upon the sale of any Products; Product royalties to any party other than LecTec, normal and customary trade, quantity and cash discounts allowed; allowances, chargebacks and credits to customers on account of rejection or return of Product. Royalties pursuant to Section 6.2.3.1 shall be payable semi-annually not later than ninety (90) days following the end of Novartis’ two-quarter period by certified check or wire transfer payable to LecTec or its assignee. Novartis shall furnish to LecTec or its assignee, at the time of each semi-annual royalty payment, an accounting of its net sales of Product in reasonable detail. Royalty Rates are based on semi-annual sales and are shown in Exhibit 6.2.3.1 hereto and made a part hereof. For the sake of clarity, Novartis shall not owe any royalty payments for any vapor patch products distributed by Novartis that would not infringe or contribute to the infringement of a valid, enforceable claim of the licensed patents listed in Exhibit C.

Solely to ensure proper accounting for and payment of the royalties due LecTec under Article 6, LecTec may request, not more than once per calendar year during the term of the License, reasonable access during normal business hours and upon at least ten (10) days prior written notice by LecTec’s independent certified accountants, reasonably acceptable to Novartis(“LecTec Auditor”), to examine and copy the records of Novartis relating to the sale of Products during the term of the License. The LecTec Auditor may not disclose any such Novartis records to LecTec but shall report to LecTec and Novartis only the results of its audit in respect of whether Novartis has properly accounted for and paid the royalties due to LecTec under Article 6, which report shall be final