Document:

THIS WARRANT AND THE SECURITIES UNDERLYING
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) AND MAY NOT
BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED, OT HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SUCH SECURITIES ACT, ANY APPLICABLE STATE SECURITIES LAWS AND THE RULES AND REGULATIONS THEREUNDER. 

 

PROTEA BIOSCIENCES GROUP, INC.

 

WARRANT

 

TO PURCHASE COMMON STOCK OF THE COMPANY

 

	Warrant No. __	Issue Date: _____ __, 20__

 

FOR VALUE RECEIVED,
PROTEA BIOSCIENCES GROUP, INC., a Delaware corporation (the “Company”), grants the following rights to ________________,
and [his] [her] [its] permitted assigns, heirs, executors and administrators (individually and collectively, the “Holder”),
as of the ___ day of ______ 20__ (“Issue Date”). This warrant (the “Warrant”) has been issued by the Company
in connection with a sale of Units of the Company’s securities pursuant to a limited offering (the “Offering”)
to “accredited investors” only (as defined in Rule 501(a) of Regulation D under the Securities Act of 1933)
pursuant to a Confidential Private Placement Memorandum, dated March 16, 2012 (the “Memorandum”). Under the terms and
conditions of the Offering, each Unit, which has a purchase price of $100,000.00, consists of 50,000 shares of the Company’s
common stock, par value $0.0001 per share (the "Common Stock") and one warrant to purchase 25,000 shares of the Company’s
Common Stock (this "Warrant") on the terms and conditions set forth herein. This Warrant is subject to the terms and
conditions set forth in a subscription agreement, by and between the Company and the Holder, executed in connection with the Offering
(the "Subscription Agreement").

 

Section 1.Grant.

 

The Holder is hereby
granted the right (collectively, the “Purchase Rights”), in accordance with the terms and conditions of this Warrant,
from the date hereof until the expiration of the “Exercise Period” (as defined below), to purchase from the Company
that number of fully paid and non-assessable shares of the Common Stock of the Company, set forth in Section 2 hereof, at the “Exercise
Price” (as defined below), upon delivery of this Warrant to the Company with the Notice of Exercise form attached as Exhibit
1 hereto, duly executed, and upon tender of the Exercise Price for the shares of Common Stock to be purchased.

 

Section 2.Number of Shares
of Common Stock Purchasable.

 

2.1   Subject to the other provisions
of this Section 2, this Warrant entitles the Holder to purchase from time to time up to 25,000 shares of the Company’s Common
Stock (the “Warrant Shares”).

    	 

    	 	

    
 

2.2   In case prior to the expiration
of these Purchase Rights by exercise or by the terms of this Warrant the Company shall undertake any reclassification, stock split,
reverse stock split, stock dividend or any similar proportionately-applied change (collectively, a “Reclassification”)
of outstanding shares of Common Stock (other than a change solely in, of, or from par value), the Holder shall thereafter be entitled,
upon exercise of this Warrant for the same total consideration as presently required, to purchase the kind and amount of shares
of stock and other securities and property receivable upon such Reclassification by a holder of the number of shares of Common
Stock which this Warrant entitles the Holder hereof to purchase immediately prior to such Reclassification. Notice of any such
Reclassification shall be given to the Holder pursuant to Section 12 hereof.

 

2.3   In case prior to the expiration
of these Purchase Rights by exercise or by the terms of this Warrant the Company shall determine to consolidate or merge with,
or convey all, or substantially all, of its property or assets to, any other corporation or corporations, or dissolve, liquidate
or wind up, then, as a condition precedent to such consolidation, merger, conveyance, dissolution, liquidation or winding up, notice
shall be given to the Holder pursuant to Section 12 hereof and lawful and adequate provision shall be made whereby the Holder shall
thereafter have the right to receive from the Company or the successor corporation, as the case may be, upon the basis and upon
the terms and conditions specified in this Warrant, in lieu of the shares of Common Stock of the Company theretofore purchasable
upon the exercise of the Purchase Rights, such shares of stock, securities, or assets as may be issued or payable with respect
to, or in exchange for, the number of shares of Common Stock of the Company theretofore purchasable upon the exercise of the Purchase
Rights had such consolidation, merger, conveyance, dissolution, liquidation or winding up not taken place; and in any such event
the rights of the Holder to an adjustment of the number of shares of Common Stock purchasable upon the exercise of the Purchase
Rights as herein provided, shall continue and be preserved in respect of any stock or securities which the Holder becomes entitled
to purchase.

 

Section 3.Exercise Period;
Registration Statement Notice.

 

3.1   The Purchase Rights represented
hereby shall be exercisable in whole or in part from time to time after the date of issuance of this Warrant until the earlier
of (i) a Qualified Public Offering or (ii) 5:00 p.m. Eastern time on the fifth anniversary of the Issue Date hereof (the “Exercise
Period”). For purposes of this Warrant, the term “Qualified Public Offering” shall mean the closing of a firm
commitment underwritten offering pursuant to an effective registration statement under the Securities Act covering the offer and
sale of Common Stock for the account of the Company in which (i) the net cash proceeds to the Company (after deduction of underwriting
discounts and commissions) are at least $15,000,000 and (ii) the offering price of the Common Stock in the Qualified Public Offering
is at least 200% of the exercise price set forth in Section 5 of this Warrant, as may be adjusted pursuant to Section 2.2 hereof.
If the Holder chooses not to exercise the Warrant in accordance with Section 4 below, this Warrant shall immediately expire upon
the closing of a Qualified Public Offering.

 

3.2   The Company shall give the Holder
written notice, at the address of the Holder set forth on the Company’s books, not less than twenty days prior to the closing
of a Qualified Public Offering.

    	 

    	 	

    
 

Section 4.Exercise.

 

4.1   The Purchase Rights represented
by this Warrant are exercisable upon the terms and conditions set forth herein at the option of the Holder in whole at any time
and in part, but not for less than 100 shares at a time, at any time and from time to time during the Exercise Period, upon the
delivery of the Notice of Exercise form attached hereto as Exhibit 1, to the Company with such notice duly executed and
upon payment in cash, wire transfer or bank cashier’s check of the Exercise Price. The Purchase Rights shall be deemed to
have been exercised, and the Holder shall be deemed to have become a stockholder of record of the Company for the purposes of receiving
dividends and for all other purposes whatsoever with respect to the shares of Common Stock so purchased, as of the date of delivery
of such properly executed notice accompanied by proper tender of the Exercise Price at the office of the Company. As promptly as
practicable on or after such date, and in any event within three (3) business days thereafter, the Company at its expense shall
issue and deliver, or cause to be issued and delivered, to the person or persons entitled to receive the same, a certificate or
certificates for the number of shares issuable upon such exercise. In the event that this Warrant is exercised in part, the Company
at its expense will execute and deliver a new Warrant of like tenor exercisable for the number of shares for which this Warrant
may then be exercised.

 

4.2   In lieu of the payment methods
set forth in Section 4.1 above, in the event the Warrant Shares have not been registered under an effective registration
statement filed pursuant to the Securities Act prior to the earlier of: (i) one (1) year from the Issue Date of this Warrant; or
(ii) the closing of the Qualified Public Offering, the Holder may elect to exchange all or some of this Warrant for shares of Common
Stock equal to the value of the amount of the Warrant being exchanged on the date of exchange.  If Holder elects to exchange
this Warrant as provided in this Section 4.2, Holder shall tender to the Company the Warrant for the amount being exchanged,
along with written notice of Holder’s election to exchange some or all of the Warrant, and the Company shall issue to Holder
the number of shares of the Common Stock computed using the following formula:

 

	X =	Y (A-B)
	 	A

 

	Where:   X =	the number of shares of Common Stock to be issued to Holder.
	Y =	the number of shares of Common Stock purchasable under the amount of the Warrant being exchanged (as adjusted to the date of such calculation).
	A =	the Fair Market Value of one share of the Common Stock on the date that the notice of exercise is received by the Company.
	B =	Exercise Price (as adjusted to the date of such calculation).

 
 

“Fair Market Value” of one
share of Common Stock as of a particular date shall mean: (i) if traded on a national securities exchange, the average volume
weighted average price reported by Bloomberg LP (“VWAP”) of the Common Stock of the Company on such exchange over
the five (5) trading days ending immediately prior to the applicable date of valuation; (ii) if quoted on the OTC Bulletin Board
or an over the counter market operated by OTC Markets Group, Inc or its successor, the average VWAP over the thirty (30) trading
days ending immediately prior to the applicable date of valuation; (iii) if determined in connection with a Qualified Public Offering,
the offering price of the Common Stock in the Qualified Public Offering; and (iv) except as set forth in (iii), if neither (i)
nor (ii) applies, the Fair Market Value shall be the value thereof, as agreed upon by the Company and the Holder; provided, however,
that if the Company and the Holder cannot agree on such value, such value shall be determined by an independent valuation firm
experienced in valuing businesses such as the Company and jointly selected in good faith by the Company and the Holder. Fees and
expenses of the valuation firm shall be paid for by the Company.

    	 

    	 	

    
 

4.3   The Company shall not affect
any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to this Section
4 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of
Exercise, the Holder (together with the Holder’s affiliates, and any other persons acting as a group together with the Holder
or any of the Holder’s affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).
For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates
shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination
is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining,
nonexercised portion of this Warrant beneficially owned by the Holder or any of its affiliates and (ii) exercise or conversion
of the unexercised or nonconverted portion of any other securities of the Company subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates. Except as set forth in
the preceding sentence, for purposes of this Section 4.3, beneficial ownership shall be calculated in accordance with Section 13(d)
of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and the rules and regulations promulgated thereunder,
it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with
Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith.
To the extent that the limitation contained in this Section 4.3 applies, the determination of whether this Warrant is exercisable
(in relation to other securities owned by the Holder together with any affiliates) and of which portion of this Warrant is exercisable
shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s
determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any affiliates)
and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company
shall have no obligation to verify or confirm the accuracy of such determination. The “Beneficial Ownership Limitation”
shall be 4.9% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares
of Common Stock issuable upon exercise of this Warrant. The Holder, upon not less than 61 days’ prior notice to the Company,
may increase or decrease the Beneficial Ownership Limitation provisions of this Section 4.3, provided that the Beneficial Ownership
Limitation in no event exceeds 9.9% of the number of shares of the Common Stock outstanding immediately after giving effect to
the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 4.3
shall continue to apply. Any such increase or decrease will not be effective until the 61st day after such notice is delivered
to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity
with the terms of this Section 4.3 to correct this paragraph (or any portion hereof) which may be defective or inconsistent with
the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly
give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

    	 

    	 	

    
 

Section 5.Exercise Price.The
exercise price for each share of Common Stock issuable to the Holder hereunder shall be $2.25 per share (the “Exercise Price”).

 

Section 6.Company’s
Warranties and Covenants as to Capital Stock. The Company has taken all action necessary and appropriate to properly
authorize, reserve and issue those shares of Common Stock issuable to the Holder pursuant to this Warrant including an authorization
of issuance and setting of exercise price. The Common Stock deliverable on the exercise of the Purchase Rights represented hereby
shall, when issued, be duly and validly issued, fully paid and nonassessable. The Company shall at all times reserve and hold
available sufficient shares of Common Stock to satisfy all conversion and purchase rights of all outstanding convertible securities
and warrants.

 

Section 7.Transfer; Compliance
With Securities Laws; Right of Company to Request Opinion of Counsel Confirming Such Compliance; Holder Responsible for Costs
of Transfer Including Reasonable Counsel Fees.The Purchase Rights shall be registered on the books of the Company,
which shall be kept by it at its principal office for that purpose. This Warrant and the Common Stock issuable upon exercise of
the Purchase Rights, may not be transferred or assigned in whole or in part without compliance with all applicable federal and
state securities laws by the transferor and the transferee, including, if requested by the Company, an opinion of counsel satisfactory
to the Company to the effect that the transfer or assignment is in compliance with applicable securities laws. Subject to such
compliance, the Purchase Rights shall be transferable on said books, in whole or in part, by the Holder in person or by duly authorized
attorney upon surrender of this Warrant properly endorsed by the Holder executing the Permitted Transfer or Assignment Form attached
hereto and made a part hereof as Exhibit 2. All costs associated with any transfer or assignment, including, without limitation,
the reasonable fees of counsel to the Company shall be borne by the transferor or assignor. The Company agrees that, while the
Purchase Rights remain valid and outstanding, its stock transfer books shall not be closed for any purpose whatsoever except under
arrangements which shall insure to persons exercising warrants or applying for transfer of stock all rights and privileges which
they might have had or received if the stock transfer books had not been closed and they had exercised their Purchase Rights at
any time during which such transfer book shall have been closed.

 

Section 8.Charges, Taxes
and Expenses.Issuance of certificates for shares of Common Stock issuable upon the exercise of this Warrant or
any portion thereof (and issuance of a replacement Warrant certificate in the event of partial exercise) shall be made without
charge to the Holder hereof for any issue taxes or any other incidental expenses in respect of the issuance of such certificates
to and in the name of the registered Holder of this Warrant, all of which taxes and expenses shall be paid by the Company, and
such certificates shall be issued in the name of the Holder of this Warrant. Certificates will be issued in a name other than
that of the Holder upon the request of a Holder and payment by the Holder of any applicable transfer taxes and compliance with
all applicable securities laws and with all applicable provisions of this Warrant including but not limited to Section 7 hereof.

    	 

    	 	

    
 

Section 9.Exchange for Other
Denominations.This Warrant is exchangeable for new certificates of like tenor and date representing in
the aggregate the right to purchase the number of shares purchasable hereunder in denominations designated by the Holder at the
time of surrender. In the event of the purchase, at any time prior to the expiration of the Exercise Period, of less than all
of the shares of Common Stock purchasable hereunder, the Company will cancel this Warrant upon surrender thereof, and will forthwith
execute and deliver to the Holder hereof a new warrant of like tenor and date for the balance of the shares purchasable hereunder.

 

Section 10.Loss, Theft, Destruction
or Mutilation of Warrant.Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory
to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation
of this Warrant, if mutilated, the Company will make and deliver a new warrant of like tenor and date, in lieu of this Warrant.

 

Section 11.Registration
Rights. The Warrant Shares are subject to the "piggy-back" registration rights set forth in Section
4 of the Subscription Agreement.

 

Section 12.Notices Including
Certificate of Company In Event of Adjustment.

 

(a)   Whenever the number of
shares purchasable hereunder shall be adjusted pursuant to Section 2 hereof, the Company shall issue a certificate signed by its
Chief Financial Officer or its President or such other appropriate officer, setting forth, in reasonable detail, the event requiring
the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the number of shares purchasable
hereunder after giving effect to such adjustment, and shall cause a copy of such certificate to be mailed (by first-class mail,
postage prepaid) to the Holder of this Warrant.

 

(b)   In case:

 

(i)   the Company shall take a record
of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution, or any right
to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, or

 

(ii)   of any capital reorganization
of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into
another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation, or

 

(iii)   of any voluntary dissolution,
liquidation or winding-up of the Company,

    	 

    	 	

    
 

then, and in each such case, the Company
will mail or deliver or cause to be mailed or delivered to the Holder or Holders a notice specifying, as the case may be, (A) the
date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character
of such dividend, distribution or right, or (B) the date on which such reorganization, reclassification, consolidation, merger,
conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders
of record of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable
upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice
shall be mailed or delivered at least 15 business days prior to the date therein specified.

 

(c)   All notices, requests, consents
and demands required by this Warrant shall be in writing and shall be personally delivered or mailed, postage prepaid, to the Company
at:

 

PROTEA BIOSCIENCES
GROUP, INC.

955 Hartman Run Road

Morgantown, WV 26507

Attn: President

Fax: 304-292-7101

 

with a copy (which shall not constitute
notice) to:

 

Richardson & Patel
LLP

750 Third Avenue, 9th
Floor

New York, New York
10017

Attn: David Feldman,
Esq.

Fax: (917) 677-8165

 

and to the Holder at the address of such
Holder set forth in the Subscription Agreement executed by the original holder of this Warrant in connection with the purchase
of one or more Units of the Company’s securities. All notices required or permitted hereunder shall be in writing and shall
be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed facsimile if sent
during normal business hours of the recipient, if not, then on the next business day, (iii) five (5) days after having been sent
by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally
recognized overnight courier, specifying next day delivery with written verification of receipt.

 

Section 13.Miscellaneous.This
Warrant shall not entitle the Holder to any of the rights of a stockholder of the Company. This Warrant shall be binding upon
the Company’s successors. This Warrant shall be governed, construed and enforced in accordance with the laws of the State
of Delaware. In case any provision of this Warrant shall be invalid, illegal or unenforceable, or partially invalid, illegal or
unenforceable, the provision shall be enforced to the extent, if any, that it may legally be enforced and the validity, legality
and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. This Warrant shall any term
hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement
of such change, waiver, discharge or termination is sought. The headings in this Warrant are for purposes of reference only, and
shall not limit or otherwise affect any of the terms hereof.

 

[signatures appear on following page]

    	 

    	 	

    

IN WITNESS WHEREOF,
the Company has caused this Warrant to be duly executed, under seal and delivered on its behalf as of the ____ day of __________,
20__.

 

 

	 	PROTEA BIOSCIENCES GROUP, INC. (SEAL)
	 	 	 
	 	 	 
	 	 	 
	 	By:	
	 	 	Stephen Turner
	 	 	President

 

    	 

    	 	

    
 

EXHIBIT 1

 

 

NOTICE OF EXERCISE PURSUANT TO

ATTACHED WARRANT

 

 

                                            , 20___

 

 

To: PROTEA BIOSCIENCES GROUP, INC.

 

(1)The undersigned, the Holder
of record of the attached Warrant of PROTEA BIOSCIENCES GROUP, INC., hereby exercises the option granted by the Purchase Rights
evidenced by the attached Warrant [and hereby tenders payment of the Exercise Price as determined by the Warrant] [on a “cashless”
basis as permitted by Section 4.2 of the Warrant] to purchase upon the terms set forth in such Warrant [________] shares of Common
Stock, which constitutes all [or a portion] of the shares of Common Stock issued pursuant to the Purchase Rights represented by
this Warrant, of PROTEA BIOSCIENCES GROUP, INC. All capitalized terms used but not defined in this notice shall have the meanings
assigned to such terms in the Warrant.

 

(2)In exercising this Warrant,
the undersigned hereby confirms and acknowledges that (a) the undersigned has complied with all terms and conditions of the Offering
as defined in the Warrant, including the requirement that the Offering was limited to “accredited” investors only,
(b) the shares of the Common Stock to be issued are being acquired solely for investment and solely for the account of the undersigned,
(c) the undersigned will not offer, sell or otherwise dispose of any such shares of Common Stock except under circumstances that
will not result in a violation of the Securities Act of 1933, as amended, or any applicable state securities laws, and (d) as required
under the terms of the Offering, the certificate or certificates representing said shares of Common Stock shall bear a restrictive
legend prohibiting and restricting transfer of such shares except in compliance with applicable federal and state securities laws.

 

(3)Please issue a certificate or
certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below.

 

(4)Please issue a new Warrant for
the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below:

 

	ATTEST:	HOLDER:	

	 	 	 
	 	 	 
	 	By:	
	 	 	 
	 	Name:	 
	 	 	 
	 	Title:	 

 

(If certificates for Common Stock or new
Warrants are requested in a name other than the undersigned, be advised that the delivery of the certificates and/or new Warrants
will be delayed until the Company assures itself that such change is permitted under Section 7 of the Warrant that such change
does not violate applicable federal and state securities laws.)

    	 

    	 	

    
 

EXHIBIT 2

 

PERMITTED TRANSFER OR ASSIGNMENT FORM

 

NOTE: THIS ASSIGNMENT BEARS A RESTRICTIVE
LEGEND BELOW

 

FOR VALUE RECEIVED,
the undersigned Holder of record of this Warrant of PROTEA BIOSCIENCES GROUP, INC., hereby sells, assigns and transfers unto the
Assignee named below all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common
Stock set forth below:

 

	Name of Transferee/Assignee	Address	No. of Shares

 

 

and does hereby irrevocably constitute
and appoint the Secretary of PROTEA BIOSCIENCES GROUP, INC. to make such transfer on the books of PROTEA BIOSCIENCES GROUP, INC.,
maintained for the purpose, with full power of substitution in the premises.

 

Attached hereto is
an opinion of counsel that the assignment does not violate or is exempt from, any federal and state securities laws. As provided
in the Warrant, including but not limited to Section 7 of the Warrant, the Company may, in its sole discretion, decide whether
such opinion is satisfactory, and Assignee and Holder agree to any reasonable delay in transfer caused by such evaluation and further
acknowledge and agree that they shall bear all costs associated with any transfer or assignment, including, without limitation,
the reasonable fees of counsel to the Company shall be borne by the transferor or assignor.

 

The undersigned also
represents that, by assignment hereof, the Assignee acknowledges that this Warrant and the shares of Common Stock to be issued
upon exercise hereof or conversion thereof are being acquired for investment and that the Assignee will not offer, sell or otherwise
dispose of this Warrant or any shares of stock to be issued upon exercise hereof or conversion thereof except under circumstances
which will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. Further, the Assignee
has acknowledged that upon exercise of this Warrant, the Assignee shall, if requested by the Company, confirm in writing, in a
form satisfactory to the Company, that the shares of stock so purchased are being acquired for investment and not with a view toward
distribution or resale in violation of applicable securities laws.

 

Accordingly, the
following restrictive legend is made applicable to this assignment (and to this Warrant and securities covered by this Warrant
as assigned hereby to Assignee):

 

 

[INSERT RESTRICTIVE LEGEND]

    	 

    	 	

    
 

This Assignment and this Warrant and
the securities underlying this Warrant as assigned hereby, have not been registered under the Securities Act of 1933, as amended
(the “Securities Act”), and may not be offered, sold or otherwise transferred, assigned, pledged or hypothecated in
the absence of such registration or an exemption therefrom under such Securities Act, any applicable state securities laws and
the rules and regulations thereunder.

 

 

 

 

	Dated: 		 	 	HOLDER:	
	 	 	 	 	 	 
	 	 	 	 	         By:	
	 	 	 	 	         Name:	
	 	 	 	 	         Title:	
	 	 	 	 	 	 
	Dated:			 	       ASSIGNEE:  	
	 	 	 	 	 	 
	 	 	 	 	         By:	
	 	 	 	 	         Name:	
	 	 	 	 	         Title:	

 

707281THIS NOTE HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF

 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS.

 

THIS NOTE IS ALSO SUBJECT TO ADDITIONAL
RESTRICTIONS ON

 TRANSFER AND OTHER PROVISIONS AS SET FORTH HEREIN.

 

	$500,000	May 19, 2012	 
	 	New York, New York	 

 

PROMISSORY NOTE AND SECURITY AGREEMENT

 

For value received,
and on the terms and subject to the conditions set forth herein, VUZIX CORPORATION, a Delaware corporation (the “Borrower”),
hereby promises to pay LC CAPITAL MASTER FUND, LTD., a Cayman Islands corporation (the “Lender”), on
the Termination Date (as hereinafter defined) the principal sum of Five Hundred Thousand Dollars ($500,000) (the “Loan”)
or, if less, the aggregate unpaid principal amount of the Advances from time to time outstanding made available by the Lender to
the Borrower pursuant to this promissory note and security agreement (this “Note”). The Borrower hereby promises
to pay interest on the unpaid principal amount of the Loan on the dates and at the rates provided for in this Note.

 

Section
1.              Certain Terms Defined. The
following terms for all purposes of this Note shall have the respective meanings specified below.

 

“Advance”
shall have the meaning set forth in Section 3.

 

“Additional
Percentage” means (i) zero percent (0%) on and after the Closing Date but prior to the three month anniversary of the
Closing Date or (ii) five percent (5%) on and after the three month anniversary of the Closing Date.

 

“Agreed Interest
Rate” means a rate per annum equal to the sum of (a) ten percent (10%) plus (b) the Additional Percentage.]

 

“Applicable
Law” shall mean any Law of any Authority, including, without limitation, all national, Federal, state and local banking
or securities laws, to which the person in question is subject or by which it or any of its material property is bound.

 

“Authority”
shall mean any governmental or quasi-governmental authority, whether executive, legislative, judicial, administrative or other,
or any combination thereof, including, without limitation, any national, Federal, state, local, territorial, county, municipal
or other government or governmental or quasi-governmental agency, arbitrator, board, body, branch, bureau, commission, corporation,
court, department, instrumentality, master, mediator, panel, referee, system or other political unit or subdivision or other entity
of any of the foregoing, whether domestic or foreign.

 

    	 

    	 

    

 

“Availability
Period” shall mean the period commencing the date hereof and ending on the earlier of (i) the Termination Date or (ii)
June 15, 2012.

 

“Borrower”
shall have the meaning set forth in the preamble.

 

“Business
Day” means any day except a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized
by law to close.

 

“Closing Date”
means the date of this Note.

 

“Collateral”
means the assets, tangible and intangible, as set forth from time to time on Schedule 1.

 

“Dollars”
or “$” means the legal currency of the United States of America.

 

“Drawdown
Notice” shall have the meaning set forth in Section 3.

 

“Existing
LC Loan Agreement” means that certain loan and security agreement dated as of December 23, 2010, as amended from time
to time (as so amended and as the same may be further amended, restated, supplemented, modified, renamed, extended or refinanced
from time to time in accordance with its provisions) by and among the Borrower, as borrower, the Lender, as lender.

 

“Indemnified
Party” shall have the meaning set forth in Section 18.

 

“Law”
shall mean any law, rule, regulation or official code, consent decree, constitution, decree, directive, enactment, guideline,
injunction, interpretation, judgment, order, ordinance, policy statement, proclamation, promulgation, requirement, rule of law,
rule of public policy, settlement agreement, statute, or writ.

 

“Lender”
shall have the meaning set forth in the preamble.

 

“Loan”
shall have the meaning set forth in the preamble.

 

“Person”
means and includes any natural person, individual, partnership, joint venture, corporation, trust, limited liability company, limited
company, joint stock company, unincorporated organization, government entity or any political subdivision or agency thereof, or
any other entity.

 

“Prepayment
Date” shall have the meaning set forth in Section 5.

 

“Subsidiary”
means any Person (i) which is directly or indirectly controlled by the Borrower, (ii) in which the Borrower owns,
directly or indirectly, at least fifty percent (50.0%) of the share capital, or (iii) which is a Subsidiary of a company described
in clause (i) or (ii) above. As used in this definition of “Subsidiary”, the term “control” means the possession,
directly or indirectly, of the power to direct or cause the direction of the management and policies of a company, whether through
ownership of voting securities, by contract, or otherwise.

 

    	2

    	 

    

 

“Termination
Date” means the earlier of (i) the declaration of an Event of Default and acceleration of the Loan pursuant to Section
11 hereof and (ii) November 15, 2012 (or if such day is not a Business Day, then the next succeeding Business Day).

 

“Transaction
Documents” means this Note and any other documents that may be executed as security for the Loan and the Borrower's obligations
in connection therewith.

 

Section
2.              Conditions
to Lending.

 

The obligation of the
Lender to make the Loan and any Advance thereunder available to the Borrower under this Note shall be expressly subject to the
following conditions precedent:

 

(a)          Corporate
Documents. The Lender shall have received such evidence as it may reasonably require as to the authority of the officers or
attorneys-in-fact executing the Transaction Documents including, but not limited to, the following:

 

		(i)	a certificate of the Borrower, certifying as true and complete as of the date hereof the constitutional
documents of the Borrower, in such form and substance as the Lender shall reasonably require;

 

		(ii)	a copy, certified as true and complete by an officer of the Borrower of the resolutions of its
board of directors evidencing approval of the Transaction Documents and authorizing an appropriate officer or officers or attorney-in-fact
or attorneys-in-fact to execute the same on its behalf;

 

		(iii)	a copy, certified as true and complete by an officer of the Borrower of all documents evidencing
any other necessary action, approvals or consents for the Transaction Documents; and

 

		(iv)	all such other agreements, instruments, documents and certificates (including a certificate of
good standing) of the Borrower as the Lender deems necessary or advisable.

 

(b)          The
Note. The Borrower shall have duly executed and delivered this Note to the Lender.

 

(c)          Drawdown
Notice. The Lender shall have received a Drawdown Notice in accordance with the terms of Section 3.

 

(d)          Uniform
Commercial Code Searches and Filings. The Lender shall have received copies of all Uniform Commercial Code searches as it shall
deem necessary and the Borrower and Guarantor shall have agreed to the filing of all such Uniform Commercial Code Financing Statements
(Form UCC-1) and other security recordation documents as the Lender shall require.

 

    	3

    	 

    

 

Section
3.              The
Loan.

 

On the terms and subject
to the conditions of this Note, the Lender hereby agrees that it may, at its sole discretion, make Five Hundred Thousand Dollars
($500,000) of the Loan available to the Borrower in multiple advances, each in an amount of no less than One Hundred Thousand Dollars
($100,000) (other than the final advance, which may be in an amount of less than $100,000 if there is less than $100,000 available
to be borrowed under this Note) (each, an “Advance”), for working capital purposes; provided, however,
that the Borrower shall not request any Advance if the amount of such Advance when aggregated with the principal amount of all
other Advances under the Loan then outstanding would exceed Five Hundred Thousand Dollars ($500,000).

 

The Borrower shall
during the Availability Period, in respect of all Advances, provide the Lender with written notice (the “Drawdown Notice”),
at least three (3) Business Days prior to the date of the proposed Advance. Each Drawdown Notice shall specify (a) the date of
the proposed borrowing (which shall be a Business Day) and (b) the disbursement instructions for the proceeds of such Advance.
Each Drawdown Notice shall be effective upon receipt by the Lender and shall be irrevocable. In addition, the Borrower shall not
be permitted to provide more than one (1) Drawdown Notice in any seven day period.

 

The Loan shall mature, and the principal
amount thereof shall become immediately due and payable (together with interest accrued thereon), on the Termination Date.

 

Section
4.              Interest
and Principal.

 

The unpaid principal
amount of the Loan, consisting of Advances made to or at the request of Borrower, shall bear interest on each such Advance from
the time it is made, at the Agreed Interest Rate. Interest shall be paid on the Termination Date or, if applicable, such earlier
date that is the Prepayment Date. Interest shall be computed on the basis of a year of 365 days and paid for the actual number
of days elapsed (including the first day but excluding the last day). The Lender shall keep the official records relating to the
Advances and payments under the Loan.

 

Any overdue principal
of or interest on the Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the Agreed
Interest Rate plus three percent (3%).

 

The outstanding principal
balance of the Loan, any interest accrued thereon and any outstanding fees, expenses or charges, shall be payable on the Termination
Date.

 

It is the intent of
the parties that the rate of interest and other charges to the Borrower under this Note shall be lawful; therefore, if for any
reason the interest or other charges payable under this Note are found by a court of competent jurisdiction, in a final determination,
to exceed the limit which Lender may lawfully charge the Borrower, then the obligation to pay interest and other charges shall
automatically be reduced to such limit and, if any amount in excess of such limit shall have been paid, then such amount shall
be refunded to the Borrower.

 

    	4

    	 

    

 

Section
5.              Optional
Prepayments.

 

The Borrower may prepay
the Loan in whole, but not in part, at any time without penalty by paying the entire outstanding principal amount together with
interest accrued thereon to the date of prepayment (the “Prepayment Date”).

 

Section
6.              General
Provisions as to Payments.

 

All payments of principal
of and interest on the Loan by the Borrower hereunder shall be made not later than 12:00 Noon (New York City time) on the date
when due by cashier’s check or by wire transfer of immediately available funds to the Lender's account or accounts at a bank
or banks in the United States specified by the Lender in writing to the Borrower promptly after Borrower’s request therefor,
without reduction by reason of any set-off or counterclaim.

 

Section
7.              Taxation.

 

All payments in respect
of or relating to this Note by Borrower shall be made without withholding or deduction for, or on account of, any present or future
taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of any tax jurisdiction
unless the withholding or deduction is required by law. If withholding or deduction is required by law, the Borrower shall pay
such additional amounts as are necessary in order that the net amounts received by the Lender after the withholding or deduction
shall equal the respective amounts which would have been receivable in respect of or relating to this Note in the absence of the
withholding or deduction.

 

Section
8.              Representations
and Warranties.

 

The Borrower
represents and warrants to the Lender that:

 

(a)          it
is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware;

 

(b)          it
is duly authorized to do business in all jurisdictions material to the conduct of its business;

 

(c)          it
has full power and authority and holds all requisite governmental licenses, permits and other approvals to enter into and perform
its obligations under this Note and to conduct its business substantially as currently conducted by it;

 

    	5

    	 

    

 

(d)          the
execution, delivery and performance of this Note and related documents are within the Borrower’s corporate powers and have
been duly authorized by all necessary corporate action at a duly held meeting or by duly executed unanimous written consent of
the board of directors of the Borrower;

 

(e)          this
Note and the related documents have been duly executed by an authorized signatory of the Borrower and constitutes a legal, valid
and binding obligation enforceable against the Borrower;

 

(f)           this
Note and the related documents do not violate any of the Borrower’s organizational documents, any law, court order or agreement
by which the Borrower is bound;

 

(g)          the
Borrower’s performance under this Note is not threatened by any pending or threatened litigation; and

 

(h)          it
has good and marketable title to all of the Collateral, subject to no pledge, lien, mortgage, hypothecation, security interest,
charge, option or other encumbrance whatsoever, other than (i) the lien and security interest in favor of the Lender created hereunder,
(ii) other the liens and security interests in favor of the Lender, (iii) lien and security interest in favor of Bridge Bank, National
Association and (iv) those liens and security interests listed on Exhibit A.

 

All representations,
covenants and warranties made herein and in any certificate or other document delivered pursuant hereto or in connection herewith
shall survive the execution of this Note.

 

Section
9.              Covenants
of the Borrower.

 

The Borrower agrees
that so long as any amounts have been drawn down under this Note and until all of the Borrower’s
obligations hereunder have been paid and performed in full, the Borrower shall:

 

(a)          maintain
its existence and authority to conduct its business as presently contemplated to be conducted (including, without limitation, maintain
all licenses, permits and approvals necessary to conduct such business under Applicable Law);

 

(b)          materially
comply with all applicable laws, rules, regulations and orders applicable thereto;

 

(c)          maintain
sole legal and beneficial ownership of the Collateral and, if applicable, promptly have the lien in favor of the Lender noted on
any and all evidences of ownership of, certificates of title, or applications for title to the Collateral, and, if necessary to
perfect the Lender’s security interest in such collateral, will promptly deliver to Lender, the originals thereof;

 

(d)          maintain
insurance with responsible companies in such amounts and against such risks as is currently carried thereby;

 

    	6

    	 

    

 

(e)          maintain
appropriate books and accounts; and

 

(f)          pay
all applicable taxes as they become due.

 

Section
10.            Negative
Covenants.

 

The Borrower agrees
that so long as any amounts have been drawn down under this Note and until all of the Borrower’s obligations hereunder have
been paid and performed in full, the Borrower shall not, without the prior written approval of the Lender:

 

(a)          incur
any additional debt, other than accounts payable and accrued expenses incurred by the Borrower in the ordinary course of business
consistent with commercially reasonable practice;

 

(b)          merge
or consolidate with any other person or entity, or liquidate or dissolve or instruct or grant resolutions to any liquidator of
the Borrower;

 

(c)          change
its structure or organizational documents or form any subsidiaries or other affiliated entities except as may be required by applicable
law or regulation;

 

(d)          make
any loans, investments or acquisitions outside the ordinary course of business;

 

(e)          create,
assume or permit to exist any mortgage, charge, encumbrance, pledge, lien or other security interest on any Collateral other than
the lien and security interest in favor of the Lender created hereunder or under any other obligation of the Borrower to the Lender,
Bridge Bank, National Association or the persons named on Exhibit A;

 

(f)          file
or suffer to be on file, or authorize or permit to be filed or to be on file, in any jurisdiction, any financing statement, or
file or authorize any like instrument, with respect to the Collateral in which the Lender is not named as the sole secured party
(other than a financing statement or instrument with respect a second priority security interest in the Collateral in favor of
Bridge Bank, National Association and financing statements with respect to the persons named on Exhibit A);

 

(g)         enter
into any agreement in which the terms of such agreement would restrict or impair the ability of the Borrower to perform its obligations
under this Note;

 

(h)          make
any distributions or pay any dividends;

 

(i)          enter
into any agreement to do any of the foregoing; or

 

(j)          take
any other voluntary action without the prior written consent of the Lender to avoid or seek to avoid the observance or performance
of any of the terms of the Note, but will at all times in good faith assist in carrying out all those terms and in taking all action
necessary or appropriate to protect the Lender against impairment.

 

    	7

    	 

    

 

Section
11.            Events
of Default.

 

Each of the following
events shall constitute an “Event of Default”:

 

(a)          any
principal of or interest on the Loan shall not be paid when due;

 

(b)          the
Borrower breaches any representation or warranty hereunder;

 

(c)          the
Borrower defaults in the due and punctual observance or performance of any covenant, condition or agreement contained in this Note
and such default is not cured (to the extent curable in the discretion of the Lender) within fifteen (15) days after the occurrence
thereof;

 

(d)          an
event or circumstance defined as an “Event of Default” in Section 8 of the Existing LC Loan Agreement shall occur
and be continuing (and subject to any cure or grace period relating thereto specified therein);

 

(e)          a
court shall enter a decree or order for relief in respect of the Borrower in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or similar official) of the Borrower for any substantial part of the property of the Borrower ordering the winding
up or liquidation of the affairs of the Borrower, and such decree or order shall remain unstayed and in effect for a period of
60 consecutive days; or

 

(f)          the
Borrower shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect,
or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking
possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Borrower or for any
substantial part of the property of the Borrower, or the Borrower shall make any general assignment for the benefit of creditors.

 

If an Event of Default
described in (d) or (e) above shall occur, the unpaid principal and accrued interest on the Loan shall become immediately due and
payable without any declaration or other act on the part of the Lender. Immediately upon the occurrence of any Event of Default
described in (d) or (e) above, or upon failure to pay this Note in full on the Termination Date, the Lender, without any notice
to the Borrower, which notice is expressly waived by the Borrower, may proceed to protect, enforce, exercise and pursue any and
all rights and remedies available to the Lender under this Note and any other agreement or instrument, and any and all rights and
remedies available to the Lender at law or in equity.

 

    	8

    	 

    

 

If any Event of Default
described in clauses (a) through (e) shall occur for any reason, whether voluntary or involuntary, and be continuing, the Lender
may by notice to the Borrower declare all or any portion of the unpaid principal amount of and accrued interest on the Loan to
be due and payable, whereupon the full unpaid amount of and accrued interest on the Loan which shall be so declared due and payable
shall be and become immediately due and payable, without further notice, demand or presentment.

 

Upon the occurrence
of an Event of Default, the Lender may, forthwith and without notice of any kind to the Borrower, proceed to foreclose against
the Collateral or any part thereof pursuant to this Note and according to the laws of the jurisdiction or jurisdictions in which
such Collateral or part thereof shall at the time be located, by doing any one or more or all of the following acts as the Lender
in its sole and complete discretion may then elect:

 

		i.	exercise all rights and remedies, in foreclosure and otherwise, available to it as a mortgagee
and/or secured party under the provisions of applicable law;

 

		ii.	institute legal proceedings to foreclose upon and against the security interests granted in and
by this Note, to recover judgment for all amounts then due and owing as indebtedness secured hereby, and to collect the same out
of any of the Collateral or the proceeds of any sale or other disposition thereof;

 

		iii.	sell the Collateral or any part thereof with or without prior notice to the Borrower free from
any claim of or by the Borrower of any nature whatsoever, and with or without the benefit of any contract thereon, by public auction
or private contract at such place and upon such terms (including, without limitation, on terms such that payment of some or all
of the purchase price be deferred) as the Lender in its absolute discretion may determine with power to postpone any such sale,
without being answerable for any loss occasioned by such sale or resulting from postponement thereof, and/or themselves to purchase
the Collateral or any part thereof at any such public auction and to set off the purchase price against all or any part of the
obligations hereunder;

 

		iv.	institute legal proceedings for the sale, transfer or other disposition, under judgment or decree
of any court of competent jurisdiction, of any or all the Collateral;

 

		v.	manage, insure, maintain and repair the Collateral and to employ the Collateral in such manner,
upon such terms and for such period as the Lender in its absolute discretion deems expedient and for the purposes aforesaid the
Lender shall be entitled to do all acts and things incidental or conducive thereto and in particular to enter into such arrangements
respecting the Collateral, and the insurance, management, maintenance, repair, and employment of the Collateral, in all respects
as if the Lender were the owner thereof and without being responsible for any loss thereby incurred;

 

    	9

    	 

    

 

		vi.	recover from the Borrower on demand any expenses, liabilities or losses as maybe incurred in or
about the exercise of the power vested in the Lender;

 

		vii.	without regard to the adequacy of the security for the obligations hereunder by virtue of this
Note or otherwise or any other collateral or other security or to the solvency of the Borrower, institute legal proceedings for
the appointment of a receiver or receivers pending foreclosure hereunder or for the sale of any of the Collateral under the order
of a court of competent jurisdiction or under other legal process;

 

		viii.	proceed by way of prejudgment attachment or replevin in accordance with the laws of the jurisdiction
in which the Collateral or any part thereof is then located to seize the Collateral by judicial process;

 

		ix.	personally, or by agents or attorneys, enter upon any premises of the Borrower, or otherwise as
permitted by applicable law, where the Collateral or any part thereof may then be located; or

 

		x.	generally, recover from the Borrower on demand each and every reasonable expense, liability or
loss incurred by the Lender in or about or incidental to the exercise by it of any of the powers aforesaid.

 

Section
12.            Collateral.

 

The Borrower does hereby
transfer, convey, mortgage, hypothecate, pledge, assign and grant a security interest to the Lender in and to the Collateral and
each and every item thereof to the extent of its right, title and interest therein TO HAVE AND TO HOLD the Collateral unto the
Lender, and its successors and assigns, as security for the due and punctual payment and performance of the obligations hereunder;
provided, however, that, and these presents are subject to the condition that, if the Borrower shall have indefeasibly
paid or caused to be paid or performed all of the obligations hereunder which are due and owing on or before the Termination Date
and no Event of Default shall have occurred and be subsisting, the security interest created by this Note shall terminate and be
discharged and upon the request of the Borrower, the Lender shall execute and deliver to the Borrower on demand, at the expense
of the Borrower, such instruments of satisfaction and release as may be appropriate.

 

This Note constitutes
a security agreement for purposes of the Uniform Commercial Code in all relevant jurisdictions. Upon an Event of Default, the Lender
shall have all the rights and remedies of a secured party provided in the Uniform Commercial Code in force in New York. The Collateral
is granted as security only and shall not subject the Lender to, or in any way affect or modify, any obligation or liability of
the Borrower with respect to any of the Collateral or any transaction in connection therewith.

 

    	10

    	 

    

 

The Borrower agrees
that it will, in such manner and form as the Lender may require, execute, deliver, file and record any financing statement, specific
assignment or other paper and take any other action that may be necessary or desirable, or that the Lender may request, in order
to create, preserve, perfect or validate any security interest or to enable the Lender to exercise and enforce its rights hereunder
with respect to any of the Collateral. To the extent permitted by applicable law, the Borrower hereby authorizes the Lender to
file, in the name of the Borrower or otherwise, Uniform Commercial Code financing statements (which may be carbon, photographic,
photostatic or other reproductions of this Note or of a financing statement relating to this Note) which the Lender in its sole
discretion may deem necessary or appropriate to further perfect its security interest in the Collateral.

 

The Borrower hereby
irrevocably appoints the Lender his true and lawful attorney, with full power of substitution, in the name of the Borrower, the
Lender or otherwise, for the sole use and benefit of the Lender, but at the expense of the Lender, to the extent permitted by law
to exercise, at any time and from time to time after an Event of Default has occurred and while it is continuing, all or any of
the following powers with respect to all or any of the Collateral:

 

(a)          to
demand, sue for, collect, receive and give acquittance for any and all monies due to become due upon or by virtue thereof;

 

(b)          to
settle, compromise, compound, prosecute or defend any action or proceeding with respect thereto;

 

(c)          to
sell, transfer, assign or otherwise deal in or with the same or the proceeds or avails thereof, as fully and effectually as if
the Lender were the absolute owner thereof; and

 

(d)          to
extend the time of payment of any or all thereof and to make any allowance and other adjustments with reference thereto;

 

provided that
the Lender shall give the Borrower not less than ten days’ prior written notice of the time and place of any sale or other
intended disposition of any of the Collateral. The Lender and the Borrower agree that such notice constitutes “reasonable
notification” within the meaning of Sections 9-611 and 9-612 of the Uniform Commercial Code.

 

The Lender may, in
its commercially reasonable judgment, determine to sell all or any part of the Collateral in a private sale. The Borrower acknowledges
that any such private sale may be at prices and on terms less favorable to the Lender than those obtainable through a public sale
without such restrictions, and, notwithstanding such circumstances, agrees that any such private sale of Collateral subject to
the aforesaid prohibitions shall not be deemed not to have been made in a commercially reasonable manner because such sale was
effected in such manner and that the Lender shall have no obligation to engage in public sales and no obligation to delay the sale
of any Collateral for the period of time necessary to permit the respective issuer thereof or obligor thereunder to register such
Collateral for public sale.

 

    	11

    	 

    

 

The Borrower covenants
and agrees that in the event that any of the Collateral shall become subject to any lien or security interest (other than the lien
and security interest in favor of the Lender created hereunder or under any other obligation of the Borrower to the Lender, Bridge
Bank or the persons listed on Exhibit A), or the lien on and security interest in the Collateral in favor of the Lender created
hereunder shall cease to be a perfected security interest in and lien on any of such Collateral except pursuant to a release herein
contemplated, the Borrower will promptly take whatever action may be necessary to release such other liens or security interests
or to restore the Lender’s lien on and security interest in the Collateral as a perfected security interest or lien, as the
case may be. The Borrower acknowledges that money damages would not be a sufficient remedy for the breach of Borrower’s covenant
in this paragraph and that, in addition to all other remedies that may be available, the Lender shall be entitled to specific performance
as a remedy for any such breach.

 

Section
13.            Further
Assurances.

 

The Borrower hereby
agrees that, from time to time upon the written request of the Lender, it will execute and deliver such further documents and do
such other acts and things as the Lender may reasonably request in order fully to effect the purposes of this Note and to protect
and preserve the priority and validity of the security interests granted hereunder.

 

Section
14.            Powers
and Remedies Cumulative; Delay or Omission Not Waiver of Event of Default.

 

No right or remedy
herein conferred upon or reserved to the Lender is intended to be exclusive of any other right or remedy, and every right and remedy
shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.

 

No delay or omission
of the Lender to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair
any such right or power or shall be construed to be a waiver of any Event of Default or an acquiescence therein; and every power
and remedy given by this Note or by law may be exercised from time to time, and as often as shall be deemed expedient, by the Lender.

 

Section
15.            Transfers.

 

The Borrower may not
transfer or assign this Note nor any right or obligation hereunder to any person or entity without the prior written consent of
the Lender. This Note is freely transferable by the Lender.

 

Section
16.            Modification.

 

This Note may be modified
only with the written consent of both the Borrower and the Lender.

 

    	12

    	 

    

 

Section
17.            Expenses.

 

The Borrower agrees
to pay to the Lender all out-of-pocket expenses (including reasonable expenses for legal services of every kind) of, or incident
to, the enforcement of any of the provisions of this Note after the occurrence of a default hereunder, or performance by the Lender
of any obligations of the Borrower in respect of the Collateral which the Borrower has failed or refused to perform, or any actual
or attempted sale, or, after the occurrence of a default hereunder, any exchange, enforcement, collection, compromise or settlement
in respect of any of the Collateral, and for the care of the Collateral and defending or asserting rights and claims of the Lender
in respect thereof, by litigation or otherwise, and all such expenses shall be secured obligations to the Lender secured hereunder.

 

Section
18.            Indemnification.

 

The Borrower agrees
to indemnify and hold harmless the Lender and its directors, officers, managers, partners, members, shareholders, affiliates, agents,
successors and assigns, (each an “Indemnified Party”) from and against any and all losses, liabilities, deficiencies,
costs, damages and expenses (including, without limitation, attorneys’ fees, charges and disbursements) incurred by such
Indemnified Party as a result of any inaccuracy in or breach of the representations, warranties or covenants made by the Borrower
herein.

 

Section
19.            Notices.

 

All notices, requests,
demands, consents, instructions or other communications required or permitted hereunder shall in writing, mailed or delivered to
each party at the respective addresses of the parties set out below, or at such other address as a party hereto shall have furnished
to the other parties in writing:

 

	 	If to the Borrower:	Vuzix Corporation
	 	 	75 Town Centre Drive
	 	 	Rochester, NY 14623
	 	 	Attn:  Grant Russell, EVP and CFO
	 	 	 
	 	If to the Lender:	LC Capital Master Fund, Ltd.
	 	 	680 Fifth Street, Suite 1202,
	 	 	New York, NY 10019
	 	 	Attention:  Richard Conway

 

All such notices and
communications will be deemed effectively given the earlier of (i) when received, (ii) when delivered personally, (iii) one Business
Day after being deposited with an overnight courier service of recognized standing or (iv) on receipt of confirmation of delivery.

 

    	13

    	 

    

 

Section
20.            Miscellaneous.

 

This Note shall be
deemed to be a contract under the laws of the State of New York, and for all purposes shall be governed by and construed in accordance
with the laws of said state. The parties hereto hereby waive presentment, demand, notice, protest and all other demands and notices
in connection with the delivery, acceptance, performance and enforcement of or any default under this Note, except as specifically
provided herein, and assent to extensions of the time of payment, or forbearance or other indulgence without notice. The Section
headings herein are for convenience only and shall not affect the construction hereof. Any provision of this Note which is illegal,
invalid, prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such illegality,
invalidity, prohibition or unenforceability without invalidating or impairing the remaining provisions hereof or affecting the
validity or enforceability of such provision in any other jurisdiction. This Note shall bind the Borrower, its successors and permitted
assigns. The rights under and benefits of this Note shall inure to the Lender and its successors and assigns.

 

[REMAINDER OF PAGE INTENTIONALLY
LEFT BLANK]

 

    	14

    	 

    

 

The
Borrower hereby waives any and all rights to demand a trial by jury in any action, suit or proceeding arising out of or relating
to this NOTE or ANY RELATED Document to which it is a party or the transactions contemplated by this Note or ANY RELATED Document
to which it is a party.

 

IN WITNESS WHEREOF, the Borrower has caused
this instrument to be duly executed on the date first above written.

 

	 	VUZIX CORPORATION 
	 	 	 
	 	By:	s/s Paul Travers	 
	 	Name:	Paul Travers	 
	 	Title:	President and CEO	 

 

	ACKNOWLEDGED:	 
	 	 
	LC CAPITAL MASTER FUND, 

LTD.	 
	 	 	 
	By:	s/s Richard Conway	 
	Name:	Richard Conway	 
	Title:	Director	 

 

    	 

    	 

    

 

SCHEDULE 1

 

COLLATERAL DESCRIPTION ATTACHMENT

 

	DEBTOR:	VUZIX CORPORATION
	 	 
	SECURED PARTY:	LC CAPITAL MASTER FUND LTD.

 

All personal property of Borrower (herein
referred to as “Borrower” or “Debtor”) whether presently existing or hereafter created or acquired, and
wherever located, including, but not limited to:

 

(a)          all
accounts (as defined in the Code) and payment intangibles, including, without limitation, all contract rights, and all other forms
of monetary obligations owing to the Grantor, and all credit insurance, guaranties, or security therefor, whether or not they have
been earned by performance;

 

(b)          all
chattel paper (as defined in the Code), including, without limitation, electronic chattel paper and tangible chattel paper evidencing
both a monetary obligation and a security interest in or lease of goods, together with any guarantees, letters of credit, and other
security therefore;

 

(c)          all
commercial tort claims (as defined in the Code);

 

(d)          all
deposit accounts (as defined in the Code) maintained by the Grantor with the Secured Party held in the name of the Grantor, and
all of the cash and cash equivalents, deposited therein from time to time, and all securities, rights, interests, shares of stock,
instruments, interests, or other property contained, deposited, held or otherwise added to any deposit account from time to time;

 

(e)          all
documents (as defined in the Code), including, without limitation, any paper that is treated in the regular course of business
as adequate evidence that the person in possession of the paper is entitled to receive, hold, and dispose of the goods the paper
covers, including warehouse receipts, bills of lading, certificates of title, and applications for certificates of title;

 

(f)          all
equipment (as defined in the Code), machinery and all fixtures, and all accessions, additions, attachments, improvements, substitutions
and replacements thereto and thereof and warranties (express and implied) received from the sellers and manufacturers of the foregoing
property, and all related claims, credits, setoffs, and other rights of recovery;

 

    	 

    	 

    

 

(g)          all
general intangibles (as defined in the Code) of any kind, including, without limitation, all money, contract rights, corporate
or other business records, all intellectual property rights, inventions, designs, formulas, patents, patent applications, service
marks, trademarks, trade names, trade secrets, engineering drawings, goodwill, rights to prepaid expenses, registrations, franchises,
copyrights, licenses, customer lists, computer programs and other software (as defined in the Code), source code, tax refund claims,
royalty, licensing and product rights, all claims under guarantees, security interests or other security held by or granted to
Grantor, all indemnification rights, and rights to retrieval from third parties of electronically processed and recorded data pertaining
to any Collateral, things in action, items, checks, drafts, and all orders in transit to or from Grantor, credits or deposits of
Grantor (whether general or special) that are held by the Secured Party;

 

(h)          all
goods (as defined in the Code);

 

(i)          all
inventory (as defined in the Code), whether in the possession of the Grantor or of a bailee or other person for sale, storage,
transit, processing, use or otherwise and whether consisting of whole goods, spare parts, components, supplies, materials, or consigned,
returned or repossessed goods, which are held for sale or lease, which are to be furnished (or have been furnished) under any contract
of service or which are raw materials, work in process or materials used or consumed in Grantor’s business, and all warranties
and related claims, credits, setoffs, and other rights of recovery with respect to any of the foregoing;

 

(j)          all
instruments (as defined in the Code) including, without limitation, every promissory note, negotiable instrument, certificated
security, or other writing that evidences a right to payment of money, that is not a lease or security agreement, and that is transferred
in the ordinary course or conduct of business (including worldwide shipment) by delivery with any necessary assignment or endorsement;

 

    	 

    	 

    

 

(k)          all
investment property (as defined in the Code) pledged to or delivered to Secured Party’s control from time to time, and any
and all other property in which the Grantor at any time has rights and in which at any time a security interest has been transferred
to the Secured Party (and regardless of whether any such property constitutes a certificated or uncertificated security or is held
directly or through one or more financial intermediaries through book entries);

 

(l)          all
letter of credit rights (as defined in the Code);

 

(m)          all
supporting obligations (as defined in the Code);

 

(n)          all
books, files, records (as defined in the Code) relating to the Collateral;

 

(o)          each
policy and contract of insurance owned or maintained by the Grantor, and all the benefits thereof including, without limitation,
all claims of whatsoever nature, as well as return premiums, and in and to all moneys and claims for moneys in connection therewith;

 

(p)          all
certificates and instruments evidencing any securities or other Collateral subject to this Security Agreement from time to time
and all interest, dividends, distributions, cash, investment property, securities, shares of stock, and other amounts and property
from time to time received, receivable, paid or payable or otherwise distributed from time to time in respect of, in exchange or
substitution for, or as an addition to any of the foregoing Collateral;

 

(q)          all
other tangible or intangible personal property of every kind and nature; and

 

(r)          all
accessions and additions to the foregoing, substitutions therefor, and replacements, products and proceeds (as defined in the Code)
of any of the property of the Grantor described in clauses (a) through (q) above (including any proceeds of insurance thereon).

 

    	 

    	 

    

 

SCHEDULE II

VUZIX CORPORATION EXISTING SECURITY INTERESTS

 

		1)	Lampe Conway – term loan of $4,549,520 plus accrued interest as of 03/31/12.

		2)	Paul Travers – convertible note payable of $209,208 plus accrued interest as of 03/31/12.

		3)	Paul Travers – note payable of $290,285 plus accrued interest as of 03/31/12.

		4)	John Burtis – note payable of $101,748 plus accrued interest as of 03/31/12.

		5)	Vast Corporation - agreement payable of $838,096 plus accrued interest as of 03/31/12.

		6)	Kopin Corporation – agreement payable of $482,547 plus accrued interest as of 03/31/12.

		7)	Capital leases – see table below with approximate balances as of April 30, 2012

		8)	Nokia Finland – note payable for R&D equipment in Finland - $280,024 (not registered in USA)

		9)	Bridge Bank – Lines of Credit up to a maximum of $2,000,000.

 

	Lessor	 	Address	 	 	Account #	 	 	Lease
 Date	 	Original
 Balance	 	 	Current
 Balance –
 April 30,

2012	 	 	Asset Leased	 
	Dell	 	P.O. Box 5292 Carol Stream, IL 60197	 	 	003-7695903-020	 	 	Aug-09	 	 	7,417.01	 	 	 	1,042.29	 	 	Computers	 
	Dell	 	P.O. Box 5292 Carol Stream, IL 60197	 	 	003-7695903-021	 	 	Sep-09	 	 	1,644.09	 	 	 	294.85	 	 	Computers	 
	Dell	 	P.O. Box 5292 Carol Stream, IL 60197	 	 	003-7695903-022	 	 	Sep-09	 	 	3,862.79	 	 	 	678.47	 	 	Computers	 
	Dell	 	P.O. Box 5292 Carol Stream, IL 60197	 	 	001-7695903-024	 	 	Oct-10	 	 	4,405.65	 	 	 	2,611.41	 	 	Computers	 
	Dell	 	P.O. Box 5292 Carol Stream, IL 60197	 	 	001-7695903-025	 	 	Feb-11	 	 	7,543.18	 	 	 	5,186.29	 	 	Computers	 
	Key Bank	 	11030 Circle Point Rd Westminster, CO 80020	 	 	591195883002	 	 	Jul-10	 	 	25,775.00	 	 	 	10,055.03	 	 	SAP Licenses	 
	Pawnee	 	700 Centre Ave. Fort Collins, Co 80526	 	 	323784	 	 	Sep-10	 	 	30,275.34	 	 	 	16,467.40	 	 	computers and R&D Equipment/Software	 
	Lenovo	 	P.O. Box 550599 Jacksonville, FL 32255	 	 	908-0000443-000	 	 	Mar-08	 	 	46,659.96	 	 	 	25,854.22	 	 	Dell Server	 
	Key Bank	 	600 Travis St Houston, TX 77002	 	 	1330644	 	 	Sep-07	 	 	121,200.00	 	 	 	15,403.25	 	 	SAP Fourth Shift Software	 
	Alliance	 	800 Walnut St. Des Moines, IA 50309	 	 	001-0085855-001	 	 	May-10	 	 	16,485.00	 	 	 	8,333.36	 	 	manufacturing equipment	 
	Financial Pacific	 	3455 S. 344th Way Federal Way, WA 98001	 	 	001-0455669-002	 	 	Jun-10	 	 	44,267.92	 	 	 	22,149.32	 	 	R & D Equipment	 
		 		 	 	GRAND TOTAL 	 	 	 	 	 	 	 	 	$ 	108,075.89	 	 	 	 

 

    	 

    	 

    

 

	Lessor	 	Address	 	 	Account #	 	 	Lease
 Date	 	Original
 Balance	 	 	Current
 Balance –
 April 30, 2012	 	 	Asset Leased	 
	Dell	 	P.O. Box 5292 Carol Stream, IL 60197	 	 	003-7695903-020	 	 	Aug-09	 	 	7,417.01	 	 	 	1,042.29	 	 	Computers	 
	Dell	 	P.O. Box 5292 Carol Stream, IL 60197	 	 	003-7695903-021	 	 	Sep-09	 	 	1,644.09	 	 	 	294.85	 	 	Computers	 
	Dell	 	P.O. Box 5292 Carol Stream, IL 60197	 	 	003-7695903-022	 	 	Sep-09	 	 	3,862.79	 	 	 	678.47	 	 	Computers	 
	Dell	 	P.O. Box 5292 Carol Stream, IL 60197	 	 	001-7695903-024	 	 	Oct-10	 	 	4,405.65	 	 	 	2,611.41	 	 	Computers	 
	Dell	 	P.O. Box 5292 Carol Stream, IL 60197	 	 	001-7695903-025	 	 	Feb-11	 	 	7,543.18	 	 	 	5,186.29	 	 	Computers	 
	Key Bank	 	11030 Circle Point Rd Westminster, CO 80020	 	 	591195883002	 	 	Jul-10	 	 	25,775.00	 	 	 	10,055.03	 	 	SAP Licenses	 
	Pawnee	 	700 Centre Ave. Fort Collins, Co 80526	 	 	323784	 	 	Sep-10	 	 	30,275.34	 	 	 	16,467.40	 	 	computers and R&D Equipment/Software	 
	Lenovo	 	P.O. Box 550599 
Jacksonville, FL 32255	 	 	908-0000443-000	 	 	Mar-08	 	 	46,659.96	 	 	 	25,854.22	 	 	Dell Server	 
	Key Bank	 	600 Travis St Houston, TX 77002	 	 	1330644	 	 	Sep-07	 	 	121,200.00	 	 	 	15,403.25	 	 	SAP Fourth Shift Software	 
	Alliance	 	800 Walnut St. Des Moines, IA 50309	 	 	001-0085855-001	 	 	May-10	 	 	16,485.00	 	 	 	8,333.36	 	 	manufacturing equipment	 
	Financial Pacific	 	3455 S. 344th Way Federal Way, WA 98001	 	 	001-0455669-002	 	 	Jun-10	 	 	44,267.92	 	 	 	22,149.32	 	 	R & D Equipment	 
		 		 	 	GRAND TOTAL 	 	 	 	 	 	 	 	 	$ 	108,075.89

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