On or about April 3, 2017, Protea Biosciences
Group, Inc., a Delaware corporation (the “
Company
”) executed and delivered a senior secured convertible promissory
note in favor of Summit Resources, Inc., a West Virginia corporation (“
Summit
” or “
Lender
”)
controlled by Steve Antoline, who was then a member of the board of directors of the Company, in the maximum principal amount of
up to $1,750,000.00. A total of $500,000 was advanced by Summit under such note. In addition, in August 2017, the Company received
a loan in the amount of $440,000 from Summit under a maximum 10% $500,000 note, dated August 25, 2017, that is payable to Summit
on the earlier of (a) December 31, 2017, (b) the Company’s receipt of $2,500,000 or more from any subsequent private placement
of securities consummated prior to December 31, 2017, or (c) the completion of a public offering of the Company’s securities.
In consideration of its making of the loan, the Company granted to Summit or its designees a seven-year warrant to purchase, for
an initial exercise price of $0.075 per share, 60,000,000 shares of the Company’s common stock, $0.0001 par value per share
(the “
Common Stock
”). In addition to the aforementioned note, three additional loans and notes were issued to
Summit pursuant to the same provisions set forth in the August 30, 2017 note. These additional loans were made on August 30, 2017
for $300,000, September 8, 2017 for $110,000, and on September 27, 2017 for $300,000. As a result, prior to October 24, 2017, Summit
had loaned an aggregate of $1,650,000 to the Company. The additional notes also granted to Summit or its designees three additional
seven-year warrants to purchase a total of 160,000,000 shares of Common Stock at an initial exercise price of $0.075 per share.
As of October 19, 2017, Summit had made
advances to the Company in the aggregate amount of $1,650,000.00 and, together with accrued and unpaid interest, the total amount
of outstanding principal and interest due under all notes issued by the Company to Summit was $1,726,173.26.
On October 20, 2017, the Company, its
subsidiary Protea Biosciences, Inc. (“
Protea
”) and Summit entered into a note and loan agreement that restated
and consolidated all prior Summit loans, effective as of October 19, 2017 (the “
Restated Summit Loan Agreement
”).
Under the terms of the Restated Summit Loan Agreement, and in view of the fact that the Company did not have liquid resources
to finance its payroll and other obligations, the parties to the Restated Loan Agreement agreed as follows:
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Summit
advanced an additional $500,000 to Protea;
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Protea
executed a new note of $2,226,173.26 in principal amount payable on November 18, 2017;
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The
Company unconditionally guaranteed the loan and note;
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Summit
received a first priority lien and security interest on all of the assets of the Company;
and
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The
Company pledged to Summit the capital stock of Protea.
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As of October 25, 2017, the Company used
and intends to use the proceeds of the additional $500,000 advance by Summit to pay (i) $25,000 in reduction of accrued and unpaid
professional fees, (ii) $170,000 in payroll obligations and related employee benefits that were due on October 23, 2017, (iii)
$30,000 for CRO retention (see below) and (iv) the balance will be applied toward working capital primarily needed for payroll
obligations due over the succeeding two weeks. There are substantial additional obligations, including past due equipment leases
and supplier obligations, that the Company may not be able to pay with its currently limited working capital reserves.
In addition, the Company and Protea agreed
to engage the services of a chief restructuring officer (the “
CRO
”) who has been given authority to provide
business management and oversight over the Company’s business and operations. The final terms of the CRO’s engagement
shall be subject to the review and approval of the Lender. The Company agreed that the CRO shall have broad authority and discretion
to manage and oversee the Company’s day-to-day operations. Without limiting the foregoing, the CRO shall be responsible
for overseeing the possible restructuring the Company’s operations, including, without limitation, allocating the Company’s
capital and evaluating and advising the board of directors of the Company (the “
Board
”) with respect to any
and all liability restructuring opportunities.
The Restated Summit Loan Agreement provides
that the Company, through the CRO, shall diligently and in good faith solicit, evaluate and pursue offers and proposals from any
party(ies) for the purchase and sale of the Company’s business and/or assets, long term financing, refinancing of existing
Company debt, raise of additional equity through the sale of stock in the Company and/or any combination of the foregoing, or
any further or additional transaction intended to remedy the Company’s operating deficit and financial distress and provide
for the long-term sustainability of the Company and/or protect the interests and investments of the Company’s stockholders
and creditors (each, a “
Proposed Transaction
”). The Restated Summit Loan Agreement provides that the Board
will not accept and/or enter into any Proposed Transaction without the prior recommendation and approval of the CRO;
provided,
however
, that the Board may accept a Proposed Transaction without the recommendation or approval of the CRO if the Board
first seeks the input of the CRO and such Proposed Transaction involves and is limited to the sale of Common Stock and/or warrants
or other rights to purchase Common Stock of the Company or the issuance of unsecured convertible securities having a maturity
beyond the Maturity Date of the Note (a “Securities Issuance”) and does not violate the documents governing the Restated
Summit Loan Agreement or applicable securities laws.
In performing its duties and responsibilities,
the CRO shall be vested with broad authority to manage and/or allocate the Company’s operations, assets, and employees.
Further, upon receipt and evaluation of any Proposed Transaction(s), the CRO shall provide his/her recommendation(s) and conclusion(s)
with respect to such Proposed Transaction(s) to the Board for final approval or rejection;
provided
,
however
, that
in the event the Board fails to enter into a binding agreement for the consummation of a Proposed Transaction as of the Maturity
Date (as extended), the CRO shall be vested at the inception of the engagement with the sole and absolute authority and discretion
in his/her reasonable business judgment, taking into account the best interest of the Company’s creditors and stockholders,
to either (i) consummate a Proposed Transaction (including, without limitation, authority to enter into any agreements or other
instruments necessary in connection therewith), or (ii) file a voluntary petition for bankruptcy on behalf of the Company. In
the event the CRO elects, pursuant to the foregoing sentence, to file a voluntary bankruptcy proceeding on behalf of the Company,
then the CRO shall have the full right and authority, subject to the approval of the Board and bankruptcy court, to propose a
plan of reorganization or negotiate, direct and/or effectuate the sale and/or disposition of the Company’s assets and/or
consummate any other transaction(s) on behalf of the Company through the bankruptcy proceedings. The CRO shall serve for an interim
period until the Company has consummated a Proposed Transaction or has otherwise, to Summit’s satisfaction in its reasonable
business judgment, implemented an alternative long-term solution to remedy the Company’s operating deficit and financial
distress.
Although the maturity date of the Summit
Note is November 18, 2017, the Restated Loan Agreement provides that Summit may, in the exercise of its sole discretion, extend
the maturity date. In addition, if the Company is able to consummate a Securities Issuance on or before November 18, 2017 that
prepays a minimum of $1,350,000 of the Summit Note and adequate working capital to sustain operations for an additional period
deemed acceptable by the CRO, the Restated Loan Agreement provides that Summit would favorably consider an extension of the maturity
date for at least 30 days.
In the event that the Company consummates
a Proposed Transaction involving the sale of a sufficient amount of a Securities Issuance to retire the principal and accrued
interest on the Summit Note, the Board of Directors may terminate the services of the CRO.
On October 23, 2017, the Company entered
into an agreement (the “
Agreement
”) with Compass Advisory Partners, LLC, an investment banking and consulting
firm located in Pittsburgh, Pennsylvania (“
Compass
”). The Agreement provides, in relevant part, that in consideration
of the Company’s financial condition and prospects for financial restructuring and capitalization, and without further approval
by the Company’s Board, the Company granted Compass the authority to file for protection under chapter 7 or chapter 11 of
the United States Bankruptcy Code (11. U.S.C. § 101 et seq.) (the “
Federal Bankruptcy Code
”) and, subject
to approval by the Bankruptcy Court, serve as CRO for the debtor-in-possession Company during the bankruptcy process and to negotiate
and consummate a sale of all or substantially all of the Company’s assets and/or file a plan of reorganization; provided,
that the final terms of the proposed plan of reorganization and/or sale of the Company’s assets after presentation by the
CRO to the Board; provided, that such authority is subject to the final approval of the Board of Directors and the Bankruptcy
Court.
Based on its recent experience, the Company’s
cash shortfall has been between $400,000 to $500,000 per month. Based on Compass’s preliminary review of the Company’s
financial position, absent significant reductions in staff and other fixed expenses and/or the Company’s ability to obtain
additional external financing, current estimates are that the Company’s working capital resources will be fully depleted
on or about November 10, 2017. Accordingly, there is a significant possibility that the Company will be required to seek protection
from its creditors under the Federal Bankruptcy Code.
On August 25, 2017, the Board of the Company
authorized a one-for-fifty (1:50) reverse stock split of the Company’s outstanding Common Stock and shares of Common Stock
issuable upon the conversion or exercise of convertible securities, warrants or options; such reverse stock split to be implemented
by the Company either prior to or in connection with any future public offering of Company securities.
On October 12, 2017, the Financial Industry
Regulatory Authority approved the reverse stock split and it became effective on October 16, 2017.