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, 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 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 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 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
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. 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 facilities
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 a decline in our operating results from 2009 to 2016. 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. 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 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. 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, 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. 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.
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
substantially 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. However, we have introduced a number of other new products, including the VuLink and FleetVu, and
intend to introduce other new products with a view to diversifying our revenue sources in the future. 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. There are direct competitors for
our DVM-250 Plus “event recorders,” which several may 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 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
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.
On
October 25, 2013, we 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 our mobile video surveillance
systems do not infringe any claim of the ‘556 Patent. We became aware that Utility had mailed letters to current and prospective
purchasers of our 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. We rejected Utility’s assertion
and are 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. We appealed the decision
and the Federal Circuit affirmed the District Court’s previous decision.
In
addition, we 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 our favor and the matter is now concluded as it relates to the USPTO.
On
June 6, 2014, we filed an Unfair Competition lawsuit against Utility in the United States District Court for the District of Kansas.
In the lawsuit, we contend that Utility has defamed us and illegally interfered with our contracts, customer relationships and
business expectancies by falsely asserting to our customers and others that our 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 our employees, in violation of that employees’ Non-Competition
and Confidentiality agreements with us. In addition to damages, we seek temporary, preliminary, and permanent injunctive relief,
prohibiting Utility from, among other things, continuing to threaten or otherwise interfere with our customers. On March 4, 2015,
an initial hearing was held upon our request for injunctive relief.
Based
upon facts revealed at the March 4, 2015 hearing, on March 16, 2015, we sought leave to amend our 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, we 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 us leave to amend our complaint, but denied our preliminary
injunction. The discovery stage of the lawsuit expired in May 2016. Utility filed a Motion for Summary Judgment and we filed a
Motion for Partial Summary Judgment. On March 30, 2017, the Court entered its order granting Utility’s motion and denying
our motion in their entireties. We have thirty (30) days after March 30, 2017 in which to appeal such decisions to the United
States Court of Appeals for the Tenth Circuit and are considering our options.
On
September 13, 2014, Utility filed suit in the United States District Court for the Northern District of Georgia against us alleging
infringement of the ‘556 Patent. The suit was served on us on September 20, 2014. As alleged in our first filed lawsuit
described above, we believe 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. We believe that the suit filed by
Utility is without merit and is vigorously defending the claims asserted against us. An adverse resolution of the foregoing litigation
or patent proceedings could have a material adverse effect on our 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,
we intend to file for summary judgment in its favor if Utility does not request outright dismissal.
We
received notice in April 2015 that Taser, one of our competitors, had commenced an action in the USPTO for a re-examination of
its U.S. Patent No. 8,781,292 (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 Taser 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 Taser’s own research and development
efforts.
We
own 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 our VuLink product.
On
August 17, 2015, the USPTO issued a first, non-final action rejecting all 20 claims of the ‘292 Patent respecting its ‘292
Patent under an
ex parte
re-examination. We were provided the opportunity to discuss the merits of the prior art and the
scope of the patent claims with the patent Examiner handling the reexamination and to amend the patent claims. On January 14,
2016, the USPTO ultimately rejected Taser’s efforts and confirmed the validity of the ‘292 Patent with 59 claims covering
various aspects of our auto-activation technology. On February 2, 2016, the USPTO issued another patent relating to our 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.
We
filed suit on January 15, 2016 in the U.S. District Court for the District of Kansas (Case No: 2:16-cv-02032) against Taser, alleging
willful patent infringement against Taser’s Axon body camera product line. The lawsuit was initiated after the USPTO reconfirmed
the validity of the ‘292 Patent, which covers various aspects of auto-activation and multiple camera coordination for body-worn
cameras and in-car video systems. The ‘292 Patent previously was subject to attack by Taser, which tried to invalidate it
at the USPTO. The USPTO ultimately rejected Taser’s efforts and confirmed the validity of the ‘292 Patent with 59
claims covering various aspects of this valuable auto-activation technology. On February 2, 2016, the USPTO issued another patent
relating to our auto-activation technology for law enforcement cameras. This ‘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. We added the ‘452 patent to its existing lawsuit against Taser seeking both monetary
damages and a permanent injunction against Taser for infringement of both the ‘452 and ‘292 Patents.
In
addition to the infringement claims, we added a new set of claims to the lawsuit alleging that Taser conspired to keep us out
of the marketplace by engaging in improper, unethical, and unfair competition. The amended lawsuit alleges Taser bribed officials
and otherwise conspired to secure no-bid contracts for our products in violation of both state law and federal antitrust law.
Our lawsuit also seeks monetary and injunctive relief, including treble damages, for these alleged violations.
We
filed an amended complaint and Taser filed an answer which denied the patent infringement allegations on April 1, 2016. In addition,
Taser filed a motion to dismiss all allegations in the complaint on March 4, 2016 for which we an amended complaint on March 18,
2016 to address certain technical deficiencies in the pleadings. Taser 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 Taser’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. We have appealed this decision to the United States Court of Appeals for the Federal Circuit and are
awaiting its decision.
In
December 2016, Taser announced that it had commenced an action in the USPTO for
inter partes review
of its U.S. Patent
No. 8,781,292 (the “ ‘292 Patent”). Previously Taser had attempted to invalidate the ‘292 Patent through
a re-examination procedure at the USPTO. On January 14, 2016, the USPTO ultimately rejected Taser’s efforts and confirmed
the validity of the ‘292 Patent with 59 claims covering various aspects of our auto-activation technology. The USPTO fully
rejected all of Taser’s previous arguments, concluding all 59 claims in Digital Ally’s ‘292 patent were valid
and non-obvious. Taser is again attempting through its recently filed
inter partes review
to convince the USPTO that Digital
Ally’s patents lack patentability. The USPTO is taking the request under consideration and has not decided whether it will
institute the
inter partes review.
In addition, Taser has requested that the patent infringement lawsuit filed by Digital
Ally in the U.S. District Court for the District of Kansas (Case No: 2:16-cv-02032) against Taser, be stayed while its
inter
partes review
is being considered by the USPTO. Digital Ally has filed a motion to deny the stay and both motions are currently
being considered by the Court.
On
May 27, 2016, we 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 us with claims covering numerous features, such as automatically and simultaneously activating
all deployed cameras in response to the activation of just one camera. Additionally, our patent claims cover automatic coordination
as well as digital synchronization between multiple recording devices. We also have 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.
Our
lawsuit alleges that WatchGuard incorporated this patented technology into its VISTA Wifi and 4RE In-Car product lines without
its permission. Specifically, we are accusing WatchGuard of infringing three patents: the ‘292 and ‘452 Patents and
U.S. Patent No. 9,325,950. We are 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 our own technology to compete against it. The lawsuit is in the early stages of discovery.
We
are also involved as a plaintiff and defendant in ordinary, routine litigation and administrative proceedings incidental to our
business from time to time, including customer collections, vendor and employment-related matters. We believe the likely outcome
of any other pending cases and proceedings will not be material to our 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.
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 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
have 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, 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, including blank check preferred stock, 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 and 10,000,000 shares of blank check
preferred stock. The common stock and preferred 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
preferred stock is not intended to have any anti-takeover effect and is not part of any series of anti-takeover measures contained
in our articles of incorporation or bylaws. However, the availability of additional authorized and unissued shares of preferred
stock could make any attempt to gain control of us or the Board more difficult or time-consuming and the availability of additional
authorized and unissued shares might make it more difficult to remove management. Shares of preferred stock could be issued by
the Board to dilute the percentage of stock owned by any stockholder and increase the cost of, or the number of, voting shares
necessary to acquire control of the Board or to meet the voting requirements imposed by Nevada law with respect to a merger or
other business combination involving us. The issuance of preferred stock with voting and conversion rights by our Board may adversely
affect the voting power of the holders of common stock, including the loss of voting control to others.
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 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 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 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 the Private Placement of the Debentures and 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 private placement in which we issued Series A warrants, Series B Warrants and Series C Warrants that
are exercisable to purchase a total of 1,539,590 shares of our common stock. The Series A Warrants are exercisable to purchase
437,086 shares of common stock for a term of 24 months from their date of issuance at a price of $13.43 per share. A total of
20,000 of the Series A warrants were exercised during 2016. The Series B and Series C Warrants are exercisable to purchase 1,102,504
shares of common stock 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, Series A Warrants, the Series B 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.
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.
Private
Placement of Warrants
On
December 30, 2016, we completed the Private Placement of $4.0 million in principal amount of 8% Senior Secured Convertible Debentures
(the “Debentures”) and common stock warrants (the “Warrants”) to two institutional investors, who are
the selling shareholders. The Debentures and Warrants were issued pursuant to a Securities Purchase Agreement (the “Purchase
Agreement”) between us and the selling shareholders. The Private Placement resulted in gross proceeds of $4.0 million before
placement agent fees and other expenses associated with the transaction. The proceeds will be used for general corporate purposes.
WestPark Capital acted as Placement Agent for us in the transaction and received a fee of $200,000 for its services. In addition,
it will receive a fee of 3% of the gross proceeds we derive from the exercise of the Warrants.
Prior
to the maturity date, the Debentures bear interest at 8% per annum with interest payable in cash quarterly in arrears on the first
business day of each calendar quarter following the issuance date. The Debentures rank senior to our existing and future indebtedness
and are secured to the extent and as provided in the security and related documents. The Debentures are convertible at any time
six months after their date of issue at the option of the holders into shares of the Company’s 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”) until the fifth anniversary of their date of issuance.
The
following is a summary of the Warrants and is subject to, and qualified in its entirety by, the terms set forth in the forms of
the Warrants filed as exhibits to our Current Report on Form 8-K, filed with the SEC on January 3, 2017.
Exercisability.
The selling stockholders may exercise the Warrants at any time after their date of issuance, subject to the beneficial ownership
limitation described below. The Warrants will expire on the fifth anniversary of their date of issuance. The selling stockholders
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, after six months of the date of issuance of the Warrants, there is no effective registration statement registering,
or no current prospectus available for, the resale of the shares issuable upon exercise of the Warrants, the selling stockholders
may also exercise the Warrants, in whole or in part, on a cashless basis. When exercised on a cashless basis, a portion of the
Warrants 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 Warrants that are outstanding on the termination date of the Warrants shall be automatically exercised
via cashless exercise.
Exercise
Price.
The exercise price of the Warrants is $5.00 per share of common stock and is subject to adjustment as described below.
Beneficial
Ownership Limitation.
A
selling stockholder shall have no right to exercise any portion of a Warrant, to the extent that, after giving effect to such
exercise, such stockholder, together with such stockholder’s affiliates, and any persons acting as a group together with
such stockholder or any such affiliate, would beneficially own in excess of, at the initial option of the holder thereof, either
4.99% or 9.99% 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 selling stockholder, upon not less than 61 days’ prior notice to us, may increase
or decrease the beneficial ownership limitation to a percentage not to exceed 9.99%. Beneficial ownership of the selling stockholders
and their 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 of the Warrants 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 Warrants will be entitled to acquire, subject to the beneficial
ownership limitation described above, 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 Warrants 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 the Warrants will be entitled to participate, subject to the beneficial ownership limitation,
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 Warrants.
Fundamental
Transaction
. If we effect a fundamental 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 the Warrants,
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 Warrants
is exercisable immediately prior to such fundamental transaction.
Transferability.
The Warrants 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 Warrants do not have any voting rights, dividends or other rights
as a holder of our capital stock until they exercise the Warrants, except as set forth above.
July
2015 Private Placement of Warrants
On
July 22, 2015, we closed a private placement in which the selling stockholders purchased the Series B Warrants exercisable to
purchase 222,738 shares of common stock and the Series C Warrants exercisable to purchase 879,766 shares of common stock.
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.