PROSPECTUS
SUPPLEMENT
(To
Prospectus dated May 18, 2015)
Filed
Pursuant to Rule 424(b)(5)
Registration
No. 333-202944
DIGITAL
ALLY, INC.
940,000
Shares of Common Stock
Series
A-1 Warrants to purchase 680,000 shares of Common Stock
Series
A-2 Warrants to purchase 200,000 shares of Common Stock
Series
B Warrants to purchase 60,000 shares of Common Stock
Pursuant
to this prospectus supplement and the accompanying prospectus (the accompanying prospectus), we are offering up to 940,000 shares
of our common stock, par value $0.001 per share, and Series B Warrants to purchase 60,000 shares of common stock to certain investors
at an offering price of $3.00 per share for an aggregate purchase price of $3,000,000. For each share of common stock purchased,
investors will receive two registered warrants, each with an exercise price of $3.36 (the “Series A-1 Warrant” and
“Series A-2 Warrant”). The Series A-1 Warrants are exercisable to purchase up to, in the aggregate, 680,000 shares
of common stock (or 0.68 warrant shares per share of common stock or pre-funded warrant purchased) and have a term of five years
commencing six months following the closing date. The Series A-2 Warrants are exercisable to purchase up to, in the aggregate,
200,000 shares of common stock (or 0.20 warrant shares per share of common stock or pre-funded warrant purchased) and have a term
of five years commencing immediately. Additionally, to the extent that an investor’s beneficial interest would otherwise
exceed 9.9% of the issued and outstanding shares of common stock, the Company will issue to such investor, in lieu of shares of
common stock at closing, a pre-funded common stock warrant that is immediately exercisable (the “Pre-Funded Warrant”
or “Series B Warrant”). The Company has reserved up to 60,000 shares for issuance under the Pre-Funded Warrrants.
Any such investor, to the extent such Pre-Funded Warrants are issued, shall pay $2.99 per share at the closing and $0.01 per share
upon exercise of the Pre-Funded Warrant. The Series A-1 Warrants, Series A-2 Warrants and Pre-Funded Warrants are referred to
herein as the “Warrants.”
As
of August 18, 2017, the aggregate market value of our voting and non-voting common stock held by non-affiliates pursuant to General
Instruction I.B.6. of Form S-3 was $20,298,067, which was calculated based on 4,832,873 outstanding shares of our voting
common stock held by non-affiliates and at a price of $4.20 per share, the closing sale price of our common stock reported
on The NASDAQ Capital Market on July 7, 2017. As a result, we are eligible to offer and sell up to an aggregate of $6,698,362
of shares of our common stock pursuant to General Instruction I.B.6. of Form S-3. Following this offering, we will have sold securities
with an aggregate market value of $6,696,000 pursuant to General Instruction I.B.6. of Form S-3 during the prior 12 calendar
month period that ends on, and includes, the date of this prospectus supplement. Pursuant to General Instruction I.B.6 of Form
S-3, in no event will we sell securities registered on this registration statement in a public primary offering with a value exceeding
more than one-third of our public float in any 12-month period so long as our public float remains below $75.0 million.
Our
common stock is listed on The NASDAQ Capital Market under the symbol “DGLY.” On August 18, 2017, the last reported
sale price of our common stock on The NASDAQ Capital Market was $3.35 per share.
Investing
in our securities involves a high degree of risk. Before making an investment decision, please read “Risk Factors”
beginning on page S-8 of this prospectus supplement, page 1 of the accompanying prospectus and in the documents incorporated by
reference into this prospectus supplement and the accompanying prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
We
are selling the shares of common stock offered hereby directly to investors. We have retained WestPark Capital, Inc. to act as
the exclusive placement agent in connection with this offering. The placement agent has agreed to use its reasonable best efforts
to solicit offers to purchase our common stock. We have agreed to pay the placement agent a fee of 5% of the aggregate gross proceeds
in this offering. The placement agent is not purchasing or selling any shares of our common stock pursuant to this prospectus
supplement or the accompanying prospectus, nor are we requiring any minimum purchase or sale of any specific number of shares
of our common stock. See “Plan of Distribution” beginning on page S-32 of this prospectus supplement for more information
regarding these arrangements.
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Per
Share
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|
Total
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Public
offering price
(1)
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$
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3.00
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$
|
2,999,400
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Placement
agent fee
(2)
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$
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0.15
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$
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149,470
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Proceeds,
before expenses, to us
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$
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2.85
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$
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2,849,430
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(1)
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Public
offering price of securities determined as 940,000 common shares issued at $3.00 per
share and 60,000 Series B pre-funded warrants issued at $2.99 per share.
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(2)
|
In
addition to the placement agent fees, we have agreed to pay up to $50,000 of the reasonable out-of-pocket expenses of the
placement agent in connection with this offering. We have also agreed to issue warrants to the placement agent. See “Plan
of Distribution” beginning on page S-32 of this prospectus supplement for more information.
|
Delivery
of the shares of common stock will take place on or about August 23, 2017, subject to the satisfaction of certain conditions.
Placement
Agent
WestPark
Capital, Inc.
The
date of this prospectus supplement is August 23, 2017
TABLE
OF CONTENTS
Investing
in our securities involves a high degree of risk. Before making an investment decision, please read “Risk Factors”
beginning on page S-8 of this prospectus supplement, page 1 of the accompanying prospectus and in the documents incorporated by
reference into this prospectus supplement and the accompanying prospectus.
We
may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read the
entire prospectus and any amendments or supplements carefully before you make your investment decision.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
ABOUT
THIS PROSPECTUS SUPPLEMENT
This
prospectus supplement and the accompanying prospectus are part of a “shelf” registration statement on Form S-3 (File
No. 333-202944) that we filed with the Securities and Exchange Commission on March 24, 2015, and declared effective on May 18,
2015.
This
document is in two parts. The first part is this prospectus supplement, which describes the terms of this offering and adds to
and updates information contained in the accompanying prospectus and the documents incorporated by reference into this prospectus
supplement and the accompanying prospectus. The second part is the accompanying prospectus, which gives more general information
about the shares of our common stock and other securities we may offer from time to time under our shelf registration statement,
some of which does not apply to the securities offered by this prospectus supplement. To the extent there is a conflict between
the information contained in this prospectus supplement, on the one hand, and the information contained in the accompanying prospectus
or any document incorporated by reference herein or therein, on the other hand, you should rely on the information in this prospectus
supplement.
This
prospectus supplement and the accompanying prospectus relate to the offering of our securities. Before buying any of our securities
offered hereby, we urge you to read carefully this prospectus supplement and the accompanying prospectus, together with the information
incorporated herein by reference as described below under the heading “
Incorporation of Certain Information by Reference
.”
This prospectus supplement contains information about our securities offered hereby and may add to, update or change information
in the accompanying prospectus.
You
should rely only on the information contained in, or incorporated by reference into, this prospectus supplement and the accompanying
prospectus. We have not authorized anyone to provide you with different or additional information.
We
are not making offers to sell or solicitations to buy our securities in any jurisdiction in which an offer or solicitation is
not authorized or in which the person making that offer or solicitation is not qualified to do so or to anyone to whom it is unlawful
to make an offer or solicitation. You should assume that the information in this prospectus supplement and the accompanying prospectus
is accurate only as of the date on the front of the respective document and that any information that we have incorporated by
reference is accurate only as of the date of the document incorporated by reference, regardless of the time of delivery of this
prospectus supplement or the accompanying prospectus or the time of any sale of a security.
This
prospectus supplement and the accompanying prospectus contain summaries of certain provisions contained in some of the documents
described herein, but reference is made to the actual documents for complete information. All the summaries are qualified in their
entirety by the actual documents. Copies of some of the documents referred to herein have been filed, will be filed or will be
incorporated herein by reference as exhibits to the registration statement, and you may obtain copies of those documents as described
below under the section entitled “
Where You Can Find More Information
.”
We
further note that the representations, warranties and covenants made by us in any agreement that is filed as an exhibit to any
document that is incorporated by reference herein were made solely for the benefit of the parties to such agreement, including,
in some cases, for the purpose of allocating risk among the parties to such agreements, and should not be deemed to be a representation,
warranty or covenant to you. Moreover, such representations, warranties or covenants were accurate only as of the date when made.
Accordingly, such representations, warranties and covenants should not be relied on as accurately representing the current state
of our affairs.
Unless
the context indicates otherwise, as used in this prospectus, the terms “Digital Ally,” “the Company,”
“we,” “our,” “us” or similar terms refer collectively to Digital Ally, Inc. and its subsidiaries.
PROSPECTUS
SUPPLEMENT SUMMARY
This
summary highlights certain information about us, this offering and selected information contained elsewhere in or incorporated
by reference into this prospectus supplement and the accompanying prospectus. This summary is not complete and does not contain
all the information that you should consider before deciding whether to invest in the securities covered by this prospectus supplement.
For a more complete understanding of Digital Ally and this offering, we encourage you to read and consider carefully the more
detailed information in this prospectus supplement and the accompanying prospectus, including the information incorporated by
reference in this prospectus supplement and the accompanying prospectus and the information included in any free writing prospectus
that we have authorized for use in connection with this offering, including the information set forth in the section titled “Risk
Factors” in this prospectus supplement beginning on page S-8.
Overview
Digital
Ally, Inc. produces digital video imaging and storage products for use in law enforcement, security and commercial applications.
Our products include an in-car digital video/audio recorder contained in a rear-view mirror for use in law enforcement and commercial
fleets; a system that provides its law enforcement customers with audio/video surveillance from multiple vantage points and hands-free
automatic activation of body-worn cameras and in-car video systems; a miniature digital video system designed to be worn on an
individual’s body; a weather-resistant mobile digital video recording system for use on motorcycles, ATV’s and boats;
a hand-held laser speed detection device that it is offering primarily to law enforcement agencies; and cloud storage solutions.
The Company has active research and development programs to adapt its technologies to other applications. It can integrate electronic,
radio, computer, mechanical, and multi-media technologies to create unique solutions to address needs in a variety of other industries
and markets, including mass transit, school bus, taxi cab and the military. The Company sells its products to law enforcement
agencies and other security organizations and consumer and commercial fleet operators through direct sales domestically and third-party
distributors internationally.
We
are pursuing several new market channels that do not involve our traditional law enforcement and private security customers. If
successful, we believe that these new market channels could yield substantial recurring service revenues for us in 2017 and beyond.
We are testing a new revenue model that involves the long-term lease of our body-worn and/or in-car hardware, together with a
monthly subscription for our cloud storage, search and archiving services for the underlying audio and video material. This new
service revenue model could have a substantial impact on our revenues and improve the stability of our quarter-to-quarter revenues
and operating results, although we can make no assurances in this regard. We believe this service revenue model may appeal to
our customers, in particular our commercial and other non-law enforcement customers, because it reduces the initial capital outlay
and eliminates repairs and maintenance in exchange for making level monthly payments for the utilization of the equipment, data
storage and management services.
Products
In-Car
Digital Video Mirror System for law enforcement – DVM-100, DVM-400, DVM-750, DVM-800 and DVM-800 HD
In-car
video systems for patrol cars have become standard equipment for may law enforcement departments. Current systems are primarily
digital based systems with cameras mounted on the windshield and the recording device generally in the trunk, headliner, dashboard,
console or under the seat of the vehicle. Most manufacturers have already developed and transitioned completely to digital video,
but some have not transitioned totally to a fully solid-state digital system and continue to rely on hard-drive or DVD based systems
which are less reliable and susceptible to heat, cold and vibration.
Our
digital video rear view mirror unit is a self-contained video recorder, microphone and digital storage system that is integrated
into a rear-view mirror, with a monitor, GPS and 900 MHz audio transceiver. Our system is more compact and unobtrusive than certain
of our competitors because it requires no recording equipment to be located in other parts of the vehicle.
Our
in-car digital video rear view mirror has the following features:
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wide
angle zoom color camera;
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standards-based
video and audio compression and recording;
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system
is concealed in the rear-view mirror, replacing factory rear view mirror;
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monitor
in rear-view mirror is invisible when not activated;
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eliminates
need for analog tapes to store and catalogue;
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easily
installs in any vehicle;
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ability
to integrate with body-worn cameras including auto-activation of either system;
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archives
audio/video data to the cloud, computers (wirelessly) and to compact flash memory, or file servers;
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900
MHz audio transceiver with automatic activation;
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marks
exact location of incident with integrated GPS;
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playback
using Windows Media Player;
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optional
wireless download of stored video evidence;
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proprietary
software protects the chain of custody; and
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and
records to rugged and durable solid state memory.
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Compact
HD Quality In-Car Digital Video (not in a rear-view mirror)- MicroVu HD for law enforcement
The
MicroVu is a compact in-car video system that is mobile (not mounted in a rear-view mirror) which provides up to 1080p HD video
recording. The MicroVu is very compact as the complete system is only 4” long by 1” high. The MicroVu is designed
for simple installation and features advanced automatic login (RFID log-in) and interoperability with our body cameras through
our VuLink products. The primary user of the MicroVu system is law enforcement, although derivative models may appeal to the commercial
fleet market, in particular the over the road trucking market.
In-Car
Digital Video “Event Recorder” System –DVM-250 Plus for Commercial Fleets
We
provide commercial fleets and commercial fleet managers with the digital video tools they need to increase driver safety, track
assets in real-time and minimize the company’s liability risk all while enabling fleet managers to operate the fleet at
an optimal level.
We market a product
designed to address these commercial fleet markets with our DVM-250 Plus event recorders that provides all types of commercial
fleets with
features and capabilities that are fully-customizable, consistent with their
specific application and inherent risks
. The DVM-250 Plus is a rear-view mirror based digital audio and video recording
system with many, but not all, the features of our DVM-800 law enforcement mirror systems at a lower price point. The DVM-250
Plus is designed to capture “events,” such as wrecks and erratic driving or other abnormal occurrences, for evidentiary
or training purposes. These markets may find our units attractive from both a feature and cost perspective, compared to other
providers. Our marketing efforts indicate that these commercial fleets are adopting this technology, in particular the ambulance
and taxi-cab markets.
We
offer a suite of data management web-based tools to assist fleet managers in the organization, archiving, and management of videos
and telematics information. Within the suite, there are powerful mapping and reporting tools that help optimize efficiency, serve
as excellent training tools for teams on safety and ultimately generate a significant return on investment for the organization.
Miniature
Body-Worn Digital Video System – FirstVU HD for law enforcement and private security
This
system is also a derivative of our in-car video systems, but is much smaller and lighter and more rugged and water-resistant to
handle a hostile outdoor environment. These systems can be used in many applications in addition to law enforcement and private
security and are designed specifically to be clipped to an individual’s pocket or other outer clothing. The unit is self-contained
and requires no external battery or storage devices. Current systems offered by competitors are digital based, but generally require
a battery pack and/or storage device to be connected to the camera by wire or other means. We believe that our FirstVU HD product
is more desirable for potential users than our competitors’ offerings because of its video quality, small size, shape and
lightweight characteristics
.
Our FirstVU HD integrates with our in-car video systems through our patented VuLink system
allowing for automatic activation of both systems.
VuLink,
VuVault.net and FleetVU Manager
The
VuLink system provides our law enforcement customers with audio/video surveillance from multiple vantage points in order to more
fully capture an event and it allows the operator to quickly and easily reassemble the various recording devices. The VuLink enables
body cameras and in-car video systems to be automatically or manually activated simultaneously.
VuVault.net
is a cost-effective, fully expandable, law enforcement cloud storage solution powered by Amazon Web Services that provides CJIS
compliant redundant, and security-enhanced storage of all uploaded videos.
FleetVU
Manager is our web-based software for commercial fleet tracking and monitoring that features and manages video captured by our
Video Event Data Recorders of incidents that require attention, such as accidents. This software solution features our cloud-based
web portal that utilizes many of the features of our VUVault.NET law-enforcement cloud-based storage solution.
The
FleetVU Manager, VuVault.net and related cloud storage are part of our strategy to generate more recurring revenue.
Hand-Held
Speed Detection System – Laser Ally
This
system is a lightweight, hand-held speed detection device that uses LIDAR (Light Detection and Ranging) technology rather than
the traditional radar systems, which use sound waves. LIDAR systems are used in high congestion traffic areas that require accuracy
and identification of the subject vehicles. This system uses new technology that prevents the Laser Ally from being detected by
current detectors or jammed by current jamming devices. This system was developed and manufactured by a third-party vendor for
us.
Other
Products
During
the last year, we have focused our research and development efforts to meet the varying needs of our customers, enhance our existing
products and commence development of new products and product categories. Our research and development efforts are intended to
maintain and enhance our competitiveness in the market niche we have carved out, as well as positioning us to compete in diverse
markets outside of law enforcement.
Market
and Industry Overview
Historically,
our primary market has been domestic and international law enforcement agencies. In 2012, we expanded our scope by pursuing the
commercial fleet vehicle and mass transit markets. In the future, given sufficient capital and market opportunity, we may try
to address the markets for private security, homeland security, mass transit, healthcare, general retail, general consumer and
other commercial markets. We have made inroads into certain commercial fleets and the ambulance service provider market.
Law
Enforcement
We
believe that law enforcement already recognizes a valuable use of our various digital audio/video products for the recording of
roadside sobriety tests. Without some form of video or audio recording, court proceedings usually consist of the police officer’s
word against that of the suspect. Records show that conviction rates increase substantially where there is video evidence to back
up officer testimony. Video evidence also helps to protect police departments against frivolous lawsuits.
The
largest source of police video evidence today is in-car video. Unfortunately, some police cars still do not have in-car video,
and in those that do, the camera usually points forward rather than to the side of the road where the sobriety test takes place.
The in-car video is typically of little use for domestic violence investigations, burglary or theft investigations, disorderly
conduct calls or physical assaults. In these cases, the FirstVU HD may provide recorded evidence of the suspect’s actions
and reactions to police intervention.
Additionally,
motorcycle patrolmen rarely have video systems. We have developed the DVM-440 Ultra as a mobile application of our digital video
recording system that can be used by motorcycle police and water patrol.
Crime
scene investigations, including detailed photography, are typically a large part of the budgets of metropolitan police forces.
The FirstVU may record a significant portion of such evidence at a much lower cost for gathering, analyzing and storing data and
evidence.
Commercial
and Other Markets
There
are numerous potential applications for our digital audio/video camera products. We believe that other markets for our digital
video systems, including the derivatives currently being developed, include private investigators, SWAT team members, over-the-road
trucking fleets, airport security, municipal fire departments, and the U.S. military. Other commercial markets for our digital
video systems include real estate appraisers, plumbers and electricians.
Schools
We
believe our products and offerings may be of benefit in kindergarten through twelfth grade school systems. We are currently assessing
our entry into this market through several pilot tests. Preliminary results have been positive and we believe this market represents
a new addressable market for our mobile audio/video recording products in 2017.
Medical
applications
We
believe our products and offerings may be of benefit in hospital and other medical services delivery systems. We are assessing
our entry into this potential market.
Private
Security Companies
There
are thousands of private security agencies in the United States employing a large number of guards. Police forces use video systems
for proof of correct conduct by officers, but private security services usually have no such tool. We believe that the FirstVU
HD is an excellent management tool for these companies to monitor conduct and timing of security rounds. In addition to the FirstVU
HD, the digital video security camera can provide fill-in security when guards have large areas to cover or in areas that do not
have to be monitored around the clock.
Homeland
Security Market
In
addition to the government, U.S. corporations are spending heavily for protection against the potential of terrorist attacks.
Public and private-sector outlays for antiterrorism measures and for protection against other forms of violence are significant.
These are potential markets for our products.
Principal
Executive Offices and Additional Information
Our
principal executive offices are located at 9705 Loiret Boulevard, Lenexa Kansas 66219. Our telephone number is (914) 813-7774.
Our website is located at www.digitalallyinc.com. Information on our website does not constitute part of this prospectus and should
not be relied upon in connection with making any decision with respect to an investment in our securities.
THE
OFFERING
Common
stock offered by us
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940,000
shares
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Common
stock outstanding before this offering
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6,001,731
shares (as more fully described in the notes following this table)
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Prefunded
Warrants offered by us
Common
Stock Purchase Warrant offered by us
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Exercisable
for 60,000 shares of common stock
Exercisable
to purchase 880,000 shares of common stock
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Common
stock to be outstanding after this offering
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6,941,731
shares (as more fully described in the notes following this table)
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7,881,731
shares assuming exercise of the Warrants in full through a cash payment
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Manner
of offering
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Registered
direct offering. See “Plan of Distribution” on page S-32 of this prospectus supplement.
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Use
of proceeds
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We
intend to use the net proceeds from this offering to retire a portion of the $4.0 million principal balance of outstanding
Secured Convertible Debentures (the “Debentures”) and subordinated notes with a principal balance of $700,000
(the “Notes”) and for working capital. See “Use of Proceeds” on page S-25 of this prospectus supplement.
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NASDAQ
Capital Market symbol
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DGLY
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Risk
factors
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Investing
in our securities involves a high degree of risk. See “Risk Factors” beginning on page S-8 of this prospectus
supplement and page 1 of the prospectus.
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The
number of shares of our common stock shown above to be outstanding immediately after this offering is based on 6,001,731 shares
outstanding as of August 18, 2017, and excludes, as of such date:
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409,831
shares of our common stock subject to outstanding options having a weighted average exercise price of $14.65 per share, but
including 871,350 shares of common stock subject to forfeiture pursuant to outstanding non-vested restricted stock awards.;
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86,363
shares of our common stock reserved for future issuance pursuant to our existing stock incentive plans;
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1,939,466
shares of our common stock issuable upon exercise of warrants outstanding as of August 18, 2017 having a weighted average
exercise price of $8.78 per share; and
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●
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63,518
shares of our common stock held as treasury stock.
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RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should consider and read carefully all the risks and uncertainties
described below, together with all the other information contained or incorporated by reference into this prospectus supplement,
prospectus and in any free writing prospectus before deciding to invest in our common stock. If any of the following risks, or
any risk described elsewhere in this prospectus or in the documents incorporated by reference herein, occurs, our business, business
prospects, financial condition, results of operations or cash flows could be materially adversely affected. In any such case,
the trading price of our common stock could decline, and you could lose all or part of your investment. The risks described below
and in the documents incorporated by reference herein are not the only ones facing us. Additional risks not currently known to
us or that we currently deem immaterial may also adversely affect us. This prospectus also contains forward-looking statements,
estimates and projections that involve risks and uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements because of specific factors, including the risks described below and in the documents incorporated
by reference herein.
You
should carefully consider the following risk factors in evaluating our business and us. The factors listed below and in the prospectus
represent certain important factors that we believe could cause our business results to differ. These factors are not intended
to represent a complete list of the general or specific risks that may affect us. It should be recognized that other risks may
be significant, presently or in the future, and the risks set forth below may affect us to a greater extent than indicated. If
any of the following risks occur, our business, financial condition or results of operations could be materially and adversely
affected. You should also consider the other information included in our annual report on Form 10-K for the year ended December
31, 2016 and subsequent quarterly reports filed with the SEC.
We
have incurred losses in recent years.
We
have had net losses for several years and had an accumulated deficit of $46,657,342 at December 31, 2016, which includes our net
losses of $12,710,688 and $12,037,892 for 2016 and 2015, respectively. Additionally, we had a net loss of $4,359,478 for the six
month ended June 30, 2017 compared with a net loss of $5,178,209 in the same period of 2016. We have implemented several initiatives
intended to improve our revenues and reduce our operating costs with a goal of restoring profitability. If we are unsuccessful
in this regard, it will have a material adverse impact on our business, prospects, operating results and financial condition.
We
will need to raise capital in addition to the proceeds of this offering – going concern.
The
$700,000 principal amount of the Notes that we issued in June 2017 matures on September 30, 3017. Additionally, the $4.0 million
principal amount of the Debentures matures in March 2018 unless the Debentures are converted by their holders ($5.00 per share
conversion rate) before maturity. The Notes and Debentures represent current liabilities as of June 30, 2017. We intend to use
part of the proceeds of this offering to retire the Notes and pay a portion of the principal of the Debentures. We will be required
to raise substantial funds to pay the principal balance of the Debentures and provide working capital if operating results do
not improve before the maturity date of the Debentures. Our operating losses and these conditions indicate that there is substantial
doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements
are issued.
We
will need to restore positive operating cash flows and profitability over the next twelve months and/or raise additional capital
to fund operations, accommodate the potential liquidity needs to retire the Debentures at their maturity, meet our payment obligations
and execute our business plan. We intend to raise capital in addition to this offering to meet these needs, including pursuing
a debt or equity offering or a financing transaction involving our intellectual property portfolio. There can be no assurance
that we will be successful in restoring positive cash flows and profitability, or that we can raise additional financing if and
when needed, and obtain it on terms acceptable or favorable to us.
We
do not have any revolving credit facilities and it may be difficult for us to enter into one.
We
have no revolving credit facility to fund our operating needs should it become necessary. It will be difficult to obtain an institutional
line of credit facility given our recent operating losses and the current banking environment, which may adversely affect our
ability to finance our business, grow or be profitable. Further, even if we could obtain a new credit facility, in all likelihood
it would not be on terms favorable to us.
If
we are unable to manage our current business activities, our prospects may be limited and our future profitability may be adversely
affected.
We
experienced a decline in our operating results from 2009 to 2016 and to date in 2017. Our revenues have been unpredictable, which
poses significant burdens on us to be proactive in managing production, personnel levels and related costs. We will need to improve
our revenues, operations, financial and other systems to manage our business effectively, and any failure to do so may lead to
inefficiencies and redundancies which reduce our prospects to return to profitability.
There
are risks related to dealing with domestic governmental entities as customers.
One
of the principal target markets for our products is the law enforcement community. In this market, the sale of products will be
subject to budget constraints of governmental agencies purchasing these products, which could result in a significant reduction
in our anticipated revenues. Such governmental agencies have experienced budgetary pressures because of the recent recession and
its impact on local sales, property and income taxes that provide funding for purchasing our products. These agencies also may
experience political pressure that dictates the way they spend money. Thus, even if an agency wants to acquire our products, it
may be unable to purchase them due to budgetary or political constraints, even if such agencies have the necessary funds, we may
experience delays and relatively long sales cycles due to their internal decision making policies and procedures.
There
are risks related to dealing with foreign governmental entities as customers.
We
target the law enforcement community in foreign countries for the sale of many of our products. While foreign countries vary,
generally the sale of our products will be subject to political and budgetary constraints of foreign governments and agencies
purchasing these products, which could result in a significant reduction in our anticipated revenues. Many foreign governments
are experiencing budgetary pressures because of the recent global recession and its impact on taxes and tariffs that in many cases
provide funding for purchasing our products. Law enforcement agencies within these countries also may experience political pressure
that dictates the way they spend money. Thus, even if a foreign country or its law enforcement agencies want to acquire our products,
it may be unable to purchase them due to budgetary or political constraints. We cannot assure investors that such governmental
agencies will have the necessary funds to purchase our products even though they may want to do so. Further, even if such agencies
have the necessary funds, we may experience delays and relatively long sales cycles due to their internal decision making policies
and procedures.
International
law enforcement and other agencies that may consider using our products must analyze a wide range of issues before committing
to purchase products like ours, including training costs, product reliability and budgetary constraints. The length of our sales
cycle may range from a few months to a year or more. We may incur substantial selling costs and expend significant effort in connection
with the evaluation of our products by potential customers before they place an order. Initial orders by foreign governments and
agencies typically are for a small number of units that are used to evaluate the products. If these potential customers do not
purchase our products, we will have expended significant resources and receive no revenue in return. In addition, we may be selected
as the vendor of choice by these foreign customers but never receive the funding necessary to purchase our product due to political
or economic reasons.
We
are marketing our DVM-250, DVM-250 Plus event recorder and FirstVu HD products to commercial customers, which is a relatively
new sales channel for us and we may experience problems in gaining acceptance.
The
principal target commercial market for our event recorder products is commercial fleet operators, such as taxi cabs, limousine
services, transit buses, ambulance services and a variety of delivery services. In addition, we are marketing our First HD to
commercial customers. These are relatively new sales channels for us and we may experience difficulty gaining acceptance of our
other products by the targeted customers. Our sales of such products will be subject to budget constraints of both the large and
small prospective customers, which could result in a significant reduction in our anticipated revenues. Certain of such companies
have experienced budgetary and financial pressures because of the recent recession and slow recovery and their impact on their
revenues, all of which may negatively impact their ability to purchase our products. Thus, even if prospective customers want
to acquire our products, they may be unable to do so because of such factors. Further, even if such companies have the necessary
funds, we may experience delays and relatively long sales cycles due to their internal decision making policies and procedures.
We
are operating in a developing market and there is uncertainty as to market acceptance of our technology and products.
The
markets for our new and enhanced products and technology are developing and rapidly evolving. They are characterized by an increasing
number of market entrants who have developed or are developing a wide variety of products and technologies, a number of which
offer certain of the features that our products offer. Because of these factors, demand and market acceptance for new products
are subject to a high level of uncertainty. There can be no assurance that our technology and products will become widely accepted.
It is also difficult to predict with any assurance the future growth rate, if any, and size of the market. If a substantial market
fails to develop, develops more slowly than expected or becomes saturated with competitors or if our products do not achieve or
continue to achieve market acceptance, our business, operating results and financial condition will be materially and adversely
affected.
Our
technology may also be marketed and licensed to device manufacturers for inclusion in the products and equipment they market and
sell as an embedded solution. As with other new products and technologies designed to enhance or replace existing products or
technologies or change product designs, these potential partners may be reluctant to integrate our digital video recording technology
into their systems unless the technology and products are proven to be both reliable and available at a competitive price. Even
assuming product acceptance, our potential partners may be required to redesign their systems to effectively use our digital video
recording technology. The time and costs necessary for such redesign could delay or prevent market acceptance of our technology
and products. A lack of, or delay in, market acceptance of our digital video recording technology and products would adversely
affect our operations. There can be no assurance that we will be able to market our technology and products successfully or that
any of our technology or products will be accepted in the marketplace.
We
expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return.
Generally,
law enforcement and other agencies and commercial fleet and mass transit operators that may consider using our products must analyze
a wide range of issues before committing to purchase products like ours, including training costs, product reliability and budgetary
constraints. The length of our sales cycle may range from several months to a year or more. We may incur substantial selling costs
and expend significant effort in connection with the evaluation of our products by potential customers before they place an order.
Initial orders by agencies typically are for a small number of units that are used to evaluate the products. If these potential
customers do not purchase our products, we will have expended significant resources and have received no revenue in return.
Our
market is characterized by new products and rapid technological change.
The
market for our products is characterized by rapidly changing technology and frequent new product introductions. Our future success
will depend in part on our ability to enhance our existing technologies and products and to introduce new products and technologies
to meet changing customer requirements. We are currently devoting, and intend to continue to devote, significant resources toward
the development of new digital video recording technology and products both as stand-alone products and embedded solutions in
third party products and systems. There can be no assurance that we will successfully complete the development of these technologies
and related products in a timely fashion or that our current or future products will satisfy the needs of the digital video recording
market. There can also be no assurance that digital video recording products and technologies developed by others will not adversely
affect our competitive position or render our products or technologies non-competitive or obsolete.
We
depend on sales from our in-car video products and body-worn cameras and if these products become obsolete or not widely accepted,
our growth prospects will be diminished.
We
derived our revenues in 2016 predominantly from sales of our in-car video systems, including the DVM-800, our largest selling
product, and the FirstVU HD body-worn camera, our second largest selling product. We expect to continue to depend on sales of
these products during 2017. A decrease in the prices of, or the demand for our in-car video products, or the failure to achieve
broad market acceptance of our new product offerings, would significantly harm our growth prospects, operating results and financial
condition.
We
substantially depend on our research and development activities to design new products and upgrades to existing products and if
these products are not widely accepted, or we encounter difficulties and delays in launching these new products, our growth prospects
will be diminished.
We
have a number of active research and development projects underway that are intended to launch new products or upgrades to existing
products. We may incur substantial costs and/or delays in completion of these activities that may not result in viable products
or may not be received well by our potential customers. We incurred $3,186,137 and $2,980,807 in research and development expenses
during the years ended December 31, 2016 and 2015, respectively, which represent a substantial expense in relation to our total
revenues and net losses. If we are unsuccessful in bringing these products from the engineering prototype phase to commercial
production, we could incur additional expenses (in addition to those already spent) without receiving revenues from the new products.
Also, these new products may fail to achieve broad market acceptance and may not generate revenue to cover expenses incurred to
design, develop, produce and market the new product offerings. Substantial delays in the launch of one or more products could
negatively impact our revenues and increase our costs, which could significantly harm our growth prospects, operating results
and financial condition.
If
we are unable to compete in our market, you may lose all or part of your investment.
The
law enforcement and security surveillance markets are extremely competitive. Competitive factors in these industries include ease
of use, quality, portability, versatility, reliability, accuracy and cost. There are direct companies with competitive technology
and products in the law enforcement and surveillance markets for all our products and those we have in development. Many of these
competitors have significant advantages over us, including greater financial, technical, marketing and manufacturing resources,
more extensive distribution channels, larger customer bases and faster response times to adapt new or emerging technologies and
changes in customer requirements. Our primary competitors include L-3 Mobile-Vision, Inc., Coban Technologies, Inc., Watchguard,
Kustom Signals, Panasonic System Communications Company, International Police Technologies, Inc. and a number of other competitors
who sell or may in the future sell in-car video systems to law enforcement agencies. Our primary competitors in the body-worn
camera market include TASER International, Inc. (“Taser”), Reveal Media and VieVU, Inc. We face similar and intense
competitive factors for our event recorders in the mass transit markets as we do in the law enforcement and security surveillance
markets. We will also compete with any company making surveillance devices for commercial use. Many of our competitors have greater
financial, technical marketing, and manufacturing resources than we do. Our primary competitors in the commercial fleet sector
include Lytx, Inc. (previously DriveCam, Inc.) and SmartDrive Systems.
There
can be no assurance that we will be able to compete successfully in these markets. Further, there can be no assurance that new
and existing companies will not enter the law enforcement and security surveillance markets in the future.
Although
we believe that our products will be distinguishable from those of our competitors based on their technological features and functionality
at an attractive value proposition, there can be no assurance that we will be able to penetrate any of our anticipated competitors’
portions of the market. Many of our anticipated competitors may have existing relationships with equipment or device manufacturers
that may impede our ability to market our technology to those potential customers and build market share. There can be no assurance
that we will be able to compete successfully against current or future competitors or that competitive pressures will not have
a material adverse effect on our business, operating results and financial condition. If we are not successful in competing against
our current and future competitors, you could lose your entire investment. See “Description of Business - Competition.”
Defects
in our products could impair our ability to sell our products or could result in litigation and other significant costs.
Any
significant defects in our products may result in, among other things, delay in time-to-market, loss of market acceptance and
sales of our products, diversion of development resources, and injury to our reputation, or increased warranty costs. Because
our products are technologically complex, they may contain defects that cannot be detected prior to shipment. These defects could
harm our reputation and impair our ability to sell our products. The costs we may incur in correcting any product defects may
be substantial and could decrease our profit margins. In 2016 and 2015 we had certain product quality issues with the FirstVU
HD, which adversely affected our revenues and operating results.
In
addition, errors, defects or other performance problems could result in financial or other damages to our customers, which could
result in litigation. Product liability litigation, even if we prevail, would be time consuming and costly to defend. Our product
liability insurance may not be adequate to cover claims. Our product liability insurance coverage per occurrence is $1,000,000,
with a $2,000,000 aggregate for our general business liability coverage and an additional $1,000,000 per occurrence. Our excess
or umbrella liability coverage per occurrence and in aggregate is $5,000,000.
Product
defects can be caused by design errors, programming bugs, or defects in component parts or raw materials. This is common to every
product manufactured which is based on modern electronic and computer technology. Because of the extreme complexity of digital
in-car video systems, one of the key concerns is operating software robustness. Some of the software modules are provided to us
by outside vendors under license agreements, while other portions are developed by our own software engineers. As with any software-dependent
product, “bugs” can occur, even with rigorous testing before release of the product. The software included in our
digital video rear view mirror products is designed to be “field upgradeable” so that changes or fixes can be made
by the end user by downloading new software through the internet. We intend to incorporate this technology into any future products
as well, providing a quick resolution to potential software issues that may arise over time.
As
with all electronic devices, hardware issues can arise from many sources. The component electronic parts we utilize come from
many sources around the world. We attempt to mitigate the possibility of shipping defective products by fully testing sub-assemblies
and thoroughly testing assembled units before they are shipped out to our customers. Because of the nature and complexity of some
of the electronic components used, such as microprocessor chips, memory systems, and zoom video camera modules, it is not technically
or financially realistic to attempt to test every single aspect of every single component and their potential interactions. By
using components from reputable and reliable sources, and by using professional engineering, assembly, and testing methods, we
seek to limit the possibility of defects slipping through. In addition to internal testing, we now have thousands of units in
the hands of law enforcement departments and in use every day. Over the past years of field use we have addressed a number of
subtle issues and made refinements requested by the end-user.
We
are dependent on key personnel.
Our
success will be largely dependent upon the efforts of our executive officers, Stanton E. Ross and Thomas J. Heckman. We do not
have employment agreements with Messrs. Ross or Heckman. The loss of the services of these individuals could have a material adverse
effect on our business and prospects. There can be no assurance that we will be able to retain the services of such individuals
in the future. We have not obtained key-man life insurance policies on these individuals. We are also dependent to a substantial
degree on our technical, research and development staff. Our success will be dependent upon our ability to hire and retain additional
qualified technical, research, management, marketing and financial personnel. We will compete with other companies with greater
financial and other resources for such personnel. Although we have not had trouble in attracting qualified personnel to date,
there can be no assurance that we will be able to retain our present personnel or acquire additional qualified personnel as and
when needed.
We
are dependent on manufacturers and suppliers.
We
purchase, and intend to continue to purchase, substantially all the components for our products and some entire products, from
a limited number of manufacturers and suppliers, most of whom are located outside the United States. Our internal process is principally
to assemble the various components and subassemblies manufactured by our suppliers and test the assembled product prior to shipping
to our customers. We do not intend to directly manufacture any of the equipment or parts to be used in our products. Our reliance
upon outside manufacturers and suppliers, including foreign suppliers, is expected to continue, increase in scope and involves
several risks, including limited control over the availability of components, and products themselves and related delivery schedules,
pricing and product quality. We may experience delays, additional expenses and lost sales if we are required to locate and qualify
alternative manufacturers and suppliers.
A
few of the semiconductor chip components for our products are produced by a very small number of specialized manufacturers. Currently,
we purchase one essential semiconductor chip from a single manufacturer. While we believe that there are alternative sources of
supply, if, for any reason, we are precluded from obtaining such a semiconductor chip from this manufacturer, we may experience
long delays in product delivery due to the difficulty and complexity involved in producing the required component and we may also
be required to pay higher costs for our components.
While
we do the final assembly, testing, packaging, and shipment of certain of our products in-house, a number of our component parts
are manufactured by subcontractors. These subcontractors include: raw circuit board manufacturers, circuit board assembly houses,
injection plastic molders, metal parts fabricators, and other custom component providers. While we are dependent upon these subcontractors
to the extent that they are producing custom subassemblies and components necessary for manufacturing our products, we still own
the designs and intellectual property involved. This means that the failure of any one contractor to perform may cause delays
in production. However, we can mitigate potential interruptions by maintaining “buffer stocks” of critical parts and
subassemblies and by using multiple sources for critical components. We also can move our subcontracting to alternate providers.
Being forced to use a different subcontractor could cause production interruptions ranging from negligible, such as a few weeks,
to very costly, such as four to six months. Further, the failure of a foreign manufacturer to deliver products to us timely, in
sufficient quantities and with the requisite quality would have a material adverse impact on our business, operations and financial
condition.
The
only components that would require a complete redesign of our digital video electronics package are the chips manufactured by
Texas Instruments. While there are competitive products available, each chip has unique characteristics that would require extensive
tailoring of product designs to use it. The Texas Instrument chip is the heart of our video processing system. If Texas Instruments
became unwilling or unable to provide us with these chips, we would be forced to redesign our digital video encoder and decoder
systems. Such a complete redesign could take substantial time (over six months) to complete. We attempt to mitigate the potential
for interruption by maintaining continuous stocks of these chips to support several months’ worth of production. In addition,
we regularly check on the end-of-life status of these parts to make sure that we will know well in advance of any decisions by
Texas Instruments to discontinue these parts. There are other semiconductors that are integral to our product design and which
could cause delays if discontinued, but not to the same scale as the Texas Instrument chips.
We
are uncertain of our ability to protect technology through patents.
Our
ability to compete effectively will depend on our success in protecting our proprietary technology, both in the United States
and abroad. We have filed for patent protection in the United States and certain other countries to cover certain design aspects
of our products. We license the critical technology on which our products are based from Sasken-Ingenient, Inc., and Lead Technologies
pursuant to license agreements. However, the technology licensed from these parties is critical because it is the basis of our
current product design. We may choose to use other video encoding and decoding technology in future products, thus lessening our
dependence on our licenses with these companies.
Some
of these patent applications are still under review by the U.S. Patent Office and, therefore, we have not yet been issued all
the patents that we applied for in the United States. No assurance can be given that any patents relating to our existing technology
will be issued from the United States or any foreign patent offices, that we will receive any patents in the future based on our
continued development of our technology, or that our patent protection within and/or outside of the United States will be sufficient
to deter others, legally or otherwise, from developing or marketing competitive products utilizing our technologies.
If
our patents were to be denied as filed, we would seek to obtain different patents for other parts of our technology. If our main
patent, which relates to the placement of the in-car video system in a rear-view mirror, is denied, it could potentially allow
our competitors to build very similar devices. However, we believe that very few of our competitors would be capable of this because
of the level of technical sophistication and level of miniaturization required. Even if we obtain patents, there can be no assurance
that they will be enforceable to prevent others from developing and marketing competitive products or methods. If we bring an
infringement action relating to any future patents, it may require the diversion of substantial funds from our operations and
may require management to expend efforts that might otherwise be devoted to our operations. Furthermore, there can be no assurance
that we will be successful in enforcing our patent rights.
Further,
if any patents are issued there can be no assurance that patent infringement claims in the United States or in other countries
will not be asserted against us by a competitor or others, or if asserted, that we will be successful in defending against such
claims. If one of our products is adjudged to infringe patents of others with the likely consequence of a damage award, we may
be enjoined from using and selling such product or be required to obtain a royalty-bearing license, if available on acceptable
terms. Alternatively, if a license is not offered, we might be required, if possible, to redesign those aspects of the product
held to infringe to avoid infringement liability. Any redesign efforts we undertake might be expensive, could delay the introduction
or the re-introduction of our products into certain markets, or may be so significant as to be impractical.
We
are involved in litigation relating to our intellectual property.
We
are subject to various legal proceedings arising from normal business operations. Although there can be no assurances, based on
the information currently available, management believes that it is probable that the ultimate outcome of each of the actions
will not have a material adverse effect on our consolidated financial statements. However, an adverse outcome in certain of the
actions could have a material adverse effect on our financial results in the period in which it is recorded.
Axon
Enterprise, Inc. – (Formerly Taser International, Inc.)
. The Company owns U.S. Patent No. 8,781,292 (the “ ‘292
Patent”), which is directed to a system that determines when a recording device, such as a law enforcement officer’s
body camera or in-car video recorder, begins recording and automatically instructs other recording devices to begin recording.
The technology described in the ‘292 Patent is incorporated in the Company’s VuLink product.
The
Company received notice in April 2015 that Taser International, Inc., now known as Axon Enterprises, Inc. (“Axon”),
had commenced an action in the USPTO for a re-examination of the ‘292 Patent. A re-examination is essentially a request
that the USPTO review whether the patent should have issued in its present form in view of the “prior art,” e.g.,
other patents in the same technology field. The prior art used by Axon was from an unrelated third party and was not the result
of any of Axon’s own research and development efforts.
On
January 14, 2016 the USPTO ultimately rejected Axon’s efforts and confirmed the validity of the ‘292 Patent with 59
claims covering various aspects of the Company’s auto-activation technology. On February 2, 2016 the USPTO issued another
patent relating to the Company’s auto-activation technology for law enforcement cameras. U.S. Patent No. 9,253,452 (the
“ ‘452 Patent”) generally covers the automatic activation and coordination of multiple recording devices in
response to a triggering event, such as a law enforcement officer activating the light bar on the vehicle.
The
Company filed suit on January 15, 2016 in the U.S. District Court for the District of Kansas (Case No: 2:16-cv-02032) against
Axon, alleging willful patent infringement against Axon’s body camera product line. The Company later added the ‘452
Patent to the suit and is seeking both monetary damages and a permanent injunction against Axon for infringement of both the ‘452
and ‘292 Patents.
In
addition to the infringement claims, the Company added a new set of claims to the lawsuit alleging that Axon conspired to keep
the Company out of the marketplace by engaging in improper, unethical, and unfair competition. The amended lawsuit alleges Axon
bribed officials and otherwise conspired to secure no-bid contracts for its products in violation of both state law and federal
antitrust law. The Company’s lawsuit also seeks monetary and injunctive relief, including treble damages, for these alleged
violations.
Axon
filed an answer which denied the patent infringement allegations on April 1, 2016. In addition, Axon filed a motion to dismiss
all allegations in the complaint on March 4, 2016 for which the Company filed an amended complaint on March 18, 2016 to address
certain technical deficiencies in the pleadings. Axon amended and renewed its motion to seek dismissal of the allegations that
it had bribed officials and otherwise conspired to secure no-bid contracts for its products in violation of both state law and
federal antitrust law on April 1, 2016. Formal discovery commenced on April 12, 2016 with respect to the patent related claims.
In January 2017, the Court granted Axon’s motion to dismiss the portion of the lawsuit regarding claims that it had bribed
officials and otherwise conspired to secure no-bid contracts for its products in violation of both state law and federal antitrust
law. The Company has appealed this decision to the United States Court of Appeals for the Federal Circuit and is awaiting its
decision.
In
December 2016, Axon announced that it had commenced an action in the USPTO for
inter partes review
(“IPR”)
of the Company’s ‘292 Patent. Previously Axon had attempted to invalidate the ‘292 Patent through a re-examination
procedure at the USPTO. Axon is again attempting through its recently filed petition to convince the USPTO that Digital Ally’s
patents lack patentability. Axon subsequently filed another action for an IPR against the ‘292 Patent and two more petitions
against the ‘452 Patent. The USPTO rejected one of Axon’s requests on the ‘292 Patent and instituted an investigation
of the other petition. As for the ‘452 Patent, the court rejected both of Axon’s requests on the petition challenging
the claims at issue in the lawsuit. Axon is now statutorily precluded from filing any more IPR petitions against either the ‘292
or ‘452 Patents.
The
District Court litigation in Kansas has been stayed since the filing of the petitions for IPR, The Court, however, requested an
update on the status of the petitions and the Company has provided such an update after the decision was rendered which denied
the final ‘452 Patent petition. Because both of Axon’s petitions for an IPR on the ‘452 Patent that related
to the claims in the lawsuit were denied, the Company is seeking to lift the stay and proceed with the lawsuit to a trial where
the question of infringement and damages can be addressed. In order to expedite the case, clarify the issues for the Court, and
remove any remaining hurdles impeding a trial of this matter, the Company will remove the ‘292 Patent from its case against
Axon. This will render moot Axon’s ‘292 Patent IPR for purposes of the litigation and the stay. Accordingly, once
the ‘292 Patent has been dismissed from the litigation, the Company believes there will be no reason to maintain the stay
and an expedited schedule for trial may be set. Because the ‘292 Patent allegations are directed only to the SPPM, a small
component of Axon’s body camera business, the dismissal will allow the Company to focus its case on the ‘452 Patent,
which covers an overwhelming majority of Axon’s body camera sales incorporating Signal technology.
Enforcement
Video, LLC d/b/a WatchGuard Video
. On May 27, 2016 the Company filed suit against Enforcement Video, LLC d/b/a WatchGuard
Video (“WatchGuard”), (Case No. 2:16-cv-02349-JTM-JPO) alleging patent infringement based on WatchGuard’s VISTA
Wifi and 4RE In-Car product lines.
The
USPTO has granted multiple patents to the Company with claims covering numerous features, such as automatically activating all
deployed cameras in response to the activation of just one camera. Additionally, Digital Ally’s patent claims cover automatic
coordination as well as digital synchronization between multiple recording devices. Digital Ally also has patent coverage directed
to the coordination between a multi-camera system and an officer’s smartphone, which allows an officer to more readily assess
an event on the scene while an event is taking place or immediately after it has occurred.
The
Company’s lawsuit alleges that WatchGuard incorporated this patented technology into its VISTA Wifi and 4RE In-Car product
lines without its permission. Specifically, Digital Ally is accusing WatchGuard of infringing three patents: the ‘292 and
‘452 Patents and U.S. Patent No. 9,325,950 (the “ ‘950 Patent”). The Company is aggressively challenging
WatchGuard’s infringing conduct, seeking both monetary damages, as well as seeking a permanent injunction preventing WatchGuard
from continuing to sell its VISTA Wifi and 4RE In-Car product lines using Digital Ally’s own technology to compete against
it. On May 8, 2017, Watchguard filed a petition seeking IPR of the ‘950 Patent. The Company will vigorously oppose that
petition. The PTAB will not issue a decision on whether to institute until approximately November 2017. The lawsuit has been stayed
pending a decision from the USPTO on whether to institute that petition.
Utility
Associates, Inc.
On October 25, 2013, the Company filed a complaint in the United States District Court for the District of
Kansas (
2:13-cv-02550-SAC)
to eliminate threats by a competitor, Utility Associates,
Inc. (“Utility”), of alleged patent infringement regarding U.S. Patent No. 6,831,556 (the “ ‘556 Patent”).
Specifically, the lawsuit seeks a declaration that the Company’s mobile video surveillance systems do not infringe any claim
of the ‘556 Patent. The Company became aware that Utility had mailed letters to current and prospective purchasers of its
mobile video surveillance systems threatening that the use of such systems purchased from third parties not licensed to the ‘556
Patent would create liability for them for patent infringement. The Company rejected Utility’s assertion and is vigorously
defending the right of end-users to purchase such systems from providers other than Utility. The United States District Court
for the District of Kansas dismissed the lawsuit because it decided that Kansas was not the proper jurisdictional forum for the
dispute. The District Court’s decision was not a ruling on the merits of the case. The Company appealed the decision and
the Federal Circuit affirmed the District Court’s previous decision.
In
addition, the Company began proceedings to invalidate the ‘556 Patent through a request for IPR of the ‘556 patent
at the USPTO. On July 27, 2015, the USPTO invalidated key claims in Utility’s ‘556 Patent. The Final Decision from
the USPTO significantly curtails Utility’s ability to threaten law enforcement agencies, municipalities, and others with
infringement of the ‘556 Patent. Utility appealed this decision to the United States Court of Appeals for the Federal Circuit.
The United States Court of Appeals for the Federal Circuit denied Utility’s appeal and therefore confirmed the ruling of
the USPTO. This denial of Utility’s appeal finalized the USPTO’s ruling in Digital’s favor and the matter is
now concluded.
On
June 6, 2014, the Company filed an Unfair Competition lawsuit against Utility in the United States District Court for the District
of Kansas. In the lawsuit, it contends that Utility has defamed the Company and illegally interfered with its contracts, customer
relationships and business expectancies by falsely asserting to its customers and others that its products violate the ‘556
Patent, of which Utility claims to be the holder.
The
suit also includes claims against Utility for tortious interference with contract and violation of the Kansas Uniform Trade Secrets
Act (KUSTA), arising out of Utility’s employment of the Company’s employees, in violation of that employee’s
Non-Competition and Confidentiality agreements with the Company. In addition to damages, the Company seeks temporary, preliminary,
and permanent injunctive relief, prohibiting Utility from, among other things, continuing to threaten or otherwise interfere with
the Company’s customers. On March 4, 2015, an initial hearing was held upon the Company’s request for injunctive relief.
Based
upon facts revealed at the March 4, 2015 hearing, on March 16, 2015, the Company sought leave to amend its Complaint in the Kansas
suit to assert additional claims against Utility. Those new claims include claims of actual or attempted monopolization, in violation
of § 2 of the Sherman Act, claims arising under a new Georgia statute that prohibits threats of patent infringement in “bad
faith,” and additional claims of unfair competition/false advertising in violation of § 63(a) of the Lanham Act. As
these statutes expressly provide, the Company will seek treble damages, punitive damages and attorneys’ fees as well as
injunctive relief. The Court concluded its hearing on April 22, 2015, and allowed the Company leave to amend its complaint, but
denied its preliminary injunction. The discovery stage of the lawsuit expired in May 2016. Utility filed a Motion for Summary
Judgment and the Company filed a Motion for Partial Summary Judgment. On March 30, 2017, the Court entered its order granting
Utility’s motion and denying the Company’s motion for summary judgment in their entireties. The Company believes the
District Court made several errors when ruling on the motions for summary judgment in light of the USPTO’s final decision
issued on July 27, 2015 and the various facts and admissions already presented to such Court and is filing an appeal to the United
States Court of Appeals for the Tenth Circuit.
On
September 13, 2014, Utility filed suit in the United States District Court for the Northern District of Georgia against the Company
alleging infringement of the ‘556 Patent. The suit was served on the Company on September 20, 2014. As alleged in the Company’s
first filed lawsuit described above, the Company believes that the ‘556 Patent is both invalid and not infringed. Further,
the USPTO has issued its final decision invalidating 23 of the 25 claims asserted in the ‘556 Patent, as noted above. The
Company believes that the suit filed by Utility is without merit and is vigorously defending the claims asserted against the Company.
An adverse resolution of the foregoing litigation or patent proceedings could have a material adverse effect on the Company’s
business, prospects, results of operations, financial condition, and liquidity. The Court stayed all proceedings with respect
to this lawsuit pending the outcome of the patent review performed by the USPTO and the appellate court. Based on the USPTO’s
final decision to invalidate substantially all claims contained in the ‘556 Patent and the United States Court of Appeals
for the Federal Circuit full denial of Utility’s appeal, the Company intends to file for summary judgment in its favor if
Utility does not request outright dismissal.
On
October 25, 2013, the Company filed a complaint in the United States District Court for the District of Kansas (
2:13-cv-02550-SAC)
to eliminate threats by a competitor, Utility Associates, Inc. (“Utility”), of alleged patent infringement
regarding U.S. Patent No. 6,831,556 (the “ ‘556 Patent”). Specifically, the lawsuit seeks a declaration that
the Company’s mobile video surveillance systems do not infringe any claim of the ‘556 Patent. The Company became aware
that Utility had mailed letters to current and prospective purchasers of its mobile video surveillance systems threatening that
the use of such systems purchased from third parties not licensed to the ‘556 Patent would create liability for them for
patent infringement. The Company rejected Utility’s assertion and is vigorously defending the right of end-users to purchase
such systems from providers other than Utility. The United States District Court for the District of Kansas dismissed the lawsuit
because it decided that Kansas was not the proper jurisdictional forum for the dispute. The District Court’s decision was
not a ruling on the merits of the case. The Company appealed the decision and the Federal Circuit affirmed the District Court’s
previous decision.
In
addition, the Company began proceedings to invalidate the ‘556 Patent through a request for
inter partes review
of
the ‘556 patent at the United States Patent and Trademark Office (“USPTO”). On July 27, 2015, the USPTO invalidated
key claims in Utility’s ‘556 Patent. The Final Decision from the USPTO significantly curtails Utility’s ability
to threaten law enforcement agencies, municipalities, and others with infringement of the ‘556 Patent. Utility appealed
this decision to the United States Court of Appeals for the Federal Circuit. The United States Court of Appeals for the Federal
Circuit denied Utility’s appeal and therefore confirmed the ruling of the USPTO. This denial of Utility’s appeal finalized
the USPTO’s ruling in Digital’s favor and the matter is now concluded.
On
June 6, 2014 the Company filed an Unfair Competition lawsuit against Utility Associates, Inc. (“Utility”) in the United
States District Court for the District of Kansas. In the lawsuit, it contends that Utility has defamed the Company and illegally
interfered with its contracts, customer relationships and business expectancies by falsely asserting to its customers and others
that its products violate the ‘556 Patent, of which Utility claims to be the holder.
The
suit also includes claims against Utility for tortious interference with contract and violation of the Kansas Uniform Trade Secrets
Act (KUSTA), arising out of Utility’s employment of the Company’s employees, in violation of that employee’s
Non-Competition and Confidentiality agreements with the Company. In addition to damages, the Company seeks temporary, preliminary,
and permanent injunctive relief, prohibiting Utility from, among other things, continuing to threaten or otherwise interfere with
the Company’s customers. On March 4, 2015, an initial hearing was held upon the Company’s request for injunctive relief.
Based
upon facts revealed at the March 4, 2015 hearing, on March 16, 2015, the Company sought leave to amend its Complaint in the Kansas
suit to assert additional claims against Utility. Those new claims include claims of actual or attempted monopolization, in violation
of § 2 of the Sherman Act, claims arising under a new Georgia statute that prohibits threats of patent infringement in “bad
faith,” and additional claims of unfair competition/false advertising in violation of § 63(a) of the Lanham Act. As
these statutes expressly provide, the Company will seek treble damages, punitive damages and attorneys’ fees as well as
injunctive relief. The Court concluded its hearing on April 22, 2015, and allowed the Company leave to amend its complaint, but
denied its preliminary injunction. The discovery stage of the lawsuit expired in May 2016. Utility filed a Motion for Summary
Judgment and the Company filed a Motion for Partial Summary Judgment. On March 30, 2017, the Court entered its order granting
Utility’s motion and denying the Company’s motion for summary judgment in their entireties. The Company believes the
District Court made several errors when ruling on the motions for summary judgment in light of the USPTO’s final decision
issued on July 27, 2015 and the various facts and admissions already presented to such Court and is filing an appeal to the United
States Court of Appeals for the Tenth Circuit.
On
September 13, 2014, Utility filed suit in the United States District Court for the Northern District of Georgia against the Company
alleging infringement of the ‘556 Patent. The suit was served on the Company on September 20, 2014. As alleged in the Company’s
first filed lawsuit described above, the Company believes that the ‘556 Patent is both invalid and not infringed. Further,
the USPTO has issued its final decision invalidating 23 of the 25 claims asserted in the ‘556 Patent, as noted above. The
Company believes that the suit filed by Utility is without merit and is vigorously defending the claims asserted against the Company.
An adverse resolution of the foregoing litigation or patent proceedings could have a material adverse effect on the Company’s
business, prospects, results of operations, financial condition, and liquidity. The Court stayed all proceedings with respect
to this lawsuit pending the outcome of the patent review performed by the USPTO and the appellate court. Based on the USPTO’s
final decision to invalidate substantially all claims contained in the ‘556 Patent and the United States Court of Appeals
for the Federal Circuit full denial of Utility’s appeal, the Company intends to file for summary judgment in its favor if
Utility does not request outright dismissal.
The
Company received notice in April 2015 that Taser International, Inc.(“Taser”), one of its competitors, had commenced
an action in the USPTO for a re-examination of its U.S. Patent No. 8,781,292 (the “ ‘292 Patent”). Taser changed
its name to Axon Enterprise, Inc. (“Axon”) effective April 5, 2017. A re-examination is essentially a request that
the USPTO review whether the patent should have issued in its present form in view of the “prior art,” e.g., other
patents in the same technology field. The prior art Axon used to request the re-examination is a patent application that never
issued into a patent was assigned to an unrelated third party and was not the result of any of Axon’s own research and development
efforts.
The
Company is also involved as a plaintiff and defendant in ordinary, routine litigation and administrative proceedings incidental
to its business from time to time, including customer collections, vendor and employment-related matters. It believes the likely
outcome of any other pending cases and proceedings will not be material to its business or financial condition.
We
are uncertain of our ability to protect our proprietary technology and information.
In
addition to seeking patent protection, we rely on trade secrets, know-how and continuing technological advancement to seek to
achieve and thereafter maintain a competitive advantage. Although we have entered into or intend to enter into confidentiality
and invention agreements with our employees, consultants and advisors, no assurance can be given that such agreements will be
honored or that we will be able to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, no assurance
can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets and know-how.
Foreign
currency fluctuations may affect our competitiveness and sales in foreign markets.
The
relative change in currency values creates fluctuations in our product pricing for potential international customers. These changes
in foreign end-user costs may result in lost orders and reduce the competitiveness of our products in certain foreign markets.
These changes may also negatively affect the financial condition of some existing or potential foreign customers and reduce or
eliminate their future orders of our products. We also import selected components which are used in the manufacturing of some
of our products. Although our purchase orders are in the United States dollar, weakness in the United States dollar could lead
to price increases for the components.
Risks
related to our license arrangements.
We
have licensing agreements with Sasken and Lead regarding certain software used as the platform for the proprietary software we
have developed for use in our products. These licensing agreements have specified terms and are renewable on an annual basis unless
both parties determine not to renew them and provided the parties are in compliance with the agreements. If we fail to make the
payments under these licenses or if these licenses are not renewed for any reason, it would cause us significant time and expense
to redevelop our software on a different software platform, which would have a material adverse effect on our business, operating
results and financial condition.
Our
revenues and operating results may fluctuate unexpectedly from quarter to quarter, which may cause our stock price to decline.
Our
revenues and operating results have varied significantly in the past and may continue to fluctuate significantly in the future
due to various factors that are both in and outside our control. Thus, we believe that period-to-period comparisons of our operating
results may not be meaningful in the short-term, and our performance in a particular period may not be indicative of our performance
in any future period.
Our
management team and a few larger stockholders have sufficient voting power to make corporate governance decisions that could have
significant effect on us and the other stockholders.
Our
officers, directors and principal stockholders (greater than five percent stockholders) together control approximately 19.5%,
including options vested or to vest within sixty days, of our outstanding common stock at December 31, 2016. Thus, these stockholders,
if they act together, will be able to exert a significant degree of influence over our management and affairs and over matters
requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition,
this concentration of ownership may delay or prevent a change in our control and might affect the market price of our common stock,
even when a change in control may be in the best interest of all stockholders. Furthermore, the interests of this concentration
of ownership may not always coincide with our interests or the interests of other stockholders. Accordingly, these stockholders
could cause us to enter into transactions or agreements that we would not otherwise consider.
We
are a party to several lawsuits both as a plaintiff and as a defendant in which we may ultimately not prevail resulting in losses
and may cause our stock price to decline.
We
are involved as a plaintiff and defendant in routine litigation and administrative proceedings incidental to our business from
time to time, including customer collections, vendor and employment-related matters. See
“Litigation.”
We believe
that the likely outcome of any other pending cases and proceedings will not be material to our business or financial condition.
However, there can be no assurance that we will prevail in the litigation or proceedings or that we may not have to pay damages
or other awards to the other party.
Risks
Relating to our Common Stock
The
possible issuance of common stock subject to options and warrants may dilute the interest of stockholders.
We
had granted options to purchase a total of 362,440 shares of our common stock under our stock option and restricted stock plans
and common stock purchase warrants for 2,379,290 shares, which were outstanding and unexercised as of December 31, 2016. The foregoing
figures include the Warrants issued in connection with our placement of the Debentures and warrants in December 2016, which are
exercisable to purchase 800,000 shares of our common stock. To the extent that outstanding stock options and Warrants are exercised,
dilution to the interests of our stockholders may occur. Moreover, the terms upon which we will be able to obtain additional equity
capital may be adversely affected since the holders of the outstanding options can be expected to exercise them at a time when
we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than those provided in such outstanding
options.
We
have never paid dividends and have no plans to in the future.
Holders
of shares of our common stock are entitled to receive such dividends as may be declared by our board of directors. To date, we
have paid no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the
foreseeable future. We intend to retain future earnings, if any, to provide funds for operation of our business. Therefore, any
return investors in our common stock will have to be in the form of appreciation, if any, in the market value of their shares
of common stock.
We
have additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common
stock.
Our
articles of incorporation authorize the issuance of 25,000,000 shares of our common stock. The common stock can be issued by our
board of directors without stockholder approval. Any future issuances of equity would further dilute the percentage ownership
of us held by our public shareholders.
Our
stock price is likely to be highly volatile because of several factors, including a limited public float.
The
market price of our common stock is likely to be highly volatile because there has been a relatively thin trading market for our
stock, which causes trades of small blocks of stock to have a significant impact on our stock price. You may not be able to resell
shares of our common stock following periods of volatility because of the market’s adverse reaction to volatility.
Other
factors that could cause such volatility may include, among other things:
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digital
video in-car recording products not being accepted by the law enforcement industry or digital video recording not being accepted
as evidence in criminal proceedings;
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acceptance
of our new products in the marketplace and, in particular, in the commercial market;
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actual
or anticipated fluctuations in our operating results;
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the
potential absence of securities analysts covering us and distributing research and recommendations about us;
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overall
stock market fluctuations;
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economic
conditions generally and in the law enforcement and security industries in particular;
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announcements
concerning our business or those of our competitors or customers;
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our
ability to raise capital when we require it, and to raise such capital on favorable terms;
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we
have no institutional line-of-credit available to fund our operations and we may be unable to obtain a line of credit under
terms that are mutually agreeable;
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changes
in financial estimates by securities analysts or our failure to perform as anticipated by the analysts;
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announcements
of technological innovations;
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conditions
or trends in the industry;
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litigation;
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changes
in market valuations of other similar companies;
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announcements
by us or our competitors of new products or of significant technical innovations, contracts, acquisitions, strategic partnerships
or joint ventures;
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future
sales of common stock;
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actions
initiated by the SEC or other regulatory bodies;
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existence
or lack of patents or proprietary rights;
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changes
in accounting standards, policies, guidance, interpretations or principles;
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statements
or changes in opinions, ratings or earnings estimates made by brokerage firms or industry analysts relating to the markets
in which we operate or expect to operate;
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departure
of key personnel or failure to hire key personnel; and
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general
market conditions.
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Any
of these factors could have a significant and adverse impact on the market price of our common stock. In addition, the stock market
in general has at times experienced extreme volatility and rapid decline that has often been unrelated or disproportionate to
the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our
common stock, regardless of our actual operating performance.
Indemnification
of officers and directors.
Our
articles of incorporation and the bylaws contain broad indemnification and liability limiting provisions regarding our officers,
directors and employees, including the limitation of liability for certain violations of fiduciary duties. Our stockholders therefore
will have only limited recourse against such individuals.
The
market for our common stock is sometimes limited and may not provide adequate liquidity.
At
times our common stock had been thinly traded on the Nasdaq Capital Market. On many days, the trading volume can be relatively
small, which meant there was limited liquidity in our shares of common stock. Selling our shares during such periods is more difficult
because smaller quantities of shares are bought and sold and news media coverage about us can be limited. These factors have at
times resulted in a limited trading market for our common stock and therefore holders of our stock may have been unable to sell
shares purchased, if they desired to do so.
If
securities or industry analyst do not publish research reports about our business, or if they downgrade our stock, the price of
our common stock could decline.
Small,
relatively unknown companies can achieve visibility in the trading market through research and reports that industry or securities
analysts publish. To our knowledge, there are no independent analysts who cover us. The lack of published reports by independent
securities analysts could limit the interest in our common stock and negatively affect our stock price. Even if we did have such
coverage, we would not have any control over the research and reports any analysts might publish. If any analyst who did cover
us downgrades our stock, our stock price could decline. If any analyst who had been covering us ceases coverage of us or failed
to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price
to decline.
Future
sales of our common stock may depress our stock price
.
On
December 30, 2016, we completed a private placement of Debentures and warrants (the “Warrants”) for gross proceed
of $4.0 million. The principal amount of the Debentures is $4.0 million and they are convertible at any time six months after
their date of issue at the option of the holders into shares of our common stock at $5.00 per share (the “Conversion Price”).
The Debentures mature on March 30, 2018. The Warrants are exercisable to purchase up to an aggregate of 800,000 shares of our
common stock commencing on the date of issuance at an exercise price of $5.00 per share (the “Exercise Price”). The
Warrants will expire on the fifth anniversary of their date of issuance. The Conversion Price and Exercise Price are subject to
adjustment upon stock splits, reverse stock splits, and similar capital changes.
On
July 22, 2015, we closed a registered direct offering and a concurrent private placement in which we issued Series A Warrants,
Series B Warrants and Series C Warrants that were exercisable to purchase a total of 1,539,590 shares of our common stock. The
Series A Warrants and Series B Warrants expired in July 2017. The Series C Warrants are exercisable to purchase 879,766 shares
for a term of five and one-half years from their dates of issuance at a price $13.43 per share. The issuance of the Warrants and
Series C Warrants may have had, and may continue to have, a depressive effect of the price of our common stock.
We
can make no prediction to the effect, if any, that future sales of our common stock, or the availability of our common stock for
future sales, will have on the market price of our common stock. Sales in the public market of substantial amounts of our common
stock, or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock. The
potential effect of these shares being sold may be to depress the price at which our common stock trades.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain
information included in this prospectus may be deemed to be forward-looking statements. Where any forward-looking statement includes
a statement of the assumptions or bases underlying the forward-looking statement, we caution that, while we believe these assumptions
or bases to be reasonable and made in good faith, assumed facts or bases almost always vary from the actual results, and the differences
between assumed facts or bases and actual results can be material, depending upon the circumstances. Where, in any forward-looking
statement, we or our management express an expectation or belief as to future results, such expectation or belief is expressed
in good faith and is believed to have a reasonable basis. We cannot assure you, however, that the statement of expectation or
belief will result or be achieved or accomplished. These statements relate to analyses and other information which are based on
forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our prospects, developments
and business strategies. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,”
“believe,” “future,” “could,” “estimate,” “expect,” “intend,”
“may,” “plan,” “predict,” “project,” “will,” and similar terms and
phrases, including references to assumptions. These statements are contained in the section “Risk Factors” and other
sections of this prospectus. These forward-looking statements involve risks and uncertainties that may cause our actual future
activities and results of operations to be materially different from those suggested or described in this prospectus. A wide variety
of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital
needs. These risks include the risks that are identified in the “Risk Factors” section of this prospectus, and include,
among others, expectations regarding the following:
Factors
that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to
be adversely affected include, but are not limited to: (1) our losses in recent years, including fiscal 2016 and 2017, and our
ability to pay the Debentures and Notes when due; (2) macro-economic risks from the effects of the decrease in budgets for the
law-enforcement community; (3) our ability to increase revenues, increase our margins and return to consistent profitability in
the current economic and competitive environment; (4) our operation in developing markets and uncertainty as to market acceptance
of our technology and new products; (5) the availability of funding from federal, state and local governments to facilitate the
budgets of law enforcement agencies, including the timing, amount and restrictions on such funding; (6) our ability to deliver
our new product offerings as scheduled and have such new products perform as planned or advertised; (7) whether there will be
commercial markets, domestically and internationally, for one or more of our newer products, and the degree to which the interest
shown in our products, including the DVM-800 HD, FirstVU HD, VuLink, VuVault.net, FleetVU and MicroVU HD, will translate into
sales during 2017; (8) our ability to maintain or expand our share of the market for our products in the domestic and international
markets in which we compete, including increasing our international revenues to their historical levels; (9) our ability to produce
our products in a cost-effective manner; (10) competition from larger, more established companies with far greater economic and
human resources; (11) our ability to attract and retain quality employees; (12) risks related to dealing with governmental entities
as customers; (13) our expenditure of significant resources in anticipation of sales due to our lengthy sales cycle and the potential
to receive no revenue in return; (14) characterization of our market by new products and rapid technological change; (15) our
dependence on sales of our DVM-800, DVM-800 HD, FirstVU, First VU HD and DVM-250 products; (16) potential that stockholders may
lose all or part of their investment if we are unable to compete in our markets and return to profitability; (17) defects in our
products that could impair our ability to sell our products or could result in litigation and other significant costs; (18) our
dependence on key personnel; (19) our reliance on third party distributors and sales representatives for part of our marketing
capability; (20) our dependence on a few manufacturers and suppliers for components of our products and our dependence on domestic
and foreign manufacturers for certain of our products; (21) our ability to protect technology through patents and to protect our
proprietary technology and information as trade secrets and through other similar means; (22) our ability to generate more recurring
cloud and service revenues; (23) risks related to our license arrangements; (24) our revenues and operating results may fluctuate
unexpectedly from quarter to quarter; (25) sufficient voting power by coalitions of a few of our larger stockholders, including
directors and officers, to make corporate governance decisions that could have significant effect on us and the other stockholders;
(26) sale of substantial amounts of our common stock that may have a depressive effect on the market price of the outstanding
shares of our common stock; (27) possible issuance of common stock subject to options and warrants that may dilute the interest
of stockholders; (28) our ability to comply with Sarbanes-Oxley Act of 2002 Section 404 as it may be required; (29) our nonpayment
of dividends and lack of plans to pay dividends in the future; (30) future sale of a substantial number of shares of our common
stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital;
(31) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our
common stock; (32) our stock price is likely to be highly volatile due to a number of factors, including a relatively limited
public float; (33) whether the legal actions that the Company is taking or has taken against Utility Associates, Axon and WatchGuard
will achieve their intended objectives; (34) whether the Court will lift the stay in the Company’s litigation against Axon
and grant an expedited trial schedule; (35) whether the USPTO rulings will curtail, eliminate or otherwise have an effect on the
actions of Axon and Utility Associates respecting us, our products and customers; (36) whether the remaining two claims under
the ‘556 Patent have applicability to us or our products; and (37) whether our patented VuLink technology is becoming the
de-facto
“standard” for agencies engaged in deploying state-of-the-art body-worn and in-car camera systems;
(38) whether such technology will have a significant impact on our revenues in the long-term; and (39) indemnification of our
officers and directors.
We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or
otherwise. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual
results may vary materially from those expected, estimated or projected.
USE
OF PROCEEDS
We
intend to use the net proceeds from this offering to retire $750,000 of principal of the Debentures and $700,000 pay the entire
outstanding principal of the Notes and the balance for working capital. Pending the application of the net proceeds, we may invest
the net proceeds in short-term, investment grade, interest-bearing securities.
As
of the date of this prospectus supplement, we cannot specify with certainty all the uses for the net proceeds to us from this
offering, if any. Thus, our management will have broad discretion regarding the timing and application of the net proceeds from
this offering. Investors will be relying on the judgment of our management regarding the application of the proceeds of this offering.
The actual use and allocation of proceeds realized from this offering will depend upon our operating revenues and cash position
and our working capital requirements and may change.
DIRECTORS
AND EXECUTIVE OFFICERS
The
following sets forth information regarding our directors and executive officers. Our directors are elected annually and hold office
until the next annual meeting of our stockholders or until their successors are elected and qualified. Officers are elected annually
and serve at the discretion of the Board of Directors.
Stanton
E. Ross
, age 55, has served as Chairman, President and Chief Executive Officer since September 2005. From March 1992 to
June 2005, Mr. Ross was the Chairman and President of Infinity Energy Resources, Inc., a publicly held oil and gas exploration
and development company (“Infinity”), and served as an officer and director of each of Infinity’s subsidiaries.
He resigned all his positions with Infinity in June 2005, except Chairman, but was reappointed President in October 2006. Mr.
Ross served on the board of directors of Studio One Media, Inc., a publicly held company, from January 2013 to March 2013. From
1991 until March 1992, he founded and served as President of Midwest Financial, a financial services corporation involved in mergers,
acquisitions and financing for corporations in the Midwest. From 1990 to 1991, Mr. Ross was employed by Duggan Securities, Inc.,
an investment banking firm in Lenexa, Kansas, where he primarily worked in corporate finance. From 1989 to 1990, he was employed
by Stifel, Nicolaus & Co., a member of the New York Stock Exchange, where he was an investment executive. From 1987 to 1989,
Mr. Ross was self-employed as a business consultant. From 1985 to 1987, Mr. Ross was President and founder of Kansas Microwave,
Inc., which developed a radar detector product. From 1981 to 1985, he was employed by Birdview Satellite Communications, Inc.,
which manufactured and marketed home satellite television systems, initially as a salesman and later as National Sales Manager.
Mr. Ross estimates he devoted most of his time to Digital Ally and the balance to Infinity in 2016. In late 2007, Infinity sold
a substantial portion of its operating assets and has not required a substantial amount of his time since such point. Mr. Ross
holds no public company directorships other than with the Company and Infinity and has not held any others during the previous
five years, except for Studio One Media, Inc.
Leroy
C. Richie,
age 75, has been the Lead Outside Director of Digital Ally since September 2005. He is also the Chairman of
the Compensation Committee and Nominating and Governance Committee and a member of the Audit Committee. Since June 1, 1999 Mr.
Richie has been a director of Infinity Energy Resources, Inc., a publicly held oil and gas exploration and development company.
Additionally, since 2008, Mr. Richie served as a member of the boards of directors of Columbia Mutual Funds, (or mutual fund companies
acquired by or merged with Columbia Mutual Funds), a family of investment companies managed by Ameriprise Financial, Inc. From
2004 to 2015, he was of counsel to the Detroit law firm of Lewis & Munday, P.C. He holds no other public directorships and
has not held any others during the previous five years, except for OGE Energy Corp. (2007-2014) and Kerr-McGee Corporation (1998-2005).
Mr. Richie serves as a member of the Board of Trustees and Vice Chairman of the Henry Ford Health System, in Detroit. Mr. Richie
was formerly Vice President of Chrysler Corporation and General Counsel for automotive legal affairs, where he directed all legal
affairs for its automotive operations from 1986 until his retirement in 1997. Before joining Chrysler, he was an associate with
the New York law firm of White & Case (1973-1978), and served as director of the New York office of the Federal Trade Commission
(1978-1983). Mr. Richie received a B.A. from City College of New York, where he was valedictorian, and a J.D. from the New York
University School of Law, where he was awarded an Arthur Garfield Hays Civil Liberties Fellowship.
Daniel
F. Hutchins
, age 61, was first elected a Director in December 2007. He serves as Chairman of the Audit Committee and is
the Board’s financial expert. Mr. Hutchins, a Certified Public Accountant, is a Principal with the accounting firm of Hutchins
& Haake, LLC and currently serves as a director and the Chief Financial Officer of Infinity Energy Resources, Inc., a publicly
held oil and gas exploration and development company, of which Stanton E. Ross is the Chairman and President. Mr. Hutchins has
served as an instructor for the Becker CPA exam with the Keller Graduate School of Management and has over 17 years of teaching
experience preparing CPA candidates for the CPA exam. He has 39 years of public accounting experience, including five years with
Deloitte & Touche, LLP. He has served on the boards of various non-profit groups and is a member of the American Institute
of Certified Public Accountants. Mr. Hutchins earned his Bachelor of Business Administration degree in Accounting at Washburn
University in Topeka, Kansas.
Michael
J. Caulfield
, age 61, was first elected a Director in May 2016. He is a member of the Audit Committee, Compensation Committee
and Nominating and Governance Committee. He served as Vice President – Strategic Development of the Company from June 1
2009 to January 11, 2012. Mr. Caulfield was most recently (2012-2016) a Vice-Chairman at Teneo Holdings, LLC, a global advisory
firm where he was responsible for the firm’s investment banking relationships with a broad range of industrial companies.
From 2006 to 2009, Mr. Caulfield served as a Managing Director at Banc of America Securities (“BAS”), where he was
responsible for the merger, acquisition, divestiture and restructuring advisory services for a number of large public and private
companies. He was also in charge of BAS’s global investment banking activities involving the Safety, Security, Engineering
and Construction Industries. Prior to joining BAS, Mr. Caulfield spent six years (2000-2006) as a Managing Director with Morgan
Stanley in New York City, leading that global investment banking firm’s efforts in the Aerospace and Defense Industries.
He was also responsible for the investment banking relationships with a number of Morgan Stanley’s largest clients. From
1989 to 2000, he worked at General Electric Capital Corp., where he served as a Managing Director and head of the Corporate Finance
Group. In this capacity, he advised GE Capital and the industrial divisions of General Electric on such issues as capital structuring,
mergers and acquisitions, and private equity transactions. Mr. Caulfield received an MBA from the Wharton School of the University
of Pennsylvania and a B.S. Degree from the University of Minnesota.
Thomas
J. Heckman
, age 58, has been the Chief Financial Officer, Treasurer and Corporate Secretary of Digital Ally, Inc. since
October 2007. Mr. Heckman is a certified public accountant (non-licensed). He has owned and operated several companies in various
industries, including oil and gas exploration and development, wholesale and retail distribution and real estate, prior to joining
the Company. He has 34 years of accounting experience, including 19 years with Deloitte & Touche, LLP, where he was a partner
in the accounting and auditing service group and specialized in public reporting companies. Mr. Heckman earned his Bachelor of
Business Administration degree in Accounting at the University of Missouri in Columbia, Missouri.
DIVIDEND
POLICY
We
have never declared or paid any cash dividends on our common stock and do not currently anticipate declaring or paying cash dividends
on our common stock in the foreseeable future. We currently intend to retain all our future earnings, if any, to finance operations.
Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend
on a number of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions
and other factors that our board of directors may deem relevant.
CAPITALIZATION
The
following table sets forth our capitalization as of June 30, 2017 on an as adjusted basis to give effect to this offering, based
on a public offering price of $3.00 per share of common stock and $2.99 per Series B warrants before deducting the
estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The
information set forth in the following table should be read in conjunction with and is qualified in its entirety by our “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and consolidated financial statements and notes
thereto incorporated by reference in this prospectus supplement and the accompanying prospectus. See “
The Offering
”
in this prospectus supplement for information relating to the expected number of shares of our common stock to be outstanding
after this offering.
|
|
Actual
as of June 30, 2017 (Unaudited)
|
|
|
As
Adjusted
for
this
Offering
(2)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents (1)
|
|
$
|
1,325
|
|
|
$
|
2,650
|
|
Total
assets
|
|
|
16,416
|
|
|
|
17,741
|
|
|
|
|
|
|
|
|
|
|
Subordinated
notes payable, net of discount of $289 (3)
|
|
|
411
|
|
|
|
—
|
|
Secured
convertible debentures, at fair value
|
|
|
3,926
|
|
|
|
3,176
|
|
Total
liabilities
|
|
|
12,228
|
|
|
|
11,067
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.001 per share; 25,000,000 shares authorized 5,743,249 shares issued and 5,679,731 shares outstanding,
actual; and 6,683,249 shares issued and 6,619,731 shares outstanding, as adjusted to give effect to this offering
|
|
|
6
|
|
|
|
7
|
|
Additional
paid-in capital
|
|
|
60,356
|
|
|
|
63,130
|
|
Accumulated
deficit (3)
|
|
|
(54,017
|
)
|
|
|
(54,306
|
)
|
|
|
|
|
|
|
|
|
|
Treasury
stock, at cost (63,518 shares)
|
|
|
(2,157
|
)
|
|
|
(2,157
|
)
|
Total
stockholders’ equity
|
|
|
4,188
|
|
|
|
6,674
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
16,416
|
|
|
$
|
17,741
|
|
|
(1)
|
Includes
$500,000 of restricted cash
|
|
|
|
|
(2)
|
After
giving effect to the sale of 940,000 shares of our common stock in this offering at the offering price of $3.00 per share,
after giving effect to the sale of 60,000 shares of our Series B warrants in this offering at the offering price
of $2.99 per share and after deducting the underwriting fees (estimated to total $149,470) and the estimated offering expenses
payable by us (estimated to total $75,030). The the net proceeds from this offering is intended to be utilized to retire $750,000
of the principal balance of outstanding Secured Convertible Debentures and subordinated notes with a principal balance of
$700,000 and for working capital purposes.
|
|
|
|
|
(3)
|
As
adjusted amounts give effect for the use the net proceeds from this offering to retire subordinated notes with a principal
balance of $700,000 and recognizing the charge-off to accumulated deficit of the remaining net of discount of $288,895 as
of June 30, 2017.
|
DILUTION
If
you invest in our common stock offered by this prospectus supplement and the accompanying prospectus, you will experience immediate
dilution to the extent of the difference between the price per share you pay in this offering and the net tangible book value
per share of our common stock immediately after this offering. Our net tangible book value as of June 30, 2017 was approximately
$3,722,258, or approximately $0.66 per share of common stock. Net tangible book value per share as of June 30, 2017 equals the
sum of our total tangible assets minus total liabilities, divided by the number of shares of our common stock outstanding as of
June 30, 2017.
Dilution
in net tangible book value per share represents the difference between the amount per share paid by the investors in this offering
and the net tangible book value per share of our common stock immediately after this offering. After giving effect to the sale
of 940,000 shares of our common stock in this offering at the offering price of $3.00 per share, the sale of 60,000
Series B warrants for $2.99 per share, and after deducting the underwriting fees (estimated to total $150,000) and the estimated
offering expenses payable by us (estimated to total $149,970), our as adjusted net tangible book value as of June 30, 2017
would have been approximately $6,207,763, or approximately $0.94 per share of common stock. This represents an immediate
increase in the net tangible book value of approximately $0.27 per share to our existing stockholders and an immediate dilution
in the net tangible book value of approximately $2.06 per share to investors participating in this offering. The following
table illustrates this calculation on a per share basis.
Public
offering price per share
|
|
$
|
3.00
|
|
Net
tangible book value per share as of June 30, 2017
|
|
$
|
0.66
|
|
Increase
in net tangible book value per share attributable to this offering
|
|
$
|
0.27
|
|
As
adjusted book value per share as of June 30, 2017, after giving effect to this offering
|
|
$
|
0.94
|
|
Dilution
per share to investors purchasing shares in this offering
|
|
$
|
2.06
|
|
The
number of shares of our common stock shown above to be outstanding immediately after this offering is based on 5,679,731 shares
outstanding as of June 30, 2017, on a historical basis, and excludes, as of such date:
|
●
|
309,831
shares of our common stock subject to outstanding options having a weighted average exercise price of $19.37 per share;
|
|
|
|
|
●
|
8,372
shares of our common stock reserved for future issuance pursuant to our existing stock incentive plans;
|
|
|
|
|
●
|
2,579,290
shares of our common stock issuable upon exercise of warrants outstanding as of June 30, 2017 having a weighted average exercise
price of $9.94 per share; and
|
|
|
|
|
●
|
63,518
shares of our common stock held as treasury stock.
|
To
the extent that any of our outstanding options or warrants are exercised, new options are issued under our stock incentive plans
or we otherwise issue additional shares of common stock in the future, there may be further dilution to the investors participating
in this offering.
PRICE
RANGE OF OUR COMMON STOCK
Our
common stock trades on The NASDAQ Capital Market under the symbol “DGLY.” The following table sets forth, for the
periods indicated, the reported high and low sales prices per share of our common stock on The NASDAQ Capital Market.
Year
Ended December 31, 2017
|
|
High
Close
|
|
|
Low
Close
|
|
1st
Quarter
|
|
$
|
5.75
|
|
|
$
|
4.00
|
|
2nd
Quarter
|
|
$
|
4.26
|
|
|
$
|
3.03
|
|
Year
Ended December 31, 2016
|
|
|
|
|
|
|
1st
Quarter
|
|
$
|
6.75
|
|
|
$
|
4.72
|
|
2nd
Quarter
|
|
$
|
4.79
|
|
|
$
|
3.56
|
|
3rd
Quarter
|
|
$
|
6.69
|
|
|
$
|
3.76
|
|
4th
Quarter
|
|
$
|
6.40
|
|
|
$
|
4.15
|
|
Year
Ended December 31, 2015
|
|
|
|
|
|
|
1st
Quarter
|
|
$
|
15.46
|
|
|
$
|
10.27
|
|
2nd
Quarter
|
|
$
|
18.30
|
|
|
$
|
12.42
|
|
3rd
Quarter
|
|
$
|
13.82
|
|
|
$
|
5.84
|
|
4th
Quarter
|
|
$
|
7.90
|
|
|
$
|
3.99
|
|
On
August 18, 2017, the last reported closing sale price of our common stock on The NASDAQ Capital Market was $3.35 per share.
DESCRIPTION
OF THE SECURITIES WE ARE OFFERING
We
are offering 940,000 shares of our common stock, par value $0.001 per share, and Series B Warrants to purchase 60,000 shares of
common stock to certain investors at an offering price of $3.00 per share and Warrants exercisable to purchase up to 880,000 shares
of common stock. The material terms and provisions of our common stock are described under the heading “Description of Capital
Stock” starting on page 15 of the accompanying prospectus.
The
Warrants
The
following is a summary of the registered warrants and is subject to, and qualified in its entirety by, the terms set forth in
the forms of the common stock purchase warrant to be filed as an exhibit to our Current Report on Form 8-K, which we expect to
file with the Securities and Exchange Commission in connection with this offering. For each share of common stock purchased, investors
will receive two registered warrants, each with an exercise price of $3.36 per share (the “Series A-1 Warrant” and
“Series A-2 Warrant”). Additionally, to the extent that an investor’s beneficial interest would otherwise exceed
9.9% of the issued and outstanding shares of common stock, the Company will issue to such investor, in lieu of shares of common
stock at closing, a pre-funded common stock warrant that is immediately exercisable (the “Pre-Funded Warrant” or “Series
B Warrant”). The Company has reserved up to 60,000 shares for the Series B Warrants.
Exercisability.
The Series A-1 Warrants are exercisable to purchase up to, in the aggregate, 680,000 shares of common stock (or 0.68 warrant
shares per share of common stock or pre-funded warrant purchased) and have a term of five years commencing six months following
the closing date. The Series A-2 Warrants are exercisable to purchase up to, in the aggregate, 200,000 shares of common stock
(or 0.20 warrant shares per share of common stock or pre-funded warrant purchased) and have a term of five years commencing immediately.
Additionally, to the extent such Pre-Funded Warrants are issued, the investor shall pay $2.99 per share at the closing and $0.01
per share upon its exercise. The Pre-Funded Warrants terminate upon exercise in full. The holder shall deliver the aggregate exercise
price for the shares of common stock specified in the exercise notice within three trading days following the date of exercise
unless the cashless exercise is specified in the exercise notice.
Cashless
Exercise.
If there is no effective registration statement registering, or no current prospectus available for, the resale
of the warrant shares, the holder may only exercise the warrant, in whole or in part, on a cashless basis. When exercised on a
cashless basis, a portion of the warrant is cancelled in payment of the purchase price payable in respect of the number of shares
of our common stock purchasable upon such exercise. Any warrant that is outstanding on the termination date of the warrant shall
be automatically exercised via cashless exercise.
Exercise
Price.
The exercise price of Warrants is $3.36 per share of common stock and is subject to adjustment as described below.
Beneficial
Ownership Limitation.
A
holder shall have no right to exercise any portion of a warrant, to the extent that, after giving effect to such exercise, such
holder, together with such holder’s affiliates, and any persons acting as a group together with such holder or any such
affiliate, would beneficially own in excess of, at the initial option of the holder thereof, either 4.99% or 9.99% (at election
of the holder) of the number of shares of common stock outstanding immediately after giving effect to the issuance of the shares
of common stock upon such exercise. The holder of the warrant, upon notice to us, may increase or decrease the beneficial ownership
limitation to a percentage not to exceed 9.99%, provided that any increase in beneficial ownership limitation shall not be effective
until 61 days following notice to us. Beneficial ownership of the holder and its affiliates will be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
Certain
Adjustments.
Stock
dividends and stock splits.
If we pay a stock dividend or otherwise make a distribution payable in shares of common stock
on shares of common stock or any other common stock equivalents, subdivide or combine outstanding common stock, or reclassify
common stock, the exercise price will be adjusted by multiplying the then exercise price by a fraction, the numerator of which
shall be the number of shares of common stock (excluding treasury shares, if any) outstanding immediately before such event, and
the denominator of which shall be the number of shares outstanding immediately after such event.
Rights
Offerings; pro rata distributions
. If we issue common stock equivalents or rights to purchase stock, warrants, securities
or other property pro rata to holders of common stock, a holder of a warrant will be entitled to acquire such common stock equivalents
or rights that such holder could have acquired if such holder had held the number of shares of common stock issuable upon complete
exercise of the warrant immediately prior to the date a record is taken for such issuance. If we declare or make any dividend
or other distribution of assets or rights to acquire assets to holders of common stock, a holder of a warrant will be entitled
to participate in such distribution to the same extent that the holder would have participated therein if the holder had held
the number of warrant shares upon full exercise of the warrant.
Fundamental
Transaction
. If we effect a fundament transaction, including, among other things, a merger, sale of substantially of the assets,
tender offer, exchange offer and other business combination transactions, then upon any subsequent exercise of a warrant, the
holder thereof shall have the right to receive, for each share of common stock that would have been issuable upon such exercise
immediately prior to the occurrence of such fundamental transaction, the number of shares of the successor’s or acquiring
corporation’s common stock or of our common stock, if we are the surviving corporation, and any additional consideration
receivable as a result of such fundamental transaction by a holder of the number of shares of common stock for which the warrant
is exercisable immediately prior to such fundamental transaction. However, if the fundamental transaction is not within the company’s
control, including not approved by the company’s Board of Directors or the consideration is not in all stock of the successor
entity, the holder shall have the option to receive from the company or any successor entity, as of the date of consummation of
such fundamental transaction, the same type or form of consideration (and in the same proportion), at the Black Scholes
value of the unexercised portion of the Warrant, that is being offered and paid to the holders of common stock of the company
in connection with the fundamental transaction, whether that consideration be in the form of cash, stock or any combination thereof,
or whether the holders of common stock are given the choice to receive from among alternative forms of consideration in connection
with the fundamental transaction.
Transferability.
The registered warrant and all rights thereunder are transferable, in whole or in part, upon surrender of the warrants, together
with a written assignment of the warrants.
No
Rights as Stockholder until Exercise.
The holders of the registered warrants do not have any voting rights, dividends or other
rights as a holder of our capital stock until they exercise such warrants.
PLAN
OF DISTRIBUTION
Pursuant
to an engagement agreement dated August 15, 2017 by and between WestPark Capital, Inc. and us, we have engaged WestPark Capital,
Inc. as the exclusive placement agent in connection with this offering. The placement agent is not purchasing or selling any shares
of our common stock we are offering by this prospect supplement but has agreed to use it reasonable best efforts to arrange for
the sale of shares of common stock offered by this prospectus supplement.
We
entered into a Securities Purchase Agreement on August 21, 2017 directly with the investors who agree to purchase shares of commons
stock in this offering. The securities purchase agreement and the placement agreement provides that the obligations of the placement
agent and the investors are subject to certain conditions precedent, including, among other things, the absence of any material
adverse change in our business and the receipt of customary opinions and closing certificates.
We
currently anticipate that the closing of this offering will take place on or about August 23, 2017, subject to customary closing
conditions.
We
have agreed to pay the placement agent a placement agent fee in cash equal to 5% of the gross proceeds from the sale of the shares
in this offering. The following table shows the per share and total placement agent fees we will pay in connection with the sale
of the shares of common stock offered hereby, assuming the purchase of all of the shares of common stock we are offering.
|
|
Per
share
|
|
|
Total
|
|
Placement
agent fee per share
|
|
$
|
0.15
|
|
|
$
|
149,470
|
|
Total
|
|
$
|
0.15
|
|
|
$
|
149,470
|
|
The
cash placement fee is determined at 5% of the gross proceeds of the sale of 940,000 shares of our common stock in this offering
at the offering price of $3.00 per share and the sale of 60,000 shares of our Series B warrants in this offering at
the offering price of $2.99 per share.
We
have agreed to reimburse the placement agent at the closing up to $45,000 for its legal expenses and up to $5,000 for its reasonable
out-of-pocket expenses. We estimate the total expenses of this offering (excluding the expenses reimbursable to the placement
agent) payable by us, excluding the placement agent fee, will be approximately $25,030. After deducting the placement agent fee
and our estimated offering expenses, we expect the net proceeds from this offering to be approximately $2,775,000.
In
addition, we have agreed to pay the placement agent a fee equal to 3% of the gross proceeds received by us upon the exercise of
the warrants issued pursuant to this offering. Such fee will be paid only after the receipt of the exercise price by us.
We
have agreed to issue to the placement agent, for $100, warrants to purchase up to 94,000 shares of common stock sold in this offering
(which represent (i) 5.0% of the aggregate number of shares of common stock or pre-funded warrant sold in this offering, and (ii)
5% of the shares underlying the Series A-1 and Series A-2 warrants) with an exercise price of $3.75 per share. The placement agent
warrants will have substantially the same terms as the warrants being sold in the offering, except that the Placement Agent warrants
will have an exercise price equal to 125% of the public offering price per share and will have a term of 5 years from the effective
date of this offering. In addition, pursuant to FINRA Rule 5110(g), the placement agent warrants and any shares issued upon exercise
of the placement agent warrants shall not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging,
short sale, derivative, put or call transaction that would result in the effective economic disposition of the securities by any
person for a period of 180 days immediately following the date of effectiveness or commencement of sales of this offering, except
the transfer of any security: (i) by operation of law or by reason of our reorganization; (ii) to any FINRA member firm participating
in the offering and the officers or partners thereof, if all securities so transferred remain subject to the lock-up restriction
set forth above for the remainder of the time period; (iii) if the aggregate amount of our securities held by the placement agent
or related persons do not exceed 1% of the securities being offered; (iv) that is beneficially owned on a pro-rata basis by all
equity owners of an investment fund, provided that no participating member manages or otherwise directs investments by the fund
and the participating members in the aggregate do not own more than 10% of the equity in the fund; or (v) the exercise or conversion
of any security, if all securities remain subject to the lock-up restriction set forth above for the remainder of the time period.
We
have agreed to indemnify the placement agent and certain other persons against certain liabilities relating to or arising out
of the placement agent’s activities under the placement agency agreement. We have also agreed to contribute to payments
the placement agent may be required to make in respect of such liabilities.
The
placement agent may be deemed to be underwriters within the meaning of Section 2(a)(11) of the Securities Act, and any commissions
received by them and any profit realized on the resale of the shares sold by them while acting as principals might be deemed to
be underwriting discounts or commissions under the Securities Act. As an underwriter, the placement agent would be required to
comply with the requirements of the Securities Act and the Exchange Act, including, without limitation, Rule 415(a)(4) under the
Securities Act and Rule 10b-5 and Regulation M under the Exchange Act. These rules and regulations may limit the timing of purchases
and sales of shares of common stock by each placement agent acting as principal. Under these rules and regulations, the placement
agent:
|
●
|
must
not engage in any stabilization activity in connection with our securities; and
|
|
|
|
|
●
|
must
not bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities, other than
as permitted under the Exchange Act, until it has completed its participation in the distribution.
|
A
copy of the placement agreement and the securities purchase agreement we entered into with the purchasers will be included as
exhibits to our Current Report on Form 8-K that will be filed with the Securities and Exchange Commission in connection with the
consummation of this offering.
The
transfer agent for our common stock is Action Stock Transfer Corporation, located at 2469 E. Fort Union Blvd., Salt Lake City.
UT 84122. Its telephone number is 801-274-1088.
Our
common stock is traded on The NASDAQ Capital Market under the symbol “DGLY.”
LEGAL
MATTERS
Certain
legal matters in connection with the shares of common stock offered hereby will be passed upon for us by Christian J. Hoffmann,
III, Securities Counsel, Digital Ally, Inc. Ellenoff Grossman & Schole LLP, New York, New York, acted as counsel to the placement
agent in connection with this offering.
EXPERTS
The
consolidated financial statements of Digital Ally, Inc. as of December 31, 2016 and 2015 and for each of the years in the two-year
period ended December 31, 2016 incorporated in this prospectus supplement and prospectus by reference from the Digital Ally, Inc.
Annual Report on Form 10-K for the year ended December 31, 2016 have been audited by RSM US LLP, as stated in their report thereon,
incorporated herein by reference, and have been incorporated in this prospectus supplement and prospectus in reliance upon such
report and upon the authority of such firm as experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We
are subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended (Exchange Act). In accordance
with the Exchange Act, we file annual, quarterly and current reports, proxy statements and other information with the Securities
and Exchange Commission (SEC). Such reports, proxy statements and other information filed by us are available to the public free
of charge at www.sec.gov. You may also read and copy any document we file with the SEC at the public reference facilities maintained
by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference
facilities by calling the SEC at 1-800-SEC-03301-800-SEC-0330 FREE. Copies of certain information filed by us with the SEC are
also available on our website at www.digitalally.com. The information available on or through our website is not part of this
prospectus supplement or the accompanying prospectus and should not be relied upon.
This
prospectus supplement and the accompanying prospectus are part of a registration statement that we filed with the SEC. This prospectus
supplement and the accompanying prospectus omit some information contained in the registration statement in accordance with SEC
rules and regulations. You should review the information and exhibits in the registration statement for further information about
us and the securities being offered hereby. Statements in this prospectus supplement or the accompanying prospectus concerning
any document we filed as an exhibit to the registration statement or that we otherwise filed with the SEC are not intended to
be comprehensive and are qualified by reference to the filings. You should review the complete document to evaluate these statements.
INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE
The
Securities and Exchange Commission (SEC) rules allow us to “incorporate by reference” into this prospectus supplement
and the accompanying prospectus much of the information we file with the SEC, which means that we can disclose important information
to you by referring you to those publicly available documents. The information that we incorporate by reference into this prospectus
supplement and the accompanying prospectus is considered to be part of this prospectus supplement and the accompanying prospectus.
These documents may include Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well
as proxy statements.
This
prospectus supplement and the accompanying prospectus incorporate by reference the documents listed below and any future filings
we make with the SEC under Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act (in each case, other than those documents or
the portions of those documents deemed to be furnished and not filed in accordance with SEC rules):
|
●
|
our
Annual Report on Form 10-K for the year ended December 31, 2016, as filed on March 28, 2017 (File No. 001-33899), including
information specifically incorporated by reference into our Form 10-K from our Proxy Statement on Schedule 14A, as filed on
April 3, 2017, for our Annual Meeting of Stockholders to be held on May 31, 2017;
|
|
|
|
|
●
|
our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 filed on August 14, 2017;
|
|
|
|
|
●
|
our
definitive Proxy Statement on Schedule 14A, as filed on April 3, 2017 (File No. 001-33899);
|
|
|
|
|
●
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our
definitive Proxy Statement on Schedule 14A, as filed on June 30, 2017 (File No. 001-33899);
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Our
Current Reports on Form 8-K filed on January 3, 2017, January 26, 2017, March 28, 2017, May 15, 2017, June 2, 2017, June 30,
2017, August 15, 2017 and August 17, 2017 (excluding any information furnished pursuant to Item 2.02 or Item 7.01 of any such
Current Report on Form 8-K) (File No. 001-33899);
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the
description of our common stock contained in our registration statement on Form SB-2, filed on October 16, 2006, No. 333-138025
(the “October 2006 Form SB-2”), [and any amendment or report subsequently filed for the purpose of updating such
description]; and
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our
specimen stock certificate contained as Exhibit 4.1 to our October 2006 SB-2 registration statement, including any subsequent
amendment or report filed for the purpose of amending such description.
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Any
statement contained in any document incorporated by reference herein shall be deemed to be modified or superseded for purposes
of this prospectus supplement to the extent that a statement contained in this prospectus supplement or any additional prospectus
supplement modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus supplement.
Because
we are incorporating by reference future filings with the SEC, this prospectus supplement and the accompanying prospectus are
continually updated and later information filed with the SEC may update and supersede some of the information included or incorporated
by reference in this prospectus supplement and the accompanying prospectus. This means that you must look at all of the SEC filings
that we incorporate by reference to determine if any of the statements in this prospectus supplement and the accompanying prospectus
or in any document previously incorporated by reference have been modified or superseded.
We
will provide without charge to each person, including any beneficial owners, to whom this prospectus supplement is delivered,
upon his or her written or oral request, a copy of any or all documents referred to above which have been or may be incorporated
by reference into this prospectus supplement and the accompanying prospectus but not delivered with this prospectus supplement.
You may request a copy of these documents by writing or telephoning us at the following address:
Digital
Ally, Inc.
9705
Loiret Blvd.
Lenexa,
KS 66210
(913)
814-7774
Attention:
Stanton E. Ross
Chairman,
President and Chief Executive Office
PROSPECTUS
DIGITAL
ALLY, INC.
$25,000,000
Shares
of Common Stock
Warrants
Debt
Securities
Convertible
Debt Securities
Rights
Units
We
may offer to the public from time to time in one or more series or issuances at prices and on terms that we will determine at
the time of each offering, shares of our common stock, warrants to purchase shares of our common stock, debt securities, convertible
debt securities, rights and/or units consisting of a combination of the foregoing securities, or any combination of these securities.
The aggregate initial offering price of all securities sold by us pursuant to this prospectus will not exceed $25,000,000.
This
prospectus describes the general manner in which our securities may be offered using this prospectus. Each time we offer and sell
securities, we will provide you with a prospectus supplement that will contain specific information about the terms of that offering.
Any prospectus supplement may also add, update, or change information contained in this prospectus. You should carefully read
this prospectus and the applicable prospectus supplement as well as the documents incorporated or deemed to be incorporated by
reference in this prospectus before you purchase any of the securities offered hereby. This prospectus may not be used to offer
and sell securities unless accompanied by a prospectus supplement.
We
may offer the securities directly or through agents or to or through underwriters or dealers. If any agents or underwriters are
involved in the sale of the securities their names, and any applicable purchase price, fee, commission or discount arrangement
between or among them, will be set forth, or will be calculable from the information set forth, in an accompanying prospectus
supplement. The securities may be offered and sold through public or private transactions at market prices prevailing at the time
of sale, at a fixed price or fixed prices, at negotiated prices, at various prices determined at the time of sale or at prices
related to prevailing market prices. We can sell the securities through agents, underwriters or dealers only with delivery of
a prospectus supplement describing the method and terms of the offering of such securities. In addition, shares of our common
stock may be offered from time to time through ordinary brokerage transactions on the Nasdaq Capital Market. See “Plan of
Distribution.”
Before
purchasing any of the shares covered by this prospectus, carefully read and consider the risk factors in the section entitled
“Risk Factors.”
Our
common stock is currently quoted on the Nasdaq Capital Market under the symbol “DGLY.” On March 19, 2015 the last
reported sales price of our common stock was $11.65 per share.
Investing
in our common stock involves a high degree of risk. You should carefully consider the matters discussed under the section entitled
“Risk Factors” in this prospectus and included in our periodic reports and other information filed with the Securities
and Exchange Commission before investing in our common stock.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The
date of this Prospectus is May18, 2015
TABLE
OF CONTENTS
The
registration statement, including the exhibits and the documents incorporated herein by reference, can be read on the Securities
and Exchange Commission website are at the Securities and Exchange Commission offices mentioned under the heading “Where
You Can Find More Information.”
Until
____________, all dealers that effect transactions in these securities, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
About
this Prospectus
You
should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized anyone to
provide you with different information. If anyone provides you with different or inconsistent information, you should not rely
on it. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted. You should not assume that the information in this prospectus is accurate
as of any date other than the date on the front cover of this prospectus. You should not assume that the information incorporated
by reference in this prospectus is accurate as of any date other than the date the respective information was filed with the Securities
and Exchange Commission. Our business, financial condition, results of operations and prospects may have changed since those dates.
This
prospectus is part of a registration statement that we filed with the Securities and Exchange Commission, or SEC, using a “shelf”
registration process. Under this shelf registration process, we may sell any of the securities, or any combination of the securities,
described in this prospectus, in each case in one of more offerings up to a total dollar amount of proceeds of $25,000,000. This
prospectus describes the general manner in which our securities may be offered by this prospectus. Each time we sell securities,
we will provide a prospectus supplement that will contain specific information about the terms of those securities and terms of
that offering. The prospectus supplement may also add, update or change information contained in this prospectus or in documents
incorporated by reference in this prospectus. To the extent that any statement that we make in a prospectus supplement is inconsistent
with statements made in this prospectus or in documents incorporated by reference in this prospectus, you should rely on the information
in the prospectus supplement. You should carefully read both this prospectus and any prospectus supplement together with the additional
information described under “Where You Can Find More Information” before buying any securities in this offering.
Until
such time, if ever, as we are eligible to use General Instruction I.B.1. of Form S-3, pursuant to General Instruction I.B.6. of
Form S-3, we are permitted to use the registration statement of which this prospectus forms a part to sell, via a primary offering,
a maximum amount of securities equal to one-third of the aggregate market value of our outstanding voting and non-voting common
equity held by non-affiliates of our company in any twelve-month period.
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in or incorporated by reference into this prospectus. Because this summary
provides only a brief overview of the key aspects of the offering, it does not contain all of the information that you should
consider before investing in our common stock. You should read the entire prospectus carefully, including “Risk Factors,”“Cautionary
Note Regarding Forward-Looking Statements” and the documents incorporated by reference, which are described under “Incorporation
of Certain Information by Reference” before making an investment decision. As used in this prospectus, unless otherwise
indicated, “we,” “our,” “us” or similar terms refer collectively to Digital Ally, Inc.
Overview
Digital
Ally produces digital video imaging and storage products for use in law enforcement, security and commercial applications. Our
current products are an in-car digital video/audio recorder contained in a rear-view mirror for use in law enforcement and commercial
fleets, a weather-resistant mobile digital video recording system for use on motorcycles, ATV’s and boats, a miniature digital
video system designed to be worn on an individual’s body; a system that provides our law enforcement customers with audio/video
surveillance from multiple vantage points; a digital video/audio recorder contained in a flashlight sold to law enforcement agencies
and other security organizations; and a hand-held laser speed detection device that it is offering primarily to law enforcement
agencies. The Company has active research and development programs to adapt its technologies to other applications. The Company
has the ability to integrate electronic, radio, computer, mechanical, and multi-media technologies to create unique solutions
to address needs in a variety of other industries and markets, including mass transit, school bus, taxi cab and the military.
We sell our products to law enforcement agencies and other security organizations, consumer and commercial fleet operators through
direct sales domestically and third-party distributors internationally.
Principal
Executive Offices and Additional Information
Our
principal executive offices are located at 9705 Loiret Boulevard, Lenexa Kansas 66219. Our telephone number is (914) 813-7774
(914)
813-7774. Our website is located at www.digitalallyinc.com. Information on our website does not constitute part of this prospectus
and should not be relied upon in connection with making any decision with respect to an investment in our securities. We are required
to file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any
documents filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330
1-800-SEC-0330
FREE. Our filings with the SEC are also available to the public from commercial document retrieval services and at the SEC’s
website at www.sec.gov.
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties
described below, together with all of the other information contained or incorporated by reference into this prospectus, before
deciding to invest in our common stock. If any of the following risks, or any risk described elsewhere in this prospectus or in
the documents incorporated by reference herein, actually occurs, our business, business prospects, financial condition, results
of operations or cash flows could be materially adversely affected. In any such case, the trading price of our common stock could
decline, and you could lose all or part of your investment. The risks described below and in the documents incorporated by reference
herein are not the only ones facing our company. Additional risks not currently known to us or that we currently deem immaterial
may also adversely affect us. This prospectus also contains forward-looking statements, estimates and projections that involve
risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as
a result of specific factors, including the risks described below and in the documents incorporated by reference herein.
You
should carefully consider the following risk factors in evaluating our business and us. The factors listed below represent certain
important factors that we believe could cause our business results to differ. These factors are not intended to represent a complete
list of the general or specific risks that may affect us. It should be recognized that other risks may be significant, presently
or in the future, and the risks set forth below may affect us to a greater extent than indicated. If any of the following risks
occur, our business, financial condition or results of operations could be materially and adversely affected. You should also
consider the other information included in our annual report on Form 10-K for the year ended December 31, 2014 and subsequent
quarterly reports filed with the SEC.
We
incurred losses in recent years.
We
have net losses for several years and had an accumulated deficit of $24,908,762 at December 31, 2014, which includes our net losses
of $9,163,261 and $2,497,940 for fiscal years 2014 and 2013, respectively. We have implemented several initiatives intended to
improve our revenues and reduce our operating costs with a goal of restoring profitability. If we are unsuccessful in this regard,
it will have a material adverse impact on our business, prospects, operating results and financial condition.
Our
credit facility
We
borrowed $2.5 million under two subordinated promissory notes during 2011, which provided the funds necessary to pay off our maturing
bank line of credit and to fund our operating needs. The subordinated promissory notes require monthly interest only payments
until their maturity date in May 2015. We have no revolving credit facility to fund our operating needs should it become necessary.
It will be difficult to obtain an institutional line of credit facility given our recent operating losses and the current banking
environment, which may adversely affect our ability to finance our business, grow or be profitable. Further, even if we could
obtain a new credit facility, in all likelihood would may not be on terms favorable to us.
If
we are unable to manage our current business activities, our prospects may be limited and our future profitability may be adversely
affected.
We
experienced rapid expansion in business through 2008 followed by a decline in our operating results from 2009 to 2014. Our revenues
have been unpredictable, which poses significant burdens on us to be proactive in managing production, personnel levels and related
costs. We will need to improve our revenues, operations, financial and other systems to manage our business effectively, and any
failure to do so may lead to inefficiencies and redundancies which reduce our prospects to return to profitability.
There
are risks related to dealing with domestic governmental entities as customers.
One
of the principal target markets for our products is the law enforcement community. In this market, the sale of products will be
subject to budget constraints of governmental agencies purchasing these products, which could result in a significant reduction
in our anticipated revenues. Such governmental agencies are currently experiencing budgetary pressures as a result of the recession
and its impact on local sales, property and income taxes that provide funding for purchasing our products. These agencies also
may experience political pressure that dictates the manner in which they spend money. As a result, even if an agency wants to
acquire our products, it may be unable to purchase them due to budgetary or political constraints. We cannot assure investors
that such governmental agencies will have the necessary funds to purchase our products even though they may want to do so. Further,
even if such agencies have the necessary funds, we may experience delays and relatively long sales cycles due to their internal
decision making policies and procedures.
There
are risks related to dealing with foreign governmental entities as customers.
We
target the law enforcement community in foreign countries for the sale of many of our products. While foreign countries vary,
generally the sale of our products will be subject to political and budgetary constraints of foreign governments and agencies
purchasing these products, which could result in a significant reduction in our anticipated revenues. Many foreign governments
are experiencing budgetary pressures as a result of the global recession and its impact on taxes and tariffs that in many cases
provide funding for purchasing our products. Law enforcement agencies within these countries also may experience political pressure
that dictates the manner in which they spend money. As a result, even if a foreign country or its’ law enforcement agencies
want to acquire our products, it may be unable to purchase them due to budgetary or political constraints. We cannot assure investors
that such governmental agencies will have the necessary funds to purchase our products even though they may want to do so. Further,
even if such agencies have the necessary funds, we may experience delays and relatively long sales cycles due to their internal
decision making policies and procedures.
International
law enforcement and other agencies that may consider using our products must analyze a wide range of issues before committing
to purchase products like ours, including training costs, product reliability and budgetary constraints. The length of our sales
cycle may range from a few months to a year or more. We may incur substantial selling costs and expend significant effort in connection
with the evaluation of our products by potential customers before they place an order. Initial orders by foreign governments and
agencies typically are for a small number of units that are used to evaluate the products. If these potential customers do not
purchase our products, we will have expended significant resources and receive no revenue in return. In addition, we may be selected
as the vendor of choice by these foreign customers but never receive the funding necessary to purchase our product due to political
or economic reasons.
We
are marketing our DVM-250 and DVM-250 Plus event recorder products to commercial fleet customers, which is a relatively new sales
channel for us and we may experience problems in gaining acceptance.
The
principal target market for our event recorder products is commercial fleet operators, such as taxi cabs, limousine services,
transit buses, ambulance services and a variety of delivery services. This is a relatively new sales channel for us and we may
experience difficulty gaining acceptance of our other products by the targeted customers. Our sales of such products will be subject
to budget constraints of both the large and small prospective customers, which could result in a significant reduction in our
anticipated revenues. Certain of such companies are experiencing budgetary and financial pressures as a result of the recession
and slow recovery and their impact on their revenues, all of which may negatively impact their ability to purchase our products.
As a result, even if prospective customers want to acquire our products, they may be unable to do so because of such factors.
Further, even if such companies have the necessary funds, we may experience delays and relatively long sales cycles due to their
internal decision making policies and procedures.
The
recent economic downturn has depressed state and local tax revenues from sales, use, income and property tax sources. The reduction
in such revenues has reduced funding to law enforcement agencies that represent our primary customers.
The
national economy was in a deep recession and the recovery has been relatively slow, resulting in lower tax collections by state
and local taxing authorities. Law enforcement agencies rely on funding from state and local tax sources to purchase our products.
These factors have decreased our primary customers’ ability to purchase our systems unless they can find other sources of
funding to cover the shortfall. While we hoped that the Economic Stimulus Act of 2009 would provide a source of alternative funding,
the amount, timing and use of such alternative funding by our prospective customers have been less than expected. We cannot assure
investors that such law enforcement agencies will have the necessary funds to purchase our products even though they may want
to do so.
We
are operating in a developing market and there is uncertainty as to market acceptance of our technology and products.
The
markets for our new and enhanced products and technology are developing and rapidly evolving. They are characterized by an increasing
number of market entrants who have developed or are developing a wide variety of products and technologies, a number of which
offer certain of the features that our products offer. Because of these factors, demand and market acceptance for new products
are subject to a high level of uncertainty. There can be no assurance that our technology and products will become widely accepted.
It is also difficult to predict with any assurance the future growth rate, if any, and size of the market. If a substantial market
fails to develop, develops more slowly than expected or becomes saturated with competitors or if our products do not achieve or
continue to achieve market acceptance, our business, operating results and financial condition will be materially and adversely
affected.
Our
technology may also be marketed and licensed to device manufacturers for inclusion in the products and equipment they market and
sell as an embedded solution. As with other new products and technologies designed to enhance or replace existing products or
technologies or change product designs, these potential partners may be reluctant to integrate our digital video recording technology
into their systems unless the technology and products are proven to be both reliable and available at a competitive price. Even
assuming product acceptance, our potential partners may be required to redesign their systems to effectively use our digital video
recording technology. The time and costs necessary for such redesign could delay or prevent market acceptance of our technology
and products. A lack of, or delay in, market acceptance of our digital video recording technology and products would adversely
affect our operations. There can be no assurance that we will be able to market our technology and products successfully or that
any of our technology or products will be accepted in the marketplace.
We
expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return.
Generally,
law enforcement and other agencies and commercial fleet and mass transit operators that may consider using our products must analyze
a wide range of issues before committing to purchase products like ours, including training costs, product reliability and budgetary
constraints. The length of our sales cycle may range from sixty days to a year or more. We may incur substantial selling costs
and expend significant effort in connection with the evaluation of our products by potential customers before they place an order.
Initial orders by agencies typically are for a small number of units that are used to evaluate the products. If these potential
customers do not purchase our products, we will have expended significant resources and have received no revenue in return.
Our
market is characterized by new products and rapid technological change.
The
market for our products is characterized by rapidly changing technology and frequent new product introductions. Our future success
will depend in part on our ability to enhance our existing technologies and products and to introduce new products and technologies
to meet changing customer requirements. We are currently devoting, and intend to continue to devote, significant resources toward
the development of new digital video recording technology and products both as stand-alone products and embedded solutions in
third party products and systems. There can be no assurance that we will successfully complete the development of these technologies
and related products in a timely fashion or that our current or future products will satisfy the needs of the digital video recording
market. There can also be no assurance that digital video recording products and technologies developed by others will not adversely
affect our competitive position or render our products or technologies non-competitive or obsolete.
We
substantially depend on sales from our in-car video products and if these products become obsolete or not widely accepted, our
growth prospects will be diminished.
We
have historically derived our revenues predominantly from sales of our in-car video systems, including the DVM-500 series and
DVM-750 digital video recorders in rear view mirrors and accessories, and we expect to continue to depend on sales of these products
during 2015. However, we introduced a number of new products from 2011 to 2014 with a view to diversifying our revenue sources
in the future. We launched our FirstVU HD, our body worn camera, and the DVM-800, our new in-car digital video recording device,
in June and December 2013, respectively. In 2014, we added the VuLink product and VUVault.net, our cloud based storage solution.
The DVM-800 has become our top selling product. A decrease in the prices of, or the demand for our in-car video products, or the
failure to achieve broad market acceptance of our new product offerings, would significantly harm our growth prospects, operating
results and financial condition.
We
substantially depend on our research and development activities to design new products and upgrades to existing products and if
these products are not widely accepted, or we encounter difficulties and delays in launching these new products, our growth prospects
will be diminished.
We
have a number of active research and development projects underway at the current time that are intended to launch new products
or upgrades to existing products. We may incur substantial costs and/or delays in completion of these activities that may not
result in viable products or may not be received well by our potential customers. We incurred $2,905,407 and $3,669,022 in research
and development expenses during the years ended December 31, 2014 and 2013, respectively, which represent a substantial expense
in relation to our total revenues and net losses. If we are unsuccessful in bringing these products from the engineering prototype
phase to commercial production, we could incur additional expenses (in addition to those already spent) without receiving revenues
from the new products. Also, these new products may fail to achieve broad market acceptance and may not generate revenue to cover
expenses incurred to design, develop, produce and market the new product offerings. Substantial delays in the launch of one or
more products could negatively impact our revenues and increase our costs, which could significantly harm our growth prospects,
operating results and financial condition.
If
we are unable to compete in our market, you may lose all or part of your investment.
Our
market is highly competitive and highly fragmented. The law enforcement and security surveillance markets are extremely competitive.
Competitive factors in these industries include ease of use, quality, portability, versatility, reliability, accuracy, cost and
other factors. Our primary competitors include L-3 Mobile-Vision, Inc., Coban Technologies, Inc., Watchguard, Kustom Signals,
Panasonic System Communications Company, Taser International, Inc. and a number of other competitors who sell or may in the future
sell body-worn cameras and in-car video systems to law enforcement agencies. There are direct competitors who have competitive
technology and products for all of our products. Many of these competitors have significant advantages over us, including greater
financial, technical, marketing and manufacturing resources, more extensive distribution channels, larger customer bases and faster
response times to adapt new or emerging technologies and changes in customer requirements. As a result, our competitors may develop
superior products or beat us to market with products similar to ours. Further, there can be no assurance that new companies will
not enter our markets in the future and we expect to encounter new competitors as we develop and market new products.
Although
we believe that our products will be distinguishable from those of our competitors on the basis of their technological features
and functionality at an attractive value proposition, there can be no assurance that we will be able to penetrate any of our anticipated
competitors’ portions of the market. Many of our anticipated competitors may have existing relationships with equipment
or device manufacturers that may impede our ability to market our technology to those potential customers and build market share.
There can be no assurance that we will be able to compete successfully against current or future competitors or that competitive
pressures will not have a material adverse effect on our business, operating results and financial condition. If we are not successful
in competing against our current and future competitors, you could lose your entire investment.
Defects
in our products could impair our ability to sell our products or could result in litigation and other significant costs.
Any
significant defects in our products may result in, among other things, delay in time-to-market, loss of market acceptance and
sales of our products, diversion of development resources, and injury to our reputation, or increased warranty costs. Because
our products are technologically complex, they may contain defects that cannot be detected prior to shipment. These defects could
harm our reputation and impair our ability to sell our products. The costs we may incur in correcting any product defects may
be substantial and could decrease our profit margins. Additionally, errors, defects or other performance problems could result
in financial or other damages to our customers, which could result in litigation. Product liability litigation, even if we prevail,
would be time consuming and costly to defend. Our product liability insurance may not be adequate to cover claims. Our product
liability insurance coverage per occurrence is $1,000,000, with a $2,000,000 aggregate for our general business liability coverage
and an additional $1,000,000 per occurrence. Our excess or umbrella liability coverage per occurrence and in aggregate is $5,000,000.
Product
defects can be caused by design errors, programming bugs, or defects in component parts or raw materials. This is common to every
product manufactured which is based on modern electronic and computer technology. Because of the extreme complexity of digital
in-car video systems, one of the key concerns is operating software robustness. Some of the software modules are provided to us
by outside vendors under license agreements, while other portions are developed by our own software engineers. As with any software-dependent
product, “bugs” can occur, even with rigorous testing before release of the product. The software included in our
digital video rear view mirror and digital video flashlight products is designed to be “field upgradeable” so that
changes or fixes can be made by the end user by downloading new software through the internet. We intend to incorporate this technology
into any future products as well, providing a quick resolution to potential software issues that may arise over time.
As
with all electronic devices, hardware issues can arise from many sources. The component electronic parts we utilize come from
many sources around the world. We attempt to mitigate the possibility of shipping defective products by fully testing sub-assemblies
and thoroughly testing assembled units before they are shipped out to our customers. Because of the nature and complexity of some
of the electronic components used, such as microprocessor chips, memory systems, and zoom video camera modules, it is not technically
or financially realistic to attempt to test every single aspect of every single component and their potential interactions. By
using components from reputable and reliable sources, and by using professional engineering, assembly, and testing methods, we
seek to limit the possibility of defects slipping through. In addition to internal testing, we now have thousands of units in
the hands of police departments and in use every day. Over the past years of field use we have addressed a number of subtle issues
and made refinements requested by the end-user.
We
are dependent on key personnel.
Our
success will be largely dependent upon the efforts of our executive officers, Stanton E. Ross and Thomas J. Heckman. We do not
have employment agreements with Messrs. Ross or Heckman. The loss of the services of these individuals could have a material adverse
effect on our business and prospects. There can be no assurance that we will be able to retain the services of such individuals
in the future. We have not obtained key-man life insurance policies on these individuals. We are also dependent to a substantial
degree on our technical, research and development staff. Our success will be dependent upon our ability to hire and retain additional
qualified technical, research, management, marketing and financial personnel. We will compete with other companies with greater
financial and other resources for such personnel. Although we have not experienced difficulty in attracting qualified personnel
to date, there can be no assurance that we will be able to retain our present personnel or acquire additional qualified personnel
as and when needed.
We
rely on third party distributors and representatives for our international marketing capability.
Our
distribution strategy is to pursue international sales through multiple channels with an emphasis on independent distributors
and representatives. Our inability to recruit and retain distributors and representatives who can successfully sell our products
would adversely affect our international sales. In addition, our arrangements with our distributors and representatives are generally
short-term. If we do not competitively price our products, meet the requirements of our distributors and representatives or end-users,
provide adequate marketing and technical support, or comply with the terms of our distribution arrangements, our distributors
and representatives may fail to aggressively market our products or may terminate their relationships with us. These developments
would likely have a material adverse effect on our international sales. Our reliance on the sales of products by others also makes
it more difficult to predict our revenues, cash flow and operating results.
We
are dependent on manufacturers and suppliers.
We
purchase, and intend to continue to purchase, substantially all of the components for our products and some entire products, from
a limited number of manufacturers and suppliers, most of whom are located outside the United States. Our internal process is principally
to assemble the various components and subassemblies manufactured by our suppliers and test the assembled product prior to shipping
to our customers. We do not intend to directly manufacture any of the equipment or parts to be used in our products. Our reliance
upon outside manufacturers and suppliers, including foreign suppliers, is expected to continue, increase in scope and involves
several risks, including limited control over the availability of components, and products themselves and related delivery schedules,
pricing and product quality. We may experience delays, additional expenses and lost sales if we are required to locate and qualify
alternative manufacturers and suppliers.
A
few of the semiconductor chip components for our products are produced by a very small number of specialized manufacturers. Currently,
we purchase one essential semiconductor chip from a single manufacturer. While we believe that there are alternative sources of
supply, if, for any reason, we are precluded from obtaining such a semiconductor chip from this manufacturer, we may experience
long delays in product delivery due to the difficulty and complexity involved in producing the required component and we may also
be required to pay higher costs for our components.
While
we do the final assembly, testing, packaging, and shipment of certain of our products in-house, a number of our component parts
are manufactured by subcontractors. These subcontractors include: raw circuit board manufacturers, circuit board assembly houses,
injection plastic molders, metal parts fabricators, and other custom component providers. While we are dependent upon these subcontractors
to the extent that they are producing custom subassemblies and components necessary for manufacturing our products, we still own
the designs and intellectual property involved. This means that the failure of any one contractor to perform may cause delays
in production. However, we can mitigate potential interruptions by maintaining “buffer stocks” of critical parts and
subassemblies and by using multiple sources for critical components. We also have the ability to move our subcontracting to alternate
providers. Being forced to use a different subcontractor could cause production interruptions ranging from negligible, such as
a few weeks, to very costly, such as four to six months. Further, the failure of a foreign manufacturer to deliver products to
us timely, in sufficient quantities and with the requisite quality would have a material adverse impact on our business, operations
and financial condition.
The
only component group that would require a complete redesign of our digital video electronics package is the Texas Instruments
chips. While there are competitive products available, each chip has unique characteristics that would require extensive tailoring
of product designs to use it. The Texas Instrument chips are the heart of our video processing system. If Texas Instruments became
unwilling or unable to provide us with these chips, we would be forced to redesign our digital video encoder and decoder systems.
Such a complete redesign could take substantial time (i.e. over six months) to complete. We attempt to mitigate the potential
for interruption by maintaining continuous stocks of these chips to support several months’ worth of production. In addition,
we regularly check on the end-of-life status of these parts to make sure that we will know well in advance of any decisions by
Texas Instruments to discontinue these parts. There are other semiconductors that are integral to our product design and which
could cause delays if discontinued, but not to the same scale as the Texas Instrument chips.
We
are uncertain of our ability to protect technology through patents.
Our
ability to compete effectively will depend on our success in protecting our proprietary technology, both in the United States
and abroad. We have filed for patent protection in the United States and certain other countries to cover certain design aspects
of our products. We license the critical technology on which our products are based from Sasken-Ingenient, Inc., and Lead Technologies
pursuant to license agreements. However, the technology licensed from these parties is critical because it is the basis of our
current product design. We may choose to use other video encoding and decoding technology in future products, thus lessening our
dependence on our licenses with these companies.
Some
of these patent applications are still under review by the U.S. Patent Office and, therefore, we have not yet been issued all
of the patents that we applied for in the United States. No assurance can be given that any patents relating to our existing technology
will be issued from the United States or any foreign patent offices, that we will receive any patents in the future based on our
continued development of our technology, or that our patent protection within and/or outside of the United States will be sufficient
to deter others, legally or otherwise, from developing or marketing competitive products utilizing our technologies.
If
our patents were to be denied as filed, we would seek to obtain different patents for other parts of our technology. If our main
patent, which relates to the placement of the in-car video system in a rear view mirror, is denied, it could potentially allow
our competitors to build very similar devices. However, we believe that very few of our competitors would be capable of this because
of the level of technical sophistication and level of miniaturization required. Even if we obtain patents, there can be no assurance
that they will be enforceable to prevent others from developing and marketing competitive products or methods. If we bring an
infringement action relating to any future patents, it may require the diversion of substantial funds from our operations and
may require management to expend efforts that might otherwise be devoted to our operations. Furthermore, there can be no assurance
that we will be successful in enforcing our patent rights.
Further,
if any patents are issued there can be no assurance that patent infringement claims in the United States or in other countries
will not be asserted against us by a competitor or others, or if asserted, that we will be successful in defending against such
claims. If one of our products is adjudged to infringe patents of others with the likely consequence of a damage award, we may
be enjoined from using and selling such product or be required to obtain a royalty-bearing license, if available on acceptable
terms. Alternatively, if a license is not offered, we might be required, if possible, to redesign those aspects of the product
held to infringe so as to avoid infringement liability. Any redesign efforts we undertake might be expensive, could delay the
introduction or the re-introduction of our products into certain markets, or may be so significant as to be impractical.
We
are uncertain of our ability to protect our proprietary technology and information.
In
addition to seeking patent protection, we rely on trade secrets, know-how and continuing technological advancement to seek to
achieve and thereafter maintain a competitive advantage. Although we have entered into or intend to enter into confidentiality
and invention agreements with our employees, consultants and advisors, no assurance can be given that such agreements will be
honored or that we will be able to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, no assurance
can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets and know-how.
Foreign
currency fluctuations may affect our competitiveness and sales in foreign markets.
The
relative change in currency values creates fluctuations in our product pricing for potential international customers. These changes
in foreign end-user costs may result in lost orders and reduce the competitiveness of our products in certain foreign markets.
These changes may also negatively affect the financial condition of some existing or potential foreign customers and reduce or
eliminate their future orders of our products. We also import selected components which are used in the manufacturing of some
of our products. Although our purchase orders are in the United States dollar, weakness in the United States dollar could lead
to price increases for the components.
Risks
related to our license arrangements.
We
have licensing agreements with Sasken and Lead regarding certain software used as the platform for the proprietary software we
have developed for use in our products. These licensing agreements have specified terms and are renewable on an annual basis unless
both parties determine not to renew them and provided the parties are in compliance with the agreements. If we fail to make the
payments under these licenses or if these licenses are not renewed for any reason, it would cause us significant time and expense
to redevelop our software on a different software platform, which would have a material adverse effect on our business, operating
results and financial condition.
Risks
related to our supply and distribution arrangement and related litigation.
On
June 5, 2013, we filed a lawsuit in the District Court of Johnson County, Kansas against Dragoneye. We had entered into a supply
and distribution agreement with Dragoneye on May 1, 2010 under which we were granted the right to sell and distribute a proprietary
law enforcement speed measurement device and derivatives to our customers under the trade name LaserAlly. The parties amended
the agreement on January 31, 2012. In our complaint we allege that Dragoneye breached the contract because it failed to maintain
as confidential information our customer list; it infringed on our trademarks, including LaserAlly and Digital Ally; it tortiously
interfered with our existing contracts and business relationships with our dealers, distributors, customers and trading partners;
and it engaged in unfair competition under the Kansas Uniform Trade Secrets Statutes. We amended the complaint to include claims
regarding alleged material defects in the products supplied under the agreement. During 2014, the parties agreed in principle
to resolve their claims; however, the parties have been unable to negotiate the terms of a final settlement agreement. Under the
agreement in principle, we would have paid all outstanding and unpaid invoices, including interest at 10% per annum, through the
date the settlement agreement was to be executed. Such amount approximated $210,000 and has been recorded in accounts payable
and accrued liabilities at December 31, 2014. In return, Dragoneye was to cancel our remaining obligation to purchase LaserAlly
products and accept responsibility for and correct the material defects in the products delivered to us under the contract at
its cost. As a result of the parties’ failure to reach terms of a final settlement, we are now seeking the court to require
Dragoneye to accept the return of all product currently in inventory (approximately $1,280,000) for a full refund as a result
of alleged material defects in the products. We have filed a Motion for Summary Judgment seeking the court to order Dragoneye
to accept the return of all inventory and refund our purchase price. The Court has not yet acted upon our Motion.
Our
revenues and operating results may fluctuate unexpectedly from quarter to quarter, which may cause our stock price to decline.
Our
revenues and operating results have varied significantly in the past and may continue to fluctuate significantly in the future
due to various factors that are both in and outside our control. As a result, we believe that period-to-period comparisons of
our operating results may not be meaningful in the short-term, and our performance in a particular period may not be indicative
of our performance in any future period.
Coalitions
of a few of our larger stockholders have sufficient voting power to make corporate governance decisions that could have significant
effect on us and the other stockholders.
Our
officers, directors and principal stockholders (greater than five percent stockholders) together control approximately 15.7%,
including options vested or to vest within sixty days, of our outstanding common stock. As a result, these stockholders, if they
act together, will be able to exert a significant degree of influence over our management and affairs and over matters requiring
stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this
concentration of ownership may delay or prevent a change in our control and might affect the market price of our common stock,
even when a change in control may be in the best interest of all stockholders. Furthermore, the interests of this concentration
of ownership may not always coincide with our interests or the interests of other stockholders. Accordingly, these stockholders
could cause us to enter into transactions or agreements that we would not otherwise consider.
We
are a party to several lawsuits both as a plaintiff and as a defendant in which we may ultimately not prevail resulting in losses
and may cause our stock price to decline.
We
are involved as a plaintiff and defendant in routine litigation and administrative proceedings incidental to our business from
time to time, including customer collections, vendor and employment-related matters. We believe that the likely outcome of any
other pending cases and proceedings will not be material to our business or financial condition. However, there can be no assurance
that we will prevail in the litigation or proceedings or that we may not have to pay damages or other awards to the other party.
Risks
Relating to our Common Stock
The
possible issuance of common stock subject to options and warrants may dilute the interest of stockholders.
We
have granted options to purchase a total of shares of our common stock under our stock option and restricted stock plans and common
stock purchase warrants for 306,481 shares which were outstanding and unexercised as of December 31, 2014. To the extent that
outstanding stock options are exercised, dilution to the interests of our stockholders may occur. Moreover, the terms upon which
we will be able to obtain additional equity capital may be adversely affected since the holders of the outstanding options can
be expected to exercise them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable
to us than those provided in such outstanding options.
We
have never paid dividends and have no plans to in the future.
Holders
of shares of our common stock are entitled to receive such dividends as may be declared by our board of directors. To date, we
have paid no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the
foreseeable future. We intend to retain future earnings, if any, to provide funds for operation of our business. Therefore, any
return investors in our common stock will have to be in the form of appreciation, if any, in the market value of their shares
of common stock.
We
have additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common
stock.
Our
articles of incorporation authorize the issuance of 9,375,000 shares of our common stock. The common stock can be issued by our
board of directors without stockholder approval. In addition, we are anticipating seeking approval from our shareholders at our
next annual meeting for an amendment to our Articles of Incorporation in order to increase the number of shares of common stock
available for issuance and to approve the authorization of blank check preferred stock. Any future issuances of equity would further
dilute the percentage ownership of us held by our public shareholders.
Our
stock price is likely to be highly volatile because of several factors, including a limited public float.
The
market price of our common stock is likely to be highly volatile because there has been a relatively thin trading market for our
stock, which causes trades of small blocks of stock to have a significant impact on our stock price. You may not be able to resell
shares of our common stock following periods of volatility because of the market’s adverse reaction to volatility.
Other
factors that could cause such volatility may include, among other things:
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digital
video in-car recording products not being accepted by the law enforcement industry or digital video recording not being accepted
as evidence in criminal proceedings;
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acceptance
of our new products in the marketplace and, in particular, the commercial fleet and mass transit market;
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actual
or anticipated fluctuations in our operating results;
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the
potential absence of securities analysts covering us and distributing research and recommendations about us;
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we
expect our actual operating results to fluctuate widely as we increase our sales and production capabilities and other operations;
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we
may have a low trading volume for a number of reasons, including that a large amount of our stock is closely held;
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overall
stock market fluctuations;
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economic
conditions generally and in the law enforcement and security industries in particular;
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announcements
concerning our business or those of our competitors or customers;
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our
ability to raise capital when we require it, and to raise such capital on favorable terms;
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we
have $2.5 million of borrowings outstanding as of March 1,2015 under two unsecured notes payable to a private, third party
lender that mature in May 2015;
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we
have no institutional line-of-credit available to fund our operations and we may be unable to obtain a line of credit under
terms that are mutually agreeable;
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changes
in financial estimates by securities analysts or our failure to perform as anticipated by the analysts;
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announcements
of technological innovations;
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conditions
or trends in the industry;
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litigation;
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changes
in market valuations of other similar companies;
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announcements
by us or our competitors of new products or of significant technical innovations, contracts, acquisitions, strategic partnerships
or joint ventures;
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future
sales of common stock;
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actions
initiated by the SEC or other regulatory bodies;
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existence
or lack of patents or proprietary rights;
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departure
of key personnel or failure to hire key personnel; and
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general
market conditions.
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Any
of these factors could have a significant and adverse impact on the market price of our common stock. In addition, the stock market
in general has at times experienced extreme volatility and rapid decline that has often been unrelated or disproportionate to
the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our
common stock, regardless of our actual operating performance.
Indemnification
of officers and directors.
Our
articles of incorporation and the bylaws contain broad indemnification and liability limiting provisions regarding our officers,
directors and employees, including the limitation of liability for certain violations of fiduciary duties. Our stockholders therefore
will have only limited recourse against such individuals.
The
market for our common stock is limited and may not provide adequate liquidity.
Until
early July 2014 our common stock has been thinly traded on the Nasdaq Capital Market. From January 1, 2014 to July 9, 2014, the
actual daily trading volume in our common stock ranged from 1,100 shares of common stock to a high of 121,300 shares of common
stock traded. On most days, this trading volume meant there was limited liquidity in our shares of common stock. Selling our shares
during this period was more difficult because smaller quantities of shares were bought and sold and news media coverage about
us was limited. These factors resulted in a limited trading market for our common stock and therefore holders of our stock may
have been unable to sell shares purchased, if they desired to do so.
However,
from July 10 to July 25, 2014 the trading volume in our common stock increase dramatically. During such period the average daily
trading volume was 2,114,908 shares per day, with a high of 11,822,500 shares traded on July 11, 2014. In addition, from August
19 to September 19, 2014 the average daily trading volume was 6,794,930 shares per day, with a high of 24,098,300 shares traded
on August 25, 2014. There can be no assurance that such liquidity in the public market for our common stock will continue
.
If
securities or industry analyst do not publish research reports about our business, or if they downgrade our stock, the price of
our common stock could decline.
Small,
relatively unknown companies can achieve visibility in the trading market through research and reports that industry or securities
analysts publish. To our knowledge there are no independent analysts who cover us. The lack of published reports by independent
securities analysts could limit the interest in our common stock and negatively affect our stock price. Even if we did have such
coverage, we would not have any control over the research and reports any analysts might publish. If any analyst who did cover
us downgrades our stock, our stock price could decline. If any analyst who had been covering us ceases coverage of us or failed
to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price
to decline.
Future
sales of our common stock may depress our stock price
.
We
can make no prediction can be made as to the effect, if any, that future sales of our common stock, or the availability of our
common stock for future sales, will have on the market price of our common stock. Sales in the public market of substantial amounts
of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for our common
stock. The potential effect of these shares being sold may be to depress the price at which our common stock trades.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain
information included in this prospectus may be deemed to be forward-looking statements. Where any forward-looking statement includes
a statement of the assumptions or bases underlying the forward-looking statement, we caution that, while we believe these assumptions
or bases to be reasonable and made in good faith, assumed facts or bases almost always vary from the actual results, and the differences
between assumed facts or bases and actual results can be material, depending upon the circumstances. Where, in any forward-looking
statement, we or our management express an expectation or belief as to future results, such expectation or belief is expressed
in good faith and is believed to have a reasonable basis. We cannot assure you, however, that the statement of expectation or
belief will result or be achieved or accomplished. These statements relate to analyses and other information which are based on
forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects,
developments and business strategies. These forward-looking statements are identified by their use of terms and phrases such as
“anticipate,” “believe,” “future,” “could,” “estimate,” “expect,”
“intend,” “may,” “plan,” “predict,” “project,” “will,”
and similar terms and phrases, including references to assumptions. These statements are contained in the section “Risk
Factors” and other sections of this prospectus. These forward looking statements involve risks and uncertainties that may
cause our actual future activities and results of operations to be materially different from those suggested or described in this
prospectus. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability,
cash flows and capital needs. These risks include the risks that are identified in the “Risk Factors” section of this
prospectus, and also include, among others, expectations regarding the following:
Factors
that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to
be adversely affected include, but are not limited to: (1) our losses in recent years, including fiscal 2013 and 2014, that in
turn could cause us to be unable to pay our $2.5 million in subordinated debt as required; (2) macro-economic risks from the effects
of the economic downturn and decrease in budgets for the law-enforcement community; (3) our ability to increase revenues, increase
our margins and return to consistent profitability in the current economic environment; (4) our operation in developing markets
and uncertainty as to market acceptance of our technology and new products; (5) the impact of the federal government’s stimulus
program on the budgets of law enforcement agencies, including the timing, amount and restrictions on funding; (6) our ability
to deliver our new product offerings as scheduled and have such new products perform as planned or advertised; (7) whether there
will be commercial markets, domestically and internationally, for one or more of our new products, and the degree to which the
interest shown in our new products, including the FirstVU HD, VuLink and VuVault.net, will continue to translate into sales during
2015; (8) our ability to maintain or expand our share of the market for our products in the domestic and international markets
in which we compete, including increasing our international revenues to their historical levels; (9) our ability to produce our
products in a cost-effective manner; (10) competition from larger, more established companies with far greater economic and human
resources; (11) our ability to attract and retain quality employees; (12) risks related to dealing with governmental entities
as customers; (13) our expenditure of significant resources in anticipation of a sale due to our lengthy sales cycle and the potential
to receive no revenue in return; (14) characterization of our market by new products and rapid technological change; (15) our
dependence on sales of our DVM-800, DVM-750 and DVM-500 Plus products; (16) potential that stockholders may lose all or part of
their investment if we are unable to compete in our markets and return to profitability; (17) defects in our products that could
impair our ability to sell our products or could result in litigation and other significant costs; (18) our dependence on key
personnel; (19) our reliance on third party distributors and representatives for our marketing capability; (20) our dependence
on a few manufacturers and suppliers for components of our products and our dependence on domestic and foreign manufacturers for
certain of our products; (21) our ability to protect technology through patents; (22) our ability to protect our proprietary technology
and information as trade secrets and through other similar means; (23) risks related to our license arrangements; (24) our revenues
and operating results may fluctuate unexpectedly from quarter to quarter; (25) sufficient voting power by coalitions of a few
of our larger stockholders, including directors and officers, to make corporate governance decisions that could have significant
effect on us and the other stockholders; (26) sale of substantial amounts of our common stock that may have a depressive effect
on the market price of the outstanding shares of our common stock; (27) possible issuance of common stock subject to options and
warrants that may dilute the interest of stockholders; (28) our ability to comply with Sarbanes-Oxley Act of 2002 Section 404
as it may be required; (29) our nonpayment of dividends and lack of plans to pay dividends in the future; (30) future sale of
a substantial number of shares of our common stock that could depress the trading price of our common stock, lower our value and
make it more difficult for us to raise capital; (31) our additional securities available for issuance, which, if issued, could
adversely affect the rights of the holders of our common stock; (32) our stock price is likely to be highly volatile due to a
number of factors, including a relatively limited public float; and (33) indemnification of our officers and directors.
We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or
otherwise. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual
results may vary materially from those expected, estimated or projected.
USE
OF PROCEEDS
Unless
otherwise specified in a prospectus supplement accompanying this prospectus, we expect to use the net proceeds from the sale of
our securities for general corporate purposes, which may include, among other things, the financing of capital expenditures, refinancings
or recapitalization transactions, acquisitions and additions to our working capital. The actual application of proceeds from the
sale of any particular tranche of securities issued hereunder will be described in the applicable prospectus supplement relating
to such tranche of securities. Until we use the net proceeds from the sale of securities for these purposes, we may place the
net proceeds in temporary investments.
We
will retain broad discretion over the use of the net proceeds from the sale of our securities offered by us hereby. Except as
described in any prospectus supplement, we currently intend to use the net proceeds from the sale of securities offered by us
pursuant to this prospectus for working capital, capital expenditures, investments in our subsidiaries, and other general corporate
purposes. We may also use such proceeds to fund acquisitions of businesses, technologies or product lines that complement our
current business or expand our business into new areas. However, we currently have no commitments or agreements for any specific
acquisitions. Pending application of the net proceeds, we intend to invest the net proceeds of the offering of securities by us
in investment-grade, interest-bearing securities.
The
intended application of proceeds from the sale of any particular offering of securities using this prospectus will be described
in the accompanying prospectus supplement relating to such offering. The precise amount and timing of the application of these
proceeds will depend on our funding requirements and the availability and costs of other funds.
RATIO
OF EARNINGS TO FIXED CHARGES
If
we offer debt securities under this prospectus, then we will, if required at the time, provide a ratio of earnings to fixed charges
in the applicable prospectus supplement for such offering.
PLAN
OF DISTRIBUTION
We
may sell the securities offered through this prospectus (i) to or through underwriters or dealers, (ii) directly to purchasers,
including our affiliates, (iii) through agents, or (iv) through a combination of any these methods. The securities may be distributed
at a fixed price or prices, which may be changed, market prices prevailing at the time of sale, prices related to the prevailing
market prices, or negotiated prices. The prospectus supplement will include the following information:
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the
terms of the offering;
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the
names of any underwriters or agents;
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the
name or names of any managing underwriter or underwriters;
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the
purchase price of the securities;
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any
over-allotment options under which underwriters may purchase additional securities from us;
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the
net proceeds from the sale of the securities;
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any
delayed delivery arrangements;
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any
underwriting discounts, commissions and other items constituting underwriters’ compensation;
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any
initial public offering price;
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any
discounts or concessions allowed or reallowed or paid to dealers;
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any
commissions paid to agents; and
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any
securities exchange or market on which the securities may be listed.
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Sale
Through Underwriters or Dealers
Only
underwriters named in the prospectus supplement are underwriters of the securities offered by the prospectus supplement.
If
underwriters are used in the sale, the underwriters will acquire the securities for their own account, including through underwriting,
purchase, security lending or repurchase agreements with us. The underwriters may resell the securities from time to time in one
or more transactions, including negotiated transactions. Underwriters may sell the securities in order to facilitate transactions
in any of our other securities (described in this prospectus or otherwise), including other public or private transactions and
short sales. Underwriters may offer securities to the public either through underwriting syndicates represented by one or more
managing underwriters or directly by one or more firms acting as underwriters. Unless otherwise indicated in the prospectus supplement,
the obligations of the underwriters to purchase the securities will be subject to certain conditions, and the underwriters will
be obligated to purchase all the offered securities if they purchase any of them. The underwriters may change from time to time
any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers.
If
dealers are used in the sale of securities offered through this prospectus, we will sell the securities to them as principals.
They may then resell those securities to the public at varying prices determined by the dealers at the time of resale. The prospectus
supplement will include the names of the dealers and the terms of the transaction.
The
maximum compensation or discount to be received by any FINRA member or independent broker-dealer will not be greater than 8% for
the sale of any securities being registered hereunder pursuant to Rule 415 of the Securities Act.
Direct
Sales and Sales Through Agents
We
may sell the securities offered through this prospectus directly. In this case, no underwriters or agents would be involved. Such
securities may also be sold through agents designated from time to time. The prospectus supplement will name any agent involved
in the offer or sale of the offered securities and will describe any commissions payable to the agent. Unless otherwise indicated
in the prospectus supplement, any agent will agree to use its reasonable best efforts to solicit purchases for the period of its
appointment.
We
may sell the securities directly to institutional investors or others who may be deemed to be underwriters within the meaning
of the Securities Act with respect to any sale of those securities. The terms of any such sales will be described in the prospectus
supplement.
Delayed
Delivery Contracts
If
the prospectus supplement indicates, we may authorize agents, underwriters or dealers to solicit offers from certain types of
institutions to purchase securities at the public offering price under delayed delivery contracts. These contracts would provide
for payment and delivery on a specified date in the future. The contracts would be subject only to those conditions described
in the prospectus supplement. The applicable prospectus supplement will describe the commission payable for solicitation of those
contracts.
Market
Making, Stabilization and Other Transactions
We
may elect to list offered securities on an exchange or in the over-the-counter market. Any underwriters that we use in the sale
of offered securities may make a market in such securities, but may discontinue such market making at any time without notice.
Therefore, we cannot assure you that the securities will have a liquid trading market.
Certain
persons participating in an offering may engage in overallotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with rules and regulations under the Exchange Act. Overallotment involves the sale in excess of the
offering size, which create a short position. Stabilizing transactions involve bids to purchase the underlying security in the
open market for the purpose of pegging, fixing or maintaining the price of the securities. Syndicate covering transactions involve
purchases of the securities in the open market after the distribution has been completed in order to cover syndicate short positions.
Penalty
bids permit the underwriters to reclaim a selling concession from a syndicate member when the securities originally sold by the
syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. Stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the securities to be higher than it would be in the absence
of the transactions. The underwriters may, if they commence these transactions, discontinue them at any time.
General
Information
Agents,
underwriters, and dealers may be entitled, under agreements entered into with us, to indemnification by us against certain liabilities,
including liabilities under the Securities Act. Our agents, underwriters, and dealers, or their affiliates, may be customers of,
engage in transactions with or perform services for us, in the ordinary course of business.
GENERAL
DESCRIPTION OF SECURITIES
We
may offer and sell, at any time and from time to time:
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shares
of our common stock;
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warrants
to purchase shares of our common stock and/or debt securities;
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debt
securities consisting of notes, debentures or other evidences of indebtedness;
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convertible
debt securities consisting of notes, debentures or other evidences of indebtedness;
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Rights
to purchase shares of our common stock and/or debt securities;
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units
consisting of a combination of the foregoing; or
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any
combination of these securities.
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The
terms of any securities we offer will be determined at the time of sale. We may issue debt securities that are exchangeable for
and/or convertible into common stock or any of the other securities that may be sold under this prospectus. When particular securities
are offered, a supplement to this prospectus will be filed with the SEC, which will describe the terms of the offering and sale
of the offered securities.
DESCRIPTION
OF CAPITAL STOCK
The
following description of our capital stock summarizes general terms and provisions that apply to our capital stock. Since this
is only a summary, it does not contain all of the information that may be important to you. The summary is subject to and qualified
in its entirety by reference to our articles of incorporation, as amended, and our bylaws, as amended, which are filed as exhibits
to the registration statement of which this prospectus is a part and incorporated by reference into this prospectus. See “Where
You Can Find More Information.”
Our
authorized capital consists of 9,375,000 shares of stock $0.001 par value per share. As of April 30, 2015, we had 4,021,069 shares
of our common stock issued and outstanding.
Common
Stock
For
all matters submitted to a vote of stockholders, holders of common stock are entitled to one vote for each share registered in
his or her name on our books, and they do not have cumulative voting rights. Each share of the common stock is entitled to share
equally with each other share of common stock in dividends from sources legally available therefore, when, as, and if declared
by the board of directors and, upon our liquidation or dissolution, whether voluntary or involuntary, to share equally in the
assets that are available for distribution to the holders of the common stock. Holders of our common stock have no preemptive,
subscription, redemption or conversion rights. The board of directors is authorized to issue additional shares of common stock
within the limits authorized by our Articles of Incorporation and without stockholder action.
Our
common stock is listed and traded on the Nasdaq Capital Market under the symbol “DGLY”.
Dividend
Policy
We
have never paid a cash dividend on our common stock. We do not anticipate paying any cash dividends on our common stock in the
foreseeable future, and we plan to retain our earnings to finance our operations and future growth.
DESCRIPTION
OF WARRANTS
We
may issue warrants for the purchase of common stock and/or debt securities. Warrants may be issued independently or together with
common stock and/or debt securities offered by any prospectus supplement and may be attached to or separate from any such offered
securities. We may issue series of warrants under a separate warrant agreement between us and a bank or trust company, as warrant
agent, all as will be set forth in the prospectus supplement relating to the particular issue of warrants. The warrant agent would
act solely as our agent in connection with the warrants and would not assume any obligation or relationship of agency or trust
for or with any holders of warrants or beneficial owners of warrants.
The
following summary of certain provisions of the warrants does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all provisions of the warrant agreements.
Reference
is made to the prospectus supplement relating to the particular issue of warrants offered pursuant to such prospectus supplement
for the terms of and information relating to such warrants, including, where applicable:
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the
specific designation and aggregate number of, and the price at which we will issue, the warrants;
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the
currency or currency units in which the offering price, if any, and the exercise price are payable;
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the
designation, amount and terms of the securities purchasable upon exercise of the warrants;
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the
number of shares of common stock purchasable upon the exercise of warrants to purchase common stock and the price at which
such number of shares of common stock may be purchased upon such exercise;
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the
date on which the right to exercise such warrants shall commence and the date on which such right shall expire or, if the
warrants may not be continuously exercised throughout that period, the specific date or dates on which the warrants may be
exercised;
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if
applicable, the exercise price for shares of our common stock and the number of shares of common stock to be received upon
exercise of the warrants;
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if
applicable, the exercise price for our debt securities, the amount of our debt securities to be received upon exercise of
the warrants, and a description of that series of debt securities;
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whether
the warrants will be issued in fully registered form or bearer form, in definitive or global form or in any combination of
these forms, although, in any case, the form of a warrant included in a unit will correspond to the form of the unit and of
any security included in that unit;
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United
States federal income tax consequences applicable to such warrants;
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the
identity of the warrant agent for the warrants and of any other depositaries, execution or paying agents, transfer agents,
registrars or other agents;
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the
proposed listing, if any, of the warrants or any securities purchasable upon exercise of the warrants on any securities exchange
or market;
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if
applicable, the date from and after which the warrants and the common stock and/or debt securities will be separately transferable;
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if
applicable, the minimum or maximum amount of the warrants that may be exercised at any one time;
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the
anti-dilution provisions of the warrants, if any;
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any
redemption or call provisions, if any;
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whether
the warrants are to be sold separately or with other securities as parts of units
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the
amount of warrants outstanding as of the most recent practicable date; and
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any
additional terms of the warrants, including terms, procedures and limitations relating to the exchange and exercise of the
warrants.
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The
exercise price for warrants will be subject to adjustment in accordance with the applicable prospectus supplement.
Each
warrant will entitle the holder thereof to purchase such number of shares of common stock at such exercise price as shall in each
case be set forth in, or calculable from, the prospectus supplement relating to the warrants, which exercise price may be subject
to adjustment upon the occurrence of certain events as set forth in such prospectus supplement. After the close of business on
the expiration date, or such later date to which such expiration date may be extended by us, unexercised warrants will become
void. The place or places where, and the manner in which, warrants may be exercised shall be specified in the prospectus supplement
relating to such warrants.
Prior
to the exercise of any warrants to purchase common stock, holders of such warrants will not have any of the rights of holders
of common stock, as the case may be, purchasable upon such exercise, including the right to receive payments of dividends, if
any, on the common stock purchasable upon such exercise, or to exercise any applicable right to vote.
DESCRIPTION
OF DEBT SECURITIES AND CONVERTIBLE DEBT SECURITIES
The
following description, together with the additional information we include in any applicable prospectus supplement, summarizes
the material terms and provisions of the debt securities that may be offered from time to time under this prospectus. We may issue
debt securities, in one or more series, as either senior or subordinated debt or as senior or subordinated convertible debt. While
the terms we have summarized below will generally apply to any future debt securities that may be offered under this prospectus,
we will describe the particular terms of any debt securities that may be offered in more detail in the applicable prospectus supplement.
The terms of any debt securities offered under a prospectus supplement may differ from the terms we describe below.
We
may issue secured or unsecured debt securities offered under this prospectus, which may be senior, subordinated or junior subordinated,
and/or convertible and which may be issued in one or more series. We will issue any new senior debt securities under a senior
indenture that we will enter into with a trustee named in such senior indenture. We will issue any subordinated debt securities
under a subordinated indenture that we will enter into with a trustee named in such subordinated indenture. We will have filed
forms of these documents as exhibits to the registration statement, of which this prospectus is a part. The terms of the debt
securities will include those set forth in the applicable indenture, any related supplemental indenture and any related securities
documents that are made a part of the indenture by the Trust Indenture Act of 1939. You should read the summary below, the applicable
prospectus supplement and the provisions of the applicable indenture, any supplemental indenture and any related security documents,
if any, in their entirety before investing in our debt securities. We use the term “indentures” to refer to both the
senior indentures and the subordinated indentures.
The
indentures will be qualified under the Trust Indenture Act of 1939, as amended (the “Trust Indenture Act”). We use
the term “trustee” to refer to either a trustee under the senior indenture or a trustee under the subordinated indenture,
as applicable.
The
following summaries of material provisions of any senior debt securities, any subordinated debt securities and the related indentures
are subject to, and qualified in their entirety by reference to, all the provisions of the indentures and any supplemental indenture
or related document applicable to a particular series of debt securities. We urge you to read the applicable prospectus supplements
related to the debt securities that are offered under this prospectus, as well as the complete indentures, that contains the terms
of the debt securities. See the information under the heading “Where You Can Find More Information” for information
on how to obtain a copy of the appropriate indenture. Except as we may otherwise indicate, the terms of any senior indenture and
any subordinated indenture will be identical.
In
addition, the material specific financial, legal and other terms as well as any material U.S. federal income tax consequences
particular to securities of each series will be described in the prospectus supplement relating to the securities of that series.
The prospectus supplement may or may not modify the general terms found in this prospectus and will be filed with the SEC. For
a complete description of the terms of a particular series of debt securities, you should read both this prospectus and the prospectus
supplement relating to that particular series.
We
will describe in the applicable prospectus supplement the terms relating to a series of debt securities, including:
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title;
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principal
amount being offered, and, if a series, the total amount authorized and the total amount outstanding;
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any
limit on the amount that may be issued;
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whether
or not we will issue the series of debt securities in global form and, if so, the terms and who the depositary will be;
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the
maturity date;
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the
principal amount due at maturity, and whether the debt securities will be issued with any original issue discount;
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whether
and under what circumstances, if any, we will pay additional amounts on any debt securities held by a person who is not a
United States person for tax purposes, and whether we can redeem the debt securities if we have to pay such additional amounts;
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the
annual interest rate, which may be fixed or variable, or the method for determining the rate, the date interest will begin
to accrue, the dates interest will be payable and the regular record dates for interest payment dates or the method for determining
such dates;
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whether
or not the debt securities will be secured or unsecured, and the terms of any secured debt;
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the
terms of the subordination of any series of subordinated debt;
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the
place where payments will be payable;
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restrictions
on transfer, sale or other assignment, if any;
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our
right, if any, to defer payment of interest and the maximum length of any such deferral period;
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the
date, if any, after which, the conditions upon which, and the price at which we may, at our option, redeem the series of debt
securities pursuant to any optional or provisional redemption provisions, and any other applicable terms of those redemption
provisions;
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provisions
for a sinking fund, purchase or other analogous fund, if any;
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the
date, if any, on which, and the price at which we are obligated, pursuant to any mandatory sinking fund or analogous fund
provisions or otherwise, to redeem, or at the holder’s option to purchase, the series of debt securities;
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whether
the indenture will restrict our ability and/or the ability of our subsidiaries to:
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incur
additional indebtedness;
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issue
additional securities;
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issue
guarantees;
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create
liens;
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pay
dividends and make distributions in respect of our capital stock and the capital stock of our subsidiaries;
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redeem
capital stock;
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place
restrictions on our subsidiaries’ ability to pay dividends, make distributions or transfer assets;
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make
investments or other restricted payments;
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sell
or otherwise dispose of assets;
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enter
into sale-leaseback transactions;
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engage
in transactions with stockholders and affiliates;
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issue
or sell stock of or sell assets of our subsidiaries; or
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effect
a consolidation or merger;
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whether
the indenture will require us to maintain any interest coverage, fixed charge, cash flow-based, asset-based or other financial
ratios;
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a
discussion of any material or special United States federal income tax considerations applicable to the debt securities;
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information
describing any book-entry features;
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the
procedures for any auction and remarketing, if any;
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the
denominations in which we will issue the series of debt securities, if other than denominations of $1,000 and any integral
multiple thereof;
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if
other than U.S. dollars, the currency in which the series of debt securities will be denominated and the currency in which
principal, premium, if any, and interest will be paid; and
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any
other specific terms, preferences, rights or limitations of, or restrictions on, the debt securities, including any events
of default that are in addition to or different than those described in this prospectus or any covenants provided with respect
to the debt securities that are in addition to those described above, and any terms which may be required by us or advisable
under applicable laws or regulations or advisable in connection with the marketing of the debt securities.
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In
addition to the debt securities that may be offered pursuant to this prospectus, we may issue other debt securities in public
or private offerings from time to time. These other debt securities may be issued under other indentures or documentation that
are not described in this prospectus, and those debt securities may contain provisions materially different from the provisions
applicable to one or more issues of debt securities offered pursuant to this prospectus.
Original
Issue Discount
One
or more series of debt securities offered under this prospectus may be sold at a substantial discount below their stated principal
amount, bearing no interest or interest at a rate that at the time of issuance is below market rates. The federal income tax consequences
and special considerations applicable to any series of debt securities generally will be described in the applicable prospectus
supplement.
Senior
Debt Securities
Payment
of the principal or premium, if any, and interest on senior debt securities will rank on a parity with all of our other indebtedness
that is not subordinated.
Subordination
of Subordinated Debt Securities
The
subordinated debt securities will be subordinate and junior in priority of payment to certain of our other indebtedness to the
extent described in a prospectus supplement. The indentures in the forms initially filed as exhibits to the registration statement
of which this prospectus is a part do not limit the amount of indebtedness which we may incur, including senior indebtedness or
subordinated indebtedness, and do not limit us from issuing any other debt, including secured debt or unsecured debt.
Conversion
or Exchange Rights
We
will set forth in the applicable prospectus supplement the terms on which a series of debt securities may be convertible into
or exchangeable for our common stock, our preferred stock or other securities, including the conversion or exchange rate, as applicable,
or how it will be calculated, and the applicable conversion or exchange period. We will include provisions as to whether conversion
or exchange is mandatory, at the option of the holder or at our option. We may include provisions pursuant to which the number
of securities that the holders of the series of debt securities receive upon conversion or exchange would, under the circumstance
described in those provisions, be subject to adjustment, or pursuant to which those holders would, under those circumstances,
receive other property upon conversion or exchange, for example in the event of our merger or consolidation with another entity.
Consolidation,
Merger or Sale
The
indentures in the forms initially filed as exhibits to the registration statement of which this prospectus is a part do not contain
any covenant that restricts our ability to merge or consolidate, or sell, convey, transfer or otherwise dispose of all or substantially
all of our assets. However, any successor of ours or acquirer of such assets must assume all of our obligations under the indentures
and the debt securities.
If
the debt securities are convertible for our other securities, the person with whom we consolidate or merge or to whom we sell
all of our property must make provisions for the conversion of the debt securities into securities which the holders of the debt
securities would have received if they had converted the debt securities before the consolidation, merger or sale.
Events
of Default under the Indentures
Except
as otherwise set forth in an applicable prospectus supplement, the following are events of default under the indentures with respect
to any series of debt securities that we may issue:
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if
we fail to pay interest when due and payable and our failure continues for 30 days and the time for payment has not been extended
or deferred;
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if
we fail to pay the principal, or premium, if any, when due and payable and the time for payment has not been extended or delayed;
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if
we fail to observe or perform any other covenant contained in the debt securities or the indentures, other than a covenant
solely for the benefit of another series of debt securities, and our failure continues for 90 days after we receive notice
from the trustee or holders of a to-be-determined percentage in aggregate principal amount of the outstanding debt securities
of the applicable series; and
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if
specified events of bankruptcy, insolvency or reorganization occur.
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If
an event of default with respect to debt securities of any series occurs and is continuing, other than an event of default specified
in the last bullet point above under “— Events of Default Under the Indentures,” the trustee or the holders
of a to-be-determined percentage in aggregate principal amount of the outstanding debt securities of that series, by notice to
us in writing, and to the trustee if notice is given by such holders, may declare the unpaid principal of, premium, if any, and
accrued interest, if any, due and payable immediately. If an event of default specified in the last bullet point above “—
Events of Default Under the Indentures” occurs with respect to us, the principal amount of and accrued interest, if any,
of each series of debt securities then outstanding shall be due and payable without any notice or other action on the part of
the trustee or any holder.
The
holders of a majority in aggregate principal amount of the outstanding debt securities of an affected series may waive any default
or event of default with respect to the series and its consequences (other than bankruptcy defaults), except there may be no waiver
of defaults or events of default regarding payment of principal, premium, if any, or interest, unless we have cured the default
or event of default in accordance with the applicable indenture.
Subject
to the terms of the indentures, if an event of default under an indenture shall occur and be continuing, the trustee will be under
no obligation to exercise any of its rights or powers under such indenture at the request or direction of any of the holders of
the applicable series of debt securities, unless such holders have offered the trustee indemnity satisfactory to it. The holders
of a majority in principal amount of the outstanding debt securities of any series will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the trustee, or exercising any trust or power conferred on
the trustee, with respect to the debt securities of that series, provided that:
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the
direction so given by the holder is not in conflict with any law or the applicable indenture; and
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subject
to its duties under the Trust Indenture Act of 1939, the trustee need not take any action that might involve it in personal
liability or might be unduly prejudicial to the holders not involved in the proceeding.
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A
holder of the debt securities of any series will only have the right to institute a proceeding under the indentures or to appoint
a receiver or trustee, or to seek other remedies if:
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the
holder has given written notice to the trustee of a continuing event of default with respect to that series;
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the
holders of a to-be-determined percentage in aggregate principal amount of the outstanding debt securities of that series have
made written request to the trustee, and such holders have offered indemnity satisfactory to the trustee, to institute the
proceeding as trustee; and
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the
trustee does not institute the proceeding, and does not receive from the holders of a majority in aggregate principal amount
of the outstanding debt securities of that series other conflicting directions, within 90 days after the notice, request and
offer.
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These
limitations do not apply to a suit instituted by a holder of debt securities if we default in the payment of the principal, premium,
if any, or interest on, the debt securities.
We
will periodically file statements with the trustee regarding our compliance with the covenants in the indentures.
Modification
of Indenture; Waiver
We
and the trustee may modify an indenture or enter into or modify any supplemental indenture without the consent of any holders
of the debt securities with respect to specific matters, including:
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to
fix any ambiguity, defect or inconsistency in the indenture;
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to
comply with the provisions described above under “—Consolidation, Merger or Sale;”
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to
comply with any requirements of the Securities and Exchange Commission in connection with the qualification of any indenture
under the Trust Indenture Act of 1939;
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to
evidence and provide for the acceptance of appointment hereunder by a successor trustee;
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to
provide for uncertificated debt securities and to make any appropriate changes for such purpose;
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to
add to, delete from, or revise the conditions, limitations and restrictions on the authorized amount, terms or purposes of
issuance, authorization and delivery of debt securities of any unissued series;
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to
add to our covenants such new covenants, restrictions, conditions or provisions for the protection of the holders, to make
the occurrence, or the occurrence and the continuance, of a default in any such additional covenants, restrictions, conditions
or provisions an event of default, or to surrender any of our rights or powers under the indenture; or
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to
change anything that does not materially adversely affect the legal rights of any holder of debt securities of any series.
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In
addition, under the indentures, the rights of holders of a series of debt securities may be changed by us and the trustee with
the written consent of the holders of at least a majority in aggregate principal amount of the outstanding debt securities of
each series that is affected. However, we and the trustee may only make the following changes with the consent of each holder
of any outstanding debt securities affected:
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extending
the fixed maturity of the series of debt securities;
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reducing
the principal amount, reducing the rate of or extending the time of payment of interest, or reducing any premium payable upon
the redemption of any debt securities; or
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reducing
the percentage of debt securities, the holders of which are required to consent to any supplemental indenture.
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Discharge
Each
indenture provides that, subject to the terms of the indenture and any limitation otherwise provided in the prospectus supplement
applicable to a particular series of debt securities, we can elect to be discharged from our obligations with respect to one or
more series of debt securities, except for specified obligations, including obligations to:
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register
the transfer or exchange of debt securities of the series;
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replace
stolen, lost or mutilated debt securities of the series;
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maintain
paying agents and agencies for payment, registration of transfer and exchange and service of notices and demands;
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recover
excess money held by the trustee;
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compensate
and indemnify the trustee; and
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appoint
any successor trustee.
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In
order to exercise our rights to be discharged, we must deposit with the trustee money or government obligations sufficient to
pay all the principal of, any premium and interest on, the debt securities of the series on the dates payments are due.
“Street
Name” and Other Indirect Holders
Investors
who hold securities in accounts at banks or brokers generally will not be recognized by us as legal holders of debt securities.
This manner of holding securities is called holding in “street name.” Instead, we would recognize only the bank or
broker, or the financial institution that the bank or broker uses to hold its securities. These intermediary banks, brokers and
other financial institutions pass along principal, interest and other payments on the debt securities, either because they agree
to do so in their customer agreements or because they are legally required to do so. If you hold debt securities in “street
name,” you should check with your own institution to find out, among other things:
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how
it handles payments and notices;
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whether
it imposes fees or charges;
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how
it would handle voting if applicable;
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whether
and how you can instruct it to send you debt securities registered in your own name so you can be a direct holder as described
below; and
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if
applicable, how it would pursue rights under your debt securities if there were a default or other event triggering the need
for holders to act to protect their interests.
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Our
obligations, as well as the obligations of the trustee under the indentures and those of any third parties employed by us or the
trustee under either of the indentures, run only to persons who are registered as holders of debt securities issued under the
applicable indenture. As noted above, we do not have obligations to you if you hold in “street name” or other indirect
means, either because you choose to hold debt securities in that manner or because the debt securities are issued in the form
of global securities as described below. For example, once we make payment to the registered holder, we have no further responsibility
for the payment even if that holder is legally required to pass the payment along to you as a “street name” customer
but does not do so.
Form,
Exchange and Transfer
We
may issue debt securities of each series only in fully registered form without coupons and, unless we otherwise specify in the
applicable prospectus supplement, in denominations of $1,000 and any integral multiple thereof. The indentures will provide that
we may issue debt securities of a series in temporary or permanent global form and as book-entry securities that will be deposited
with, or on behalf of, The Depository Trust Company or another depositary named by us and identified in a prospectus supplement
with respect to that series (the “Depository”). See “Book-Entry” below for a further description of the
terms relating to any book-entry securities.
At
the option of the holder, subject to the terms of the indentures and the limitations applicable to global securities described
below or in the applicable prospectus supplement, the holder of the debt securities of any series can exchange the debt securities
for other debt securities of the same series, in any authorized denomination and of like tenor and aggregate principal amount.
Subject
to the terms of the indentures and the limitations applicable to global securities set forth below in the applicable prospectus
supplement, holders of the debt securities may present the debt securities for exchange or for registration of transfer, duly
endorsed or with the form of transfer endorsed thereon duly executed if so required by us or the security registrar, at the office
of the security registrar or at the office of any transfer agent designated by us for this purpose. Unless otherwise provided
in the debt securities that the holder presents for transfer or exchange, we will make no service charge for any registration
of transfer or exchange, but we may require payment of any taxes or other governmental charges.
We
will name in the applicable prospectus supplement the security registrar, and any transfer agent in addition to the security registrar,
that we initially designate for any debt securities. We may at any time designate additional transfer agents or rescind the designation
of any transfer agent or approve a change in the office through which any transfer agent acts, except that we will be required
to maintain a transfer agent in each place of payment for the debt securities of each series.
If
we elect to redeem the debt securities of any series, we will not be required to:
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issue,
register the transfer of, or exchange any debt securities of any series being redeemed in part during a period beginning at
the opening of business 15 days before the day of mailing of a notice of redemption of any debt securities that may be selected
for redemption and ending at the close of business on the day of the mailing; or
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register
the transfer of or exchange any debt securities so selected for redemption, in whole or in part, except the unredeemed portion
of any debt securities we are redeeming in part.
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Book-Entry
Securities
The
following description of book-entry securities will apply to any series of debt securities issued in whole or in part in the form
of one or more global securities, except as otherwise described in a related prospectus supplement.
Book-entry
securities of like tenor and having the same date will be represented by one or more global securities deposited with and registered
in the name of a depositary that is a clearing agent registered under the Securities Exchange Act of 1934, as amended, or the
Exchange Act. Beneficial interests in book-entry securities will be limited to institutions that have accounts with the depositary,
or “participants,” or persons that may hold interests through participants.
Ownership
of beneficial interests by participants will only be evidenced by, and the transfer of that ownership interest will only be effected
through, records maintained by the depositary. Ownership of beneficial interests by persons that hold through participants will
only be evidenced by, and the transfer of that ownership interest within such participant will only be effected through, records
maintained by the participants. The laws of some jurisdictions require that certain purchasers of securities take physical delivery
of such securities in definitive form. Such laws may impair the ability to transfer beneficial interests in a global security.
Payment
of principal of and any premium and interest on book-entry securities represented by a global security registered in the name
of or held by a depositary will be made to the depositary, as the registered owner of the global security. Neither we, the trustee
nor any agent of ours or the trustee will have any responsibility or liability for any aspect of the depositary’s records
or any participant’s records relating to or payments made on account of beneficial ownership interests in a global security
or for maintaining, supervising or reviewing any of the depositary’s records or any participant’s records relating
to the beneficial ownership interests. Payments by participants to owners of beneficial interests in a global security held through
such participants will be governed by the depositary’s procedures, as is now the case with securities held for the accounts
of customers registered in “street name,” and will be the sole responsibility of such participants.
A
global security representing a book-entry security is exchangeable for definitive debt securities in registered form, of like
tenor and of an equal aggregate principal amount registered in the name of, or is transferable in whole or in part to, a person
other than the depositary for that global security, only if (i) the depositary notifies us that it is unwilling or unable to continue
as depositary for that global security or the depositary ceases to be a clearing agency registered under the Exchange Act, (ii)
there shall have occurred and be continuing an event of default with respect to the debt securities of that series or (iii) other
circumstances exist that have been specified in the terms of the debt securities of that series. Any global security that is exchangeable
pursuant to the preceding sentence shall be registered in the name or names of such person or persons as the depositary shall
instruct the trustee. It is expected that such instructions may be based upon directions received by the depositary from its participants
with respect to ownership of beneficial interests in such global security.
Except
as provided above, owners of beneficial interests in a global security will not be entitled to receive physical delivery of debt
securities in definitive form and will not be considered the holders thereof for any purpose under the indentures, and no global
security shall be exchangeable, except for a security registered in the name of the depositary. This means each person owning
a beneficial interest in such global security must rely on the procedures of the depositary and, if such person is not a participant,
on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder under the
indentures. We understand that under existing industry practices, if we request any action of holders or an owner of a beneficial
interest in such global security desires to give or take any action that a holder is entitled to give or take under the indentures,
the depositary would authorize the participants holding the relevant beneficial interests to give or take such action, and such
participants would authorize beneficial owners owning through such participant to give or take such action or would otherwise
act upon the instructions of beneficial owners owning through them.
Information
Concerning the Trustee
The
trustee, other than during the occurrence and continuance of an event of default under an indenture, undertakes to perform only
those duties as are specifically set forth in the applicable indenture and is under no obligation to exercise any of the powers
given it by the indentures at the request of any holder of debt securities unless it is offered reasonable security and indemnity
against the costs, expenses and liabilities that it might incur. However, upon an event of default under an indenture, the trustee
must use the same degree of care as a prudent person would exercise or use in the conduct of his or her own affairs.
Payment
and Paying Agents
Unless
we otherwise indicate in the applicable prospectus supplement, we will make payment of the interest on any debt securities on
any interest payment date to the person in whose name the debt securities, or one or more predecessor securities, are registered
at the close of business on the regular record date for the interest.
We
will pay principal of and any premium and interest on the debt securities of a particular series at the office of the paying agents
designated by us, except that, unless we otherwise indicate in the applicable prospectus supplement, we may make interest payments
by check which we will mail to the holder or by wire transfer to certain holders. Unless we otherwise indicate in a prospectus
supplement, we will designate an office or agency of the trustee in the City of New York as our paying agent for payments with
respect to debt securities of each series. We will name in the applicable prospectus supplement any other paying agents that we
initially designate for the debt securities of a particular series. We will maintain a paying agent in each place of payment for
the debt securities of a particular series.
All
money we pay to a paying agent or the trustee for the payment of the principal of or any premium or interest on any debt securities
which remains unclaimed at the end of two years after such principal, premium or interest has become due and payable will be repaid
to us, and the holder of the debt security thereafter may look only to us for payment thereof.
Governing
Law
Except
as otherwise specified in the applicable prospectus supplement, the indentures and the debt securities will be governed by and
construed in accordance with the laws of the State of New York, except to the extent that the Trust Indenture Act of 1939 is applicable.
DESCRIPTION
OF RIGHTS
General
We
may issue rights to our stockholders to purchase shares of our common stock described in this prospectus. We may offer rights
separately or together with one or more additional rights, common stock, warrants or any combination of those securities in the
form of units, as described in the applicable prospectus supplement. Each series of rights will be issued under a separate rights
agreement to be entered into between us and a bank or trust company, as rights agent. The rights agent for any rights we offer
will be set forth in the applicable prospectus supplement. The rights agent will act solely as our agent in connection with the
certificates relating to the rights of the series of certificates and will not assume any obligation or relationship of agency
or trust for or with any holders of rights certificates or beneficial owners of rights. The following description sets forth certain
general terms and provisions of the rights to which any prospectus supplement may relate. The particular terms of the rights to
which any prospectus supplement may relate and the extent, if any, to which the general provisions may apply to the rights so
offered will be described in the applicable prospectus supplement. To the extent that any particular terms of the rights, rights
agreement or rights certificates described in a prospectus supplement differ from any of the terms described below, then the terms
described below will be deemed to have been superseded by that prospectus supplement. We encourage you to read the applicable
rights agreement and rights certificate for additional information before you decide whether to purchase any of our rights.
The
prospectus supplement relating to any rights that we offer will include specific terms relating to the offering, including, among
other matters:
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the
date of determining the stockholders entitled to the rights distribution;
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the
aggregate number of shares of common stock, preferred stock or other securities purchasable upon exercise of the rights;
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the
exercise price;
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the
aggregate number of rights issued;
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whether
the rights are transferrable and the date, if any, on and after which the rights may be separately transferred;
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the
date on which the right to exercise the rights will commence, and the date on which the right to exercise the rights will
expire;
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the
method by which holders of rights will be entitled to exercise;
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the
conditions to the completion of the offering;
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the
withdrawal, termination and cancellation rights;
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whether
there are any backstop or standby purchaser or purchasers and the terms of their commitment;
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whether
stockholders are entitled to oversubscription rights;
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any
U.S. federal income tax considerations; and
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any
other terms of the rights, including terms, procedures and limitations relating to the distribution, exchange and exercise
of the rights.
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If
less than all of the rights issued in any rights offering are exercised, we may offer any unsubscribed securities directly to
persons other than stockholders, to or through agents, underwriters or dealers or through a combination of such methods, including
pursuant to standby arrangements, as described in the applicable prospectus supplement. In connection with any rights offering,
we may enter into a standby underwriting or other arrangement with one or more underwriters or other persons pursuant to which
such underwriters or other persons would purchase any offered securities remaining unsubscribed for after such rights offering.
DESCRIPTION
OF UNITS
We
may issue units composed of one or more of the other securities described in this prospectus in any combination. Each unit will
be issued so that the holder of the unit is also the holder of each security included in the unit. Thus, the holder of a unit
will have the rights and obligations of a holder of each included security. The unit agreement under which a unit is issued may
provide that the securities included in the unit may not be held or transferred separately, at any time or at any time before
a specified date.
The
applicable prospectus supplement may describe:
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the
designation and terms of the units and of the securities comprising the units, including whether and under what circumstances
those securities may be held or transferred separately;
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any
provisions for the issuance, payment, settlement, transfer or exchange of the units or of the securities comprising the units;
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the
terms of the unit agreement governing the units;
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United
States federal income tax considerations relevant to the units; and
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whether
the units will be issued in fully registered or global form.
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The
preceding description and any description of units in the applicable prospectus supplement does not purport to be complete and
is subject to and is qualified in its entirety by reference to the unit agreement and, if applicable, collateral arrangements
and depositary arrangements relating to such units.
Warrants
In
connection with its private placement of a $4.0 million Secured Convertible Note in August 2014 to an institutional investor,
the Company issued a warrant (the “August Warrant”) exercisable to purchase 262,295 shares of common stock at $7.32
per share. The August Warrant is exercisable immediately and expires August 28, 2019. The August Warrant contains anti-dilution
provisions. During February 2015, the holder of the $4.0 million Secured Convertible Note completed the full conversion of the
principal and related interest into a total of 661,213 shares of common stock under a registration statement on Form S-3.
If,
during the period beginning on the closing date and ending on the two (2) year anniversary of the closing date, we offer, sell,
grant any option to purchase, or otherwise disposes of any of our or our subsidiaries’ equity or equity equivalent securities
(a “Subsequent Placement”), the Holder shall have the right to participate for 50% of any such future Subsequent Placement.
Anti-Takeover
Provisions Under Nevada Law.
Combinations
with Interested Stockholder.
Sections 78.411-78.444, inclusive, of the Nevada Revised Statutes (“NRS”) contain
provisions governing combinations with an interested stockholder. For purposes of the NRS, “combinations” include:
(i) any merger or consolidation with any interested stockholder, (ii) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition to any interested stockholder of corporate assets with an aggregate market value equal to 5% or more of the
aggregate market value of the corporation’s consolidated assets, 5% or more of the outstanding shares of the corporation
or 10% or more of the earning power or net income of the corporation; (iii) the issuance to any interested stockholder of voting
shares (except pursuant to a share dividend or similar proportionate distribution) with an aggregate market value equal to 5%
or more of the aggregate market value of all the outstanding shares of the corporation, (iv) the dissolution of the corporation
if proposed by or on behalf of any interested stockholder, (v) any reclassification of securities, recapitalization or corporate
reorganization that will have the effect of increasing the proportionate share of the corporation’s outstanding voting shares
held by any interested stockholder and (vi) any receipt by the interested stockholder of the benefit (except proportionately as
a stockholder) of any loan, advance, guarantee, pledge or other financial assistance. For purposes of the NRS, an “interested
stockholder” is defined to include any beneficial owner of more than 10% of any class of the voting securities of a Nevada
corporation and any person who is an affiliate or associate of the corporation and was at any time during the preceding three
years the beneficial owner or more than 10% of any class of the voting securities of the Nevada corporation.
Subject
to certain exceptions, the provisions of the NRS statute governing combinations with interested stockholders provide that a Nevada
corporation may not engage in a combination with an interested stockholder for two years after the date that the person first
became an interested stockholder unless the combination or the transaction by which the person first became an interested stockholder
is approved by the board of directors before the person first became an interested stockholder.
Control
Share Acquisitions.
The NRS also contains a “control share acquisitions statute.” If applicable to a Nevada corporation
this statute restricts the voting rights of certain stockholders referred to as “acquiring persons,” that acquire
or offer to acquire ownership of a “controlling interest” in the outstanding voting stock of an “issuing corporation.”
For purposes of these provisions a “controlling interest” means with certain exceptions the ownership of outstanding
voting stock sufficient to enable the acquiring person to exercise one-fifth or more but less than one-third, one-third or more
but less than a majority, or a majority or more of all voting power in the election of directors and “issuing corporation”
means a Nevada corporation that has 200 or more stockholders of record, at least 100 of whom have addresses in Nevada appearing
on the stock ledger of the corporation, and which does business in Nevada directly or through an affiliated corporation. The voting
rights of an acquiring person in the affected shares will be restored only if such restoration is approved by the holders of a
majority of the voting power of the corporation. The NRS allows a corporation to “opt-out” of the control share acquisitions
statute by providing in such corporation’s articles of incorporation or bylaws that the control share acquisitions statute
does not apply to the corporation or to an acquisition of a controlling interest specifically by types of existing or future stockholders,
whether or not identified.
Transfer
Agent or Registrar
Action
Stock Transfer Corp. is the transfer agent and registrar of our common stock.
LEGAL
MATTERS
The
validity of our common stock will be passed upon for us by Christian J. Hoffmann, III, Securities Counsel of Digital Ally, Inc.
EXPERTS
The
audited consolidated financial statements incorporated by reference in this prospectus and elsewhere in the registration statement
have been so incorporated by reference in reliance upon the report of Grant Thornton LLP, independent registered public accountants,
upon the authority of said firm as experts in accounting and auditing.
INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
The
SEC allows us to “incorporate by reference” information contained in documents that we file with the SEC into this
prospectus. This means that we can disclose important information to you by referring you to those documents and that the information
included in those documents is considered part of this prospectus. The following documents filed with the SEC are incorporated
by reference into this prospectus, unless otherwise indicated:
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our
Annual Report on Form 10-K for the year ended December 31, 2014, as filed on March 23, 2015 (File No. 001-33899), including
information specifically incorporated by reference into our Form 10-K from our Proxy Statement on Schedule 14A (filed on April
28, 2015) for our Annual Meeting of Stockholders to be held on June 9, 2015;
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our
Current Reports on Form 8-K filed on November 14, 2014, February 2, 2015; February 13, 2015; and February 27, 2015 (excluding
any information furnished pursuant to Item 2.02 or Item 7.01 of any such Current Report on Form 8-K) (File No. 001-33899);
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the
description of our common stock contained in our registration statement on Form SB-2, filed on October 16, 2006, No. 333-138025(the
“October 2006 Form SB-2”), and any amendment or report subsequently filed for the purpose of updating such description;
and
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our
specimen stock certificate contained as Exhibit 4.1 to our October 2006 SB-2 registration statement.
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All
documents filed by us pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act (excluding any information furnished
pursuant to Item 2.02 or Item 7.01 on any Current Report on Form 8-K) after the date of the initial registration statement and
prior to the effectiveness of the registration statement and after the date of this prospectus and prior to the termination of
this offering shall be deemed to be incorporated in this prospectus by reference and to be a part hereof from the date of filing
of such documents. Any statement contained herein, or in a document incorporated or deemed to be incorporated by reference herein,
shall be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained herein or
in any subsequently filed document which also is or is deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute
a part of this prospectus.
We
will provide to each person, including any beneficial owner, to whom this prospectus is delivered these incorporated documents
without charge, excluding any exhibits to these documents unless the exhibit is specifically incorporated by reference in such
document, upon request received in writing or by telephone at the following address: Corporate Secretary, Digital Ally, Inc.,
9705 Loiret Boulevard, Lenexa Kansas 66219, (914) 813-9774
(914) 813-9774.
INTERESTS
OF NAMED EXPERTS AND COUNSEL
None.
MATERIAL
CHANGES
None.
WHERE
YOU CAN FIND MORE INFORMATION
This
prospectus forms a part of a registration statement on Form S-3 we filed with the SEC. This prospectus does not contain all of
the information found in the registration statement. For further information regarding us and our common stock, you may desire
to review the full registration statement, including its exhibits and schedules, filed under the Securities Act. The registration
statement of which this prospectus forms a part, including its exhibits and schedules and the documents incorporated by reference
therein, may be inspected and copied at the public reference room maintained by the SEC at 100 F Street, N.E., Washington, D.C.
20549. Copies of the materials may also be obtained from the SEC at prescribed rates by writing to the public reference room maintained
by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the public
reference room by calling the SEC at 1-800-SEC-0330
1-800-SEC-0330
FREE. The SEC maintains a website on the Internet at www.sec.gov that contains reports, proxy and information statements, and
other information regarding companies that file electronically with the SEC. We maintain a website on the Internet at www.digitalally.com.
Our registration statement, of which this prospectus constitutes a part, can be downloaded from the SEC’s website or from
our website. Information on the SEC website, our website or any other website is not incorporated by reference in this prospectus
and does not constitute part of this prospectus.
We
are subject to the proxy solicitation rules, annual and periodic reporting requirements, restrictions of stock purchases and sales
by affiliates and other requirements of the Exchange Act. We furnish our stockholders with annual reports containing audited financial
statements certified by independent auditors. You may read and copy any documents filed by us with the SEC at the public reference
room and website of the SEC and at our website referred to above.
Digital
Ally, Inc.
1,000,000
Shares of Common Stock
and
1,000,000
Common Stock Purchase Warrants
Placement
Agent
WestPark
Capital, Inc.
Prospectus
Supplement
August
23, 2017
DIGITAL
ALLY, INC.
PROSPECTUS
May
18, 2015
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