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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