Item
1.01 Entry into a Material Definitive Agreement.
Digital
Ally, Inc., a Nevada corporation (the “Company”), entered into a Securities Purchase Agreement (the “Purchase
Agreement”), dated August21, 2017, with institutional investors, pursuant to which the Company agreed to issue and sell,
in registered direct offering (the “Offering”), an aggregate of 940,000 shares (the “Shares”) of common
stock, par value $0.001 per share, of the Company (“Common Stock”) at an offering price of $3.00 and Series B Warrants,
for gross proceeds of $3.0 million before the deduction of the placement agent fee and offering expenses. For each share of common
stock purchased, investors received two registered warrants, each with an exercise price of $3.36 per share and a (the “Series
A-1 Warrant” and “Series A-2 Warrant”). The Series A-1 Warrants are exercisable to purchase up to 680,000 shares
of common stock (or 0.68 warrant shares per share of common stock purchased) in the aggregate, and have a term of five years commencing
six months following the closing date. The Series A-2 Warrants are exercisable to purchase 200,000 shares of common stock (or
0.20 warrant shares per Share of common stock purchased), in the aggregate, and have a term of five years. Additionally, the Company
issued to certain of the investors, in lieu of shares of common stock at closing, the Series B Warrants that are immediately exercisable
to purchase 60,000 shares of common stock for which the investors paid $2.99 per share at the closing and will pay $0.01 per share
upon exercise of the Series B Warrants so that such investors’ beneficial interest would not exceed 9.9% of the issued and
outstanding shares of common stock. The Series B Warrant terminates upon exercise in full. The Series A-1 Warrants, Series A-2
Warrants and Series B Warrants are referred to herein as the “Warrants.”
The
Shares and the Warrants were offered by the Company pursuant to a registration statement on Form S-3 (File No. 333-202944), which
was initially filed with the Securities and Exchange Commission (the “Commission”) on March 24, 2015 and was declared
effective by the Commission on May 18, 2015 (the “Registration Statement”). The closing of the Offering occurred on
August 23, 2017.
Subject
to limited exceptions, a holder of the Warrants will not have the right to exercise any portion of its Warrants if the holder,
together with its affiliates, would beneficially own in excess of 4.99% (or, at election of investor, 9.99%) of the number of
shares of Common Stock outstanding immediately after giving effect to such exercise (the “Beneficial Ownership Limitation”);
provided, however, that upon notice to the Company, the holder may increase or decrease the Beneficial Ownership Limitation, but
in no event shall the Beneficial Ownership Limitation exceed 9.99%, provided that any increase in the Beneficial Ownership Limitation
shall not be effective until 61 days following notice to us.
The
Purchase Agreement also contains representations, warranties, indemnification and other provisions customary for transactions
of this nature. From the closing hereof until 75 days after the Closing Date, neither the Company nor any Subsidiary shall issue,
enter into any agreement to issue or announce the issuance or proposed issuance of any shares of Common Stock or Common Stock
Equivalents. From the closing date until no Purchaser holds any of the Warrants, the Company is prohibited from effecting or entering
into an agreement to effect any issuance by the Company or any of its Subsidiaries of Common Stock or Common Stock Equivalents
(or a combination of units thereof) involving a Variable Rate Transaction. “
Variable Rate Transaction
” means
a transaction in which the Company (i) issues or sells any debt or equity securities that are convertible into, exchangeable or
exercisable for, or include the right to receive additional shares of Common Stock either (A) at a conversion price, exercise
price or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the shares
of Common Stock at any time after the initial issuance of such debt or equity securities, or (B) with a conversion, exercise or
exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or
upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market
for the Common Stock or (ii) enters into any agreement, including, but not limited to, an equity line of credit, whereby the Company
may issue securities at a future determined price. Any Purchaser shall be entitled to obtain injunctive relief against the Company
to preclude any such issuance, which remedy shall be in addition to any right to collect damages. Notwithstanding the foregoing,
the foregoing provisions shall not apply to an Exempt Issuance, except that no Variable Rate Transaction shall be an Exempt Issuance,
as such terms are defined in the Securities Purchase Agreement.
WestPark
Capital, Inc. (“WestPark”) acted as the exclusive placement agent for the offering under a engagement agreement (the
“Engagement Agreement”). The Company paid WestPark a placement fee in cash equal to 5% of the gross proceeds from
the sale of the securities and reimbursed it for up to $50,000 of reasonable out-of-pocket expenses. Further, the Company is issuing
WestPark warrants exercisable to purchase 94,000 shares of its Common Stock at a price equal to $3.75 per share. The warrants
to WestPark are initially exercisable six months following issuance and have a term of five years from the date of effectiveness
of the offering and were issued in a private placement pursuant to Rule 4(a)(2) of the Securities Act. The Engagement Agreement
also contains representations, warranties, indemnification and other provisions customary for transactions of this nature.
The
Company intends to use the net proceeds to retire approximately $750,000 principal amount of its Secured Convertible Debentures
with an outstanding principal balance of $4.0 million and the entire $700,000 principal amount of its subordinated notes and the
balance for general corporate purposes.
The
Company’s directors and officers entered into lock-up agreements for a period of 75 days from the closing date.
The
foregoing summaries of the Purchase Agreement, the Warrants and the Placement Agreement do not purport to be complete and are
subject to, and qualified in their entirety by, such documents attached as Exhibits 10.1, 4.1, 4.2, 4.3 and 1.1, respectively,
to this Current Report on Form 8-K, which are incorporated herein by reference.
This
Current Report on Form 8-K does not constitute an offer to sell any securities or a solicitation of an offer to buy any securities,
nor shall there be any sale of any securities in any state or jurisdiction in which such an offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction.