Item
1.01 Entry into a Material Definitive Agreement
On
July 26, 2017, Premier Packaging Corporation (“PPC”), a wholly-owned subsidiary of Document Security Systems, Inc.
(“DSS”), entered into a Loan Agreement and accompanying Term Note Non-Revolving Line of Credit Agreement (collectively,
the “Equipment Line of Credit Transaction Documents”) with Citizens Bank, N.A., a national banking association (“Citizens”),
pursuant to which Citizens agrees to lend up to $1,200,000 for the purpose of enabling PPC to purchase equipment from time to
time that it may need for use in its business. Each advance under the Equipment Line of Credit shall be limited to a maximum of
100% of the Hard Costs (as hereinafter defined) of the applicable item of purchased equipment. “Hard Costs” shall
mean the invoice price of such equipment less delivery and installation costs and taxes. Advances may be made respecting this
Equipment Line of Credit from time to time from the date of establishment of the Equipment Line of Credit until July 26, 2018.
The aggregate principal balance outstanding under the Equipment Line of Credit shall bear interest thereon at a per annum rate
of 2% above the LIBOR Advantage Rate (as defined in the attached Term Note Non-Revolving Line of Credit) until the Conversion
Date (as defined in the attached Term Note Non-Revolving Line of Credit). Effective on the Conversion Date, the interest rate
payable on the aggregate principal balance outstanding shall be adjusted to a fixed rate equal to 2% above Citizens’ cost
of funds on the Conversion Date as determined by Citizens. After the Conversion Date, the aggregate principal balance may be repaid
in (i) up to 84 installments comprised of principal and interest for new manufacturing equipment, (ii) up to 60 installments comprised
of principal and interest for used manufacturing equipment and vehicles or (iii) up to 36 installments comprised of principal
and interest for new or used office equipment. As of the date of this Current Report on Form 8-K, no advances have yet been made
to PPC under the Equipment Line of Credit.
The
Equipment Line of Credit is subject to certain financial covenants set forth in the Equipment Line of Credit Transaction Documents,
which include but are not limited to the requirements (i) that PPC maintain at all times a maximum total liabilities to tangible
net worth ratio of 3.0 to 1.0, reported annually, beginning December 31, 2017, according to GAAP, (ii) that PPC not permit
the ratio of its EBITDA (as defined in the Loan Agreement) to Interest Expense plus CMLTD (as defined in the Loan Agreement) to
be less than 1.15 to 1.0, tested annually beginning December 31, 2017, and (iii) that PPC maintain at all times a current ratio
of 1.25 to 1.0, reported annually, beginning December 31, 2017.
Under
the Equipment Line of Credit Transaction Documents, PPC is subject to standard events of default which include, but are not limited
to, a default for non-payment, false or misleading representations and warranties, unsatisfied third-party judgements or liens
that negatively affect the Collateral, insolvency or bankruptcy, which may lead to acceleration of the obligations due and payable
under the Equipment Line of Credit.
In
conjunction with the Equipment Line of Credit Transaction Documents, PPC and Citizens also entered into a Security Agreement dated
July 26, 2017 (the “Security Agreement”), pursuant to which PPC granted a security interest in the Collateral, defined
as PPC’s present and future right, title and interest in and to any and all personal property whether now existing or hereafter
created, acquired or arising and wherever located from time to time, including, without limitation: accounts, chattel paper, goods,
inventory, equipment, fixtures, farm products, instruments, investment property, documents, commercial tort claims, deposit accounts,
letter-of-credit rights, general intangibles, supporting obligations, and records of, accession to and proceeds and products of
the foregoing. The Security Agreement restates the same events of default as set forth in the Equipment Line of Credit Transaction
Documents.
The
foregoing descriptions are summaries only, and do not purport to set forth the complete terms of the Equipment Line of Credit
Transaction Documents or the Security Agreement, and such descriptions are qualified in their entirety by reference to each of
the Loan Agreement, the Term Note Non-Revolving Line of Credit Agreement, and the Security Agreement filed as Exhibits 10.1, 10.2
and 10.3 respectively, to this Current Report on Form 8-K.