Exhibit 10.3

 

SECURITY AGREEMENT

 

THIS SECURITY AGREEMENT (this “Agreement”) is made as of September 8, 2016 (the
“Effective Date”) by and among (A) Protea Biosciences Group, Inc., a corporation
organized under the laws of the State of Delaware (“PRGB” or the “Parent”); (B)
Protea Biosciences, Inc., a corporation organized under the laws of the State of
Delaware (the “Subsidiary”); and (C) ____________ (the “Secured Party”). The
Parent and the Subsidiary, which is a wholly-owned subsidiary of the Parent, are
individually and collectively referred to herein as the “Debtor”. The Debtor and
the Secured Party are hereinafter sometimes individually referred to as a
“Party” and collectively as the “Parties.”

 

RECITALS

 

A.       Secured Party has provided to the Parent a $650,000 loan (the “Loan”),
evidenced by a 10% original issue discount secured promissory note in $720,000
principal face amount due October 15, 2016 (the “Note”) and, unless otherwise
expressly defined in this Agreement, all capitalized terms when used herein,
shall have the same meanings as they are defined in the Note;

 

B.       The Subsidiary has agreed to provide the Secured Party with a full
recourse guaranty for the prompt payment and performance of all Obligations of
the Parent, as set forth in the guaranty agreement annexed as Exhibit A to the
Note (the “Guaranty Agreement”);

 

C.       The Parties intend that the Debtor’s obligation to repay and otherwise
perform its Obligations under the Note and the Note shall be secured by all of
the Collateral (as defined below) of the Debtor; and

 

D.       The Recitals shall be deemed to be an integral part of this Agreement
as though more fully set forth at length in the body of this Agreement. Unless
otherwise expressly defined in this Agreement, all capitalized terms used herein
shall have the same meaning as assigned to them in the Note.

 

NOW, THEREFORE, in consideration of the above recitals and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:

 

1.       Grant of Security Interest. To secure the full and timely performance
of all of Debtor’s obligations and liabilities to Secured Party in connection
with the Loan and pursuant to the Note and this Security Agreement
(collectively, the “Obligations”), each Debtor hereby unconditionally and
irrevocably pledges, grants and hypothecates to Secured Party a continuing first
priority senior lien and security interest (the “Security Interest”) in and to
all of the property described on Exhibit 1 to this Agreement (the “Collateral”).

 

   

 

 

2.           Priority of Security Interest.           Secured Party and each
Debtor each acknowledge and agree that:

 

(a)       subject to the “Existing Liens” (as defined in Section 3(m) below)
including any “Permitted Liens” (as that term is defined on Exhibit 2 annexed
hereto), the Security Interest granted by the Debtor in the Collateral pursuant
to this Agreement represents a perfected first priority senior secured lien,
charge, encumbrance and Security Interest (collectively, the “Lien”) in such
Collateral; and

 

(b)       this Security Interest shall include the terms and conditions of the
Guaranty Agreement and the Secured Party’s right to receive all required
payments under the Note for so long as no Event of Default (as defined in the
Note) shall have occurred and be continuing.

 

(c)       upon the occurrence of any Event of Default under the Note or
hereunder, the Secured Party may exercise any of its rights and remedies with
respect to the Collateral owned by the Debtor and the Security Interest granted
by the Debtor hereunder, all as provided in the Loan Documents

 

3.       Representations and Covenants.

 

(a)       Other Liens. Debtor owns all right, title and interest in the
Collateral (or has appropriate rights to use in the case of property subject to
leases, licenses or similar arrangements in which any one or more Debtor is the
licensee or lessee) and, except for the Lien in favor of the Secured Party or
other Permitted Liens, (i) there are no other Liens or security interests
encumbering the Collateral, and (ii) Debtor will not permit the Collateral to be
subject to any adverse lien, security interest or encumbrance (other than Liens
in favor of the Secured Party and Permitted Liens), and Debtor will defend the
Collateral against the claims and demands of all persons at any time claiming
the same or any interest therein. No financing statements covering any
Collateral or any proceeds thereof are on file in any public office.

 

(b)       This Agreement creates in favor of the Secured Party a valid Lien in
the Collateral securing the payment and performance of the Obligations, subject
only to the Senior Lender and other Permitted Liens. Upon making the filings of
UCC-1 financing statements with the Secretary of State of the State of Delaware
and the State of West Virginia and the Recorder of Deeds in Delaware and West
Virginia, all security interests created hereunder in any Collateral which may
be perfected by filing Uniform Commercial Code (“UCC”) financing statements
shall have been duly perfected. Without limiting the generality of the
foregoing, except for the filing of said financing statements, no consent of any
third parties and no authorization, approval or other action by, and no notice
to or filing with, any Governmental Authority or regulatory body is required for
(i) the execution, delivery and performance of this Agreement, (ii) the creation
or perfection of the Security Interests created hereunder in the Collateral or
(iii) the enforcement of the rights of the Secured Party hereunder.

 

(c)       Debtor hereby authorizes the Secured Party to file one or more
financing statements under the UCC, with respect to the Collateral, with the
proper filing and recording agencies in any jurisdiction deemed proper by it.

 

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(d)       Further Documentation. At any time and from time to time, Debtor will
promptly and duly execute and deliver such further instruments and documents and
take such further action as Secured Party may reasonably request for the purpose
of obtaining or preserving the full benefits of this Agreement and of the rights
and powers herein granted. The undersigned Debtor hereby authorizes Secured
Party to file with the appropriate filing office, now or hereafter from time to
time, financing statements, continuation statements and amendments thereto,
naming the undersigned as Debtor and covering all of the Collateral of each of
the Debtor, including but not limited to any specific listing, identification or
type of all or any portion of the assets of the undersigned.  The undersigned
acknowledges and agrees, by evidence of its signature below, that this
authorization is sufficient to satisfy the requirements of Revised Article 9 of
the Uniform Commercial Code.

 

(e)       Indemnification. Debtor agrees to defend, indemnify and hold harmless
Secured Party against any and all liabilities, costs and expenses (including,
without limitation, all reasonable legal fees and expenses): (i) with respect
to, or resulting from, any delay in paying any and all excise, sales or other
taxes which may be payable or are determined to be payable with respect to any
of the Collateral; (ii) with respect to, or resulting from, any delay in
complying with any law, rule, regulation or order of any Governmental Authority
applicable to any of the Collateral or (iii) with respect to, resulting or
incurred any costs, expenses or losses incurred by the Secured Party in
connection with protecting or preserving the Collateral or the Secured Party’s
rights in such Collateral; provided, however, that this indemnification shall
not extend to any damages caused by the gross negligence or willful misconduct
of Secured Party.

 

(f)       Change of Jurisdiction of Organization; Relocation of Business or
Collateral. Debtor shall not change its jurisdiction of organization, relocate
its chief executive office, principal place of business or its records or allow
the relocation of any Collateral (unless such relocation is in the ordinary
course of business) without thirty (30) days’ prior written notice to Secured
Party.

 

(g)       Limitations on Modifications of Accounts, Etc. After final payment in
full of the indebtedness owed to Senior Lender and upon the occurrence and
during the continuation of any Event of Default or Termination Event (as defined
in the Note), Debtor shall not, without Secured Party’s prior written consent,
grant any extension of the time of payment of any of the accounts, chattel
paper, instruments or amounts due under any contract or document, compromise,
compound or settle the same for less than the full amount thereof, release,
wholly or partly, any person liable for the payment thereof, or allow any credit
or discount whatsoever thereon other than trade discounts and rebates granted in
the ordinary course of Debtor’s business.

 

(h)       Authority. Debtor has all requisite corporate or other power and
authority to execute this Agreement and to perform all of its obligations
hereunder, and this Agreement has been duly executed and delivered by Debtor and
constitutes the legal, valid and binding obligation of Debtor, enforceable in
accordance with its terms. The execution, delivery and performance by Debtor of
this Agreement have been duly authorized by all necessary corporate action and
do not (i) require any authorization, consent or approval by any governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, (ii) violate any provision of any law, rule or regulation or of any
order, writ, injunction or decree presently in effect, having applicability to
Debtor or the article of incorporation or by-laws of Debtor, or (iii) result in
a breach of or constitute a default under any indenture, loan or credit
agreement or any other agreement, lease or instrument to which Debtor is a party
or by which it or its properties may be bound or affected.

 

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(i)       Maintenance of Records. Debtor will keep and maintain at its own cost
and expense satisfactory and complete records of the Collateral and may not
relocate such books of account and records or tangible Collateral unless it
delivers to the Secured Party at least 30 days prior to such relocation (i)
written notice of such relocation and the new location thereof (which must be
within the United States) and (ii) evidence that appropriate financing
statements under the UCC and other necessary documents have been filed and
recorded and other steps have been taken to create in favor of the Secured Party
a valid, perfected and continuing perfected priority lien in the Collateral.

 

(j)       Inspection Rights. Secured Party will have full access during normal
business hours, and upon reasonable prior notice, to all of the books,
correspondence and other records of Debtor relating to the Collateral, and
Secured Party or their representatives may examine such records and make
photocopies or otherwise take extracts from such records, subject to Debtor’s
reasonable confidentiality requirements. Debtor agrees to render to Secured
Party, at Debtor’s expense, such clerical and other assistance as may be
reasonably requested with regard to the exercise of its rights pursuant to this
paragraph.

 

(k)       Compliance with Laws, Etc. Debtor shall comply in all material
respects with all laws, rules, regulations and orders of any Governmental
Authority applicable to any part of the Collateral or to the operation of
Debtor’s business; provided, however, that Debtor may contest any such law,
rule, regulation or order in any reasonable manner which does not, in the
reasonable opinion of Debtor, adversely affect Secured Party’s rights or the
priority of its liens on the Collateral.

 

(l)       Payment of Obligations. Debtor shall pay before delinquency all
obligations associated with the Collateral, including license fees, taxes,
assessments and governmental charges or levies imposed upon the Collateral or
with respect to any of its income or profits derived from the Collateral; as
well as all claims of any kind (including, without limitation, claims for labor,
materials and supplies) against or with respect to the Collateral, except that
no such charge need be paid if (i) the validity or amount of such charge is
being contested in good faith by appropriate proceedings, (ii) such proceedings
do not involve any material danger of the sale, forfeiture or loss of any of the
Collateral or any interest in the Collateral and (iii) such charge is adequately
reserved against on Debtor’s books in accordance with generally accepted
accounting principles.

 

(m)       Existing Liens and Limitations on Liens on Collateral. Except for :
(i) Permitted Liens, (ii) Liens held by the State of West Virginia Economic
Development Authority secured by the tangible personal property and equipment of
each Debtor, and (iii) Liens held by licensors of intellectual property,
including patents and other intangible assets that is licensed to a Debtor
(collectively, the “Existing Liens”), the Debtor shall not create, incur or
permit to exist, shall defend the Collateral against and shall take such other
action as is necessary to remove, any Lien or claim on or to the Collateral, and
shall defend the right, title and interest of Secured Party in and to any of the
Collateral against the claims and demands of all other persons.

 

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(p)       Limitations on Dispositions of Collateral. After final payment in full
of the indebtedness owed to Senior Lender, Debtor shall not sell, transfer,
lease or otherwise dispose of a material portion of the Collateral, or offer or
contract to do so without the written consent of Secured Party; provided,
however, that Debtor will be allowed to (1) sell its inventories in the ordinary
course of business and (2) sell and grant non-exclusive licenses to its
products, intellectual property and related documentation in the ordinary course
of business.

 

(q)       Good Standing. Commencing on a date which shall be not more than
thirty (30) days from the date of this Agreement, the Debtor shall be and at all
times preserve and keep in full force and effect its valid existence and good
standing and any rights and franchises material to its business.

 

(r)       Inventory. Except in the ordinary course of business, Debtor may not
consign any of its inventory or sell any of its inventory on bill and hold, sale
or return, sale on approval, or other conditional terms of sale without the
consent of the Secured Party which shall not be unreasonably withheld or
delayed.

 

(s)       Offices. Debtor may not relocate its chief executive office to a new
location without providing 10 days prior written notification thereof to the
Secured Party and so long as, at the time of such written notification, Debtor
provides any financing statements or fixture filings necessary to perfect and
continue the perfection of the Security Interests granted and evidenced by this
Agreement.

 

(t)       Certificates. At any time and from time to time that any Collateral
consists of instruments, certificated securities or other items that require or
permit possession by the secured party to perfect the security interest created
hereby, Debtor shall deliver such Collateral to the Agent.

 

(u)       Tangible Chattel Paper. Debtor shall cause all tangible chattel paper
constituting Collateral to be delivered to the Secured Party, or, if such
delivery is not possible, then to cause such tangible chattel paper to contain a
legend noting that it is subject to the security interest created by this
Agreement. To the extent that any Collateral consists of electronic chattel
paper, Debtor shall cause the underlying chattel paper to be “marked” within the
meaning of Section 9-105 of the UCC (or successor section thereto).

 

(v)       Letter-of-Credit. To the extent that any Collateral consists of
letter-of-credit rights, Debtor shall cause the issuer of each underlying letter
of credit to consent to an assignment of the proceeds thereof to the Secured
Party.

 

(w)       Third Party. To the extent that any Collateral is in the possession of
any third party, Debtor shall join with the Secured Party in notifying such
third party of the Secured Party’s security interest in such Collateral and
shall use its best efforts to obtain an acknowledgement and agreement from such
third party with respect to the Collateral, in form and substance reasonably
satisfactory to the Secured Party.

 

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(x)       Tort Claims. If any Debtor shall at any time hold or acquire a
commercial tort claim, Debtor shall promptly notify the Secured Party in a
writing signed by Debtor of the particulars thereof and grant to the Secured
Party in such writing a security interest therein and in the proceeds thereof,
all upon the terms of this Agreement, with such writing to be in form and
substance satisfactory to the Agent.

 

(y)           Further Identification of Collateral. Debtor has full right, title
and interest in and to all identified Collateral listed on Exhibit “1”. Debtor
shall furnish to Secured Party, from time to time, statements and schedules
further identifying and describing the Collateral and such other reports in
connection with the Collateral as Secured Party may reasonably request, all in
reasonable detail. 

 

4.       Secured Party’s Appointment as Attorney-in-Fact.

 

(a)       Powers. Debtor and Secured Party hereby appoints the officers or
agents of Secured Party (each an “Agent”) to act on behalf of Secured Party,
with full power of substitution, as its attorney-in-fact with full irrevocable
power and authority in the place of Debtor and in the name of Debtor or in its
own name, so long as an Event of Default has occurred and is continuing, for the
purpose of carrying out the terms of this Agreement, to take any and all
appropriate action and to execute any instrument which may be necessary or
desirable to accomplish the purposes of this Agreement. Without limiting the
foregoing, so long as an Event of Default has occurred and is continuing,
Secured Party, in its discretion, will have the right, without notice to, or the
consent of, Debtor, to do any of the following on Debtor’s behalf:

 

(i)       to pay or discharge any obligations in connection with the Collateral,
including license fees and taxes or liens levied or placed on or threatened
against the Collateral;

 

(ii)       to direct any party liable for any payment under any of the
Collateral to make payment of any and all amounts due or to become due
thereunder directly to Secured Party or as Secured Party directs;

 

(iii)       to ask for or demand, collect and receive payment of and receipt for
any payments due or to become due at any time in respect of or arising out of
any Collateral;

 

(iv)       to commence and prosecute any suits, actions or proceedings at law or
in equity in any court of competent jurisdiction to enforce any right in respect
of any Collateral;

 

(v)       to defend any suit, action or proceeding brought against Debtor with
respect to any Collateral;

 

(vi)       to settle, compromise or adjust any suit, action or proceeding
described in subsection (v) above and, to give such discharges or releases in
connection therewith as Secured Party may deem appropriate;

 

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(vii)       to assign any license or patent right included in the Collateral of
a Debtor (along with the goodwill of the business to which any such license or
patent right pertains), throughout the world for such term or terms, on such
conditions and in such manner as Secured Party in their sole discretion
determine;

 

(viii)       to sell, transfer, pledge and make any agreement with respect to or
otherwise deal with any of the Collateral and to take, at Secured Party’s option
and Debtor’s expense, any actions which Secured Party deems necessary to
protect, preserve or realize upon the Collateral and Secured Party’s Liens on
the Collateral and to carry out the intent of this Agreement, in each case to
the same extent as if Secured Party were the absolute owners of the Collateral
for all purposes;

 

(ix)       to operate the Business of Debtor using the Collateral and shall have
the right to assign, sell, lease or otherwise dispose of and deliver all or any
part of the Collateral, at public or private sale or otherwise, either with or
without special conditions or stipulations, for cash or on credit or for future
delivery, in such parcel or parcels and at such time or times and at such place
or places, and upon such terms and conditions as the Agent may deem commercially
reasonable, all without (except as shall be required by applicable statute and
cannot be waived) advertisement or demand upon or notice to any Debtor or right
of redemption of a Debtor, which are hereby expressly waived. Upon each such
sale, lease, assignment or other transfer of Collateral, the Secured Party, may,
unless prohibited by applicable law which cannot be waived, purchase all or any
part of the Collateral being sold, free from and discharged of all trusts,
claims, right of redemption and equities of any Debtor, which are hereby waived
and released; and

 

(x)       to notify any account Debtor and any obligors under instruments or
accounts to make payments directly to the Agent, on behalf of the Secured Party,
and to enforce the Debtor’s rights against such account Debtor and obligors.

 

Debtor hereby ratifies whatever actions Secured Party lawfully does or causes to
be done in accordance with this Section 3. This power of attorney will be a
power coupled with an interest and will be irrevocable.

 

(b)       No Duty on Secured Party’s Part. The powers conferred on Secured Party
by this Section 3 are solely to protect Secured Party’s interest in the
Collateral and do not impose any duty upon it to exercise any such powers.
Secured Party will be accountable only for amounts that it actually receives as
a result of the exercise of such powers, and neither Secured Party nor any of
their officers, directors, employees or agents will, in the absence of willful
misconduct or gross negligence, be responsible to Debtor for any act or failure
to act pursuant to this Section 3.

 

(c)       Application of Proceeds. The proceeds of any sale, lease or other
disposition of the Collateral hereunder or from payments made on account of any
insurance policy insuring any portion of the Collateral shall be applied first,
to the expenses of retaking, holding, storing, processing and preparing for
sale, selling, and the like (including, without limitation, any taxes, fees and
other costs incurred in connection therewith) of the Collateral, to the
reasonable attorneys’ fees and expenses incurred by the Agent in enforcing the
Secured Party’s rights hereunder and in connection with collecting, storing and
disposing of the Collateral, and then to satisfaction of the Obligations pro
rata among the Secured Party (based on then-outstanding principal amounts under
the Note at the time of any such determination), and to the payment of any other
amounts required by applicable law, after which the Secured Party shall pay to
Debtor any surplus proceeds. If, upon the sale, license or other disposition of
the Collateral, the proceeds thereof are insufficient to pay all amounts to
which the Secured Party are legally entitled, the Debtor will be liable for the
deficiency, together with interest thereon, at the Interest Rate as set forth in
the Note, or the lesser amount permitted by applicable law, and the reasonable
fees of any attorneys employed by the Secured Party to collect such deficiency.
To the extent permitted by applicable law, Debtor waives all claims, damages and
demands against the Secured Party arising out of the repossession, removal,
retention or sale of the Collateral, unless due solely to the gross negligence
or willful misconduct of the Secured Party as determined by a final judgment
(not subject to further appeal) of a court of competent jurisdiction.

 

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5.       Duty To Hold In Trust. Upon the occurrence of any Event of Default and
at any time thereafter, Debtor shall, upon receipt of any revenue, income,
dividend, interest or other sums subject to the Security Interests, whether
payable pursuant to the Note or otherwise, or of any check, draft, note, trade
acceptance or other instrument evidencing an obligation to pay any such sum,
hold the same in trust for the Secured Party, and shall forthwith endorse and
transfer any such sums or instruments, or both, to the Secured Party, pro-rata
in proportion to their respective then-currently outstanding principal amount of
Note for application to the satisfaction of the Obligations.

 

6.       Expenses Incurred by Secured Party. Secured Party shall pay all of its
own fees and costs incurred in the preparation of this Agreement and any related
documents. If Debtor fails to perform or comply with any of its agreements or
covenants contained in this Agreement, and Secured Party performs or complies,
or otherwise causes performance or compliance with such agreement or covenant in
accordance with the terms of this Agreement, then the reasonable expenses of
Secured Party incurred in connection with such performance or compliance will be
jointly and severally payable by Debtor to Secured Party on demand and will
constitute Obligations secured by this Agreement.

 

7.       Remedies. If a Event of Default has occurred and is continuing, Secured
Party may exercise, in addition to all other rights and remedies granted to it
in this Agreement and in any other instrument or agreement relating to the
Obligations, all rights and remedies of a Secured Party under the Delaware
Commercial Code (including the Uniform Commercial Code), as amended from time to
time (the “Code”). Without limiting the foregoing, in such circumstances,
without demand of performance or other demand, presentment, protest,
advertisement or notice of any kind (except any notice required by law) to or
upon Debtor or any other person (all of which demands, defenses, advertisements
and notices are hereby waived), Secured Party may collect, receive, appropriate
and realize upon any or all of the Collateral and/or may sell, lease, assign,
give an option or options to purchase or otherwise dispose of and deliver any or
all of the Collateral (or contract to do any of the foregoing), in one or more
parcels at public or private sale or sales, at any exchange, broker’s board or
office of Secured Party or elsewhere upon such terms and conditions as Secured
Party may deem advisable, for cash or on credit or for future delivery without
assumption of any credit risk. Secured Party will have the right upon any such
public sale or sales and, to the extent permitted by law, upon any such private
sale or sales, to purchase all or any part of the Collateral so sold, free of
any right or equity of redemption in Debtor, which right or equity is hereby
waived or released. Secured Party will apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale, after
deducting all reasonable expenses incurred therein or in connection with the
care or safekeeping of any of the Collateral or in any way relating to the
Collateral or the rights of Secured Party under this Agreement (including,
without limitation, reasonable attorneys’ fees and expenses) to the payment in
whole or in part of the Obligations, in such order as Secured Party may elect,
and only after such application and after the payment by Secured Party of any
other amount required by any provision of law, need Secured Party account for
the surplus, if any, to Debtor. To the extent permitted by applicable law,
Debtor waives all claims, damages and demands it may acquire against Secured
Party arising out of the exercise by Secured Party of any of its rights
hereunder. If any notice of a proposed sale or other disposition of Collateral
is required by law, such notice will be deemed reasonable and proper if given at
least thirty (30) days before such sale or other disposition. Debtor will remain
liable for any deficiency if the proceeds of any sale or other disposition of
the Collateral are insufficient to pay the Obligations and the reasonable fees
and disbursements of any attorneys employed by Secured Party to collect such
deficiency.

 

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8.       Limitation on Duties Regarding Preservation of Collateral. The sole
duty of Secured Party with respect to the custody, safekeeping and preservation
of the Collateral, under the appropriate Code section or otherwise, will be to
deal with it in the same manner as Secured Party deals with similar property for
its own account. Neither Secured Party nor any of its employees, affiliates or
agents will be liable for failure to demand, collect or realize upon all or any
part of the Collateral or for any delay in doing so or will be under any
obligation to sell or otherwise dispose of any Collateral upon the request of
Debtor or otherwise.

 

9.       Powers Coupled with an Interest. All authorizations and agencies
contained in this Agreement with respect the Collateral are irrevocable and
powers coupled with an interest.

 

10.       No Waiver; Cumulative Remedies. Secured Party will not by any act
(except by a written instrument pursuant to Section 11(a) hereof) of delay,
indulgence, omission or otherwise be deemed to have waived any right or remedy
hereunder or to have acquiesced in any Event of Default under the Note or in any
breach of any of the terms and conditions of this Agreement. No failure to
exercise, nor any delay in exercising, on the part of Secured Party, any right,
power or privilege hereunder will operate as a waiver thereof. No single or
partial exercise of any right, power or privilege hereunder will preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. A waiver by Secured Party of any right or remedy under this Agreement
on any one occasion will not be construed as a bar to any right or remedy that
Secured Party would otherwise have on any subsequent occasion. The rights and
remedies provided in this Agreement are cumulative, may be exercised singly or
concurrently and are not exclusive of any rights or remedies provided by law.

 

 

 

 

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11.       Miscellaneous.

 

(a)       Amendments and Waivers. Any term of this Agreement may only be amended
by prior written consent of Debtor and Secured Party. Any amendment or waiver
effected in accordance with this Section 11(a) will be binding upon all of the
parties hereto and their respective successors and assigns.

 

(b)       Transfer; Successors and Assigns. This Agreement will be binding upon
and inure to the benefit of Debtor and Secured Party, and their respective
successors or assigns. As set forth under the Note, Debtor may not assign any of
its rights or delegate any of its duties under this Agreement.

 

(c)       Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Delaware without regard to the laws
that might be applicable under conflicts of laws principles.

 

(d)       Counterparts. This Agreement may be executed in any number of
counterparts (including by facsimile), each of which will be an original, but
all of which together will constitute one instrument.

 

(e)       Titles and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.

 

(f)       Notices. All notices and other communications required or permitted
hereunder shall be delivered (i) in person, (ii) by electronic mail, (iii) by
way of recognized national overnight delivery service or (iv) by way of first
class mail postage prepaid to the following addresses (or to such other address
as may be designated in a properly delivered notice) to Debtor and Secured Party
as set forth in the Note.

 

(g)       Term. This Agreement shall terminate on the date on which all payments
under the Note have been indefeasibly satisfied in full and all other
Obligations have been satisfied in full or discharged (through cash payment or a
conversion); provided, however, that all indemnities of the Note contained in
this Agreement shall survive and remain operative and in full force and effect
regardless of the termination of this Agreement.

 

(h)       Severability. In the event that any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, such provision(s) shall be ineffective only to
the extent of such invalidity, illegality or unenforceability without
invalidating the remainder of such provision or the remaining provisions of this
Agreement and such invalidity, illegality or unenforceability shall not affect
any other provision of this Agreement, which shall remain in full force and
effect.

 

(i)       Entire Agreement. This Agreement and the other documents evidencing,
securing, or relating to the Note constitute the entire understanding and
agreement between the parties with regard to the subjects hereof and thereof and
supersede all prior agreements, representations and undertakings of the parties,
whether oral or written, with respect to such subject matter.

 

[Signature pages follow]

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IN WITNESS WHEREOF, Debtor and Secured Party have caused this Agreement to be
duly executed and delivered as of the date first above written.

 

SECURED PARTY:

 

 

By:_____________________________________

Name:

Title:

 

DEBTOR:

 

Protea Biosciences Group, Inc.

 

By:_________________________

Name: Stephen Turner

Title:            Chief Executive Officer

 

Protea Biosciences, Inc.

 

By:_______________________

Name: Stephen Turner

Title:   Chief Executive Officer

 

 

 

 

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EXHIBIT 1

 

DESCRIPTION OF COLLATERAL

 

 

 

Collateral” means the collateral in which the Secured Party is granted a
security interest by this Agreement and which shall include the following
personal property of the Parent and the Subsidiary (collectively, the “Debtor”),
whether presently owned or existing or hereafter acquired or coming into
existence, wherever situated, and all additions and accessions thereto and all
substitutions and replacements thereof, and all proceeds, products and accounts
thereof, including, without limitation, all proceeds from the sale or transfer
of the Collateral and of insurance covering the same and of any tort claims in
connection therewith:

 

(i)       All accounts receivable and other rights to receive payments from
customers;

 

(ii)       all inventory, including, without limitation, all merchandise, raw
materials, parts, supplies, all documents of title representing any of the
foregoing, packing and shipping materials, work in process and finished products
including such inventory as is temporarily out of Debtor’s custody or possession
or in transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing and any documents of title representing any of the above;

 

(iii)       all documents, cash, deposit accounts, securities, securities
entitlements, securities accounts, investment property, financial assets,
letters of credit, certificates of deposit, supporting obligations, instruments
and chattel paper and Debtor’s books relating to the foregoing;

 

(iv)       all of Debtor’s books, records and data relating to any of the
foregoing in any form whatsoever and any and all claims, rights and interests in
any of the above and all substitutions therefore, additions and accessions
thereto and proceeds thereof;

 

(v)       all rights, remedies, powers and/or privileges of Debtor with respect
to any of the foregoing; and

 

(vi)       any and all proceeds and products of the foregoing, including, all
money, accounts, general intangibles, deposit accounts, documents, instruments,
letter-of-credit rights, investment property, chattel paper, goods, insurance
proceeds and any other tangible or intangible property received upon the sale or
disposition of any of the foregoing; provided that, to the extent that the
provisions of any contract, license or agreement expressly prohibit (which
prohibition is enforceable under applicable law) the assignment thereof and the
grant of a security interest therein, Debtor’s rights in such contract, license
or agreement shall be excluded from the foregoing assignment and grant for so
long as such prohibition continues, it being understood that upon request of
Secured Party, Debtor shall in good faith use commercially reasonable efforts to
obtain consent for the creation of a security interest in favor of Secured Party
in Debtor’s rights under such contract, license or agreement.

 

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EXHIBIT 2

 

PERMITTED LIENS

 

“Indebtedness” shall mean, with respect to any Person, without duplication,
(a) all obligations of such Person for borrowed money, (b) all obligations of
such Person evidenced by bonds, debentures, the Note or similar instruments, or
upon which interest payments are customarily made, (c) all obligations of such
Person under conditional sale or other title retention agreements relating to
property purchased by such Person (other than customary reservations or
retentions of title under agreements with suppliers entered into in the ordinary
course of business), (d) all obligations (including, without limitation,
earn-out obligations) of such Person incurred, issued or assumed as the deferred
purchase price of property or services purchased by such Person (other than
trade debt and accrued expenses incurred in the ordinary course of business and
due within six months of the incurrence thereof) which would appear as
liabilities on a balance sheet of such Person, (e) all Indebtedness of others
secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien on, or payable out of the
proceeds of production from, property owned or acquired by such Person, whether
or not the obligations secured thereby have been assumed, (f) the maximum amount
of all letters of credit issued or bankers’ acceptances facilities created for
the account of such Person and, without duplication, all drafts drawn thereunder
(to the extent unreimbursed), (g) all preferred Capital Stock issued by such
Person and which by the terms thereof are (at the request of the holders thereof
or otherwise) subject to mandatory sinking fund payments, redemption or other
acceleration at any time prior to the date which is six months after the
Maturity Date, (h) the principal balance outstanding under any synthetic lease,
tax retention operating lease, off-balance sheet loan or similar off-balance
sheet financing product plus any accrued interest thereon, (i) all obligations
of any partnership or unincorporated joint venture in which such Person is a
general partner or a joint venturer and (l) obligations of such Person under
non-compete agreements to the extent such obligations are quantifiable
contingent obligations of such Person under generally accepted accounting
principles.

 

“Permitted Liens” means any of the following:

 

(a)       Liens which secure purchase money Indebtedness and capital lease
obligations with respect to the purchase or lease of additional equipment and
which encumber only the assets acquired with such purchase money Indebtedness or
the assets subject to such capital lease;

 

(b)       Pledges, deposits or Liens arising or made to secure payment of
workers’ compensation, unemployment insurance or other forms of governmental
insurance or benefits or to participate in any fund in connection with workers’
compensation, unemployment insurance, pensions or other social security
programs;

 

(c)       Easements, rights-of-way, encumbrances and other restrictions on the
use or value of real property or any other property or asset which do not
materially impair the use thereof;

 

(d)       Liens for Taxes and Liens imposed by operation of law (including,
without limitation, Liens of mechanics, materialmen, warehousemen, carriers and
landlords, and similar Liens) provided that (i) except as disclosed on the
Disclosure Schedule, the amount secured is not overdue by more than ninety (90)
days and no Lien has been filed, or (ii) the validity or amount thereof is being
contested in good faith by lawful proceedings diligently conducted, reserve or
other provision required by GAAP has been made, levy and execution thereon have
been (and continue to be) stayed, or payment is fully covered by insurance
(subject to the customary deductible); and

 

(e)       Rights of offset or statutory banker’s Liens arising in the ordinary
course of business in favor of commercial banks, provided that any such Lien
shall only extend to deposits and property in possession of such commercial
bank.

 

 

 

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