Filed
Pursuant to Rule 424(b)(5)
Registration
No. 333-225227
The information in this preliminary
prospectus supplement is not complete and may be changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary prospectus supplement is not an offer to sell these
securities and it is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY
PROSPECTUS SUPPLEMENT
(To
Prospectus dated June 7, 2018)
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SUBJECT
TO COMPLETION
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DATED
JUNE 5, 2020
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DIGITAL
ALLY, INC.
Shares of Common Stock
Digital
Ally, Inc. (the “Company”, “our”, “we” and “us”) is offering, pursuant to this
prospectus supplement and the accompanying base prospectus, shares
of common stock, par value $0.001 per share (the “Common Stock”).
We will sell to the investors the shares of
Common Stock at a public offering price of $ per share. We will pay all of the expenses incident to the registration, offering
and sale of such shares under this prospectus supplement and the accompanying base prospectus.
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No
Exercise of Over-Allotment
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Full
Exercise of Over-Allotment
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Per
Share
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Total
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Per
Share
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Total
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Public offering price
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$
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$
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$
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$
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Underwriting discounts and commissions(1)
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$
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$
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$
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$
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Offering proceeds to us, before expenses
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$
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$
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$
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$
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(1)
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See
“Underwriting” for additional information regarding total compensation payable to the underwriters, including
expenses for which we have agreed to reimburse the underwriters.
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We
have granted the underwriters an option to purchase from us up to (i) of
additional shares of our common stock at the public offering price, less underwriting discounts and commissions, within 45 days
from the date of this prospectus supplement (provided that in no event may the aggregate market value of securities sold in the
offering, including from the over-allotment option, exceed the limitations set forth in Rule I.B.6 of Form S-3). If the underwriters
exercise this option in full, the total underwriting discounts and commissions will be $
and the total proceeds, before expenses, to us will be $ .
Our
Common Stock is listed on The Nasdaq Capital Market (“Nasdaq”) under the symbol “DGLY.” The last reported
sale price for our Common Stock on Nasdaq on June 5, 2020 was $2.54 per share.
As
of the date of this prospectus supplement, the aggregate market value of our outstanding voting and non-voting common equity held
by non-affiliates was approximately $50,829,190 based on 22,449,177 shares of outstanding Common Stock, of which 19,829,190 shares
were held by non-affiliates, and the last reported sale price of our Common Stock of $2.54 per share on June 1, 2020. Pursuant
to General Instruction I.B.6 of Form S-3, in no event will we sell securities 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 $75,000,000. During the
previous 12 calendar months prior to and including the date of this prospectus supplement, we have sold $10,154,476 of our securities
pursuant to General Instruction I.B.6 of Form S-3.
You
should read carefully this prospectus supplement, the accompanying base prospectus and the documents incorporated by reference
into this prospectus supplement and the accompanying base prospectus before you invest.
Our
business and an investment in our shares of Common Stock involve a high degree of risk. See “Risk Factors” beginning
on page S-13 of this prospectus supplement, on page 2 of the accompanying base prospectus and the risk factors described
in the documents incorporated by reference into this prospectus supplement and the accompanying base prospectus for more information.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
determined if this prospectus supplement and accompanying base prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
The
underwriters expect to deliver the shares of Common Stock to the purchasers on or about June ,
2020.
AEGIS
CAPITAL CORP.
The
date of this Prospectus Supplement is , 2020
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS SUPPLEMENT
This document is in two parts, this prospectus
supplement and the accompanying base prospectus, both of which are part of a registration statement on Form S-3 that we filed with
the U.S. Securities and Exchange Commission (the “SEC”) using a “shelf” registration process.
The two parts of this document include: (1)
this prospectus supplement, which describes the specific details regarding this offering of the Common Stock; and (2) the
accompanying base prospectus, which provides a general description of the securities that we may offer, some of which may not
apply to this offering. Generally, when we refer to this “prospectus,” we are referring to both documents combined.
If information in this prospectus supplement is inconsistent with the accompanying base prospectus, you should rely on this prospectus
supplement. You should read this prospectus supplement together with the additional information described below under the heading
“Where You Can Find More Information” and “Incorporation of Documents by Reference.”
Any statement made in this prospectus supplement
or in a document incorporated or deemed to be incorporated by reference into this prospectus supplement will 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 in any other subsequently filed document that is also incorporated by reference into this prospectus supplement modifies or
supersedes that statement. Any statements so modified or superseded will be deemed not to constitute a part of this prospectus
supplement except as so modified or superseded. In addition, to the extent of any inconsistencies between the statements in this
prospectus supplement and similar statements in any previously filed report incorporated by reference into this prospectus supplement,
the statements in this prospectus supplement will be deemed to modify and supersede such prior statements.
The registration statement that contains this
prospectus supplement, including the exhibits to the registration statement and the information incorporated by reference, contains
additional information about the securities offered under this prospectus supplement. That registration statement can be read on
the SEC website or at the SEC offices mentioned below under the heading “Where You Can Find More Information.”
We are responsible for the information contained
and incorporated by reference in this prospectus supplement, the accompanying base prospectus and any related free writing prospectus
that we prepare or authorize. We have not authorized anyone to provide you with different or additional information, and we take
no responsibility for any other information that others may give you. If you receive any other information, you should not rely
on it.
This prospectus supplement and the accompanying
base prospectus do not constitute an offer to sell or the solicitation of an offer to buy any securities other than the registered
securities to which this prospectus supplement relates, nor do this prospectus supplement and the accompanying base prospectus
constitute an offer to sell or the solicitation of an offer to buy securities in any jurisdiction to any person to whom it is unlawful
to make such offer or solicitation in such jurisdiction.
You should not assume that the information
in this prospectus supplement and the accompanying base prospectus is accurate at any date other than the date indicated on the
cover page of this prospectus supplement or that any information we have incorporated by reference is correct on any date subsequent
to the date of the document incorporated by reference. Our business, financial condition, results of operations or prospects may
have changed since that date.
You should not rely on or assume the accuracy
of any representation or warranty in any agreement that we have filed in connection with this offering or that we may otherwise
publicly file in the future because any such representation or warranty may be subject to exceptions and qualifications contained
in separate disclosure schedules, may represent the parties’ risk allocation in the particular transaction, may be qualified
by materiality standards that differ from what may be viewed as material for securities law purposes or may no longer continue
to be true as of any given date.
We are not offering to sell or seeking
offers to purchase these securities in any jurisdiction where the offer or sale is not permitted. We have not done anything
that would permit this offering or possession or distribution of this prospectus supplement and accompanying base prospectus
in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United
States who come into possession of this prospectus supplement and accompanying base prospectus must inform themselves about,
and observe any restrictions relating to, the offering of the securities as to distribution of the prospectus supplement and
accompanying base prospectus outside of the United States.
Solely for convenience, our trademarks and
tradenames referred to in this prospectus supplement, including the information in the accompanying base prospectus and the documents
incorporated by reference herein and therein, may appear without the ® or ™ symbols, but such references are not intended
to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and
tradenames.
Information contained in, and that can be accessed
through our website, www.digitalallyinc.com, does not constitute part of this prospectus supplement, including the information
in the accompanying base prospectus and the documents incorporated by reference herein and therein.
This prospectus supplement, including the information
in the accompanying base prospectus and the documents incorporated by reference herein and therein, includes market and industry
data that has been obtained from third party sources, including industry publications, as well as industry data prepared by our
management on the basis of its knowledge of and experience in the industries in which we operate (including our management’s
estimates and assumptions relating to such industries based on that knowledge). Management’s knowledge of such industries
has been developed through its experience and participation in these industries. While our management believes the third-party
sources referred to in this prospectus supplement, the accompanying base prospectus and such other documents are reliable, neither
we nor our management have independently verified any of the data from such sources referred to in this prospectus supplement,
the accompanying base prospectus and such other documents or ascertained the underlying economic assumptions relied upon by such
sources. Internally prepared and third-party market forecasts, in particular, are estimates only and may be inaccurate, especially
over long periods of time. Furthermore, references in this prospectus supplement, the accompanying base prospectus and such other
documents to any publications, reports, surveys or articles prepared by third parties should not be construed as depicting the
complete findings of the entire publication, report, survey or article. The information in any such publication, report, survey
or article is not incorporated by reference in this prospectus supplement, the accompanying base prospectus and such other documents.
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights certain information
about us, this offering and selected information contained or incorporated by reference in this prospectus supplement and the
accompanying base 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, Inc. and this offering, we encourage you to read and consider carefully this entire prospectus supplement, including the
information the accompanying base prospectus and the documents incorporated by reference herein and therein, as well as 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-13. Unless the context provides otherwise,
all references herein to “Digital Ally”, “the “Company”, “we”, “our” and
“us” refer to Digital Ally, Inc.
Company Overview
We
produce 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 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; and cloud storage solutions. We have active research and development programs to adapt our technologies
to other applications. We 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, taxicab and the military.
We sell our products to law enforcement agencies, private security customers and organizations and consumer and commercial fleet
operators through direct sales domestically and third-party distributors internationally.
COVID – 19 Pandemic
The
consolidated financial statements incorporated by reference into this prospectus supplement
and accompanying base prospectus as well as the description of our business contained herein, unless otherwise indicated, principally
reflect the status of our business and the results of our operations as of March 31, 2020. Since that date, economies throughout
the world have continued to be severely disrupted by the effects of the quarantines, business closures and the reluctance of individuals
to leave their homes as a result of the outbreak of the coronavirus (“COVID-19”). Although we remain open as
an “essential business,” our supply chain has been disrupted and our customers,
in particular our commercial customers, have been significantly impacted which has, in turn, reduced our level of operations and
activities. In addition, the capital markets have been disrupted and our efforts to raise necessary capital will likely be adversely
impacted by the outbreak of the virus and we cannot forecast with any certainty when the disruptions caused by it will cease to
impact our business and the results of our operations. In reading this prospectus supplement and accompanying base prospectus,
including the related exhibits, the information incorporated by reference herewith and our discussion of our ability to continue
as a going concern set forth in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 filed with the
U.S. Securities and Exchange Commission (the “SEC”) on May 20, 2020, and in the
Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on April 6, 2020, including the notes
to the financial statements contained therein, in each case, consider the additional uncertainties caused by the outbreak of COVID-19.
Our
Products
We
supply technology-based products utilizing our portable digital video and audio recording capabilities for the law enforcement
and security industries and for the commercial fleet and mass transit markets. We have the ability to integrate electronic, radio,
computer, mechanical, and multi-media technologies to create positive solutions to our customers’ requests. Our products
include: the DVM-800 and DVM-800 Lite, in-car digital video mirror systems for law enforcement; the FirstVU and the FirstVU HD,
body-worn cameras, our patented and revolutionary VuLink product, which integrates our body-worn cameras with our in-car systems
by providing hands-free automatic activation
for both law enforcement and commercial markets; the DVM-250 and DVM-250 Plus, a commercial line of digital video mirrors that
serve as “event recorders” for the commercial fleet and mass transit markets; and FleetVU and VuLink, our cloud-based
evidence management systems. We introduced the EVO-HD product in the second quarter of 2019 and began full-scale deliveries in
the third quarter of 2019. The EVO-HD is designed and built on a new and highly advanced technology platform that we expect to
become the platform for a new family of in-car video solution products for the law enforcement and commercial markets. We believe
that the launch of these new products will help to reinvigorate our in-car and body-worn systems revenues while diversifying and
broadening the market for our product offerings. The following describes our product portfolio
In-Car
Digital Video Mirror System for Law Enforcement – EVO-HD, DVM-800 and DVM-800 Lite
In-car
video systems for patrol cars are now a necessity and have generally become standard. 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, and some have offered full high definition (“HD”)
level recordings which is currently state-of-art for the industry.
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, global positioning system (“GPS”) and
900 megahertz (“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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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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records to rugged
and durable solid-state memory.
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We
have completed development of a new in-car digital video platform under the name EVO-HD which it launched during the second quarter
of 2019. The EVO-HD is a next generation system that offers a multiple HD in-car camera solution system with built-in patented
VuLink auto-activation technology. The EVO-HD is built on an entirely new and highly advanced technology platform that enables
many new and revolutionary features, including auto activation beyond the car and body camera. No other provider can offer built-in
patented VuLink auto-activation technology.
The
EVO-HD provides law enforcement officers with an easier to use, faster and more advanced system for capturing video evidence and
uploading than similar products sold by the Company’s competitors. Additional features include:
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a
remote cloud trigger feature that allows dispatchers to remotely start recordings;
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simultaneous
audio/video play back;
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cloud
connectivity via cell modem, including the planned deployment of the new 5G network;
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near
real-time mapping and system health monitoring;
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body-camera
connectivity with built-in auto activation technology; and
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128
gigabyte internal storage, up to 2 terabyte external solid-state drive storage.
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The
EVO-HD is designed and built on a new and highly advanced technology platform that will become the platform for a whole new family
of in-car video solution products for the law enforcement. The innovative EVO-HD technology replaces the current in-car mirror-based
systems with a miniaturized system that can be custom-mounted in the vehicle while offering numerous hardware configurations to
meet the varied needs and requirements of its law enforcement customers. The EVO-HD can support up to four HD cameras, with two
cameras having pre-event and evidence capture assurance (“ECA”) capabilities to allow agencies to review entire shifts.
An internal cell modem will allow for connectivity to the VuVault.net cloud, powered by Amazon Web Services (“AWS”)
and real time metadata when in the field.
In-Car
Digital Video “Event Recorder” System – DVM-250 Plus for Commercial Fleets
Digital
Ally provides commercial fleets and commercial fleet managers with the digital video tools that they need to increase driver safety
and 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 provide all types of commercial fleets with features
and capabilities which 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 of, the features of our DVM-800
law enforcement mirror systems, which we sell 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. The commercial fleet markets may find our units attractive from both a feature and a cost perspective compared to other
providers. We believe that due to our marketing efforts, commercial fleets are adopting this technology, in particular the ambulance
and taxi-cab markets.
Digital
Ally offers a suite of data management web-based tools to assist fleet managers in the organization, archival, and management
of videos and telematics information. Within the suite, there are powerful mapping and reporting tools that are intended to optimize
efficiency, serve as excellent training tools for teams on safety and ultimately generate a significant return on investment for
the organization.
The
EVO-HD described above will also become the platform for a whole new family of in-car video solution products for the commercial
markets. The innovative EVO-HD technology will replace the current in-car mirror-based systems with a miniaturized system that
can be custom-mounted in the vehicle while offering numerous hardware configurations to meet the varied needs and requirements
of its commercial customers. In its commercial market application, the EVO-HD can support up to four HD cameras, with two cameras
having pre-event and ECA capabilities to allow customers to review entire shifts. An internal cell modem will allow for connectivity
to the FleetVU Manager cloud-based system for commercial fleet tracking and monitoring, powered by AWS and real time metadata
when in the field.
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.
Auto-activation and Interconnectivity
Between In-Car Video Systems and FirstVU HD Body Worn Camera Products
– VuLink for Law Enforcement Applications
Recognizing
a critical limitation in law enforcement camera technology, we pioneered the development
of our VuLink ecosystem that provides intuitive auto-activation functionality as well as coordination between multiple recording
devices. The United States Patent and Trademark Office (the “USPTO”) has recognized
these pioneering efforts by granting us multiple patents with claims covering numerous features, such as automatically activating
an officer’s cameras when the light bar is activated or when a data-recording
device such as a smart weapon is activated. Additionally, the awarded patent claims cover automatic coordination between multiple
recording devices. Prior to this work, officers were forced to manually activate each device while responding to emergency scenarios,
a requirement that both decreased the usefulness of the existing camera systems and diverted officers’ attention
during critical moments. Our FirstVU HD integrates with our in-car video systems through our patented VuLink system allowing for
automatic activation of both systems.
This
feature is becoming a standard feature required by many law agencies. Unfortunately, certain of our competitors have chosen to
infringe our patent and develop products that provide the same or similar features as our VuLink system. We filed lawsuits against
two competitors – Axon Enterprises, Inc. (“Axon,” formerly known as Taser International, Inc.) and Enforcement
Video, LLC d/b/a WatchGuard Video (“WatchGuard”) – which challenge Axon’s and WatchGuard’s infringing
products. On May 13, 2019, WatchGuard and the Company resolved the dispute and executed a settlement agreement in the form of
a Release and License Agreement. The litigation has been dismissed as a result of this settlement.
Axon
– On June 17, 2019, the U.S. District Court for the District of Kansas
(the “U.S. District Court”) granted Axon’s motion for summary judgment that Axon did not infringe on the Company’s
patent and dismissed the case. Importantly, the U.S. District Court’s ruling did not find that the Company’s ‘452
Patent was invalid. It also did not address any other issue, such as whether the Company’s requested damages were appropriate,
and it does not impact the Company’s ability to file additional lawsuits to hold other competitors accountable for patent
infringement. This ruling solely related to an interpretation of the Company’s claims as they relate to Axon and was unrelated
to the supplemental briefing the Company filed on its damages claim and the WatchGuard settlement. Those issues are separate and
the U.S. District Court’s ruling on the motion for summary judgment had nothing to do with the Company’s damages request.
We
filed an opening appeal brief on August 26, 2019 with the U.S. Court of Appeals for the Tenth Circuit (the “Court of Appeals”),
appealing the U.S. District Court’s granting of Axon’s motion for summary judgment. Axon responded by filing a responsive
brief on November 6, 2019 and we then filed a reply brief responding to Axon on November 27, 2019. The Court of Appeals scheduled
oral arguments on our appeal of the U.S. District Court’s summary judgment ruling on April 6, 2020. This appeal was intended
to address the Company’s position that the U.S. District Court incorrectly dismissed our claims against Axon. If the Court
of Appeals overturns the ruling of the U.S. District Court, the case will be remanded to the U.S District Court before a new judge.
On March 12, 2020, the panel of judges for the Court of Appeals issued an order cancelling the oral arguments previously set for
April 6, 2020, having determined that the appeal will be decided solely based on the parties’ briefs. On April 22, 2020,
a three-judge panel of the United States Court of Appeals denied our appeal and affirmed the District Court’s
previous decision to grant Axon summary judgment. On May 22, 2020, we filed a petition for panel rehearing requesting that we
be granted a rehearing of our appeal of the U.S. District Court’s summary judgment ruling. Furthermore, we requested that
we be given an opportunity to make our case through oral argument in front of the three-judge panel of the Court of Appeals.
WatchGuard –
On May 27, 2016, the Company filed suit against WatchGuard alleging patent infringement
based on WatchGuard’s VISTA Wifi and 4RE In-Car product lines. On May 13, 2019, the parties resolved the dispute and executed
a settlement agreement in the form of a Release and License Agreement. The litigation has been dismissed as a result of this settlement.
The Release and License Agreement contains the following key terms:
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WatchGuard paid Digital Ally a one-time, lump settlement payment of $6,000,000.
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Digital Ally has granted WatchGuard a perpetual covenant not to sue if WatchGuard’s products incorporate agreed-upon modified recording functionality. Digital Ally has also granted WatchGuard a license to the ‘292 Patent and the ‘452 Patent (and related patents, now existing and yet-to-issue) through December 31, 2023. The parties have agreed to negotiate in good faith to attempt to resolve any alleged infringement that occurs after the license period expires.
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The parties have further agreed to release each other from all claims or liabilities pre-existing the settlement.
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As part of the settlement, the parties agreed that WatchGuard is making no admission that it has infringed any of Digital Ally’s patents.
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Upon
receipt of the $6,000,000, the parties filed a joint motion to dismiss the lawsuit with the court, which was granted.
We
believe that the outcome of the Axon lawsuit will largely define the competitive landscape for the body-worn and in-car video market
for the foreseeable future. We expect that our VuLink product and its related patents will be recognized as the revolutionary and
pioneering invention by the U.S. courts.
VuVault.net and
FleetVU Manager
VuVault.net
is a cost-effective, fully expandable, law enforcement cloud storage solution powered by AWS that provides redundant and security-enhanced
storage of all uploaded videos that comply with the United States Federal Bureau of Investigation’s
Criminal Justice Information Services Division requirements.
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 requiring 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.
Disinfectant Line
and Related Safety Products
Effective
April 3, 2020, the Company entered into a wholesale distribution agreement (the “Wholesale Agreement”)
with Trust Think, LLC (“Trust Think”). Pursuant to the terms of the Wholesale Agreement, the
Company has been engaged to service, promote, and sell certain Danolyte® disinfecting
products, which are manufactured and distributed by Trust Think to certain first responder and commercial customers with whom
the Company has existing relationships. Danolyte® has been listed on
the United States Environmental Protection Agency’s (“EPA”) List
N: Disinfectants for Use Against SARS-CoV-2, the virus that causes COVID-19. The Company will receive a percentage of the sales
sold through the Company’s distribution channels.
The
Company will offer the disinfecting products to its first responder customers including police, fire and paramedics. Commercial
customers such as cruise lines, taxi-cab and para transit may also be good candidates for the products. The Company is considering
enhancing the line of disinfectant products for additional related products including hardware to efficiently and effectively dispense
the disinfectants and temperature measuring devices.
On
June 2, 2020, the Company announced that its was launching its branded ThermoVuä
product line. ThermoVu is a non-contact temperature-measuring
instrument that measures temperature through the wrist. ThermoVu has optional features such as facial recognition to improve facility
security by restricting access based on temperature and/or facial recognition parameters. ThermoVu provides an instant pass/fail
audible tone with its temperature display and controls access to facilities based on such results. It can be applied in schools,
office buildings, subway stations, airports and other public venues.
On
June 2, 2020, the Company also announced the launch of its branded Shieldä
Disinfectant/Sanitizer and several related products to fulfill
demand by current customers and others for a disinfectant and sanitizer that is less harsh than many of the traditional products
now widely distributed. The Shieldä product
line contains a cleaner with no harsh chemicals or fumes. Hypochlorous acid (“HOCL”), the active ingredient of the
Company’s Shield products, falls under category IV of the EPA’s toxicity categories, the least toxic category. Cleaning
crews are not required to wear personal protective equipment when applying and reapplying HOCL.
Other Products
During
the last year, we 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. In December 2019, the Company announced a partnership with Pivot International for design and
manufacture of a new and innovative Breathalyzer Device utilizing the Company’s recently issued patent. With this new technology,
when an officer is conducting a field sobriety test and the breathalyzer is activated, the digital video recording device will
automatically start a recording, later embedding the meta-data captured onto the recorded video. The ‘732 Patent was granted
by the U.S. Patent Office in August 2019 and is an expansion of Digital Ally’s patented VuLink automatic activation technology.
Corporate Information
We
were incorporated in Nevada on December 13, 2000 as Vegas Petra, Inc. From that date until November 30, 2004, when we entered
into a Plan of Merger with Digital Ally, Inc., a Nevada corporation, which was formerly known as Trophy Tech Corporation (the “Acquired
Company”), we had not conducted any operations and were a closely-held company. In
conjunction with the merger, we were renamed Digital Ally, Inc.
The
Acquired Company, which was incorporated on May 16, 2003, engaged in the design, development, marketing and sale of bow hunting-related
products. Its principal product was a digital video recording system for use in the bow hunting industry. It changed its business
plan in 2004 to adapt its digital video recording system for use in the law enforcement and security markets. We began shipments
of our in-car digital video rear view mirrors in March 2006.
On January 2, 2008, we
commenced trading on Nasdaq under the symbol “DGLY.” We conduct our business
from 9705 Loiret Boulevard, Lenexa, Kansas 66219. Our website address is www.digitalallyinc.com.
Information contained on our website does not form part of this prospectus supplement and accompanying base prospectus and is intended
for informational purposes only.
Recent Developments
Nasdaq Continued Listing
Rule Compliance
On
July 11, 2019, we were officially notified by The Nasdaq Stock Market LLC that, for the previous 30 consecutive
business days, the minimum Market Value of Listed Securities (the “MVLS”) for our Common Stock was below the $35
million minimum MVLS requirement for continued listing on Nasdaq under Nasdaq Listing Rule 5550(b)(2) (the “MVLS
Rule”). In accordance with Nasdaq Listing Rule 5810(c)(3)(C), we had 180 calendar
days, or until January 7, 2020, to regain compliance with the MVLS Rule, or in the alternative, the minimum
stockholders’ equity requirement of $2,500,000. To regain compliance with the MVLS Rule, the minimum MVLS for our
Common Stock must have been at least $35 million for a minimum of 10 consecutive business days at any time during this
180-day period. If we failed to regain compliance with either the MVLS Rule or the minimum stockholders’ equity
requirement by January 7, 2020, we could have been delisted from Nasdaq.
On January 8, 2020, we
received a determination letter (the “Letter”) from the staff of Nasdaq (the “Staff”)
stating that we had not regained compliance with the MVLS Standard, since our Common Stock was below the $35 million minimum MVLS
requirement for continued listing on Nasdaq under the MLVS Rule and had not been at least $35 million for a minimum of 10 consecutive
business days at any time during the 180-day grace period granted to us. Pursuant to the Letter, unless we requested a hearing
to appeal this determination by 4:00 p.m. Eastern Time on January 15, 2020, our Common Stock would have been delisted from Nasdaq,
trading of our Common Stock would have been suspended at the opening of business on January 17, 2020, and a Form 25-NSE would have
been filed with the SEC, which would have removed our Common Stock from listing and registration on Nasdaq.
On January 13, 2020,
we requested a hearing before the Nasdaq Hearings Panel (the “Panel”) to appeal
the Letter and a hearing was set for February 20, 2020 at 11:00 a.m. Eastern Time. In anticipation of such hearing, we were asked
to provide the Panel with a plan to regain compliance with the minimum MLVS requirement under the MLVS Rule, which needed to include
a discussion of the events that we believe will enable us to timely regain compliance with the minimum MLVS requirement, or in
the alternative, the minimum shareholders’ equity requirement. On January 21, 2020, we submitted a compliance plan that we
believed was sufficient to permit us to regain compliance with the minimum stockholders’ equity requirement. On February
20, 2020, we appeared before the Panel to discuss our plan to regain compliance, including, but not limited to, complying with
Nasdaq Listing Rule 5550(b)(1), which is the minimum stockholders’ equity standard
for continued listing, which requires that companies listed on Nasdaq maintain a minimum of $2,500,000 in stockholders’
equity (“Rule 5550(b)(1)”). On March 6, 2020, we received written notice from
the Panel indicating that, based on the plan of compliance that we had presented at such hearing, the Panel granted our request
for the continued listing of our Common Stock on Nasdaq, subject to, among other things, us keeping the Staff updated on the progress
of our compliance plan and ultimately being able to evidence shareholder equity in an amount greater than or equal to $2,500,000
in accordance with Rule 5550(b)(1) no later than June 30, 2020. During this time, our Common Stock will remain listed and trading
on Nasdaq. We intend for the proceeds of this offering to provide us with the necessary capital in order to comply with the minimum
stockholders’ equity requirement. If we are not successful in raising the total amount contemplated by this offering, we
will not satisfy the minimum stockholders’ equity requirement and, unless we are able to raise additional capital prior to
June 30, 2020, our Common Stock will, in all likelihood, be delisted from Nasdaq.
On
April 22, 2020, we received a written notification from the Nasdaq Stock Market LLC indicating that we were not in compliance with
Nasdaq Listing Rule 5550(a)(2), as the closing bid price for our Common Stock was below $1.00 per share for the last thirty (30)
consecutive business days. Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), the Company has been granted a 180-calendar day compliance
period to regain compliance with the minimum bid price requirement. However, the 180-day grace period to regain compliance with
the Minimum Bid Price Requirement under applicable Nasdaq rules has been extended due to the global market impact caused by COVID-19.
More specifically, Nasdaq has stated that the compliance periods for any company previously notified about non-compliance will
be suspended effective April 16, 2020, through June 30, 2020. On July 1, 2020, companies would receive the balance of any pending
compliance period exception to come back into compliance with the applicable Minimum Bid Price Requirement. As a result of this
extension, the Company has until December 28, 2020, to regain compliance with the Minimum Bid Price Requirement. During the compliance
period, the Company’s shares of common stock will continue to be listed and traded on the Nasdaq Capital Market. To regain
compliance, the closing bid price of the Company’s shares of common stock must meet or exceed $1.00 per share for at least
ten (10) consecutive business days by December 28, 2020. Management continues to believe that adherence to its current operating
and business plan will enable the Company to regain compliance. If the Company is not in compliance by December 28, 2020, the Company
may be afforded a second 180-calendar day compliance period. To qualify for this additional time, the Company will be required
to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for
Nasdaq with the exception of the minimum bid price requirement.
Wholesale Agreement
Effective April 3, 2020, the Company entered
into the Wholesale Distribution Agreement with Trust Think. Pursuant to the terms of the Wholesale Agreement, the Company has
been engaged to service, promote, and sell certain Danolyte® disinfecting products, which are manufactured and distributed
by Trust Think, to certain first responder and commercial customers with whom the Company has relationships. The
Wholesale Agreement has an initial term beginning on April 3, 2020 and ends one (1) year thereafter. Thereafter, the Wholesale
Agreement renews automatically for successive additional terms of one (1) year each unless the Company or Think Tank provides
written notice of non-renewal at least thirty (30) days prior to the expiration of the then current term. Either party may terminate
the Wholesale Agreement at any time, effective immediately upon written notice if it has good cause for termination, as defined
in the Wholesale Agreement.
Executive
Pay Reduction
Our
compensation committee of our board of directors (the “Committee”) determined
that the cash portion of the annual base salaries of Stanton E. Ross, the Company’s
President and Chief Executive Officer, and Thomas J. Heckman, the Company’s
Chief Financial Officer, Treasurer and Secretary, shall be reduced to annual rates of $150,000 each for the balance of 2020, commencing
May 1, 2020. The Committee also decided that the balance of the annual salaries of Messrs. Ross and Heckman for 2020, which are
$69,230.76 and $55,384.00, respectively, as of May 1, 2020, will be paid through the issuance of shares of restricted Common Stock
under the Company’s 2018 Stock Option and Restricted Stock Plan, with the Company
paying the applicable federal and state taxes on such amounts. We issued Messrs. Ross and Heckman 75,250 shares of such Common
Stock and 60,200 shares of such Common Stock, respectively, effective April 17, 2020, based on a closing price of $0.92 per share
on such date.
Promissory
Note Under the Paycheck Protection Program
On
April 4, 2020, the Company entered into a promissory
note which provides for a loan in the amount of $1,418,900 (the “PPP Loan”) pursuant to the Paycheck Protection Program
under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
The PPP Loan has a two-year term and bears interest at a rate of 0.98% per annum. Monthly principal and interest payments are
deferred for six months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment
penalties. The promissory note contains events of default and other provisions customary for a loan of this type. The Paycheck
Protection Program provides that the PPP Loan may be partially or wholly forgiven if the funds are used for certain qualifying
expenses as described in the CARES Act. The Company intends to use the majority of the PPP Loan amount for qualifying expenses
and to apply for forgiveness of the loan in accordance with the terms of the CARES Act.
April
2020 Registered Offering and Concurrent Private Placement
On
April 17, 2020, we entered into a securities purchase agreement (the “Purchase Agreement”) with certain institutional
investors (the “Institutional Investors”), providing for the issuance of (i) our 8% Senior Secured Convertible Promissory
Notes due April 16, 2021 with an aggregate principal face amount of $1,666,666 (the “April 2020 Notes”), which April
2020 Notes were, subject to certain conditions, convertible into an aggregate of 1,650,164 shares of the Common Stock (the
“Conversion Shares”), at a price per share of $1.01 and (ii) five-year warrants (the “April 2020 Warrants”)
to purchase an aggregate of up to 1,237,624 shares of Common Stock (the “April 2020 Warrant Shares”) at an exercise
price of $1.31 per share, subject to customary adjustments, which April 2020 Warrants were immediately exercisable upon issuance
and on a cashless basis if the April 2020 Warrant Shares were not registered 180 days after the date of issuance (the “April
2020 Offering”). The April 2020 Warrant Shares were registered for resale pursuant to a prospectus, dated May 13, 2020,
to our currently effective registration statement on Form S-1 (File No. 333-238035), which was initially filed on May 6, 2020
and declared effective on May 13, 2020 (the “May 2020 Resale Registration Statement”). The closing of the April 2020
Offering occurred simultaneously with the execution and delivery of the Purchase Agreement and related transaction documents,
pursuant to which the Institutional Investors purchased the April 2020 Notes and the April 2020 Warrants for an aggregate purchase
price of $1,500,000.
On June 1, 2020, the Institutional Investors
converted an aggregate of $1,664,665 in principal amount of April 2020 Notes into an aggregate of 1,663,667 shares of Common Stock
(including accrued interest) and exercised all of the April 2020 Warrants, resulting in the issuance to the Institutional Investors
of an aggregate of 1,567,481 shares of Common Stock.
Pursuant
to the Purchase Agreement, an aggregate of $500,000 in principal amount of the
April 2020 Notes (the “April 2020 Registered Notes”), and the shares of Common
Stock underlying the April 2020 Registered Notes, were issued to the Institutional
Investors in an offering that was registered pursuant to a prospectus supplement, dated April 20, 2020, to our currently
effective registration statement on Form S-3 (File No. 333-225227), which was initially filed with the SEC on May 25, 2018, and
was declared effective on June 6, 2018.
Pursuant
to the Purchase Agreement, we issued to the Institutional Investors in a private placement, the remaining aggregate of $1,166,666
in principal amount of April 2020 Notes,
the Conversion Shares, the April 2020 Warrants and the April 2020 Warrant
Shares. We also entered into a Registration Rights Side Letter, dated April 17, 2020, with the Institutional Investors agreeing
to use our best efforts to file, within 30 days after the closing of the April 2020 Offering,
a resale registration statement on Form S-1 to
register the applicable Conversion Shares and the April 2020 Warrant Shares, and
to use our commercially reasonable efforts to have such registration statement declared
effective within 90 days after the closing date of the April 2020 Offering to permit
the resale of the Conversion Shares and the April 2020 Warrant Shares by the Institutional
Investors. Such remaining aggregate of $1,166,666 in principal amount of April 2020 Notes, the Conversion Shares, the April
2020 Warrants and the April 2020 Warrant Shares were registered under the May Resale Registration Statement.
In
connection with the Purchase Agreement, we and our subsidiary entered into a security agreement, dated
as of April 17, 2020, with the Institutional Investors (the “Security Agreement”),
pursuant to which we and our subsidiary granted to the Institutional Investors a security interest in, among other items, we and
our subsidiary’s accounts, chattel paper, documents, equipment, general intangibles,
instruments and inventory, and all proceeds, as set forth in the Security Agreement. In addition, pursuant to an intellectual
property security agreement, dated as of April 17, 2020, we granted to the Institutional Investors a continuing security interest
in all of our right, title and interest in, to and under certain of our trademarks, copyrights and patents. In addition, our subsidiary
agreed to guarantee and act as surety for our obligation to repay all of the April
2020 Notes issued in connection with the April 2020 Offering pursuant
to a subsidiary guarantee.
On
June 4, 2020, Digital Ally, Inc. (the “Company”) consummated an underwritten public offering (the “Offering”)
of 3,090,909 shares (the “Firm Shares”) of common stock, par value $0.001 per share, of the Company (the “Common
Stock”). The Offering was conducted pursuant to an underwriting agreement, dated June 2, 2020 (the “Underwriting Agreement”),
between the Company and Aegis Capital Corp., as representative (the “Representative”) of the underwriters (the “Underwriters”).
The gross proceeds to the Company from the Offering, before deducting underwriting discounts and commissions and other estimated
Offering expenses, and assuming the Underwriters do not exercise their option to purchase the Option Shares, was approximately
$5.1 million.
THE OFFERING
Shares of Common Stock Offered
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We are offering shares of Common Stock.
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Common Stock outstanding before this offering (1)
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22,499,177 shares of Common Stock, as of June 5, 2020.
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Common Stock to be outstanding after this offering (1)
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shares of Common Stock (assuming no exercise of the underwriters’ over-allotment option), or shares if the over-allotment option is exercised in full.
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Over-allotment option
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We have granted the underwriters an option to purchase from us up to (i) additional shares of our common stock at the public offering price, less underwriting discounts and commissions, within 45 days from the date of this prospectus supplement (provided that in no event may the aggregate market value of securities sold in the offering, including from the over-allotment option, exceed the limitations set forth in Rule I.B.6 of Form S-3).
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Use of proceeds
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We intend to use the net proceeds of this offering for general corporate purposes, including for compliance with certain Nasdaq continued listing requirements and continued investments in our commercialization efforts. See “Use of Proceeds” herein.
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Risk factors
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Investing in our securities involves a high degree of risk. You should read the “Risk Factors” section on page S-13 of this prospectus supplement for a discussion of factors to consider before deciding to invest in the units.
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Nasdaq symbol
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DGLY
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(1)
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The
number of shares of our Common Stock outstanding prior to and to be outstanding immediately after this offering, as set forth
in the table above, is based on 22,449,177 outstanding as of June 5, 2020, and includes or excludes the following as of such
date:
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excludes 583,625
shares of our Common Stock issuable upon exercise of outstanding options with a weighted average exercise price of $3.68 per
share as of June 5, 2020;
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includes 734,750
shares of our Common Stock subject to forfeiture pursuant to outstanding non-vested restricted stock grants as of June 5,
2020;
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excludes 1,936 shares
of our Common Stock as of June 5, 2020 reserved for future issuance pursuant to our existing stock incentive plans;
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excludes 4,530,466
shares of our Common Stock issuable upon exercise of warrants outstanding as of June 5, 2020 having a weighted average exercise
price of $5.37 per share;
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excludes 63,518
shares of our Common Stock held as treasury stock as of June 5, 2020;
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excludes the exercise
of an overallotment option we have granted to the underwriters of the June 2, 2020 Offering to purchase from us of up to 463,636 of
additional shares of our common stock at $1.65 less underwriting discounts and commissions, within 45 days from June 2, 2020;
and
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excludes the issuance
of up to 1,980 shares of our Common Stock issuable from time to time upon conversion or repayment of the principal amount
of $2,000 in aggregate principal balance as of June 5, 2020 of outstanding April 2020 Notes issued to the Institutional Investors
on April 17, 2020.
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RISK
FACTORS
Investing
in our securities involves a high degree of risk. You should carefully consider and evaluate all of the information contained
in this prospectus supplement, the accompanying base prospectus and in the documents that we incorporate by reference into this
prospectus supplement and the accompanying base prospectus before you decide to purchase our securities. In particular, you should
carefully consider and evaluate the risks and uncertainties described under the heading “Risk Factors” in this prospectus
supplement. Any of the risks and uncertainties set forth in this prospectus supplement, the accompanying base prospectus and in
the documents that we incorporate by reference herein and therein, as updated by annual, quarterly and other reports and documents
that we file with the SEC and incorporate by reference into this prospectus supplement could materially and adversely affect our
business, results of operations and financial condition, which in turn could materially and adversely affect the value of our
securities. As a result, you could lose all or part of your investment.
Risks
Related to this Offering of Securities
Our
insiders and affiliated parties beneficially own a significant portion of our Common Stock.
As
of the date of this prospectus supplement, our executive officers, directors, and affiliated parties beneficially own approximately
11.4% of our Common Stock, including options vested or to vest within sixty (60) days. As a result, our executive officers, directors
and affiliated parties will have significant influence to:
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elect
or defeat the election of our directors;
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amend
or prevent amendment of our articles of incorporation or bylaws;
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effect
or prevent a merger, sale of assets, change of control or other corporate transaction; and
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affect
the outcome of any other matter submitted to the stockholders for vote.
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In
addition, any sale of a significant amount of our Common Stock held by our directors and executive officers, or the possibility
of such sales, could adversely affect the market price of our Common Stock. Management’s
stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us,
which in turn could reduce our stock price or prevent our stockholders from realizing any gains from our Common Stock. 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.
The
market price for our Common Stock is particularly volatile given our status as a relatively unknown company with a small and thinly
traded public float, and lack of profits, which could lead to wide fluctuations in the share price of our Common Stock. You may
be unable to sell any shares of Common Stock that you hold at or above your purchase price, which may result in substantial losses
to you.
The
market for our Common Stock is characterized by significant price volatility when compared to the shares of larger, more established
companies that trade on a national securities exchange and have large public floats, and we expect that the share price of our
Common Stock will continue to be more volatile than the shares of such larger, more established companies for the indefinite future.
The volatility in the share price of our Common Stock is attributable to a number of factors. First, as noted above, our Common
Stock is, compared to the shares of such larger, more established companies, sporadically and thinly traded. The price for our
shares of share price of our Common Stock could, for example, decline precipitously in the event that a large
number of shares of our Common Stock is sold on the market without commensurate demand. Secondly, an investment in our securities
is a speculative or “risky” investment due to our lack of profits to date. As
a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment
in the event of negative news or lack of progress, be more inclined to sell their shares of share price of our Common Stock on
the market more quickly and at greater discounts than would be the case with the stock of a larger, more established company that
trades on a national securities exchange and has a large public float. Many of these factors are beyond our control and may decrease
the market price of our Common Stock regardless of our operating performance.
If
we are not able to comply with the applicable continued listing requirements or standards of Nasdaq, Nasdaq could delist our Common
Stock.
Our Common Stock is currently listed on Nasdaq.
In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards, including
those regarding director independence and independent committee requirements, minimum stockholders’ equity,
minimum share price, and certain corporate governance requirements. There can be no assurances that we will be able to comply
with the applicable listing standards. We intend for the proceeds of this offering to provide us with the necessary capital
in order to comply with Nasdaq’s minimum stockholders’ equity requirement of $2,500,000. If we are not successful
in raising the total amount contemplated by this offering, we will not satisfy such minimum stockholders’ equity requirement
and, unless we are able to raise additional capital prior to June 30, 2020, will, in all likelihood, be delisted from Nasdaq.
See “Recent Developments — Nasdaq Continued Listing Rule Compliance.”
In
the event that our Common Stock is delisted from Nasdaq and is not eligible for quotation on another market or exchange, trading
of our Common Stock could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted
securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or
obtain accurate price quotations for, our Common Stock, and there would likely also be a reduction in our coverage by securities
analysts and the news media, which could cause the price of our Common Stock to decline further. Also, it may be difficult for
us to raise additional capital if we are not listed on a major exchange.
In the event that our Common Stock is
delisted from Nasdaq, U.S. broker-dealers may be discouraged from effecting transactions in shares of our Common Stock because
they may be considered penny stocks and thus be subject to the penny stock rules.
The SEC has adopted a number of rules to
regulate a “penny stock” that restricts transactions involving stock which
is deemed to be a penny stock. Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and
15g-9 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These rules may have the effect
of reducing the liquidity of penny stocks. “Penny stocks” generally
are equity securities with a price of less than $5.00 per share (other than securities registered on certain national
securities exchanges or traded on Nasdaq if current price and volume information with respect to transactions in such
securities is provided by the exchange or system). Our shares of Common Stock have in the past constituted, and may again in
the future constitute, a “penny stock” within the meaning of the rules. The additional sales practice and
disclosure requirements imposed upon U.S. broker-dealers may discourage such broker-dealers from effecting transactions in
shares of our Common Stock, which could severely limit the market liquidity of such shares of Common Stock and impede their
sale in the secondary market.
A U.S.
broker-dealer selling a penny stock to anyone other than an established customer or “accredited investor” (generally,
an individual with a net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or
her spouse) must make a special suitability determination for the purchaser and must receive the purchaser’s written
consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the “penny
stock” regulations require the U.S. broker-dealer to deliver, prior to any transaction
involving a “penny stock”, a disclosure schedule prepared in accordance with SEC standards relating to the “penny
stock” market, unless the broker-dealer or the transaction is otherwise exempt. A U.S.
broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer and the registered representative and
current quotations for the securities. Finally, a U.S. broker-dealer is required to submit monthly statements disclosing
recent price information with respect to any “penny stock” held in a customer’s
account and information with respect to the limited market in “penny stocks”.
You should be aware that, according to the
SEC, the market for “penny stocks” has suffered in recent years from patterns
of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false
and misleading press releases; (iii) “boiler room” practices involving high-pressure
sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials
and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, resulting in investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market
or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our securities.
If and when a larger trading market for
our Common Stock develops, the market price of our Common Stock is still likely to be highly volatile and subject to wide fluctuations,
and you may be unable to resell your shares at or above the price at which you acquired them.
The market
price of our Common Stock may be highly volatile and could be subject to wide fluctuations in response to a number of factors that
are beyond our control, including, but not limited to:
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variations in our revenues and operating expenses;
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actual or anticipated changes in the estimates of our operating results or changes in stock market analyst recommendations regarding our Common Stock, other comparable companies or our industry generally;
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market conditions in our industry, the industries of our customers and the economy as a whole;
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actual or expected changes in our growth rates or our competitors’ growth rates;
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developments in the financial markets and worldwide or regional economies;
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announcements of innovations or new products or services by us or our competitors;
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announcements by the government relating to regulations that govern our industry;
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sales of our Common Stock or other securities by us or in the open market;
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changes in the market valuations of other comparable companies; and
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other events or factors, many of which are beyond our control, including those resulting from such events, or the prospect of such events, including war, terrorism and other international conflicts, public health issues including health epidemics or pandemics, such as the recent outbreak of COVID-19, and natural disasters such as fire, hurricanes, earthquakes, tornados or other adverse weather and climate conditions, whether occurring in the United States or elsewhere, could disrupt our operations, disrupt the operations of our suppliers or result in political or economic instability.
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In addition,
if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of
our Common Stock could decline for reasons unrelated to our business, financial condition or operating results. The trading price
of our shares of Common Stock might also decline in reaction to events that affect other companies in our industry, even if these
events do not directly affect us. Each of these factors, among others, could harm the value of your investment in our securities.
In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against
companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s
attention and resources, which could materially and adversely affect our business, operating results and financial condition.
Our ability to use our net operating
loss carry-forwards and certain other tax attributes may be limited.
Under
Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change”
(generally defined as a greater than 50% change (by value) in its equity ownership over a
three-year period), the corporation’s ability to use its pre-change net operating
loss carry-forwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be
limited. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, including as
a result of the completion of this offering when it is taken together with other transactions we may consummate in the succeeding
three-year period. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carry-forwards
to offset U.S. federal taxable income may be subject to limitations, which potentially could result in increased future tax liability
to us.
We do not anticipate paying dividends
on our Common Stock in the foreseeable future; you should not buy our securities if you expect dividends.
The payment of dividends on our Common Stock
will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board of
directors (“Board of Directors”)
may consider relevant. If we do not pay dividends, our Common Stock may be less valuable because a return on your investment will
only occur if our stock price appreciates.
We currently
intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate paying
any cash dividends on our Common Stock in the foreseeable future.
Purchasers in this offering will experience
immediate and substantial dilution in the book value of their investment.
The
public offering price of our Common Stock in this offering will exceed the net tangible book value per share of our Common Stock
outstanding prior to this offering. Therefore, if you purchase shares of Common Stock in this offering at a public offering price
of $ per share, you will experience immediate dilution of $ per share,
or approximately % of the public offering price of such shares representing the difference between
our pro forma as adjusted net tangible book value per share as of March 31, 2020, after giving effect to the issuance of
Common Stock in this offering and on a pro forma basis all other issuances/redemptions subsequent to March 31, 2020 as if they
had occurred as of March 31, 2020. This dilution is due in large part to the fact that the Company has a substantial accumulated
stockholder’s deficit at March 31, 2020. In addition, on a pro forma as adjusted basis, purchasers in this offering
will have contributed approximately % of the aggregate price paid by all purchasers
of our Common Stock and will own approximately % of our Common Stock outstanding after
this offering, based on the public offering price of $ per share of Common Stock. The exercise of
outstanding stock options and warrants, and the conversion of other outstanding convertible debt will result in further dilution
of your investment. In addition, you may experience further dilution upon our election to repay the April 2020 Notes in shares
of our Common Stock. See the section entitled “Dilution” on page S-31 of this prospectus supplement.
Exercise of options or warrants, or conversion
or repayment of other convertible securities, may have a dilutive effect on your percentage ownership of Common Stock, and may
result in a dilution of your voting power and an increase in the number of shares of Common Stock eligible for future resale in
the public market, which may negatively impact the trading price of our shares of Common Stock.
The exercise,
conversion or repayment of some or all of our outstanding warrants or convertible securities, as applicable, could result in significant
dilution in the percentage ownership interest of investors in this offering and in the percentage ownership interest of our existing
common stockholders and in a significant dilution of voting rights and earnings per share.
As of
June 5, 2020, we have warrants outstanding to purchase 4,530,466 shares of Common Stock. The warrants have a weighted average exercise
price of $5.37 and a weighted average years to maturity of approximately 2.2 years. In addition, we have options to purchase 583,625
shares of our Common Stock outstanding and exercisable at an average price of $3.68 per share.
On April
17, 2020, we issued the April 2020 Notes, which
are convertible into or payable in shares for up to 1,650,164 shares of our Common Stock, from time to time, and we also issued
the April 2020 Warrants to the Institutional Investors, which are exercisable, from
time to time, for up to 1,237,624 shares of our Common Stock. As of June 5, 2020, the aggregate outstanding principal balance of
the April 2020 Notes was $2,000, and the April 2020 Notes may result in the issuance of up to 1,980 shares of our Common Stock
upon conversion or repayment of outstanding principal balance. As of June 1, 2020, all of the April 2020 Warrants had been exercised.
Subject to lock-up provisions described
under “Underwriting,” we are
generally not restricted from issuing additional securities, including shares of Common Stock, securities that are convertible
into or exchangeable for, or that represent the right to receive, Common Stock or substantially similar securities. In addition
to the dilutive effects described above, the exercise, conversion or repayment, as applicable, of those securities would lead
to an increase in the number of shares of Common Stock eligible for resale in the public market. Sales of substantial numbers
of such shares of Common Stock in the public market could adversely affect the market price of our shares of Common Stock. Substantial
dilution and/or a substantial increase in the number of shares of Common Stock available for future resale may negatively impact
the trading price of our shares of Common Stock.
We may seek to raise additional funds,
finance acquisitions or develop strategic relationships by issuing securities that would dilute the ownership of the Common Stock.
Depending on the terms available to us, if these activities result in significant dilution, it may negatively impact the trading
price of our shares of Common Stock.
We may
acquire other technologies or finance strategic alliances by issuing our equity or equity-linked securities, which may result in
additional dilution to our stockholders. We have financed our operations, and we expect to continue to finance our operations,
acquisitions, if any, and the development of strategic relationships by issuing equity and/or convertible securities, which could
significantly reduce the percentage ownership of our existing stockholders. Further, any additional financing that we secure may
require the granting of rights, preferences or privileges senior to, or pari passu with, those of our Common Stock. Any issuances
by us of equity securities may be at or below the prevailing market price of our Common Stock and in any event may have a dilutive
impact on your ownership interest, which could cause the market price of our Common Stock to decline. We may also raise additional
funds through the incurrence of debt or the issuance or sale of other securities or instruments senior to our shares of Common
Stock. The holders of any securities or instruments we may issue may have rights superior to the rights of our common stockholders.
If we experience dilution from issuance of additional securities and we grant superior rights to new securities over common stockholders,
it may negatively impact the trading price of our shares of Common Stock.
Our charter documents and Nevada law
could prevent a takeover that stockholders consider favorable and could also reduce the market price of our Common Stock.
Provisions
of Nevada anti-takeover law (NRS 78.378 et seq.) could have the effect of
delaying or preventing a third-party from acquiring us, even if the acquisition arguably could benefit our stockholders.
Various provisions of our by-laws may delay, defer or prevent a tender offer or takeover attempt of us that a stockholder
might consider in his or her best interest. Our by-laws may be adopted, amended or repealed by the affirmative vote of the
holders of at least a majority of our outstanding shares of capital stock entitled to vote for the election of directors, and
except as provided by Nevada law, our Board of Directors shall have the power to adopt, amend or repeal the bylaws by a vote
of not less than a majority of our directors. The interests of these stockholders and directors may not be consistent with
your interests, and they may make changes to the by-laws that are not in line with your concerns.
Subject
to applicable Nasdaq rules regarding the issuance of 20% or more of our Common Stock, our authorized but unissued shares of Common
Stock are available for our Board or Directors to issue without stockholder approval. We may use these additional shares for a
variety of corporate purposes, however, faced with an attempt to obtain control of us by means of a proxy context, tender offer,
merger or other transaction our Board of Directors acting alone and without approval of our stockholders can issue large amounts
of capital stock as part of a defense to a take-over challenge.
The existence
of the foregoing provisions and other potential anti-takeover measures could limit the price that investors might be willing to
pay in the future for shares of our Common Stock. They could also deter potential acquirers of our company, thereby reducing the
likelihood that you could receive a premium for your Common Stock in an acquisition.
If securities or industry analysts do
not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations
regarding our Common Stock adversely, our Common Stock price and trading volume could decline.
The trading
market for our shares of Common Stock will be influenced by the research and reports that industry or securities analysts may publish
about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding
our Common Stock adversely, or provide more favorable relative recommendations about our competitors, our share price would likely
decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which in turn could cause our Common Stock price or trading volume to decline.
The requirements of being a U.S. public
company may strain our resources and divert management’s attention.
As a
U.S. public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act,
the listing requirements of Nasdaq, and other applicable securities rules and regulations. Compliance with these rules and regulations
will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase
demand on our systems and resources. The Exchange Act requires, among other things, that we file annual and current reports with
respect to our business and operating results.
As a
result of disclosure of information in this prospectus supplement, and in the documents that we incorporate by reference herein
and therein, as well as in filings required of a public company, our business and financial condition is more visible, which we
believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful,
our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor,
these claims, and the time and resources necessary to resolve them, could divert resources of our management and harm our business
and operating results.
We may not be able to maintain an active,
liquid trading market for our Common Stock, which may cause our Common Stock to trade at a discount and make it difficult for you
to sell the Common Stock you hold.
Our Common
Stock is currently listed on Nasdaq. However, there can be no assurance that we will be able to maintain an active market for our
Common Stock either now or in the future. If an active and liquid trading market cannot be sustained, you may have difficulty selling
any of our Common Stock that you hold. The market price of our Common Stock may decline below the applicable public offering price
you paid in this offering, and you may not be able to sell your shares of our Common Stock at or above the price you paid, or at
all.
Because our management will have broad
discretion and flexibility in how the net proceeds from this offering are used, our management may use the net proceeds in ways
with which you disagree or which may not prove effective.
We currently intend to use the net
proceeds from this offering as discussed under “Use of Proceeds” in this
prospectus supplement. We have not allocated specific amounts of the net proceeds from this offering for any of the foregoing
purposes. Accordingly, our management will have significant discretion and flexibility in applying the net proceeds of this
offering. You will be relying on the judgment of our management with regard to the use of these net proceeds, and you will
not have the opportunity, as part of your investment decision, to assess whether the net proceeds are being used
appropriately. It is possible that the net proceeds will be invested in a way that does not yield a favorable, or any, return
for us. The failure of our management to use such funds effectively could have a material adverse effect on our business,
financial condition, operating results and cash flow.
Risks Related to our Business
We have incurred losses in recent years.
We have
had net losses for several years and had an accumulated deficit of $87,388,619 at December 31, 2019, which includes our net losses
of $10,005,713 for the year ended December 31, 2019, as compared to $15,544,551 for the year ended December 31, 2018. As of March
31, 2020, we had an accumulated deficit of $89,722,729, which includes net losses
of $2,334,110 for the three months ended March 31, 2020. We have included disclosure of our liquidity plan and the substantial
doubt about our ability to continue as a going concern in our Quarterly Report on
Form 10-Q for the three months ended March 31, 2020. Furthermore, the report of our independent registered public accounting firm
in our Annual Report on Form 10-K for the year ended December 31, 2019 included an
explanatory paragraph regarding the substantial doubt about our ability to continue
as a going concern. 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 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 2019 and to date in 2020. 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.
We face risks related to health epidemics
and other outbreaks, which could significantly disrupt our operations and could have a material adverse impact on us, and the recent
coronavirus outbreak could materially and adversely affect our business.
An
outbreak of a new respiratory illness caused by COVID-19 has resulted in millions of infections and hundreds of thousands of
deaths worldwide, as of the date of filing of this prospectus supplement, and continues to spread across the globe, including
throughout the law enforcement and commercial fleets channels in the United States, the major market in which we operate. The
outbreak of COVID-19 or by other epidemics could materially and adversely affect our business, financial condition and
results of operations. If COVID-19 worsens in the United States and Asia, or in any other regions in which we have material
operations or sales, our business activities originating from affected areas, including sales, manufacturing and supply chain
related activities, could be adversely affected. Although we have been deemed by the State of Kansas to be an
“essential business”, our supply chain has been disrupted and our
customers, in particular our commercial customers, have been significantly impacted, which has in turn reduced our operations
and activities, Disruptive activities from COVID-19 could still include the temporary closure of our manufacturing facilities
and those used in our supply chain processes, restrictions on the export or shipment of our products, significant cutback of
ocean container delivery from Asia, business closures in impacted areas, and restrictions on our employees’ and
consultants’ ability to travel and to meet with customers. The extent to
which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted,
including new information which may emerge concerning the severity of the virus and the actions to contain it or treat its
impact, among others. COVID-19 could also result in social, economic and labor instability in the countries in which we or
our customers and suppliers operate.
If workers
at one or more of our offices or the offices of our suppliers or manufacturers become ill or are quarantined and in either or both
events are therefore unable to work, our operations could be subject to disruption. Further, if our manufacturers become unable
to obtain necessary raw materials or components, we may incur higher supply costs or our manufacturers may be required to reduce
production levels, either of which may negatively affect our financial condition or results of operations. In addition, the capital
markets have been disrupted and our efforts to raise necessary capital will likely be adversely impacted by the outbreak of COVID-19.
As a result, we cannot forecast with any certainty when the disruptions caused by such outbreak will cease to impact our business
and the results of our operations. In reviewing our consolidated financial statements for the year ended December 31, 2019
and the quarterly period ended March 31, 2020, as well as the notes to such financial statements,
including our discussion of our ability to continue as a going concern set forth therein, which financial statements and notes
are incorporated by reference to this prospectus supplement, consider the additional uncertainties caused by the outbreak of COVID-19.
The extent to which COVID-19 affects our results will depend on future developments that are highly uncertain and cannot be predicted,
including actions to contain COVID-19 or address and treat its effects, among others.
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. Some foreign governments are experiencing
budgetary pressures because of various reasons specific to them and their 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 FirstVU 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 for various reasons specific to them or the industry in which they operate, 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 2018, 2019 and to date in 2020 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 2020, although we do expect our newly launched EVO-HD in-car system to gain traction in 2020.
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 $485,748 and $462,171 in research and development expenses
during three months ended March 31, 2020 and 2019, 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 companies with direct 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 Axon, Reveal Media and WatchGuard. 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 “Business – Competition” in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2019 that we filed with the SEC on April 6, 2020 for additional
information.
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 2018 and 2017, we had certain product quality issues with the DVM-800 and FirstVU HD, which adversely
affected our revenues and operating results however, these issues have been successfully mitigated at this time.
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 that 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, although we entered into retention agreements with such officers
on December 23, 2008, which were amended in April 2018. The loss of the services of either 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 be subject to political and social risks associated with specific regions of the world including
those that may be subject to changes in tariffs that may have substantial effects on our product costs and supply chain reliability
and availability. 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 who currently sources such chipsets from the Philippines,
China, Taiwan and South Korea, among other countries. 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 Incorporated (“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 Instruments 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 Instruments chips.
Although
we have not historically had significant supply chain issues with these manufacturers, suppliers, and subcontractors, there can
be no assurance that we will be able to retain our present relationships and should we lose these manufacturers, suppliers, and
subcontractors, our business would be adversely affected.
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 at least 37 patents for protection in the United States and certain other countries to cover certain design aspects
of our products.
We have
been issued at least 22 patents to date by the USPTO. In addition, we have at least 15 patent applications that 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, were to be challenged and denied, it could potentially
allow our competitors to build very similar devices. Currently, this patent is not being challenged. 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 Enterprises, Inc. (Formerly Taser International,
Inc.). The Company owns U.S. Patent No. 9,253,452 (the “452 Patent”), which
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 with the U.S. District Court (Case No: 2:16-cv-02032) against Axon, alleging willful patent
infringement against Axon’s body camera product line and signal auto-activation
product. The Company is seeking both monetary damages and a permanent injunction against Axon for infringement of the ‘452
Patent. See “Prospectus Summary — Our Products.”
Enforcement Video, LLC d/b/a WatchGuard
Video. On May 27, 2016, the Company filed
suit against WatchGuard, in the U.S. District Court for the District of Kansas (Case No. 2:16-cv-02349-JTM-JPO) alleging patent
infringement based on WatchGuard’s VISTA Wifi and 4RE In-Car product lines.
See “Prospectus Summary — Our Products.”
PGA Tour, Inc. On
January 22, 2019 the PGA Tour, Inc. (the “PGA”) filed suit against the Company
in the Federal District Court for the District of Kansas (Case No. 2:19-cv-0033-CM-KGG) alleging breach of contract and breach
of implied covenant of good faith and fair dealing relating to the Web.com Tour Title Sponsor Agreement (the “Agreement”).
The contract was executed on April 16, 2015 by and between the parties. Under the Agreement, the Company would be a title sponsor
of and receive certain naming and other rights and benefits associated with the Web.com Tour for 2015 through 2019 in exchange
for the Company’s payment to the PGA of annual sponsorship fees. The suit has
been resolved and the case has been dismissed with prejudice on April 17, 2019.
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. The Company believes the likely
outcome of any other pending cases and proceedings will not be material to its business or its 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.
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.
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 which 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 “Prospectus Supplement Summary”
for additional information. 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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying
base prospectus and the documents incorporated by reference herein and therein, including the sections entitled “Risk Factors”,
contain “forward-looking statements” within the meaning of Section 21(E) of the Exchange Act and Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”). These forward-looking statements include, without
limitation: statements regarding proposed new products or services; statements concerning litigation or other matters; statements
concerning projections, predictions, expectations, estimates or forecasts for our business, financial and operating results and
future economic performance; statements of management’s goals and objectives; statements concerning our competitive environment,
availability of resources and regulation; trends affecting our financial condition, results of operations or future prospects;
our financing plans or growth strategies; and other similar expressions concerning matters that are not historical facts. Words
such as “may”, “will”, “should”, “could”, “would”, “predicts”,
“potential”, “continue”, “expects”, “anticipates”, “future”, “intends”,
“plans”, “believes” and “estimates,” and variations of such terms or similar expressions,
are intended to identify such forward-looking statements.
Forward-looking statements should not be read
as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by which,
that performance or those results will be achieved. Forward-looking statements are based on information available at the time they
are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and
uncertainties that could cause actual performance or results to differ materially from what is expressed in or suggested by the
forward-looking statements.
Forward-looking statements speak only as of
the date they are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update
forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking
information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements,
no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. Investors
should review our subsequent reports filed with the SEC described in the sections of this prospectus supplement entitled “Where
You Can Find More Information” and “Incorporation of Certain Information by Reference,” all of which are accessible
on the SEC’s website at www.sec.gov.
USE OF PROCEEDS
We estimate that the net proceeds to us from
the sale of the securities offered by this prospectus supplement in this offering will be $ (or $
if the underwriters fully exercise their over-allotment option) after deducting commissions and estimated offering expenses payable
by us.
We currently intend to use the net proceeds
from this offering for general corporate purposes, including for compliance with certain Nasdaq continued listing requirements
and continued investments in our commercialization efforts. We may also use a portion of the net proceeds for the acquisitions
of businesses, products, technologies or licenses that are complementary to our business, although we have no present commitments
or agreements to do so.
The allocation of the net proceeds of the offering
set forth above is based upon our current plans and assumptions regarding industry and general economic conditions, our future
revenues and expenditures.
The amounts and timing of our actual expenditures
may vary significantly and will depend on numerous factors, including market conditions, cash generated or used by our operations,
business developments and opportunities that may arise and related rate of growth. We may find it necessary or advisable to use
portions of the proceeds from this offering for other purposes.
Circumstances that may give rise to a change
in the use of proceeds and the alternate purposes for which the proceeds may be used include:
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●
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the existence of other opportunities or the need to take advantage of changes in timing of our existing activities;
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|
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●
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the need or desire on our part to accelerate, increase or eliminate existing initiatives due to, among other things, changing market conditions and competitive developments; and/or
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|
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|
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●
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if strategic opportunities present themselves (including acquisitions, joint ventures, licensing and other similar transactions).
|
From time to time, we evaluate these factors
and other factors and we anticipate continuing to make such evaluations to determine if the existing allocation of resources, including
the proceeds of this offering, is being optimized.
We believe that the net proceeds of this offering,
together with the net proceeds from the offering of our securities received in connection with the Securities Purchase Agreement
and cash on hand, will be sufficient to fund our operations through the balance of 2020, and we believe that we will need
to raise additional capital to fund our operations thereafter. Additional capital may not be available on terms favorable to us,
or at all. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing,
if available, may involve restrictive covenants or additional security interests in our assets. Any additional debt or equity
financing that we complete may contain terms that are not favorable to us or our stockholders. If we raise additional funds through
collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies
or products or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to
delay, reduce the scope of, or eliminate some or all of, our development programs or liquidate some or all of our assets.
CAPITALIZATION
The
following table sets forth our actual cash and cash equivalents and our capitalization as of March 31, 2020:
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●
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on
an actual basis;
|
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●
|
pro
forma basis to give effect to the issuance of the April 2020 Notes, the June 2, 2020 Offering and any other issuances/redemptions
after March 31, 2020; and
|
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●
|
on
a pro forma as adjusted basis to give effect to the sale of the securities offered hereby at a public offering price of $ per
share of Common Stock (assuming no exercise of the underwriter’s over-allotment option).
|
You
should read this information in conjunction with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our consolidated financial statements and related notes appearing in our Quarterly Report on
Form 10-K for the quarter ended March 31, 2020, which is incorporated by reference in this prospectus supplement and accompanying
base prospectus. The information below has also been provided on an as adjusted basis to give further effect to this current offering.
|
|
As
of March 31, 2020
|
|
|
|
Actual
|
|
|
Pro
Forma
|
|
|
Pro
Forma As Adjusted
|
|
Cash
and cash equivalents
|
|
$
|
328,526
|
|
|
$
|
9,829,342
|
|
|
$
|
|
|
Long
and short-term promissory notes payable
|
|
$
|
589,000
|
|
|
$
|
1,758,800
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.001 per share; 50,000,000 shares authorized, 16,067,928, 22,512,695 and shares
issued – actual as of March 31, 2020, pro forma and pro forma as adjusted
|
|
$
|
16.068
|
|
|
$
|
22,513
|
|
|
$
|
|
|
Additional
paid-in capital
|
|
|
87,390,377
|
|
|
|
95,880,054
|
|
|
|
|
|
Treasury
stock, at cost (63,518 shares)
|
|
|
(2,157,226
|
)
|
|
|
(2,157,226
|
)
|
|
|
|
|
Accumulated
deficit
|
|
|
(89,722,729
|
)
|
|
|
(89,887,835
|
)
|
|
|
|
|
Total
stockholders’ equity/deficit
|
|
$
|
(4,473,510
|
)
|
|
$
|
3,857,506
|
)
|
|
$
|
|
|
The
pro forma column above reflects (i) our acquisition of a loan in the principal amount of $1,418,900 pursuant to the Paycheck Protection
Program under the CARES Act (ii) the April 2020 Offering (iii) the conversion of the April 2020 Notes into an aggregate of 1,648,185
shares of Common Stock, including related accrued interest, (iv) the exercise of the April 2020 Warrants for an aggregate
of 1,567,481 shares of Common Stock, and (v) any other issuances/redemptions that have occurred as if they had occurred
subsequent to March 31, 2020.
The pro
forma as adjusted column above reflects our sale of Common Stock in this offering at a public offering price of $
per share. The above discussion and table are based on 16,004,410 shares of Common Stock
outstanding as of March 31, 2020 and includes or excludes the following as of such date:
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excludes 584,125 shares of our Common Stock issuable upon exercise of outstanding options with a weighted average exercise price of $3.69 per share as of March 31, 2020;
|
|
|
|
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●
|
includes 747,500 shares of our Common Stock subject to forfeiture pursuant to outstanding non-vested restricted stock grants as of March 31, 2020;
|
|
|
|
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●
|
excludes 121,636 shares of our Common Stock as of March 31, 2020 reserved for future issuance pursuant to our existing stock incentive plans;
|
|
|
|
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●
|
excludes 4,530,466 shares of our Common Stock issuable upon exercise of warrants outstanding as of March 31, 2020 having a weighted average exercise price of $5.12 per share;
|
|
|
|
|
●
|
excludes 63,518 shares of our Common Stock held as treasury stock, as of March 31, 2020;
|
|
|
|
|
●
|
includes the issuance of 3,090,909 shares of Common Stock which were issued in the June 2, 2020 Offering less underwriting discount/commissions and expenses of the offering subsequent to March 31, 2020;
|
|
|
|
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●
|
excludes the exercise of an overallotment option we have granted
to the underwriters of the June 2, 2020 Offering to purchase from us of up to 463,636 of additional shares of our common
stock at $1.65 less underwriting discounts and commissions, within 45 days from June 2, 2020;
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|
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|
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●
|
includes the issuance of up to 1,663,677 shares of our Common Stock issued upon conversion of the principal amount of $1,664,666 in aggregate principal balance and related interest related to the April 2020 Notes as of June 1, 2020 that were issued to the Institutional Investors on April 17, 2020;
|
|
|
|
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●
|
includes the issuance of up to 1,567,481 shares of Common Stock which were issued upon the exercise of the outstanding warrants subsequent to March 31, 2020;
|
|
|
|
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●
|
excludes the issuance of up to 1,980 shares of our Common Stock issuable from time to time upon conversion or repayment of the principal amount of $2,000 in aggregate principal balance as of June 1, 2020 of outstanding April 2020 Notes issued to the Institutional Investors on April 17, 2020;
|
|
|
|
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●
|
includes the issuance of 135,450 shares of Common Stock which were issued pursuant to stock compensation plans and the forfeiture of 12,750 restricted shares of Common Stock subsequent to March 31, 2020; and
|
|
|
|
|
●
|
reflects the sale
of the shares of Common Stock offered hereby at a public offering price of $ per
share (assuming no exercise of the underwriters’ over-allotment option).
|
DILUTION
A purchaser
of our securities in this offering will be diluted to the extent of the difference between the price paid for each share of our
Common Stock and the net tangible book value per share of our Common Stock after this offering. Our net tangible book value as
of March 31, 2020 was approximately $(4,891,095), or $(0.31) per share of our Common Stock. Net tangible book value per share is
equal to our total tangible assets minus total liabilities, all divided by 16,004,410 shares of Common Stock outstanding at March
31, 2020.
After
giving effect to the pro forma effect of (i) the conversion of the April 2020 Notes into an aggregate of 1,663,677 shares of
Common Stock including related accrued interest, (ii) the exercise of the April 2020 Warrants for an aggregate of 1,567,481 shares
of Common Stock, (iii) all other issuances/redemptions that have occurred subsequent to March 31, 2020 as if they had occurred
as of March 31, 2020, and to our sale in this offering of shares of Common Stock
offered by this prospectus supplement at a public offering price of $ per share of Common Stock,
and after deducting the estimated underwriting discount, commissions and our estimated offering expenses, and assuming no exercise
of the underwriter of its over-allotment option, our pro forma as adjusted net tangible book value as of March 31, 2020
would have been approximately $ or approximately $ per
share. This represents an immediate increase in pro forma as adjusted net tangible book value of approximately $
per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of approximately
$ per share to purchasers of our Common Stock in this offering, as illustrated by the following
table:
Public
offering price per share of Common Stock
|
|
$
|
|
|
Historical
net tangible book value per share at March 31, 2020, before giving effect to this offering
|
|
$
|
(0.31
|
)
|
Increase
in pro forma net tangible book value per share at March 31, 2020, attributable to current shareholders before giving effect
to this offering
|
|
|
|
|
Pro
forma net tangible book value per share at March 31, 2020, before giving effect to this offering
|
|
|
|
|
Increase
in pro forma as adjusted net tangible per share attributable to investors in this offering
|
|
$
|
|
|
Pro
forma as adjusted net tangible book value per share, as
adjusted to give effect to this offering
|
|
$
|
|
|
Dilution
to pro forma as adjusted net tangible book value per share to investors in this offering
|
|
$
|
|
|
The following
table summarizes as of March 31, 2020, on an as adjusted basis, as described above, the number of shares of our Common Stock, the
total consideration and the average price per share (1) paid to us by our existing stockholders and (2) to be paid by investors
purchasing shares of our Common Stock in this offering at a public offering price of $ per
share of Common Stock, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:
|
|
Shares
Purchased
|
|
|
Total
Consideration
|
|
|
Average
Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per
Share
|
|
Existing stockholders
|
|
|
22,512,695
|
|
|
|
|
%
|
|
$
|
95,902,567
|
|
|
|
|
%
|
|
$
|
4.26
|
|
New investors
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
|
|
|
|
Total
|
|
|
|
|
|
|
100.0
|
%
|
|
$
|
|
|
|
|
100.0
|
%
|
|
$
|
|
|
The
above discussion and table are based on 16,004,410 shares of Common Stock outstanding as of March 31, 2020 and includes or excludes
the following as of such date:
|
●
|
excludes 584,125 shares of our Common Stock issuable upon exercise of outstanding options with a weighted average exercise price of $3.69 per share as of March 31, 2020;
|
|
|
|
|
●
|
includes 747,500 shares of our Common Stock subject to forfeiture pursuant to outstanding non-vested restricted stock grants as of March 31, 2020;
|
|
|
|
|
●
|
excludes 121,636 shares of our Common Stock as of March 31, 2020 reserved for future issuance pursuant to our existing stock incentive plans;
|
|
|
|
|
●
|
excludes 4,530,466 shares of our Common Stock issuable upon exercise of warrants outstanding as of March 31, 2020 having a weighted average exercise price of $5.12 per share;
|
|
|
|
|
●
|
excludes 63,518 shares of our Common Stock held as treasury stock, as of March 31, 2020;
|
|
|
|
|
●
|
includes the issuance of 3,090,909 shares of Common Stock which
were issued in the June 2, 2020 Offering at $1.65 less underwriting discount/commissions and expenses of the offering
subsequent to March 31, 2020;
|
|
|
|
|
●
|
excludes the exercise of an overallotment option we have granted
to the underwriters of the June 2, 2020 Offering to purchase from us of up to 463,636 of additional shares of our common
stock at $1.65 less underwriting discounts and commissions, within 45 days from June 2, 2020;
|
|
|
|
|
●
|
includes the issuance of up to 1,663,677 shares of our Common Stock issued upon conversion of the principal amount of $1,664,666 in aggregate principal balance and related interest related to the April 2020 Notes as of June 1, 2020 that were issued to the Institutional Investors on April 17, 2020;
|
|
|
|
|
●
|
includes the issuance of up to 1,567,481 shares of Common Stock which were issued upon the exercise of the outstanding warrants subsequent to March 31, 2020;
|
|
|
|
|
●
|
excludes the issuance of up to 1,980 shares of our Common Stock issuable from time to time upon conversion or repayment of the principal amount of $2,000 in aggregate principal balance as of June 1, 2020 of outstanding April 2020 Notes issued to the Institutional Investors on April 17, 2020;
|
|
|
|
|
●
|
includes the issuance of 135,450 shares of Common Stock which were issued pursuant to stock compensation plans and the forfeiture of 12,750 restricted shares of common stock subsequent to March 31, 2020; and
|
|
|
|
|
●
|
reflects the sale
of the shares of Common Stock offered hereby at a public offering price of $
per share (assuming no exercise of the underwriters’ over-allotment option).
|
To the extent that our outstanding options
or warrants are converted or exercised, you could experience further dilution. To the extent that we raise additional capital through
the sale of additional equity, the issuance of any of our shares of Common Stock could result in further dilution to our stockholders.
DESCRIPTION
OF SECURITIES THAT WE ARE OFFERING
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
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 the
accompanying base prospectus is a part and incorporated by reference herein and therein. See “Where You Can Find More Information.”
Our authorized capital consists of 50,000,000
shares of Common Stock, $0.001 par value per share. As of June 5, 2020, we had 22,499,177 shares of our Common Stock issued and
outstanding, which excludes 63,518 shares held in treasury.
Common
Stock
Voting
Rights
Each
share of our Common Stock entitles the owner to one vote. There is no cumulative voting. A simple majority can elect all of the
directors at a given meeting, and the minority would not be able to elect any director at that meeting.
Dividends
Each
share of our Common Stock is entitled to receive an equal dividend, if one is declared. We cannot provide any assurance that we
will declare or pay cash dividends on our Common Stock in the future. Any future determination to declare cash dividends will
be made at the discretion of our Board of Directors, subject to applicable laws, and will depend on our financial condition, results
of operations, capital requirements, general business conditions and other factors that our Board of Directors may deem relevant.
Our Board of Directors may determine it to be necessary to retain future earnings (if any) to finance our growth. See “Risk
Factors” and “Dividend Policy.”
Liquidation
If
the Company is liquidated, then assets that remain (if any) after the creditors are paid and the owners of any securities with
liquidation preferences senior to the Common Stock are paid will be distributed to the owners of our Common Stock pro rata.
Preemptive
Rights
Owners
of our Common Stock have no preemptive rights. We may sell shares of our Common Stock to third parties without first offering
such shares to current stockholders.
Redemption
Rights
We
do not have the right to buy back shares of our Common Stock except in extraordinary transactions, such as mergers and court approved
bankruptcy reorganizations. Owners of our Common Stock do not ordinarily have the right to require us to buy their Common Stock.
We do not have a sinking fund to provide assets for any buy back.
Conversion
Rights
Shares
of our Common Stock cannot be converted into any other kind of stock except in extraordinary transactions, such as mergers and
court approved bankruptcy reorganizations.
Nonassessability
All
outstanding shares of our Common Stock are fully paid and nonassessable.
Listing
Our
Common Stock trades on Nasdaq under the symbol “DGLY.”
Options
and Warrants
As of June 5, 2020, there were outstanding
Common Stock options entitling the holders to purchase 583,625 shares of Common Stock
at a weighted average exercise price of $3.68 per share with a weighted average remaining
contractual life of 6.9 years and warrants entitling the holders to purchase up to 4,530,466
shares of Common Stock at a weighted average exercise price of $5.37 per share with
a weighted average remaining contractual life of 2.2 years.
Nevada
Anti-Takeover Statutes
Nevada
law provides that an acquiring person who acquires a controlling interest in a corporation may only exercise the voting rights
of control shares if those voting rights are conferred by a majority vote of the corporation’s disinterested stockholders
at a special meeting held upon the request of the acquiring person. If the acquiring person is accorded full voting rights and
acquires control shares with at least a majority of all the voting power, then stockholders who did not vote in favor of authorizing
voting rights for those control shares are entitled to payment for the fair value of such stockholders’ shares. A “controlling
interest” is an interest that is sufficient to enable the acquiring person to exercise at least one-fifth of the voting
power of the corporation in the election of directors. “Control shares” are outstanding voting shares that an acquiring
person or associated persons acquire or offer to acquire in an acquisition and those shares acquired during the 90-day period
before the person involved became an acquiring person.
These
provisions of Nevada law apply only to “issuing corporations” as defined therein. An “issuing corporation”
is a Nevada corporation that (a) has 200 or more stockholders, with at least 100 of such stockholders being both stockholders
of record and residents of Nevada, and (b) does business in Nevada directly or through an affiliated corporation. As of the date
of this prospectus supplement, we do not have 100 stockholders of record that are residents of Nevada. Therefore, these provisions
of Nevada law do not apply to acquisitions of our shares and will not so apply until such time as both of the foregoing conditions
are satisfied. At such time as these provisions of Nevada law may apply to us, they may discourage companies or persons interested
in acquiring a significant interest in or control of our company, regardless of whether such acquisition may be in the interest
of our stockholders.
Nevada
law also restricts the ability of a corporation to engage in any combination with an interested stockholder for three years from
when the interested stockholder acquires shares that cause the stockholder to become an interested stockholder, unless the combination
or purchase of shares by the interested stockholder is approved by the Board of Directors before the stockholder became an interested
stockholder. If the combination was not previously approved, then the interested stockholder may only effect a combination after
the three-year period if the stockholder receives approval from a majority of the disinterested shares or the offer satisfies
certain fair price criteria.
An
“interested stockholder” is a person who is:
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the
beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the corporation;
or
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an
affiliate or associate of the corporation and, at any time within three years immediately before the date in question, was
the beneficial owner, directly or indirectly of 10% or more of the voting power of the then outstanding shares of the corporation.
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Our
articles of incorporation, as amended, and bylaws, as amended, do not exclude us from these restrictions.
These
provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and
in the policies formulated by the Board of Directors and to discourage some types of transactions that may involve the actual
or threatened change of control of our company. These provisions are designed to reduce our vulnerability to an unsolicited proposal
for the potential restructuring or sale of all or a part of our company. However, these provisions could discourage potential
acquisition proposals and could delay or prevent a change in control of our company. They also may have the effect of preventing
changes in our management.
Transfer
Agent
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.
UNDERWRITING
Aegis Capital Corp. is acting as the representative
of the underwriters of the offering. We will enter into an underwriting agreement dated June , 2020 with the representative. Subject
to the terms and conditions of the underwriting agreement, we will agree to sell to the underwriters named below and the underwriters
named below will severally agree to purchase, at the public offering price less the underwriting discounts and commissions set
forth on the cover page of this prospectus supplement, the following respective number of shares of our Common Stock:
Underwriter
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Number of Shares
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Aegis Capital Corp.
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The underwriters will be committed to purchase
all of the shares of Common Stock offered by us other than those covered by the option to purchase additional shares described
below, if they purchase any shares. The obligations of the underwriters may be terminated upon the occurrence of certain events
specified in the underwriting agreement. Furthermore, pursuant to the underwriting agreement, the underwriters’ obligations
are subject to customary conditions, representations and warranties contained in the underwriting agreement, such as receipt by
the underwriters of officers’ certificates and legal opinions.
We will agree to indemnify the underwriters
against specified liabilities, including liabilities under the Securities Act of 1933, as amended, and to contribute to payments
the underwriters may be required to make in respect thereof.
The underwriters are offering the Common Stock,
subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel and
other conditions specified in the underwriting agreement. The underwriters reserve the right to withdraw, cancel or modify offers
to the public and to reject orders in whole or in part.
The underwriters propose to offer the Common
Stock offered by us to the public at the public offering price set forth on the cover of this prospectus supplement. In addition,
the underwriters may offer some of the Common Stock to other securities dealers at such price less a concession of $
per share. After the initial offering, the public offering price and concession to dealers may be changed.
We will grant the underwriters an over-allotment
option. This option, which is exercisable for up to 45 days after the date of this prospectus supplement, permits the underwriters
to purchase a maximum of additional shares of Common Stock from us to cover over-allotments.
If the underwriters exercise all or part of this option, they will purchase shares of Common Stock covered by the option at the
public offering price that appears on the cover page of this prospectus supplement, less the underwriting discount. If this option
is exercised in full, the total price to the public will be $ and the total proceeds to us
will be $ .
Discounts
and Commissions. The following table shows the public offering price, underwriting discount and proceeds, before expenses,
to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.
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Total
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Per
Share
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Without
Over-Allotment
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With
Over-Allotment
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Public
offering price
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$
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$
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$
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Underwriting
discount (7%)
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$
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$
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$
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Proceeds,
before expenses, to us
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$
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$
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$
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In
addition, we will also agree to pay all expenses relating to the offering, including (a) all filing fees and expenses relating
to the registration of the shares to be sold in the offering (including shares sold upon exercise of the underwriters’ over-allotment
option) with the SEC; (b) all fees associated with the review of the offering by FINRA and all fees and expenses relating to the
listing of such shares on Nasdaq; (c) all fees, expenses and disbursements relating to the registration, qualification or exemption
of securities offered under the “blue sky” securities laws designated by the underwriters; (d) all fees, expenses
and disbursements relating to the registration, qualification or exemption of securities offered under the securities laws of
foreign jurisdictions designated by the underwriters; (e) transfer and/or stamp taxes, if any, payable upon the transfer of the
shares from the Company to the representative; (f) fees and expenses of our legal counsel and accountants; and (g) “road
show” expenses, diligence fees and the fees and expenses of the representative’s legal counsel not to exceed $30,000.
We estimate that the total expenses of the
offering, excluding the underwriting discount, will be approximately $ .
Lock-Up Agreement. Pursuant to a
certain “lock-up” agreement, we, and any successor, have agreed, subject to certain exceptions, not to, for a period
of 21 days from the date of the pricing of the offering (1) offer, sell or otherwise transfer or dispose of, directly or indirectly,
any shares of capital stock of the Company or (2) file or caused to be filed any registration statement with the SEC relating
to the offering of any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares
of our capital stock. Notwithstanding the foregoing, in the event the closing price of the Common Stock as reported on Nasdaq
for three (3) consecutive trading days is at least 25% above the public offering price of the shares of Common Stock pursuant
to this offering, such lock-up period shall be terminated.
This lock-up provision applies to Common
Stock and to securities convertible into or exchangeable or exercisable for Common Stock. The exceptions permit, among other things
and subject to restrictions, the issuance of Common Stock upon the exercise of outstanding stock options and warrants or other
outstanding convertible securities.
Discretionary
Accounts. The underwriters do not intend to confirm sales of the securities offered hereby to any accounts over which they
have discretionary authority.
Electronic
Offer, Sale and Distribution of Shares. A prospectus supplement in electronic format may be made available on the websites
maintained by one or more of the underwriters or selling group members, if any, participating in this offering and one or more
of the underwriters participating in this offering may distribute prospectus supplements electronically. The representative may
agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders.
Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on
the same basis as other allocations. Other than the prospectus supplement in electronic format, the information on these websites
is not part of this prospectus supplement or the registration statement of which this prospectus supplement forms a part, has
not been approved or endorsed by us or any underwriter in its capacity as underwriter, and should not be relied upon by investors.
Other
Relationships. Certain of the underwriters and their affiliates may in the future provide various investment banking, commercial
banking and other financial services for us and our affiliates for which they may receive customary fees; however, except as disclosed
in this prospectus supplement, we have no present arrangements with any of the underwriters for any further services.
Stabilization.
In connection with this offering, the underwriters may engage in stabilizing transactions, overallotment transactions, syndicate
covering transactions, penalty bids and purchases to cover positions created by short sales.
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Stabilizing
transactions permit bids to purchase shares so long as the stabilizing bids do not exceed a specified maximum, and are engaged
in for the purpose of preventing or retarding a decline in the market price of the shares while the offering is in progress.
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Overallotment
transactions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated
to purchase. This creates a syndicate short position which may be either a covered short position or a naked short position.
In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares
that they may purchase in the overallotment option. In a naked short position, the number of shares involved is greater than
the number of shares in the overallotment option. The underwriters may close out any short position by exercising their overallotment
option and/or purchasing shares in the open market.
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Syndicate
covering transactions involve purchases of shares in the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will
consider, among other things, the price of shares available for purchase in the open market as compared with the price at
which they may purchase shares through exercise of the overallotment option. If the underwriters sell more shares than could
be covered by exercise of the overallotment option and, therefore, have a naked short position, the position can be closed
out only by buying shares in the open market. A naked short position is more likely to be created if the underwriters are
concerned that after pricing there could be downward pressure on the price of the shares in the open market that could adversely
affect investors who purchase in the offering.
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Penalty
bids permit the representative to reclaim a selling concession from a syndicate member when the shares originally sold by
that syndicate member are purchased in stabilizing or syndicate covering transactions to cover syndicate short positions.
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These
stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market
price of our shares or common stock or preventing or retarding a decline in the market price of our shares or common stock. As
a result, the price of our common stock in the open market may be higher than it would otherwise be in the absence of these transactions.
Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may
have on the price of our common stock. These transactions may be effected on the NASDAQ Capital Market.
Passive
market making. In connection with this offering, underwriters and selling group members may engage in passive market making
transactions in our common stock in accordance with Rule 103 of Regulation M under the Exchange Act, during a period before the
commencement of offers or sales of the shares and extending through the completion of the distribution. A passive market maker
must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids
are lowered below the passive market maker’s bid, that bid must then be lowered when specified purchase limits are exceeded.
Offer
Restrictions Outside the United States
Other
than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities
offered by this prospectus supplement in any jurisdiction where action for that purpose is required. The securities offered by
this prospectus supplement may not be offered or sold, directly or indirectly, nor may this prospectus supplement or any other
offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in
any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that
jurisdiction. Persons into whose possession this prospectus supplement comes are advised to inform themselves about and to observe
any restrictions relating to the offering and the distribution of this prospectus supplement. This prospectus supplement does
not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus supplement in any
jurisdiction in which such an offer or a solicitation is unlawful.
Listing
Our
common stock is listed on the Nasdaq under the symbol “DGLY.”
Transfer
Agent and Registrar
The
transfer agent and registrar 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.
LEGAL
MATTERS
Sullivan & Worcester LLP, New York, New
York, will render a legal opinion as to the validity of the securities to be registered hereby. Sichenzia Ross Ference LLP, New
York, New York, is acting as counsel for the underwriters in connection with this offering.
EXPERTS
The
consolidated financial statements of Digital Ally, Inc. as of December 31, 2019 and for the year ended December 31, 2019 incorporated
in this prospectus supplement by reference from the Digital Ally, Inc. Annual Report on Form 10-K for the year ended December
31, 2019 have been audited by RBSM LLP, an independent registered public accounting firm, as stated in their report thereon, incorporated
herein by reference, and have been incorporated in this registration statement of which this prospectus supplement forms
a part in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
The
consolidated financial statements of Digital Ally, Inc. as of December 31, 2018 and for the year then ended incorporated in this
prospectus supplement by reference from the Digital Ally, Inc. Annual Report on Form 10-K for the year ended December 31,
2019 have been audited by RSM US LLP, an independent registered public accounting firm, as stated in their report thereon, incorporated
herein by reference, and have been incorporated in this registration statement of which this prospectus supplement forms
a part in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
This
prospectus supplement constitutes a part of a registration statement on Form S-3 filed under the Securities Act. As permitted
by the SEC’s rules, this prospectus supplement and the accompanying base prospectus, which form a part of the registration
statement, do not contain all the information that is included in the registration statement. You will find additional information
about us in the registration statement. Any statements made in this prospectus supplement concerning legal documents are not necessarily
complete and you should read the documents that are filed as exhibits to the registration statement or otherwise filed with the
SEC for a more complete understanding of the document or matter.
We file annual, quarterly
and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public at no cost
from the SEC’s website at www.sec.gov. Our corporate website is www.digitalallyinc.com. The information on
our corporate website is not incorporated by reference in this prospectus supplement, the accompanying base prospectus and the
documents incorporated by reference herein and therein, and you should not consider it a part of this prospectus supplement, accompanying
prospectus or such documents.
INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
We
incorporate by reference the filed documents listed below (excluding those portions of any Current Report on Form 8-K that are
not deemed “filed” pursuant to the General Instructions of Form 8-K), except as superseded, supplemented or modified
by this prospectus supplement or any subsequently filed document incorporated by reference herein as described below:
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our
Annual Report on Form 10-K for the year ended December 31, 2019 and its amendment on Form 10-K/A, filed with the SEC on April
6, 2020 and April 29, 2020, respectively;
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our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 20, 2020;
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our Current Reports on Form 8-K filed with the SEC on January 9,
2020, January 14, 2020, March 3, 2020, March 9, 2020, April 8, 2020, April 20, 2020, April 21, 2020 and April 24, 2020, June 4,
2020; and
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the
description of our Common Stock contained in our Registration Statement on 8-A filed with the SEC on December 28, 2007, including
all amendments and reports filed for the purpose of updating such description.
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We
also incorporate by reference into this prospectus supplement additional documents that we may file with the SEC under Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof but before the completion or termination of this offering
(excluding any information not deemed “filed” with the SEC). Any statement contained in a previously filed document
is deemed to be modified or superseded for purposes of this prospectus supplement to the extent that a statement contained in
this prospectus supplement or in a subsequently filed document incorporated by reference herein modifies or supersedes the statement,
and any statement contained in this prospectus supplement is deemed to be modified or superseded for purposes of this prospectus
supplement to the extent that a statement contained in a subsequently filed document incorporated by reference herein modifies
or supersedes the statement.
We
will provide, without charge, to each person to whom a copy of this prospectus supplement is delivered, including any beneficial
owner, upon the written or oral request of such person, a copy of any or all of the documents incorporated by reference herein,
including exhibits. Requests should be directed to:
Digital
Ally, Inc.
9705
Loiret Blvd.
Lenexa,
KS 66219
(913)
814-7774
corporate@digitalallyinc.com
Copies
of these filings are also available on our website at www.digitalallyinc.com. For other ways to obtain a copy of these
filings, please refer to “Where You Can Find More Information” above.
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 June 7, 2018 the last reported
sales price of our common stock was $2.55 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 June 7, 2018
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.
As
of June 7, 2018, the aggregate market value of our outstanding common stock held by non-affiliates, or public float, was approximately
$14.95 million based on 7,152,607 total shares of outstanding common stock, at a price of $2.55 per share, which was the last
reported sale price of our common stock on the Nasdaq Capital Market on June 7, 2018. We have offered approximately $3.8 million
of securities 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. 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.
Offerings
Under This Prospectus
Under
this prospectus, we may offer shares of our common stock and preferred stock, various series of debt securities and/or warrants
or rights to purchase any of such securities, either individually or in units, with a total value of up to $25,000,000, from time
to time at prices and on terms to be determined by market conditions at the time of the offering. This prospectus provides you
with a general description of the securities we may offer. Each time we offer a type or series of securities under this prospectus,
we will provide a prospectus supplement that will describe the specific amounts, prices and other important terms of the securities,
including, to the extent applicable:
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designation
or classification;
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aggregate
principal amount or aggregate offering price;
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maturity,
if applicable;
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rates
and times of payment of interest or dividends, if any;
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redemption,
conversion or sinking fund terms, if any;
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voting
or other rights, if any; and
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conversion
or exercise prices, if any.
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The
prospectus supplement also may add, update or change information contained in this prospectus or in documents we have incorporated
by reference into this prospectus. However, no prospectus supplement will fundamentally change the terms that are set forth in
this prospectus or offer a security that is not registered and described in this prospectus at the time of its effectiveness.
We
may sell the securities directly to investors or to or through agents, underwriters or dealers. We, and our agents or underwriters,
reserve the right to accept or reject all or part of any proposed purchase of securities. If we offer securities through agents
or underwriters, we will include in the applicable prospectus supplement:
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the
names of those agents or underwriters;
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applicable
fees, discounts and commissions to be paid to them;
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details
regarding over-allotment options, if any; and
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the
net proceeds to us.
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This
prospectus may not be used to consummate a sale of any securities unless it is accompanied by a prospectus supplement.
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,”
and “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.
Company
Overview
We
produce 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 system that provides our 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; and cloud storage solutions including cloud-based fleet management and driver monitoring/training applications.
We have active research and development programs to adapt our technologies to other applications. We have 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, and consumer and commercial fleet operators through direct sales domestically and third-party
distributors internationally. We have several new and derivative products in research and development that we anticipate will
begin commercial production during the second half of 2018.
Principal
Executive Offices and Additional Information
Our
executive offices are located at 9705 Loiret Boulevard, Lenexa, Kansas 66219, and our telephone number is (913) 814-7774. Our
website address is www.digitalallyinc.com. Information contained on our website does not form part of this prospectus and
is intended for informational purposes only.
RISK
FACTORS
Investing
in our securities involves significant risk. The prospectus supplement applicable to each offering of our securities will contain
a discussion of the risks applicable to an investment in Digital Ally, Inc. Prior to making a decision about investing in our
securities, you should carefully consider the specific factors discussed under the heading “Risk Factors” in the applicable
prospectus supplement, together with all of the other information contained or incorporated by reference in the prospectus supplement
or appearing or incorporated by reference in this prospectus. You should also consider the risks, uncertainties and assumptions
discussed under the heading “Risk Factors” included in our most recent annual report on Form 10-K, as revised or supplemented
by our subsequent quarterly reports on Form 10-Q or our Registration Statement on Form S-1 dated May 23, 2018, or our current
reports on Form 8-K that we have filed with the SEC, all of which are incorporated herein by reference, and which may be amended,
supplemented or superseded from time to time by other reports we file with the SEC in the future. The risks and uncertainties
we have described are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently
deem immaterial may also affect our operations. The occurrence of any of these risks might cause you to lose all or part of your
investment in the offered securities.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus, including the sections entitled “Risk Factors”, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Business”, contain forward-looking statements that include information
relating to future events, future financial performance, strategies, expectations, our competitive environment, regulation and
availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new products
or services; our statements concerning litigation or other matters; statements concerning projections, predictions, expectations,
estimates or forecasts for our business, financial and operating results and future economic performance; statements of management’s
goals and objectives; trends affecting our financial condition, results of operations or future prospects; our financing plans
or growth strategies; and other similar expressions concerning matters that are not historical facts. Words such as “may”,
“will”, “should”, “could”, “would”, “predicts”, “potential”,
“continue”, “expects”, “anticipates”, “future”, “intends”, “plans”,
“believes” and “estimates,” and similar expressions, as well as similar statements in the future tense,
identify forward-looking statements.
Forward-looking
statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications
of the times at, or by which, that performance or those results will be achieved. Forward-looking statements are based on information
available at the time they are made and/or management’s good faith belief as of that time with respect to future events,
and are subject to risks and uncertainties that could cause actual performance or results to differ materially from what is expressed
in or suggested by the forward-looking statements.
Forward-looking
statements speak only as of the date they are made. You should not put undue reliance on any forward-looking statements. We assume
no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors
affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more
forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking
statements.
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 2017 and 2016, and
our ability to pay the Notes, June Notes (as defined below) and Secured Note (as defined below) 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, including
whether deliveries will resume under the AMR contract; (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 in 2018 and have such new products perform as planned or
advertised; (7) whether we will be able to increase the sales, domestically and internationally, for our 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, in 2018; (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 nonpayment of dividends and lack of plans to pay dividends in the future; (29) 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; (30) our additional securities available for issuance, which, if
issued, could adversely affect the rights of the holders of our Common Stock; (31) our stock price is likely to be highly
volatile due to a number of factors, including a relatively limited public float; (32) whether the legal actions that the
Company is taking or has taken against Utility Associates, Axon and WatchGuard will achieve their intended objectives; (33)
whether the USPTO rulings will curtail, eliminate or otherwise have an effect on the actions of Axon Enterprises, Inc. (“Axon” - formerly known as Taser International, Inc.) and Enforcement Video, LLC dba WatchGuard Video
(“Watchguard”) and Utility Associates respecting us, our products and customers; (34) whether the remaining two
claims under the U.S. Patent No. 6,831,556 (the “556 Patent”) have applicability to us or our products; and (35)
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; (36) the United States Patent and Trademark Office (the
“USPTO”) decision on WatchGuard’s petition seeking Inter Partes Review (“IPR”) of the
U.S. Patent No. 8,781,292 (‘292 Patent); (37) whether such technology will have a significant impact on our revenues in
the long-term; and (38) indemnification of our officers and directors.
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.
See
“Plan of Distribution” elsewhere in this prospectus for more information.
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 over allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with rules and regulations under the Exchange Act. Over allotment 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
Capital
Stock
Our
authorized capital consists of 25,000,000 shares of Common Stock, $0.001 par value per share. As of June 7, 2018, we had 7,152,607
shares of our Common Stock issued and outstanding, which excludes 63,518 shares held in treasury.
Common
Stock
Voting
Rights
Each
share of our Common Stock entitles the owner to one vote. There is no cumulative voting. A simple majority can elect all of the
directors at a given meeting, and the minority would not be able to elect any director at that meeting.
Dividends
Each
share of our Common Stock is entitled to receive an equal dividend, if one is declared. We cannot provide any assurance that we
will declare or pay cash dividends on our Common Stock in the future. Any future determination to declare cash dividends will
be made at the discretion of our Board of Directors, subject to applicable laws, and will depend on our financial condition, results
of operations, capital requirements, general business conditions and other factors that our Board of Directors may deem relevant.
Our Board of Directors may determine it to be necessary to retain future earnings (if any) to finance our growth. See “Risk
Factors” and “Dividend Policy.”
Liquidation
If
the Company is liquidated, then assets that remain (if any) after the creditors are paid and the owners of preferred stock receive
liquidation preferences (as applicable) will be distributed to the owners of our Common Stock pro rata.
Preemptive
Rights
Owners
of our Common Stock have no preemptive rights. We may sell shares of our Common Stock to third parties without first offering
such shares to current stockholders.
Redemption
Rights
We
do not have the right to buy back shares of our Common Stock except in extraordinary transactions, such as mergers and court approved
bankruptcy reorganizations. Owners of our Common Stock do not ordinarily have the right to require us to buy their Common Stock.
We do not have a sinking fund to provide assets for any buy back.
Conversion
Rights
Shares
of our Common Stock cannot be converted into any other kind of stock except in extraordinary transactions, such as mergers and
court approved bankruptcy reorganizations.
Nonassessability
All
outstanding shares of our Common Stock are fully paid and nonassessable.
Options
and Warrants
As
of June 7, 2018, there were outstanding Common Stock options entitling the holders to purchase 274,637 shares of Common Stock
at a weighted average exercise price of $4.55 per share and warrants entitling the holders to purchase up to 4,246,133 shares
of Common Stock at a weighted average exercise price of $5.73 per share.
Nevada
Anti-Takeover Statutes
Nevada
law provides that an acquiring person who acquires a controlling interest in a corporation may only exercise the voting rights
of control shares if those voting rights are conferred by a majority vote of the corporation’s disinterested stockholders
at a special meeting held upon the request of the acquiring person. If the acquiring person is accorded full voting rights and
acquires control shares with at least a majority of all the voting power, then stockholders who did not vote in favor of authorizing
voting rights for those control shares are entitled to payment for the fair value of such stockholders’ shares. A “controlling
interest” is an interest that is sufficient to enable the acquiring person to exercise at least one-fifth of the voting
power of the corporation in the election of directors. “Control shares” are outstanding voting shares that an acquiring
person or associated persons acquire or offer to acquire in an acquisition and those shares acquired during the 90-day period
before the person involved became an acquiring person.
These
provisions of Nevada law apply only to “issuing corporations” as defined therein. An “issuing corporation”
is a Nevada corporation that (a) has 200 or more stockholders, with at least 100 of such stockholders being both stockholders
of record and residents of Nevada, and (b) does business in Nevada directly or through an affiliated corporation. As of the date
of this prospectus, we do not have 100 stockholders of record that are residents of Nevada. Therefore, these provisions of Nevada
law do not apply to acquisitions of our shares and will not so apply until such time as both of the foregoing conditions are satisfied.
At such time as these provisions of Nevada law may apply to us, they may discourage companies or persons interested in acquiring
a significant interest in or control of our company, regardless of whether such acquisition may be in the interest of our stockholders.
Nevada
law also restricts the ability of a corporation to engage in any combination with an interested stockholder for three years from
when the interested stockholder acquires shares that cause the stockholder to become an interested stockholder, unless the combination
or purchase of shares by the interested stockholder is approved by the Board of Directors before the stockholder became an interested
stockholder. If the combination was not previously approved, then the interested stockholder may only effect a combination after
the three-year period if the stockholder receives approval from a majority of the disinterested shares or the offer satisfies
certain fair price criteria.
An
“interested stockholder” is a person who is:
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the
beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the corporation;
or
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an
affiliate or associate of the corporation and, at any time within three years immediately before the date in question, was
the beneficial owner, directly or indirectly of 10% or more of the voting power of the then outstanding shares of the corporation
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Our
articles of incorporation and bylaws do not exclude us from these restrictions.
These
provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and
in the policies formulated by the Board of Directors and to discourage some types of transactions that may involve the actual
or threatened change of control of our company. These provisions are designed to reduce our vulnerability to an unsolicited proposal
for the potential restructuring or sale of all or a part of our company. However, these provisions could discourage potential
acquisition proposals and could delay or prevent a change in control of our company. They also may have the effect of preventing
changes in our management.
Transfer
Agent
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.
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 date 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
title of the series of units;
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the
price or prices at which the units will be issued;
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a
discussion of certain United States federal income tax considerations applicable to the units; and
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any
other terms of the units and their constituent securities.
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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.
LEGAL
MATTERS
Robinson
Brog Leinwand Greene Genovese & Gluck P.C. will render a legal opinion as to the validity of the securities to be registered
hereby. The validity of any securities will be passed upon for any underwriters or agents by counsel we will name in the applicable
prospectus supplement.
EXPERTS
The
consolidated financial statements incorporated by reference from Digital Ally, Inc.’s Annual Report on Form 10-K as of December
31, 2017 and 2016 and for each of the years in the two-year period ended December 31, 2017 have been audited by RSM US LLP, independent
registered public accounting firm, as stated in their report which is incorporated herein by reference, and has been so incorporated
in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
INCORPORATION
BY REFERENCE
We
incorporate by reference the filed documents listed below (excluding those portions of any Current Report on Form 8-K that are
not deemed “filed” pursuant to the General Instructions of Form 8-K), except as superseded, supplemented or modified
by this prospectus or any subsequently filed document incorporated by reference herein as described below:
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our
Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on April 13, 2018;
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our
Quarterly Report on Form 10-Q for the three months ended March 31, 2018, filed with the SEC on May 15, 2018;
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our
Definitive Proxy Statement on Schedule 14A for our annual meeting of stockholders to be held on June 27, 2018, filed with
the SEC on May 14, 2018; and
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our
Registration Statement on Form S-1 filed with the SEC on May 23, 2018 and the related Prospectus filed with the SEC on June
6, 2018, pursuant to Rule 424(b)(3); and
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our
Current Reports on Form 8-K filed with the SEC on April 4, 2018, April 13, 2018, April 20, 2018, May 15, 2018, and May 17,
2018.
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We
also incorporate by reference into this prospectus additional documents we may file with the SEC under Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date hereof but before the completion or termination of this offering (excluding
any information not deemed “filed” with the SEC). Any statement contained in a previously filed document is
deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained in this
prospectus or in a subsequently filed document incorporated by reference herein modifies or supersedes the statement, and any
statement contained in this prospectus is deemed to be modified or superseded for purposes of this prospectus to the extent
that a statement contained in a subsequently filed document incorporated by reference herein modifies or supersedes the
statement.
We
will provide, without charge, to each person to whom a copy of this prospectus is delivered, including any beneficial owner, upon
the written or oral request of such person, a copy of any or all of the documents incorporated by reference herein, including
exhibits. Requests should be directed to:
Digital
Ally, Inc.
9705
Loiret Blvd.,
Lenexa,
KS 66219
(913)
814-7774
Corporate@digitalallyinc.com
Copies
of these filings are also available on our website at www.digitalallyinc.com. For other ways to obtain a copy of these
filings, please refer to “Where You Can Find More Information” above.
INTERESTS
OF NAMED EXPERTS AND COUNSEL
None.
MATERIAL
CHANGES
None.
WHERE
YOU CAN FIND MORE INFORMATION
We
file annual, quarterly and current reports, proxy statements and other information with the SEC. We have also filed with the SEC
under the Securities Act a registration statement on Form S-1 with respect to the Common Stock offered by this prospectus. This
prospectus, which constitutes part of the registration statement, does not contain all the information set forth in the registration
statement or the exhibits and schedules which are part of the registration statement, portions of which are omitted as permitted
by the rules and regulations of the SEC. Statements made in this prospectus regarding the contents of any contract or other document
are summaries of the material terms of the contract or document. With respect to each contract or document filed as an exhibit
to the registration statement, reference is made to the corresponding exhibit. For further information pertaining to us and the
Common Stock offered by this prospectus, reference is made to the registration statement, including the exhibits and schedules
thereto, copies of which may be inspected without charge at the Public Reference Room of the SEC at 100 F Street, N.E., Washington,
D.C. 20549 on official business days during the hours of 10 a.m. to 3 p.m. Copies of all or any portion of the registration statement
may be obtained from the SEC at prescribed rates. Information on the Public Reference Room may be obtained by calling the SEC
at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC. The web site can be accessed at www.sec.gov.
The internet address of Digital Ally is www.digitalallyinc.com. Information contained on our website is not a part of,
and is not incorporated into, this prospectus, and the inclusion of our website address in this prospectus is an inactive textual
reference only.
Digital
Ally, Inc.
Shares of Common Stock
PROSPECTUS
SUPPLEMENT
AEGIS
CAPITAL CORP.
, 2020
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