THIS CONVERTIBLE PROMISSORY NOTE (THIS “NOTE”) AND THE SECURITIES ISSUABLE UPON
CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), APPLICABLE STATE SECURITIES LAWS, OR APPLICABLE
LAWS OF ANY FOREIGN JURISDICTION. THIS NOTE AND SUCH SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY
NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY
APPLICABLE STATE SECURITIES LAWS AND IN THE ABSENCE OF COMPLIANCE WITH
APPLICABLE LAWS OF ANY FOREIGN JURISDICTION, OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED AND SUCH
FOREIGN JURISDICTION LAWS HAVE BEEN SATISFIED.

 

PROTEA BIOSCIENCES GROUP, Inc.

 

CONVERTIBLE PROMISSORY NOTE

 

   [Morgantown, West Virginia] $[   ]  Issue Date: [   ], 2013

 

1. Principal and Interest. PROTEA BIOSCIENCES GROUP, INC. (the “Company”), a
Delaware corporation, for value received, hereby promises to pay to the order of
[ ] or his, her or its assigns (“Holder”), in lawful money of the United States
of America at the address for notices to Holder set forth in the Note Purchase
Agreement (as defined below) (or such other address as Holder shall provide to
the Company in writing pursuant hereto), the principal amount of $[ ] (the
“Principal Amount”), together with interest as set forth below.

 

This Note is being issued pursuant to that certain Note Purchase Agreement (the
“Purchase Agreement”) by and among the Company and the Purchasers thereunder
(each a "Holder" and, collectively, the “Holders”) dated as of the Issue Date
first set forth above, setting forth the terms of the offering and sale (the
“Offering”) by the Company of up to $750,000 (the “Maximum Offering”) of 10%
convertible promissory notes (each a “Note” and collectively the “Notes”).

 

This Note shall become due and payable on the one-year anniversary of the Issue
Date set forth above (the “Due Date”). Interest on the unpaid Principal Amount
shall accrue from the Issue Date until the earlier of the Due Date, or such date
when the entire Principal Amount is paid in full, at the rate of ten percent
(10%) per annum or such lesser rate as shall be the maximum rate allowable under
applicable law. Simple interest shall be computed on the basis of a 360-day year
of twelve 30-day months, and shall be accrued and added to principal on an
annual basis. The Company shall not be obligated to make any interest payments
until the Due Date, or, if earlier, the date when the Principal Amount is paid
in full and may be paid, at the Company’s election, either in cash or shares of
the Company’s common stock, par value $0.0001 per share (the “Common Stock”)
valued at $0.50 per share (subject to proportionate adjustment for forward or
reverse stock splits, combinations, stock dividends and other recapitalization
events), or any combination of cash and shares.

 

Capitalized terms used herein but not otherwise defined shall have the
respective meanings ascribed to such terms in the Purchase Agreement.

 

 

 

 

2. Automatic Conversion.

 

2.1 Financing. At the initial closing of the Financing, the entire Principal
Amount and all accrued unpaid interest thereon will be automatically converted
into Units sold in the Financing as set forth in this Section 2.1. The Financing
is planned to include the sale of Units at a purchase price of $100,000 per Unit
with each Unit consisting of (1) 200,000 shares of Common Stock (the “Shares”)
and (2) two warrants (the “Warrant”), including (a) a 1 year warrant to purchase
200,000 shares of Common Stock at an exercise price of $0.50 per share and (b) a
5 year warrant to purchase 100,000 shares of Common Stock at an exercise price
of $0.75 per share. Each $100,000 in outstanding principal and accrued unpaid
interest shall be converted into one Unit sold in the Financing (the “Conversion
Price”). The Financing is also planned to include certain registration and
anti-dilution rights and a right to participate in certain future securities
offerings of the Company. All terms of the Financing remain subject to change in
the discretion of the Company and .

 

2.2 Effect of Automatic Conversion. Upon an automatic conversion pursuant to
Section 2.1 above, all indebtedness evidenced by this Note shall be
automatically satisfied in full and no interest shall continue to accrue on this
Note thereafter and all rights of Holder hereunder shall terminate. The Company
shall not be obligated to issue certificates evidencing the securities issuable
upon such conversion unless this Note is either delivered to the Company or its
transfer agent, or Holder notifies the Company or its transfer agent that this
Note has been lost, stolen or destroyed and executes an agreement satisfactory
to the Company to indemnify the Company from any loss incurred by it in
connection with this Note. The Company shall, as soon as practicable after such
delivery, or such agreement and indemnification, issue and deliver to such
Holder of this Note, a certificate or certificates for the securities to which
Holder shall be entitled. The person or persons entitled to receive securities
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such securities on such date. The Company shall not issue
fractional Shares or Warrants but shall round up the number of Shares and/or
Warrants issued to the nearest whole number.

 

3. Optional Conversion.

 

3.1 Optional Conversion. Notwithstanding anything herein to the contrary, if an
initial closing of the sale of securities in the Financing does not take place
within 120 days after the Issue Date, the Notes will be convertible by the
holders at their option for the 60 days thereafter. The rate of conversion will
be for each $100,000 of principal and interest converted (or portion thereof),
the holder will receive 200,000 shares (the “Optional Conversion Shares” and
together with the Shares, the “Shares”) of common stock of the Company and a
warrant (the “Optional Conversion Warrant” and together with the Warrant, the
“Warrants”) to purchase 150,000 shares of common stock, which warrant will be
exercisable at $1.10 for a period of five years (the “Optional Conversion Price”
and together with the Conversion Price, the “Conversion Prices”), subject to
proportionate adjustments for stock splits, combinations, stock dividends and
other recapitalization events. Holder’s optional conversion right provided under
this Section 3.1 is referred to herein as the “Conversion Option”. The
Conversion Prices shall be paid by Holder by forgiveness of such amount of the
principal and accrued interest on this Note being converted as specified in the
applicable Conversion Notice (as hereinafter defined).

 

3.2 Conversion Procedure for the Conversion Option. Upon conversion of this Note
pursuant to the Conversion Option, Holder shall surrender this Note, duly
endorsed, at the office of the Company and shall provide written notice (the
"Conversion Notice") to the Company at its principal corporate office of the
election to convert the same and the amount of unpaid principal and interest
being converted. The date on which the Conversion Notice is received by the
Company is referred to herein as the "Conversion Date". The Company, as soon as
practicable thereafter, shall issue and deliver to Holder a certificate or
certificates for the number of Optional Conversion Shares and Optional
Conversion Warrants to which Holder shall be entitled (such certificates bearing
such legends as are required by applicable state and federal securities laws).

 

2

 

 

 

3.3 Mechanics and Effect of Conversion for the Conversion Option. No fractional
Optional Conversion Shares or Optional Conversion Warrants shall be issued upon
any conversion hereunder. All fractional Optional Conversion Shares and/or
Optional Conversion Warrants shall be rounded up to the nearest whole share. Any
conversion pursuant to the Conversion Option, and the sale and issuance of
Optional Conversion Shares and Optional Conversion Warrants pursuant thereto,
shall be deemed to have occurred immediately upon the Company’s receipt of the
Conversion Notice. From and after such time, Holder shall be treated for all
purposes as the record holder of the Optional Conversion Shares and Optional
Conversion Warrants. Upon conversion of this Note in full, with no principal or
accrued interest amount thereafter outstanding, the Company shall be released
from all its obligations and liabilities hereunder.

 

4. Fundamental Transactions. If, at any time while this Note remains
outstanding, (A) the Company effects any merger or consolidation of the Company
with or into another entity where the Company is not the surviving corporation
(other than in connection with a reverse merger pursuant to which the owner's of
the Company's securities immediately prior to such transaction own a majority of
the Company's securities following such transaction), (B) the Company effects
any sale of all or substantially all of its assets in one or a series of related
transactions other than as part of a reorganization, (C) any tender offer or
exchange offer (whether by the Company or another entity) is completed pursuant
to which holders of Common Stock are permitted to tender or exchange their
shares for other securities, cash or property, or (D) the Company effects any
reclassification of the Common Stock or any compulsory share exchange pursuant
to which the Common Stock is effectively converted into or exchanged for other
securities, cash or property (in any such case, a “Fundamental Transaction”),
then upon any subsequent conversion of this Note pursuant to the provisions
herein, Holder shall have the right to receive, for each Conversion Share,
Conversion Warrant, Optional Conversion Share and/or Optional Conversion Warrant
(collectively, the “Conversion Securities”) that would have been issuable upon
such conversion absent such Fundamental Transaction, the same kind and amount of
securities, cash or property as it would have been entitled to receive upon the
occurrence of such Fundamental Transaction if it had been, immediately prior to
such Fundamental Transaction, the holder of one share of Common Stock and a
warrant to purchase one share of Common Stock.

 

5. Prepayment. At any time when there remains unpaid principal or accrued unpaid
interest under this Note, if the Financing has not had an initial closing within
120 days following the Issue Date, the Company shall have the right to prepay,
upon 14 days prior written notice to Holder, without premium or penalty, any or
all of such unpaid principal or interest, during which notice period Holder may
exercise the conversion rights under this Note to the extent then applicable.

 

6. Events of Default.

 

6.1 Each of the following events shall constitute a default under this Note
(each an “Event of Default”) if not cured by the Company within thirty (30)
calendar days after receipt of written notice thereof from Holder or such longer
period as set forth below:

 

(a) failure by the Company to pay the principal or interest amount when due
hereunder;

 

(b) failure by the Company or the Company’s transfer agent, or the Company’s
successor in a Fundamental Transaction, to issue securities issuable upon
conversion of this Note to Holder within thirty (30) calendar days after the
receipt of a Conversion Notice or the event causing automatic conversion and
surrender by Holder to the Company or the Company’s transfer agent (or the
Company’s successor or successor’s transfer agent following a Fundamental
Transaction);

 

3

 

 

 

(c) the Company shall: (1) make a general assignment for the benefit of its
creditors; (2) apply for or consent to the appointment of a receiver, trustee,
assignee, custodian, sequestrator, liquidator or similar official for itself or
any of its assets and properties; (3) commence a voluntary action for relief as
a debtor under the United States Bankruptcy Code; (4) file with or otherwise
submit to any governmental authority any petition, answer or other document
seeking: (A) reorganization, (B) an arrangement with creditors or (C) to take
advantage of any other present or future applicable law respecting bankruptcy,
reorganization, insolvency, readjustment of debts, relief of debtors,
dissolution or liquidation; (5) file or otherwise submit any answer or other
document admitting or failing to contest the material allegations of a petition
or other document filed or otherwise submitted against it in any proceeding
under any such applicable law, or (6) be adjudicated a bankrupt or insolvent by
a court of competent jurisdiction;

 

(d) any case, proceeding or other action shall be commenced against the Company
for the purpose of effecting, or an order, judgment or decree shall be entered
by any court of competent jurisdiction approving (in whole or in part) anything
specified in Section 6.1(c) hereof, or any receiver, trustee, assignee,
custodian, sequestrator, liquidator or other official shall be appointed with
respect to the Company, or shall be appointed to take or shall otherwise acquire
possession or control of all or a substantial part of the assets and properties
of the Company, and any of the foregoing shall continue unstayed and in effect
for any period of at least sixty (60) days;

 

6.2 If any Event of Default specified in Sections 6.1(c) or (d) occurs, then
following the passage of the applicable cure period the full principal amount of
this Note, together with any other amounts owing in respect thereof, to the date
of the Event of Default shall become immediately due and payable without any
action on the part of Holder, and if any other Event of Default occurs, the full
principal amount of this Note, together with any other amounts owing in respect
thereof, to the date of acceleration shall become, at Holder’s election,
immediately due and payable in cash. All Notes for which the full amount
thereunder shall have been paid in accordance herewith shall promptly be
surrendered to or as directed by the Company. Holder need not provide and the
Company hereby waives any presentment, demand, protest or other notice of any
kind, and Holder may immediately and without expiration of any grace period
enforce any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Such declaration may be rescinded and
annulled by Holder at any time prior to payment hereunder and Holder shall have
all rights as a Note holder until such time, if any, as the full payment under
this Section 6.2 shall have been received by it. No such rescission or annulment
shall affect any subsequent Event of Default or impair any right consequent
thereon.

 

7. Notice of Proposed Transfers. Prior to any proposed transfer of this Note or
the Conversion Securities, unless there is in effect a registration statement
under the Securities Act covering the proposed transfer, Holder shall give
written notice to the Company of such Holder’s intention to effect such
transfer. Each such notice shall describe the manner and circumstances of the
proposed transfer in sufficient detail, and shall, if the Company so requests,
be accompanied by an unqualified written opinion of legal counsel, who shall be
reasonably satisfactory to the Company, addressed to the Company and reasonably
satisfactory in form and substance to the Company’s counsel, to the effect that
the proposed transfer of this Note or the Conversion Securities may be effected
without registration under the Securities Act; provided, however, no such
opinion of counsel shall be necessary for a transfer without consideration by a
Holder to any affiliate of such Holder, or a transfer by a Holder which is a
partnership to a partner of such partnership or a retired partner of such
partnership who retires after the date hereof, or to the estate of any such
partner or retired partner or the transfer by gift, will or intestate succession
of any partner to his spouse or lineal descendants or ancestors, if the
transferee agrees in writing to be subject to the terms hereof and of the
Purchase Agreement to the same extent as if such transferee were the original
Holder hereunder. Each certificate evidencing this Note or the Conversion
Securities transferred as above provided shall bear an appropriate restrictive
legend, except that this Note or certificate shall not bear such restrictive
legend if in the opinion of counsel for the Company such legend is not required
in order to establish compliance with any provisions of the Securities Act.

 

4

 

 

 

8. Reservation of Conversion Securities. The Company covenants and agrees that
all Conversion Securities will, upon conversion of this Note, be duly
authorized, validly issued, fully paid and nonassessable, and free of all
preemptive rights, liens and encumbrances, except for restrictions on transfer
provided for herein and in the Company’s organizational documents, as amended
from time to time. Prior to executing this Note or as soon as reasonably
possible thereafter, the Company shall reserve out of its authorized and
unissued Common Stock, solely for the purpose of providing for the exercise of
the rights to convert this Note, such number of Conversion Securities as shall
be sufficient therefore at the applicable Conversion Price, and shall use its
best efforts and take such reasonable actions as are necessary to ensure that
such securities remain so reserved for issuance in the future.

 

9. No Impairment. The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this
Note, but will at all times in good faith assist in the carrying out of all such
terms and in the taking of all such action as may be necessary or appropriate in
order to protect the rights of Holder against impairment.

 

10. Waivers. The Company hereby waives presentment, demand for performance,
notice of non-performance, protest, notice of protest and notice of dishonor. No
delay on the part of Holder in exercising any right hereunder shall operate as a
waiver of such right or any other right. This Note is being delivered in and
shall be construed in accordance with the laws of the State of Delaware, without
regard to the conflicts of laws provisions thereof.

 

11. No Stockholder Rights. Nothing contained in this Note shall be construed as
conferring upon Holder or any other person the right to vote or to consent or to
receive notice as a stockholder of the Company.

 

12. Amendment. This Note may only be amended with the written consent of the
Holders of a majority of the then outstanding principal amount due under all
Notes issued in the Offering.

 

13. Notices. Any notice, other communication or payment required or permitted
hereunder shall be in writing and shall be deemed to have been given upon
delivery to the address provided pursuant to the Purchase Agreement.

 

14. Subordination. The Notes shall be, to the extent permitted by applicable
law, subordinate to all outstanding debt of the Company.

 

5

 

 

 

ISSUED as of the date first above written.

 

  PROTEA BIOSCIENCES GROUP, INC.         By:     Name: Steven Turner   Title:
President

 

6