Item
1.01 Entry into a Material Definitive Agreement.
On
November 14, 2016, Document Security Systems, Inc. (the “Company”) entered into a Proceeds Investment Agreement (the
“Agreement”) with Brickell Key Investments LP (“BKI”). Pursuant to the Agreement, BKI invested an aggregate
of $13,500,000 (the “Financing Amount”) in a patent purchase and monetization program to be implemented and managed
by the Company (the “Financing”). Pursuant to the Agreement, $9,000,000 of the Financing Amount is to be used to cover
the Company’s purchase of a portfolio of U.S. and foreign LED patents and a license from Intellectual Discovery Co., Ltd.,
a Korean Company (collectively, the “LED Patent Portfolio”), and to cover attorneys’ fees and out-of-pocket
expenses for legal proceedings relating to enforcement of the LED Patent Portfolio. In addition, the Company may use up to $4,500,000
of the Financing Amount to fund the defense of
Inter Partes Review
or other similar proceedings that may be filed from
time to time by defendants with the U.S. Patent & Trademark Office relating to the LED Patent Portfolio, and for its general
working capital needs.
In
consideration of the Financing, the Company assigned to BKI its rights to the Patent Asset Proceeds, defined as any and all monetary
recoveries (whether through damages, recoveries, royalties, monies, lump-sum payments, up-front payments, settlement amounts,
distribution of property, cash value of equities, license fees or other revenues or other assets or amounts) paid by a defendant
or defendants or a third-party to the Company as a result of or in connection with the LED Patent Portfolio, in an amount equal
to the Minimum Return and the Additional Return as hereinafter defined (the “Assigned Rights”). Under the Assigned
Rights, in addition to repayment in full of the Financing Amount, the Company will pay BKI, solely from realized Patent Asset
Proceeds, a return equal to the sum of (A) a certain multiple of the Financing Amount or a designated annualized IRR Return on
the Financing Amount, whichever is greater (the “Minimum Return”), plus (B) an additional designated percentage of
the Patent Asset Proceeds net of the Minimum Return (the “Additional Return”). Once the Minimum Return and Additional
Return to BKI are satisfied, Intellectual Discovery Co., Ltd. will be entitled to a payment of a certain percentage of the Patent
Asset Proceeds with the remaining balance of Patent Asset Proceeds to be retained by the Company.
In
consideration of the Financing, the Company also issued to BKI a five-year warrant to purchase up to 750,000 shares of the Company’s
common stock at an exercise price of $1.00 per share (the “Warrant”). The Company shall have no obligation to file
a registration statement with respect to the shares underlying the Warrant (the “Warrant Shares”) for its next public
or private offering of common stock, regardless of when such offering may occur;
provided, however,
that if at any time
thereafter during the term of the Warrant, the Company proposes to register any of its common stock under the Securities Act of
1933, as amended (the “Act”) in connection with an underwritten public offering, the Warrant provides for piggy-back
registration rights of the Warrant Shares (the “Piggy-Back Registration Rights”),
provided, however,
that the
Piggy-Back Registration Rights will not apply to any registration (1) on Form S-8 (or any successor form), (2) of solely a dividend
reinvestment plan, or (3) for the sole purpose of offering registered securities to another Person in connection with the acquisition
of assets or capital stock of such Person in connection with a merger, consolidation, combination or similar transaction with
such Person.
Under
the Agreement, the Company would be in default if it (1) fails to pay over Patent Asset Proceeds it receives in accordance with
the terms of the payment waterfall when due, (2) makes a material misrepresentation or breaches any other material covenant or
provision of the Agreement, or (3) incurs or guarantees any additional indebtedness in the aggregate in excess of $1,000,000 without
BKI’s consent. In the case of a non-payment default resulting from the receipt of insufficient Patent Asset Proceeds to
satisfy the Minimum Return or Additional Return to BKI, BKI’s sole recourse shall be limited to realized Patent Asset Proceeds
and foreclosure of the LED Patent Portfolio. BKI will have full recourse remedies for material breaches of the Agreement other
than for non-payment, and in the case of the Company’s willful misconduct, bad faith or gross negligence in connection with
performing its obligations under the Agreement.
The
foregoing description is a summary only, does not purport to set forth the complete terms of the Agreement or the Warrant, and
is qualified in its entirety by reference to each of the Agreement and the Warrant, which the Company will file as exhibits to
its Annual Report on Form 10-K for year ending December 31, 2016.