As disclosed in its
Form 10-K filed with the Securities Exchange Commission (“SEC”) on April 14, 2017, on April 7, 2017, the Company and
our subsidiary Protea Biosciences, Inc. (the “Borrowers”) entered into a loan agreement with Summit Resources, Inc.,
a West Virginia corporation (“Summit”) that is owned by Stephen Antoline, one of the members of the Board of Directors
of the Company. Summit is also a major stockholder of the Company.
Under the terms of
the Summit loan agreement, the Borrowers will receive loan proceeds from Summit of up to $1,750,000. The loan amount includes $200,000
previously advanced by Summit and an additional $1,550,000 that ill be advanced to us from April 2017 through July 2017. The Borrowers
issued to Summit a 15% senior secured promissory note in the principal amount of up to $1,750,000 that is payable in monthly installments
over a period of 36 months.
Of the loan proceeds, $1,250,000 will be
used to purchase a new state-of-the-art mass spectrometer we recently ordered and the balance of the loan will be used for working
capital. We have agreed to apply 30% of the net proceeds (after commissions and offering expenses) we receive from any future equity
or equity type financing to reduce and prepay the $500,000 working capital portion of the loan. In addition, the entire loan is
subject to mandatory prepayment in the event and to the extent that we receive gross proceeds of $5,000,000 or more from any subsequent
public offering of our securities.
Commencing 30 days after installation of
the instrument the Borrowers will pay monthly installments of principal and accrued interest in the amount equal to the greater
of (a) $62,030.86 (representing 36 monthly installments of principal and accrued interest at the rate of 15% per annum), or (b)
20% of the cash proceeds we receive from customers who may request services from the Company using the new mass spectrometer equipment.
We also agreed to establish a special lock box to deposit customer cash proceeds we receive from our use of such equipment.
The Summit note is convertible into shares
of the Company’s common stock, $0.001 par value per share (the “Common Stock”), at the option of the holder at
a conversion price equal to
the lower
of $0.075 per share (as adjusted by the contemplated the reverse stock split), or
(b) 85% of the offering price per share of the Common Stock in any subsequent public offering of the Company’s Common Stock.
The loan is secured by a first lien and
security interest on all of the Borrowers. assets and properties, including the purchased equipment and all purchase orders we
receive in connection therewith.
In consideration for the loan we issued
to Summit a 7-year warrant to purchase 20,000,000 shares of Company Common Stock at an exercise price of $0.075 per share.
On September 8, 2016, the Company borrowed
the sum of $650,000 from GRQ Consulting, Inc. 401k (“GRQ”) a non-affiliated third party. Such loan was evidenced by
a $720,000 10% original issue discount convertible note that was due and payable on October 15, 2016 (the “Original GRQ Note”).
As of March 31, 2017, the Company paid all but $280,000 of the principal amount of the Original GRQ Note and currently owes GRQ
a total $301,577.79, inclusive of $21,577.79 of accrued and unpaid interest.
The Original GRQ Note was guaranteed by
our Protea Biosciences subsidiary and is secured by all of the accounts receivable and inventory of the Company and our subsidiary,
and all contract rights and proceeds thereof (the “GRQ Collateral”).
On April 20, 2017, we entered into an exchange
agreement with GRQ under Section 3(a)(9) of the Securities Act of 1933, as amended. Under the terms of the exchange agreement,
GRQ exchanged the Original GRQ Note for a new Company note that requires the Borrowers to pay in full the overdue $301,577.79 amount
by not later than June 30, 2017, plus an additional unsecured amount of $375,000 by September 30, 2017 (the “Final Maturity
Date”); which latter amount is convertible by the holder at any time at a conversion price $0.075 per share or may be paid
at our option at any time prior to the Final Maturity Date by delivering to the note holder 5,000,000 shares of our Common Stock.
On April 21, 2017, GRQ exercised its conversion right an converted the $375,000 balance of the note into 5,000,000 shares of our
common stock.
The guaranty of our Protea subsidiary and
GRQ’s security interest in the GRQ collateral remain in full force and effect pending our payment of the $301,577.79 amount
due on June 30, 2017.
In a related development on April 21, 2017,
we entered into an agreement with Summit under which Summit:
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Consented to the exchange agreement with
GRQ and waived any defaults on our part under the Summit loan agreement; and
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agreed to waive its security interest
in the GRQ Collateral until such time as we pay the $301,577.79 obligation to GRQ.
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The Company and our subsidiary reaffirmed
Summit’s senior priority lien and security interest on all of our assets and properties, other than the specific GRQ Collateral.