THIS CONVERTIBLE PROMISSORY NOTE (“NOTE”) AND THE SECURITIES ISSUABLE UPON
CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES
ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), APPLICABLE STATE LAW, OR
APPLICABLE LAWS OF ANY FOREIGN JURISDICTION, AND MAY NOT BE SOLD, OFFERED FOR
SALE, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS
(A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND
APPLICABLE STATE OR FOREIGN SECURITIES LAWS COVERING ANY SUCH TRANSACTION OR (B)
SUCH TRANSACTION IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND
APPLICABLE STATE OR FOREIGN SECURITIES LAWS COVERING SUCH TRANSACTION.

 

CONVERTIBLE PROMISSORY NOTE

 

$500,000 February 18, 2019   Rochester, New York

 

FOR VALUE RECEIVED, DOCUMENT SECURITY SYSTEMS, INC. (“Document Security Systems”
or the “Borrower”) promises to pay to LiquidValue Development Pte Ltd (the
“Holder”), or to its order, the principal sum of $500,000 (the “Principal
Amount”), of which up to $500,000 can be paid by the “Optional Conversion” (as
hereinafter defined) of such amount into up to 446,428 shares of “Common Stock”
(as hereinafter defined), provided all of the conditions precedent contained in
Section 3 of this Note have been satisfied, together with interest in arrears on
the unpaid principal balance from time to time outstanding from the date hereof
until the entire Principal Amount due hereunder is paid in full at the rate(s)
provided below.

 

1. Maturity. The aggregate outstanding Principal Amount, together with all
accrued interest thereon and expenses incurred by the Holder in connection
herewith (cumulatively, the “Outstanding Amount”), shall be due and payable in
full on the earliest to occur of (the earliest of such events being the
“Maturity Date”): (i) February 18, 2020 (the “Scheduled Maturity Date”) and (ii)
the acceleration of this Note upon the occurrence of an Event of Default.

 

2. Interest. Interest shall accrue on the then outstanding balance of the
Principal Amount at a fixed interest rate per annum equal to 8%. Accrued
interest shall be payable in cash in arrears on the last day of each calendar
quarter, with first interest payment to commence on June 30, 2019, until the
Principal Amount is paid in full. If at any time the outstanding Principal
Amount shall be paid in full, then all accrued interest shall be payable at the
time of such principal payment.

 

3. Conversion.

 

3.1. Optional Conversion. At anytime during the term of this Note, and provided
all of the conditions precedent contained in Section 3 of this Note have been
satisfied, up to $500,000 (“Maximum Conversion Amount”) of the outstanding
balance of the Principal Amount may, at the sole option of the Holder, be
converted, in whole or in part, into fully paid and non-assessable shares of
Document Security Systems’ common stock, par value $0.02 per share (the “Common
Stock”), at a conversion price equal to $1.12 per share (the “Conversion
Price”), subject to adjustment as set forth herein (“Optional Conversion”).

 

   

 

 

3.2. Mechanics of Conversion. The Holder shall notify the Borrower in writing of
its election to convert all or part of the Maximum Conversion Amount
(“Conversion Amount”) in accordance with Section 3.1 (“Conversion Notice”). Such
conversion shall only become effective after all of the following conditions
have been satisfied:

 

a. Borrower receives the Conversion Notice;

 

b. Borrower receives all necessary consents and approvals for such conversion,
including but not limited to those consents and approvals required under any
State and Federal securities laws (collectively “Approvals”), which Approvals
Borrower will make a good faith effort to obtain after receipt of the Conversion
Notice;

 

c. Holder executes any and all documents required in connection with such
Approvals and the conversion;

 

d. Borrower issues and delivers to Holder a certificate or certificates for the
number of shares of Common Stock, if any, to which Holder shall be entitled as
provided herein, within seven (7) calendar days of receipt of the Conversion
Notice (“Certificates”); and

 

e. Holder provides Borrower with written confirmation that the outstanding
balance of the Principal Amount has been reduced by the Conversion Amount
(“Reduction Certificate”). Upon the occurrence of the events set forth in
Sections 3.2 (a), (b), (c), and (d) above, and this Section 3.2(e), Borrower
shall deliver to the Holder a Restated Note (“Restated Note”) evidencing the
remaining outstanding balance of the Principal Amount, if any, which Restated
Note shall in all other respects be identical with this Note, except that the
Maximum Principal Amount shall be reduced by the Conversion Amount.; provided
however, there will be no obligation to issue a Restated Note in the event of
conversions of less than an aggregate of $50,000.

 

3.3. Fractional Shares. No fractional shares of Common Stock shall be issued
upon the completion of the Optional Conversion. In lieu of any fractional shares
to which the holder would otherwise be entitled, the Borrower may either, at
Borrower’s option, pay cash equal to such fraction multiplied by the Conversion
Price or have such amount continue to be included as part of the outstanding
Principal Amount.

 

3.4. Subdivision or Combination of Common Stock. If Document Security Systems at
any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
will be proportionately reduced, and if Document Security Systems at any time
combines (by reverse stock split, recapitalization or otherwise) its outstanding
shares of Common Stock into a smaller number of shares, the Conversion Price in
effect immediately prior to such combination will be proportionately increased.

 

3.5. Merger, Consolidation or Sale of Assets. If there shall be a merger or
consolidation of Document Security Systems with or into another corporation
(other than a merger or reorganization involving only a change in the state of
incorporation of Document Security Systems), or the sale of all or substantially
all of Document Security Systems’ capital stock or assets to any other person,
then as a part of such transaction, and provided all of the conditions precedent
to the issuance of the Certificates have been satisfied, provision shall be made
so that the Holder shall thereafter be entitled to receive the number of shares
of stock or other securities or property of Document Security Systems or of the
successor corporation resulting from the merger, consolidation or sale, to which
the Holder would have been entitled if the Holder had exercised the Optional
Conversion immediately prior thereto.

 

3.6. Notice of Adjustment to Conversion Price. Upon any adjustment or other
change relating to the Conversion Price or the securities issuable upon the
conversion pursuant to the Optional Conversion, then, and in each such case, the
Borrower shall give to the Holder written notice thereof, which notice shall
state the Conversion Price resulting from such adjustment and the increase or
decrease in the number or other denominations of securities issuable at such
price upon completion of the Optional Conversion setting forth in reasonable
detail the method of calculation and the facts upon which such calculation is
based.

 

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3.7. Reservation of Shares. Document Security Systems covenants that upon
receiving additional listing approval from the NYSE American stock exchange for
the Common Stock underlying this Note, it will at all times until this Note is
paid or converted, as applicable under the terms hereof reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of issue upon completion of any Optional Conversion, such number of
shares of Common Stock as shall then be issuable upon the completion of the
Optional Conversion.

 

3.8. No Stockholder Rights. Nothing contained in this Note shall be construed as
conferring upon Holder or any other person by virtue of its ownership of this
Note, any rights whatsoever as a stockholder of Document Security Systems.

 

3.9 The Optional Conversion shall automatically terminate and become null and
void upon the occurrence of any of the following events:

 

a. Payment in full of the Principal Amount and any other sums due hereunder; or

 

b. Assignment of this Note or Holder’s rights under this Note by Holder; or

 

c. After exercising commercially reasonable and good faith efforts, Borrower
fails to obtain the Approvals within 180 days of Borrower’s receipt of the
Conversion Notice; or

 

d. Holder’s exercise of the Optional Conversion and completion of the conversion
up to the Maximum Conversion Amount.

 

4. Optional Borrower Redemption. At any time Borrower shall have the right to
redeem or prepay all or any portion of the then outstanding Principal Amount of
this Note without premium.

 

5. Usury. All agreements between the Borrower and the Holder are hereby
expressly limited so that in no contingency or event whatsoever, whether by
reason of acceleration of maturity of the indebtedness evidenced hereby or
otherwise, shall the amount paid or agreed to be paid to the Holder for the use,
forbearance, or detention of the indebtedness evidenced hereby exceed the
maximum permissible amount under applicable law. If, from any circumstance
whatsoever, fulfillment of any provision hereof at the time performance of such
provision shall be due shall involve transcending the limit of validity
prescribed by law, the obligation to be fulfilled shall automatically be reduced
to the limit of such validity, and if from any circumstances the Holder should
ever receive as interest an amount which would exceed the highest lawful rate,
such amount which would be excessive interest shall be applied to the reduction
of the principal balance evidenced hereby and not to the payment of interest,
and, if the Principal Amount of this Note has been paid in full, shall be
refunded to the Borrower.

 

6. Late Charge. If an interest payment is not received within ten days of its
due date, Borrower shall pay a late charge equal to two percent (2%) of the
delinquent amount; any excess collected by mistake shall be refunded on request,
and each such late charge shall be separately charged and collected by the
Holder. Payments may be applied in any order in the sole discretion of the
Holder but prior to demand, shall be applied first to past due interest,
expenses and late charges, then to scheduled principal payments, if any, which
are past due, then to current interest, expenses and late charges, and last to
remaining principal.

 

7. Replacement of Note. If this Note is mutilated, lost, stolen or destroyed,
the Borrower shall issue or cause to be issued in exchange and substitution for
and upon cancellation hereof, or in lieu of and substitution for this Note, a
new Note, but only upon receipt of evidence reasonably satisfactory to the
Borrower of such loss, theft or destruction and customary and reasonable bond or
indemnity, if requested.

 

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8. Events of Default. The following constitute an event of default (“Event of
Default”):

 

a. Borrower fails to pay any amount of principal, interest or other amounts
under this Note when due and said failure continues for a period of thirty (30)
days after Borrower’s receipt of written notice from Holder;

 

b. Borrower fails or neglects to perform, keep or observe any of the covenants,
conditions or agreements contained in this Note and such failure or neglect
continues after Holder provided Borrower with thirty (30) days written notice
thereof;

 

c. Any warranty or representation now or hereafter made by the Borrower in
connection with this Note is untrue or incorrect in any material respect, or any
schedule, certificate, statement, report, financial data, notice, or writing
furnished at any time pursuant to this Note by the Borrower to the Holder is
untrue or incorrect in any material respect, on the date as of which the facts
set forth therein are stated or certified;

 

d. A proceeding under any bankruptcy, reorganization, arrangement of debt,
insolvency, readjustment of debt or receivership law or statute is filed against
Borrower which is not dismissed within sixty (60) days of its filing, or a
proceeding under any bankruptcy, reorganization, arrangement of debt,
insolvency, readjustment of debt or receivership law or statute is filed by
Borrower or the Borrower makes an assignment for the benefit of creditors or
Borrower takes any corporate action to authorize any of the foregoing;

 

e. Borrower voluntarily or involuntarily dissolves or is dissolved, terminates
or is terminated; or

 

f. Borrower becomes insolvent or fails generally to pay its debts as they become
due, and said failure continues for a period of thirty (30) days after written
notice of same from the Holder to the Borrower.

 

9. Remedies. Upon the occurrence of an Event of Default, at the option and upon
the written declaration of the Holder (or automatically without such declaration
if an Event of Default set forth in Section 8(d) occurs), the entire Outstanding
Amount shall, without presentment, demand, protest, or notice of any kind, all
of which are hereby expressly waived, be forthwith due and payable, and Holder
may, immediately and without expiration of any period of grace, enforce payment
of all amounts due and owing under this Note and exercise any and all other
remedies granted to it at law, in equity or otherwise.

 

10. Miscellaneous.

 

a. Notices. All notices to any party required or permitted hereunder shall be in
writing and shall be sent to the physical address or email address set forth for
such party as follows:

 

  i. If to the Holder:

 

LiquidValue Development Pte Ltd

7th Floor, Skyway Centre

23 Queen’s Road West

Sheung Wan, Hong Kong

Attention: Fai H. Chan

fai@sed.com.sg

 

  ii. If to Borrower:

 

Document Security Systems, Inc.

200 Canal View Boulevard, Suite 300

Rochester, NY 14623

Attention: Chief Financial Officer

pjones@dsssecure.com

 

 4 

 

 

Any such notice shall be deemed effectively given (i) upon personal delivery to
the party to be notified; (ii) when sent by confirmed electronic transmission or
facsimile if sent during normal business hours of the recipient, if not, then on
the next business day; (iii) three days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or (iv) one day after
deposit with a recognized national overnight courier, specifying next day
delivery, or two days after deposit with a recognized international overnight
courier, specifying two day delivery, in each case with written verification of
receipt.

 

b. Waiver. No failure to exercise, and no delay in exercising, on the part of
the Holder, any right, power, or privilege hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, power, or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power, or privilege. The rights and remedies herein
provided are cumulative and not exclusive of any rights or remedies provided by
law.

 

c. Amendments. Any term, covenant, or condition of this Note may be amended or
waived only by written consent of the Borrower and the Holder.

 

d. Expenses. Any reasonable expense incurred by the Holder (including, without
limitation, reasonable attorneys’ fees and disbursements) in connection with the
administration, or enforcement of this Note and any other document executed by
the Borrower in connection with the obligations of Borrower hereunder or any
amendment hereto or thereto, or the exercise of any right or remedy upon the
occurrence of an Event of Default, including, without limitation, the costs of
collection and reasonable attorneys’ fees and expenses, shall be paid by the
Borrower within thirty (30) days of receiving written notice thereof from the
Holder. Any such expense incurred by the Holder and not timely paid by the
Borrower shall be added to the other obligations hereunder and shall earn
interest at the same rate per annum as the principal hereunder.

 

e. Governing Law. This Note shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to any conflict or
choice of laws principles. Any litigation involving this Note shall be brought
in the County of Monroe and State of New York.

 

f. Transfer; Successors and Assigns. The terms and conditions of this Note shall
inure to the benefit of and be binding upon the respective permitted successors
and assigns of the parties. This Note and the rights, privileges and obligations
of Holder hereunder, shall not be assigned, sold or transferred by Holder, in
part or in full without the prior written consent of the Borrower, provided that
the Holder may assign or transfer any of its rights, privileges, or obligations
set forth in, arising under, or created by this Agreement to any entity
controlled by, controlling or under common control with the Holder. The Borrower
may not assign this Note without prior written consent of the Holder, provided
that the Borrower may assign this Note to any successor of all or substantially
all of its assets or business, or any entity surviving the merger, combination
or consolidation with the Borrower. Notwithstanding the above, under no
circumstances shall the Optional Conversion or the rights, privileges and
obligations of Holder pursuant thereto be separately assigned by Holder.

 

g. Entire Agreement. This Note constitutes the full and entire agreement of the
Borrower and the Holder with respect to the subject matter hereof.

 

h. Confidentiality. In addition to separate confidentiality agreement, if any,
the Holder will at all times keep confidential and not divulge, use or make
accessible to anyone the terms and conditions of this Note and the transactions
described herein, and any non-public material information concerning or relating
to the business or financial affairs of the Borrower to which such party has
been or will become privy relating to this Note, except to its employees and
advisors in such capacity, as required to perform its obligations hereunder, if
required by law or rules of a stock exchange on which its or its parent’s
securities are listed, or with the prior written consent of the Borrower.

 

[The remainder of this page intentionally left blank.]

 

 5 

 

 

IN WITNESS WHEREOF, the parties have caused this Note to be executed by their
duly authorized representatives as of the day and year first above written.

 

  DOCUMENT SECURITY SYSTEMS, INC.         By: /s/ Jeffrey Ronaldi   Name:
Jeffrey Ronaldi   Title: Chief Executive Officer

 

  LIQUIDVALUE DEVELOPMENT PTE LTD         By: /s/ Fai H. Chan   Name: Fai H.
Chan            Title: Owner

 

[Signature Page to Convertible Promissory Note]