As filed with the U.S. Securities and Exchange Commission on May 22, 2020.

 

Registration Statement No. 333-        

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM S-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

DIGITAL ALLY, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   3663   20-0064269

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

Digital Ally, Inc.

9705 Loiret Blvd.,

Lenexa, KS 66219

(913) 814-7774

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Stanton E. Ross

Chief Executive Officer

Digital Ally, Inc.

9705 Loiret Blvd.,

Lenexa, KS 66219

(913) 814-7774

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

David E. Danovitch, Esq.

Scott M. Miller, Esq.

Michael DeDonato, Esq.
Hans Ge, Esq

Sullivan & Worcester LLP

1633 Broadway

New York, NY 10019

(212) 660-3060

 

Christian J. Hoffmann, III

9705 Loiret Blvd.

Lenexa, KS 66219

(913) 814-7774

 

M. Ali Panjwani, Esq.

Michael Brito-Stamm, Esq.

Pryor Cashman LLP

7 Times Square

New York, New York 10036

(212) 421-4100

 

 

Approximate date of commencement of proposed sale to the public: From time to time after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [X]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [X]
    Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. [  ]

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered (1)     Proposed Maximum Aggregate Offering
Price (1)(2)
      Amount of Registration
Fee (2)
 
Common stock, par value $0.001 per share (5)   $ 6,900,000     $ 895.62  
Common stock purchase warrants to purchase shares of common stock, par value $0.001 per share (3)(4)   $     $  
Common stock, par value $0.001 per share, issuable upon exercise of common stock purchase warrants (4)(6)(7)   $ 6,900,000     $ 895.62  
Pre-funded common stock purchase warrants to purchase shares of common stock, par value $0.001 per share (3)(4)(5)   $     $  
Common stock underlying pre-funded common stock purchase warrants (3)(6)   $

    $

 
Total   $

13,800,000

    $

1,791.24

 

 

(1) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”). Pursuant to Rule 416 under the Securities Act, this registration statement also covers such indeterminate number of additional shares of the registrant’s common stock, par value $0.001 per share (the “Common Stock”), issued to prevent dilution resulting from stock splits, stock dividends or similar events. No additional consideration will be received for such additional number of shares of Common Stock, and therefore no registration fee is required pursuant to Rule 457(i) under the Securities Act. This registration statement covers the offering price of additional securities that the underwriters have the option to purchase.
   
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price of all securities being registered.
   
(3) No separate registration fee is required pursuant to Rule 457(g) or Rule 457(i) under the Securities Act.
   
(4) For each share of Common Stock sold, investors in this offering will receive a common stock purchase warrant to purchase one share of Common Stock to be exercisable at a price of $[●] per share of Common Stock (which price is equal to 120% of the public offering price per share of Common Stock).
   
(5) The proposed maximum offering price of the common stock proposed to be sold in this offering will be reduced on a dollar-for-dollar basis based on the offering price of any pre-funded common stock purchase warrants offered and sold in this offering.
   
(6) Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(g) under the Securities Act.
   

(7)

Relates to shares of Common Stock underlying the common stock purchase warrants, if such common stock purchase warrants are exercised for cash. If such common stock purchase warrants are exercised on a cashless basis, then the underlying shares of Common Stock shall be covered by the Registration Fee in respect of the shares of common stock.

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(A) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said section 8(A), may determine.

 

 

 

   

 

 

The information in this prospectus 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 prospectus 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   SUBJECT TO COMPLETION   DATED MAY 22, 2020​

 

DIGITAL ALLY, INC.

 

[●] Shares of Common stock

[●] Warrants to Purchase up to [●] Shares of Common Stock
Pre-funded Warrants to Purchase Shares of Common Stock

Shares of Common Stock Underlying the Pre-funded Warrants

 

Digital Ally, Inc. (the “Company”, “our”, “we” and “us”) is offering [●] shares of our common stock, $0.001 par value per share (the “Common Stock”), together with warrants to purchase up to [●] shares of our Common Stock (“Warrants”), at an aggregate public offering price of $[●] per share of Common Stock and accompanying Warrant (and the shares of Common Stock that are issuable from time to time upon exercise of the Warrants). A Warrant to purchase one share of our Common Stock will be issued for every one share of Common Stock sold in this offering. Each Warrant will be immediately exercisable to purchase one share of Common Stock at a price of $[] per share of Common Stock (which price is equal to 120% of the public offering price per share of Common Stock).

 

We are also offering to each purchaser whose purchase of shares of Common Stock in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the holder, 9.99%) of our outstanding shares of Common Stock immediately following the consummation of this offering, the opportunity to purchase, if the purchaser so chooses, pre-funded warrants to purchase Common Stock (the “Pre-Funded Warrants”), in lieu of shares of Common Stock. Each Pre-Funded Warrant will be exercisable for one share of our Common Stock. The purchase price of each Pre-Funded Warrant will equal the price per share at which the shares of Common Stock are being sold to the public in this offering, minus $0.01, and the exercise price of each Pre-Funded Warrant will be $0.01 per share. This offering also relates to the shares of Common Stock issuable upon exercise of any Warrants and Pre-Funded Warrants sold in this offering. For each Pre-Funded Warrant that we sell, the number of shares of Common Stock that we are offering will be decreased on a one-for-one basis. Each share of Common Stock and Pre-Funded Warrant is being sold together with an accompanying Warrant to purchase one share of our Common Stock, at an exercise price of $ per share of Common Stock (120% of the public offering price of one share of Common Stock). Because we will issue a Warrant for each share of our Common Stock and for each Pre-Funded Warrant sold in this offering, the number of Warrants sold in this offering will not change as a result of a change in the mix of the shares of our Common Stock and Pre-Funded Warrants sold.

 

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 May 21, 2020 was $0.804 per share. There is no established trading market for the Warrants or the Pre-Funded Warrants, and we do not expect a market to develop. In addition, we do not intend to apply for the listing of the Warrants or the Pre-Funded Warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the Warrants and the Pre-Funded Warrants will be limited.

 

The actual number of securities, the offering prices of the Common Stock, and the exercise price for the Warrants will be as determined between us and the underwriters at the time of pricing, and may be at a discount to the current market price of our Common Stock. The price of our Common Stock on Nasdaq during recent periods will only be one of many factors in determining the public offering prices of the Common Stock. Other factors to be considered in determining the public offering prices include our history, our prospects, the industry in which we operate, our past and present operating results, the previous experience of our executive officers, the general condition of the securities markets at the time of this offering and discussions between the underwriters and prospective investors. The recent market price used throughout this prospectus may not be indicative of the final offering price.

 

Investing in our securities involves a high degree of risk. Before making any investment in our securities, you should read and carefully consider the risks described in this prospectus under “Risk Factors” beginning on page 15 of this prospectus.

 

Per Share and Accompanying Warrant   Per Pre-
Funded
Warrant and Accompanying Warrant
    Total(1)  
Public offering price(2)(3)   $                     $                     
Underwriting discounts and commissions(2)(3)(4)   $     $  
Proceeds, before expenses, to us   $     $  

 

(1) Assumes no sale of Pre-Funded Warrants.
   
(2) The public offering price is $         per share of Common Stock and $0.01 per accompanying Warrant and $       per Pre-Funded Warrant and $0.01 per accompanying Warrant.
   
(3) The underwriters will receive an underwriting discount equal to           % of the gross proceeds in this offering. In addition, we have agreed to pay up to a maximum of $            of the fees and expenses of the underwriters in connection with this offering, which includes the fees and expenses of underwriters’ counsel. See “Underwriting” Section for more information.
   
(4) We have also agreed to issue to the underwriters warrants to purchase up to an aggregate of       shares of our Common Stock. See “Underwriting” beginning on page 45 for additional information regarding these warrants and underwriting compensation generally.

 

The underwriters have the option to purchase up to (i) [●] additional shares of Common Stock, and/or (ii) additional Warrants to purchase up to [●] additional shares of Common Stock solely to cover over-allotments, if any, at the public offering price per share of Common Stock and the public offering price per Warrant set forth above, less the underwriting discounts and commissions. Such over-allotment option may be used to purchase shares of Common Stock and/or Warrants, or any combination thereof, as determined by the underwriters, but such purchases cannot exceed an aggregate of 15% of the number of shares of Common Stock, 15% of the number of shares of Common Stock underlying the Pre-funded Warrants and 15% of the number of shares of Common Stock underlying the Warrants sold in the primary offering. Such over-allotment option is exercisable for 45 days from the date of this prospectus.

 

You should rely only on the information contained in this prospectus or any prospectus supplement or amendment hereto. We have not authorized anyone to provide you with different information.

 

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 underwriters expect to deliver the Common Stock to the purchasers on or about [●], 2020.

 

Joint Book-Running Managers

 

Roth Capital Partners Lake Street

 

The date of this Prospectus , 2020

 

   

 

 

TABLE OF CONTENTS

 

  Page
Prospectus
About this Prospectus 4
Prospectus Summary 5
The Offering 13
Risk Factors 15
Cautionary Note Regarding Forward-Looking Statements 33
Use of Proceeds 34
Market Price for Common Equity and Related Stockholder Matters 35
Capitalization 36
Dilution 37
Security Ownership of Certain Beneficial Owners and Management 38
Certain Relationships and Related Transactions 39
Description of Securities 40
Underwriting 45
Material U.S. Federal Income Tax Considerations 53
Legal Matters 59
Experts 59
Where You Can Find More Information 59
Incorporation of Certain Information By Reference 59

 

You should rely only on the information contained in this prospectus and any free-writing prospectus that we authorize to be distributed to you. We have not, and the underwriters have not, authorized anyone to provide you with information different from or in addition to that contained in this prospectus or any related free-writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. Neither we nor the underwriters are offering to sell, and are seeking offers to buy, the securities offered by this prospectus only in jurisdictions where offers and sales are permitted. Neither we, nor the underwriters, have done anything that would permit this offering or possession or distribution of this 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 must inform themselves about, and observe any restrictions relating to, the offering of the securities as to distribution of the prospectus outside of the United States. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the securities. Our business, financial conditions, results of operations and prospects may have changed since that date. You should also read and consider this prospectus along with the related exhibits, together with the information in the documents to which we have referred you under the captions “Where You Can Find More Information” and “Incorporation of Certain Information By Reference” in this prospectus before making your investment decision.

 

  3  

 

 

ABOUT THIS PROSPECTUS

 

Solely for convenience, our trademarks and tradenames referred to in this registration statement, 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.

 

This prospectus 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). Our management’s knowledge of such industries has been developed through its experience and participation in these industries. While our management believes that the third-party sources referred to in this prospectus are reliable, neither we nor our management have independently verified any of the data from such sources referred to in this prospectus 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. In addition, the underwriters have not independently verified any of the industry data prepared by management or ascertained the underlying estimates and assumptions relied upon by management. Furthermore, references in this prospectus 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.

 

  4  

 

 

PROSPECTUS SUMMARY

 

This summary highlights certain information about us, this offering and selected information contained elsewhere in or incorporated by reference into this 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. For a more complete understanding of Digital Ally, Inc. and this offering, we encourage you to read and consider carefully the more detailed information in this prospectus, including the information in any free writing prospectus that we have authorized for use in connection with this offering, including the information set forth in the section titled “Risk Factors” in this prospectus beginning on page 15. 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 intothis 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, 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

 

  5  

 

 

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:

 

  wide angle zoom color camera;
     
  standards-based video and audio compression and recording;
     
  system is concealed in the rear-view mirror, replacing factory rear-view mirror;
     
  monitor in rear-view mirror is invisible when not activated;
     
  easily installs in any vehicle;
     
  ability to integrate with body-worn cameras including auto-activation of either system;
     
  archives audio/video data to the cloud, computers (wirelessly) and to compact flash memory, or file servers;
     
  900 MHz audio transceiver with automatic activation;
     
  marks exact location of incident with integrated GPS;
     
  playback using Windows Media Player;
     
  optional wireless download of stored video evidence;
     
  proprietary software protects the chain of custody; and
     
  records to rugged and durable solid-state memory.

 

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:

 

  a remote cloud trigger feature that allows dispatchers to remotely start recordings;

 

  6  

 

 

  simultaneous audio/video play back;
     
  cloud connectivity via cell modem, including the planned deployment of the new 5G network;
     
  near real-time mapping and system health monitoring;
     
  body-camera connectivity with built-in auto activation technology; and
     
  128 gigabyte internal storage, up to 2 terabyte external solid-state drive storage.

 

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.

 

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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. The Company is evaluating its alternatives including whether to file a motion requesting a rehearing in front of the three-judge panel or the entire Court of Appeals.

 

  8  

 

 

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:

 

  WatchGuard paid Digital Ally a one-time, lump settlement payment of $6,000,000.
     
  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.
     
  The parties have further agreed to release each other from all claims or liabilities pre-existing the settlement.
     
  As part of the settlement, the parties agreed that WatchGuard is making no admission that it has infringed any of Digital Ally’s patents.

 

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

 

Effective April 3, 2020, the Company entered into a distribution agreement with Trust Think, LLC. Pursuant to the terms of the distribution 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 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.

 

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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 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. 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 such rule by January 7, 2020, we could have been delisted from Nasdaq. In the event of such notification, Nasdaq rules permitted us an opportunity to appeal Nasdaq’s determination.

 

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 the Staff notified us that a hearing was scheduled for February 20, 2020 at 11:00 a.m. Eastern Time. 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. On January 21, 2020, we submitted a compliance plan that we believed was sufficient to permit us to regain compliance with the minimum MLVS 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 stockholder’s 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.

 

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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 Distribution Agreement

 

Effective April 3, 2020, the Company entered into a Wholesale Distribution Agreement (the “Wholesale Agreement”) with Trust Think, LLC, which is a Division of 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 (the “Products”), to certain first responder and commercial customers with whom the Company has relationships. Danolyte® has been listed on the United States Environmental Protection Agency’s 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.

 

The Agreement has an initial term beginning on April 3, 2020 and ending one (1) year thereafter. Thereafter, the 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 Agreement at any time, effective immediately upon written notice if it has good cause for termination as defined in the 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.

 

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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 the Purchase Agreement with certain institutional investors (the “Institutional Investors”), providing for the issuance of (i) the Company’s 8% Senior Secured Convertible Promissory Notes due April 16, 2021 with an aggregate principal face amount of $1,666,666, which notes are, 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 “Institutional Warrants”) to purchase an aggregate of up to 1,237,624 shares of Common Stock (the “Institutional Warrant Shares”) at an exercise price of $1.31, subject to customary adjustments, which warrants are immediately exercisable upon issuance and on a cashless basis if the warrants have not been registered 180 days after the date of issuance (the “April 2020 Offering”). The closing of such offering occurred simultaneously with the execution and delivery of the Purchase Agreement and related transaction documents, pursuant to which the Institutional Investors purchased such notes and warrants for an aggregate purchase price of $1,500,000.

 

Pursuant to the Purchase Agreement, an aggregate of $500,000 in principal amount of such notes (the “Registered Notes”), and the shares of Common Stock underlying the Registered Notes, were issued to the Institutional Investors in the Registered Offering and registered under the Securities Act pursuant the Shelf Registration Statement.

 

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 Notes, the Conversion Shares, the Institutional Warrants and the Institutional 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 Offering, the registration statement of which this prospectus forms a part, to register the applicable Conversion Shares and the Institutional Warrant Shares, and to use our commercially reasonable efforts to have the registration statement declared effective, within 90 days after the closing date of the Offering to permit the resale of the Conversion Shares and the Institutional Warrant Shares by the Institutional Investors.

 

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 the Company’s obligation to repay all of the Company’s notes issued in connection with the offering pursuant to a subsidiary guarantee.

 

Warehouse and Office Building Lease

 

On May 13, 2020, the Company entered into a lease agreement for new warehouse and office space which will serve as the company’s new principal executive office and primary business location. The terms of the lease include no base rent for the first six months and monthly payments ranging from $12,398 to $13,693 thereafter, with a maturity date of December 2026. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to its new location. The Company will move to and occupy the new space after certain improvements are completed by the landlord which is expected to be in June 2020. The Company believes that this facility is adequate to meet the Company’s needs for the immediate future and that, should it be needed, we will be able to secure additional space to accommodate the expansion of operations.

 

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THE OFFERING

 

Common Stock being offered by us   [          ] shares of Common Stock ([___] shares if the underwriters exercise their over-allotment option in full to purchase shares of Common Stock at the public offering price), and assuming no sale of Pre-Funded Warrants by us.
     
Pre-Funded Warrants offered by us   We are also offering Pre-Funded Warrants to purchasers whose purchase of shares of Common Stock in this offering would otherwise result in any such purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of Common Stock immediately following the consummation of this offering, the opportunity to purchase, if any such purchaser so chooses, Pre-Funded Warrants, in lieu of shares of Common Stock that would otherwise result in such purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of Common Stock. Each Pre-Funded Warrant will be exercisable for one share of Common Stock. The purchase price of each Pre-Funded Warrant will be equal to the price per share at which shares of Common Stock are sold to the public in this offering, minus $0.01, and the exercise price of each Pre-Funded Warrant will be $0.01 per share. This offering also relates to the shares of Common Stock issuable upon exercise of any Pre-Funded Warrant sold in this offering. The Pre-Funded Warrants will be exercisable immediately and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. For each Pre-Funded Warrant that we sell, the number of shares of Common Stock that we are offering will be decreased on a one-for-one basis.
     
Warrants being offered by us   We are also offering [_____] Warrants to purchase up to an aggregate of [  ] shares of Common Stock. Each Warrant permits its holder to purchase one share of our Common Stock and a Warrant will be issued for every one share of Common Stock sold in this offering. Each Warrant will be immediately exercisable at a price of $[  ] per share of Common Stock (which price is equal to 120% of the public offering price per share of Common Stock) and will expire five years from the closing date of this offering.
     
Shares of Common Stock underlying the Warrants   [  ] shares.
     
Common Stock outstanding before this offering (1)   16,127,110 shares of Common Stock, as of May 20, 2020.

 

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Common Stock to be outstanding after this
offering (1)
  [  ] shares of Common Stock (assuming the sale of all shares of Common Stock in this offering, at the public offering price of $[  ] per share of Common Stock and accompanying Warrant, no sale of any Pre-Funded Warrants, no exercise of any of the Warrants issued in this offering, and no exercise of the underwriters’ over-allotment option).
     
Over-allotment option   We have granted the underwriters an option to purchase [___] additional shares of Common Stock and/or Warrants to purchase [____] shares of Common Stock at the public offering price per share of Common Stock and the public offering price per Warrant set forth on the cover page hereto, less underwriting discounts and commissions. Such over-allotment option may be used to purchase shares of Common Stock and/or Warrants, or any combination thereof, as determined by the underwriters, but such purchases cannot exceed an aggregate of 15% of the number of shares of Common Stock, 15% of the number of shares of Common Stock underlying the Pre-funded Warrants and 15% of the number of shares of Common Stock underlying the Warrants sold in the primary offering. This option is exercisable, in whole or in part, for a period of 45 days from the date of this prospectus.
     
Use of proceeds   We intend to use the net proceeds of this offering for general corporate purposes, including for compliance with certain Nasdaq continued listing requirement and continued investments in our commercialization efforts. See “Use of Proceeds” herein.
     
Risk factors   Investing in our securities involves a high degree of risk. You should read the “Risk Factors” section on page 15 of this prospectus for a discussion of factors to consider before deciding to invest in our securities.
     
Nasdaq symbol and trading   Our Common Stock is listed on The Nasdaq Capital Market under the symbol “DGLY.” There is no established trading market for the Pre-Funded Warrants or the Warrants and we do not expect a market for such securities to develop. In addition, we do not intend to apply for the listing of the Pre-Funded Warrants or the Warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the Pre-Funded Warrants and the Warrants will be limited.
     
No listing of Pre-funded Warrants or Warrants   We do not intend to apply for listing of the Pre-funded Warrants or Warrants on any securities exchange or trading system.

 

  (1) 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 16,127,110 outstanding as of May 21, 2020, and includes or excludes the following as of such date:

 

  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 May 21, 2020;
     
  includes 734,750 shares of our Common Stock subject to forfeiture pursuant to outstanding non-vested restricted stock grants as of May 21, 2020;
     
  excludes 1,936 shares of our Common Stock as of May 21, 2020 reserved for future issuance pursuant to our existing stock incentive plans;
     
  excludes 6,097,947 shares of our Common Stock issuable upon exercise of warrants outstanding as of May 21, 2020 having a weighted average exercise price of $4.35 per share;
     
  excludes 63,518 shares of our Common Stock held as treasury stock as of May 21, 2020;
     
  excludes the issuance of up to 1,650,164 shares of our Common Stock issuable from time to time upon conversion or repayment of the principal amount of $1,666,666 in aggregate principal balance as of May 21, 2020 of outstanding 8% Senior Secured Convertible Promissory Notes, (collectively, the “April 2020 Notes”) issued to the certain investors on April 17, 2020;
     
 

excludes the issuance of up to 1,237,624 shares of common stock which are issuable from time to time upon the exercise of the five-year warrants at a price of $1.31 of the April 2020 Notes issued to the certain investors on April 17, 2020 as part of the April 2020 Notes;

     
  excludes up to 248,938 shares of Common Stock which may be issued, under certain circumstances, in payment of interest on the April 2020 Notes, in payment of interest on certain other promissory notes issued to certain institutional investors, and for premium payments which may be payable upon prepayment of the April 2020 Notes and such other promissory notes, all in lieu of cash payments; and
     
  excludes an aggregate of [____] shares of Common Stock underlying the Pre-Funded Warrants or the Warrants to be issued in this offering (assuming no exercise of the underwriters’ over-allotment option).

 

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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 and in the documents that we incorporate by reference into this 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. Any of the risks and uncertainties set forth in this prospectus, as updated by annual, quarterly and other reports and documents that we file with the SEC and incorporate by reference into this prospectus 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, our executive officers, directors, and affiliated parties beneficially own approximately 18.7% 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:

 

  elect or defeat the election of our directors;
     
  amend or prevent amendment of our articles of incorporation or bylaws;
     
  effect or prevent a merger, sale of assets, change of control or other corporate transaction; and
     
  affect the outcome of any other matter submitted to the stockholders for vote.

 

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.

 

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Holders of the Warrants will not be entitled to any rights with respect to our Common Stock but will be subject to all changes made with respect to our Common Stock.

 

Holders of the Warrants will not be entitled to any rights with respect to our Common Stock (including, without limitation, voting rights and rights to receive any dividends or other distributions on our Common Stock), but holders of the Warrants will be subject to all changes affecting our Common Stock. For example, if an amendment is proposed to our articles of incorporation requiring stockholder approval and the record date for determining the stockholders of record entitled to vote on the amendment occurs prior to the relevant holder acquiring shares of our Common Stock as a result of exercise of such holder’s Warrants, such holder will not be entitled to vote on the amendment, although such holder will nevertheless be subject to any changes in the powers, preferences or special rights of our Common Stock.

 

There is no public market for the Pre-Funded Warrants or the Warrants being offered in this offering.

 

There is no established public trading market for the Pre-Funded Warrants or the Warrants being offered in this offering, and we do not expect a market to develop. In addition, we do not intend to apply to list the Pre-Funded Warrants or the Warrants on any securities exchange or nationally recognized trading system, including Nasdaq. Without an active market, the liquidity of the Pre-Funded Warrants or the Warrants will be limited.

 

The Pre-Funded Warrants and the Warrants are speculative in nature.

 

The Pre-Funded Warrants and the Warrants offered hereby do not confer any rights of Common Stock ownership on their respective holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of Common Stock at a fixed price. Specifically, commencing on the date of issuance, (i) holders of the Pre-Funded Warrants may exercise their right to acquire the Common Stock and pay an exercise price of $0.01 per share and (ii) holders of the Warrants may exercise their right to acquire the Common Stock and pay an exercise price of $ per share, or 120% of the public offering price per share of our Common Stock. Moreover, following this offering, the market value of the Pre-Funded Warrants and the Warrants is uncertain and there can be no assurance that the market value of the Pre-Funded Warrants and the Warrants will equal or exceed their public offering price. Furthermore, each Pre-Funded Warrant and each Warrant will expire five years from the original issuance date.

 

Each Warrant will be immediately exercisable to purchase one share of Common Stock at a price of $[ ] per share of Common Stock (which price is equal to 120% of the public offering price per share of Common Stock) and expire on the fifth anniversary of the date of issuance. In the event that our Common Stock price does not exceed the exercise price of the Pre-Funded Warrants or the Warrants during the period when the Pre-Funded Warrants and the Warrants are exercisable, as applicable, such warrants may not have any value.

 

Holders of the Pre-Funded Warrants and Warrants will have no rights as a common stockholder until they acquire shares of our Common Stock.

 

Until you acquire shares of our Common Stock upon exercise of the Pre-Funded Warrants and the Warrants, you will have no rights with respect to the shares of our Common Stock issuable upon exercise of such Pre-Funded Warrants and Warrants. Upon exercise of the Warrants, you will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after the exercise date.

 

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In the event that the mandatory prepayment provisions under our April 2020 Notes are triggered, servicing such debt will require a significant amount of cash, and we may not have sufficient cash flow from our business to make payments on our debt, and such prepayment, if triggered, may adversely affect our financial condition and operating results.

 

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the April 2020 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors that may be beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional debt financing or equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations, including the April 2020 Notes. In addition, any of our future debt agreements may contain restrictive covenants that may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of our debt.

 

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.

 

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.

 

On July 11, 2019, we were officially notified by Nasdaq 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. 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 such rule by January 7, 2020, we could have been delisted from Nasdaq. In the event of such notification, Nasdaq rules permitted us an opportunity to appeal Nasdaq’s determination

 

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.

 

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On January 13, 2020, we requested a hearing before the Nasdaq Hearings Panel (the “Panel”) to appeal the Letter and the Staff notified us that a hearing was scheduled for February 20, 2020 at 11:00 a.m. Eastern Time. 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. On January 21, 2020, we submitted a compliance plan that we believed was sufficient to permit us to regain compliance with the minimum MLVS 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 stockholder’s 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.

 

There can be no assurance that we will be able to continue to meet our plan of compliance that we submitted to the Panel and that we will be able to evidence compliance with Rule 5550(b)(1) on or before June 30, 2020, or that, in the event that we regain compliance with such rule, we will continue to remain in compliance with such rule and all other Nasdaq continued listing standards. However, in the event that this offering is successful and we are able to raise all of the proceeds associated with this offering, we expect that it will help enable us to remain in compliance with Rule 5550(b)(1). However, there can be no assurance that this offering will be successful and that we will be able to raise adequate proceeds to enable it to remain in compliance with Nasdaq’s continued listing standards.

 

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.

 

If our Common Stock ceases to be listed for trading on Nasdaq, the Company would expect that its Common Stock would be traded on one of the three tiered marketplaces of the OTC Markets Group. In the event that we are delisted from Nasdaq, our Common Stock may lose liquidity, increase volatility, and lose market maker support.

 

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.

 

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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:

 

  variations in our revenues and operating expenses;
     
  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;
     
  market conditions in our industry, the industries of our customers and the economy as a whole;
     
  actual or expected changes in our growth rates or our competitors’ growth rates;
     
  developments in the financial markets and worldwide or regional economies;
     
  announcements of innovations or new products or services by us or our competitors;
     
  announcements by the government relating to regulations that govern our industry;
     
  sales of our Common Stock or other securities by us or in the open market;
     
  changes in the market valuations of other comparable companies; and
     
  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 and accompanying Warrants in this offering exceeds the net tangible book value per share of our Common Stock outstanding prior to this offering. Therefore, if you purchase shares of Common Stock and accompanying Warrants in this offering at a combined public offering price of $[__] per share and accompanying Warrant, assuming no issuance of any Pre-Funded Warrants in this offering, you will experience immediate dilution of $[__] per share, or approximately [__]% of the public offering price of such shares and accompanying Warrant, representing the difference between our 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. This dilution is due in large part to the fact that our earlier investors paid substantially less than the public offering price when they purchased shares of Common Stock. In addition, 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 and accompanying Warrant, assuming no issuance of any Pre-Funded Warrants in this offering. 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 37 of this prospectus.

 

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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 May 21, 2020, we have warrants outstanding to purchase 6,097,947 shares of Common Stock. The warrants have a weighted average exercise price of $4.35 and a weighted average years to maturity of approximately 2.9 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 8% Senior Secured Convertible Promissory Notes to certain investors (the “April 2020 Notes”) which are convertible into or payable in shares of our Common Stock, from time to time, and we also issued warrants (the “April 2020 Warrants”) to such investors exercisable for shares of our Common Stock, from time to time, for up to 2,887,788 shares of our Common Stock. As of May 21, 2020, the aggregate outstanding principal balance of the April 2020 Notes was $1,666,666. The April 2020 Notes may result in the issuance of up to 1,650,164 shares of our Common Stock upon conversion or repayment of outstanding principal balance. In addition the April 2020 Notes may result in the issuance of up to additional 248,938 shares of Common Stock which may be issued, under certain circumstances, in payment of interest on the April 2020 Notes, and for premium payments which may be payable upon prepayment of the April 2020 Notes, all in lieu of cash payments. The April 2020 Warrants may result in the issuance of up to 1,237,624 shares of our Common Stock upon exercise.

 

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.

 

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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, 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.

 

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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. 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, 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 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 the Annual Report on Form 10-K of Digital Ally, Inc. for the year ended December 31, 2019 included an explanatory paragraph regarding the substantial doubt about the Company’s 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, 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.

 

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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, 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, 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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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In addition to the infringement claims, the Company brought claims alleging that Axon conspired to keep the Company out of the marketplace by engaging in improper, unethical and unfair competition. The amended lawsuit alleges that Axon bribed officials and otherwise conspired to secure no-bid contracts for its products in violation of both state law and federal antitrust law. The Company’s lawsuit also seeks monetary and injunctive relief, including treble damages, for these alleged violations.

 

Axon filed an answer, which denied the Company’s patent infringement allegations on April 1, 2016. In addition, Axon filed a motion to dismiss all such allegations in the complaint on March 4, 2016, for which the Company filed an amended complaint on March 18, 2016 to address certain technical deficiencies in the pleadings. The Company amended its complaint and Axon renewed its motion to seek dismissal of the allegations that it had bribed officials and otherwise conspired to secure no-bid contracts for its products in violation of both state law and federal antitrust law on April 1, 2016. Formal discovery commenced on April 12, 2016 with respect to the patent related claims. In January 2017, the U.S. District Court granted Axon’s motion to dismiss the portion of the lawsuit regarding claims that it had bribed officials and otherwise conspired to secure no-bid contracts for its products in violation of both state law and federal antitrust law. On May 2, 2018, the Federal Circuit Court affirmed the U.S. District Court’s ruling relative to the antitrust portion of the lawsuit and on October 1, 2018 the Supreme Court denied the Company’s petition for review.

 

In December 2016 and January 2017, Axon filed two petitions for inter partes review (“IPR”) against the ‘452 Patent. The USPTO rejected both of Axon’s petitions. Axon is now statutorily precluded from filing any more IPR petitions against the ‘452 Patent.

 

The U.S. District Court litigation was temporarily stayed following the filing of the petitions for IPR. However, on November 17, 2017, the U.S. District Court rejected Axon’s request to maintain the stay. With this significant ruling, the parties proceeded towards trial. When litigation resumed, the U.S. District Court issued a claim construction order (also called a Markman Order) where it sided with the Company on all disputes and denied Axon’s attempts to limit the scope of the claims. Fact discovery closed on October 8, 2018, and a final pretrial conference took place on January 16, 2019. The parties each filed a motion for summary judgment on January 31, 2019, and the U.S. District Court granted Axon’s motion for summary judgment on June 17, 2019. 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.

 

The Company filed an opening appeal brief on August 26, 2019 with the United States 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 the Company then filed a reply brief responding to Axon on November 27, 2019. The Court of Appeals scheduled oral arguments on the Company’s 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 the Company’s 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. The Company is considering asking for a rehearing in front of the three-judge panel or the entire Court of Appeals.

 

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.

 

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The USPTO has granted multiple patents to the Company with claims covering numerous features, such as automatically activating all deployed cameras in response to the activation of just one camera. Additionally, the Company’s patent claims cover automatic coordination as well as digital synchronization between multiple recording devices. The Company also has patent coverage directed to the coordination between a multi-camera system and an officer’s smartphone, which allows an officer to more readily assess an event on the scene while an event is taking place or immediately after it has occurred.

 

The Company’s lawsuit alleged that WatchGuard incorporated this patented technology into its VISTA Wifi and 4RE In-Car product lines without the Company’s permission. Specifically, the Company accused WatchGuard of infringing three patents: the U.S. Patent No. 8,781,292 (the “‘292 Patent”), the ‘452 Patent and U.S. Patent No. 9,325,950 (the “950 Patent”). The Company aggressively challenged WatchGuard’s infringing conduct, seeking both monetary damages, as well as seeking a permanent injunction preventing WatchGuard from continuing to sell its VISTA Wifi and 4RE In-Car product lines using the Company’s own technology to compete against it. On May 8, 2017, WatchGuard filed a petition seeking IPR of the ‘950 Patent. The Company opposed that petition and on December 4, 2017, The Patent Trial and Appeal Board (“PTAB”) rejected WatchGuard’s request to institute an IPR on the ‘950 Patent. The lawsuit also involved the ‘292 Patent and the ‘452 Patent, the ‘452 Patent being the same patent involved in the Company’s claims asserted against Axon. The ‘292 Patent previously was subject to the IPR process with the USPTO, but in June 2018, the USPTO rejected Axon’s arguments and did not invalidate the ‘292 Patent. WatchGuard had previously agreed to be bound by Axon’s IPRs and, as such, WatchGuard is now statutorily barred from any further IPR challenges with respect to the ‘950 Patent, ‘452 Patent, and ‘292 Patent. Since the defeat of Axon’s ‘292 Patent IPR, the Court has lifted the stay and set a schedule which had moved the case towards trial. 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 resolution of the dispute centers includes the following key terms:

 

  WatchGuard will pay the Company a one-time, lump sum settlement payment of $6 million.
  The Company has granted WatchGuard a perpetual covenant not to sue if WatchGuard’s products incorporate agreed-upon modified recording functionality.
  The Company 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.
  The parties have further agreed to release each other from all claims or liabilities pre-existing the settlement.
  As part of the settlement, the parties agreed that WatchGuard is making no admission that it has infringed any of the Company’s patents.

 

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.

 

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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 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.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus and the documents incorporated by reference herein, 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. 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 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.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds to us from the sale of the securities offered by this prospectus in this offering will be approximately $[  ] million (or $[  ] million if the underwriters fully exercise their over-allotment option), excluding any exercise of the Pre-Funded Warrants and the Warrants issued in connection with this offering, based upon a public offering price of $[  ] per share and accompanying Warrant, 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 requirement and continued investments in our commercialization efforts. We may 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 represents our estimates 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:

 

  the existence of other opportunities or the need to take advantage of changes in timing of our existing activities;
     
  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
     
  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. Pending the application of the net proceeds as described above, we will hold the net proceeds from this offering in short-term, interest-bearing, securities.

 

We believe that the net proceeds of this offering, together with cash on hand, will be sufficient to fund our operations through at least the balance of 2020, and we believe that we will need to raise additional capital to fund our operations thereafter if warrant exercises for cash do not materialize. 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.

 

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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Our Common Stock trades on Nasdaq under the symbol “DGLY.”

 

Holders

 

There were approximately 173 record holders of our Common Stock at May 21, 2020. The number of registered stockholders excludes any beneficial owners of Common Stock held in street name.

 

Dividend Policy

 

We have never declared or paid any cash dividends on our Common Stock. We intend to retain any future earnings and do not expect to pay any cash dividends in the foreseeable future.

 

  35  

 

 

CAPITALIZATION

 

The following table sets forth our actual cash and cash equivalents and our capitalization as of March 31, 2020:

 

  on an actual basis;
  pro forma basis to give effect to the issuance of the April 2020 Notes and any other issuances occurred as of March 31, 2020; and
  on a pro forma as adjusted basis to give effect to the sale of the securities offered hereby (assuming no exercise of the Warrants issued in this offering, no Pre-Funded Warrants issued, and no exercise of the underwriters’ 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-Q for the quarter ended March 31, 2020, which is incorporated by reference in this prospectus. The information below has also been provided on an as adjusted basis to give further effect to this current offering.

 

The as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

   

As of March 31, 2020

 
    Actual     Pro Forma    

Pro Forma

As Adjusted

 
Cash and cash equivalents   $ 328,526     $ 3,232,426     $

[___]

 
Long and short-term promissory notes payable   $ 589,000     $ 2,877,900     $

[___]

 
                         
Stockholders’ deficit:                        
Common stock, par value $0.001 per share; 50,000,000 shares authorized, 16,067,928, 16,067,928 and ______ shares issued  – actual as of March 31, 2020, pro forma and pro forma as adjusted   $ 16.068      $ 16,068     $

[___]

 
Additional paid-in capital     87,390,377       88,020,377      

[___]

 
Treasury stock, at cost (63,518 shares)     (2,157,226 )     (2,157,226 )    

[___]

 
Accumulated deficit     (89,722,729 )     (89,737,729 )    

[___]

 
Total stockholders’ equity/deficit   $ (4,473,510 )   $ (3,858,510 )  

$

[___]

 

 

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 and (ii) the April 2020 Offering.

 

The pro forma as adjusted column above reflects our sale of Common Stock and Warrants in this offering at an assumed public offering price of $[___]. 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 4,860,323 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;
     
 

excludes the issuance of up to 1,650,164 shares of our Common Stock issuable from time to time upon conversion or repayment of the principal amount of $1,666,666 in aggregate principal balance as of May 21, 2020 of the April 2020 Notes issued to the certain investors on April 17, 2020;

     
 

excludes the issuance of up to 1,237,624 shares of common stock which are issuable from time to time upon the exercise of the five-year warrants at a price of $1.31 of the April 2020 Notes issued to the certain investors on April 17, 2020 as part of the April 2020 Notes; and

     
 

excludes up to 248,938 shares of Common Stock which may be issued, under certain circumstances, in payment of interest on the April 2020 Notes, in payment of interest on certain other promissory notes issued to certain institutional investors, and for premium payments which may be payable upon prepayment of the April 2020 Notes and such other promissory notes, all in lieu of cash payments; and

     
  excludes an aggregate of [____] shares of Common Stock underlying the Warrants to be issued in this offering (assuming no issuance of any Pre-Funded Warrants and no exercise of the underwriters’ over-allotment option).

 

  36  

 

 

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 our sale in this offering of [   ] shares of Common Stock and accompanying Warrants offered by this prospectus at the public offering price of $[__] per share of Common Stock and accompanying Warrant, and after deducting the estimated underwriting discount, commissions and our estimated offering expenses and excluding the proceeds, if any from the exercise of the Warrants issued pursuant to this offering, and assuming no exercise of the underwriters of their over-allotment option, our pro forma net tangible book value as of March 31, 2020 would have been approximately $[           ] or approximately $[           ] per share. This represents an immediate increase in net tangible book value of approximately $[           ] per share to our existing stockholders and an immediate dilution in pro forma 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           $

[___] 

 
                 
Net tangible book value per share at March 31, 2020, before giving effect to this offering   $        

[___] 

 
Pro forma net tangible book value before this offering   $        

[___] 

 
Increase in pro forma net tangible book value per share attributable to new investors purchasing shares in this offering   $        

[___] 

 
Pro forma as adjusted net tangible book value per share after giving effect to this offering           $

[___] 

 
Dilution per share to new investors           $

[___] 

 

 

The information above is illustrative only and will change based on actual pricing and other terms of this offering determined at pricing.

 

The following table summarizes as of March 31, 2020, on a pro forma 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 and accompanying Warrants in this offering at an assumed public offering price of $[__] per share of Common Stock and accompanying Warrant, before deducting underwriting discounts and commissions and estimated offering expenses payable by us and assuming no issuance of any Pre-Funded Warrants:

 

    Shares
Purchased
    Total
Consideration
    Average Price  
    Number     Percent     Amount     Percent     Per Share  
Existing stockholders     16,067,928       [___] %   $ 87,406,445       [___] %   $ 5.44  
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 4,860,323 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;
     
 

excludes the issuance of up to 1,650,164 shares of our Common Stock issuable from time to time upon conversion or repayment of the principal amount of $1,666,666 in aggregate principal balance as of May 21, 2020 of the April 2020 Notes issued to the certain investors on April 17, 2020

     
 

excludes the issuance of up to 1,237,624 shares of common stock which are issuable from time to time upon the exercise of the five-year warrants at a price of $1.31 of the April 2020 Notes issued to the certain investors on April 17, 2020 as part of the April 2020 Notes; and

     
 

excludes up to 248,938 shares of Common Stock which may be issued, under certain circumstances, in payment of interest on the April 2020 Notes, in payment of interest on certain other promissory notes issued to certain institutional investors, and for premium payments which may be payable upon prepayment of the April 2020 Notes and such other promissory notes, all in lieu of cash payments.

 

To the extent that outstanding options or warrants are converted or exercised, you could experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of additional equity, the issuance of these shares could result in further dilution to our stockholders.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth, as of May 21, 2020, information regarding beneficial ownership of our Common Stock, as adjusted to reflect the sale of the securities offered by us in this offering for:

 

  each person, or group of affiliated persons, known by us to beneficially own more than 5% of our Common Stock;
     
  each of our executive officers;
     
  each of our directors; and
     
  all of our current executive officers and directors as a group

 

Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power of that security, including securities that are currently exercisable or exercisable within sixty (60) days of May 21, 2020. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons named in the table below have sole voting and investment power with respect to all shares of Common Stock shown that they beneficially own, subject to community property laws where applicable.

 

Common Stock subject to securities currently exercisable or exercisable within sixty (60) days of May 21, 2020, are deemed to be outstanding for computing the percentage ownership of the person holding such securities and the percentage ownership of any group of which the holder is a member but are not deemed outstanding for computing the percentage of any other person.

 

Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o Digital Ally, Inc., 9705 Loiret Blvd., Lenexa, KS 66219.

 

   

Number of shares
beneficially owned
before this

offering (1)

    % of Total
Voting
Power
   

Number of shares
beneficially

owned after

this offering (2)

   

% of Total
Voting

Power

 
    Common     Before     Common     After  
    Shares     %     Offering     Shares     %     Offering  
5% or Greater Stockholders:                                                
Michael Glita
25 Notchpark Road
Little Falls, NJ 07424
    1,410,475       8.5 %     8.5 %     1,410,475       [__] %     [__] %
Executive Officers and Directors:                                                
Stanton E. Ross (3)     1,408,551       8.5 %     8.5 %     1,408,551       [__] %     [__] %
Leroy C. Richie (4)     190,468       1.2 %     1.2 %     190,468       [__] %     [__] %
Daniel F. Hutchins (5)     193,950       1.2 %     1.2 %     193,950       [__] %     [__] %
Michael J. Caulfield (6)     152,855       0.9 %     0.9 %     152,855       [__] %     [__] %
Thomas J. Heckman (7)     1,162,913       7.0 %     7.0 %     1,162,913       [__] %     [__] %
                                                 
All executive officers and directors as a group (five individuals)     3,063,737       18.7 %     18.7 %     3,063,737       [__] %     [__] %

 

(1) Based on 16,127,110 shares of Common Stock issued and outstanding as of May 21, 2020 and, with respect only to the ownership by all executive officers and directors as a group, an additional aggregate of 488,750 options vested or to vest within sixty (60) days held by officers and directors as of May 21, 2020.
   
(2) Based on 16,127,110 shares of Common Stock issued and outstanding as of May 21, 2020 and, with respect only to the ownership by all executive officers and directors as a group, an additional aggregate of 488,750 options vested or to vest within sixty (60) days held by officers and directors as of May 21, 2020. The percentages assume the sale of all of the [●] shares of Common to be offered under this prospectus, the  excludes the exercise of the Warrants and assumes no exercise of the underwriters’ over-allotment option.
   
(3) Mr. Ross’s total shares include: (i) 375,000 restricted shares that are subject to forfeiture to us and (ii) vested options exercisable to purchase 15,000 shares of Common Stock. Mr. Ross has pledged 200,525 shares of Common Stock and options exercisable to purchase 15,000 shares of Common Stock to the lenders as collateral for personal loans.
   
(4) Mr. Richie’s total shares include vested options exercisable to purchase 151,250 shares of Common Stock.
   
(5) Mr. Hutchins’ total shares include vested options exercisable to purchase 160,000 shares of Common Stock.
   
(6) Mr. Caulfield’s total shares include vested options exercisable to purchase 150,000 shares of Common Stock.
   
(7) Mr. Heckman’s total shares include (i) 225,000 restricted shares that are subject to forfeiture to us, (ii) vested options exercisable to purchase 12,500 shares of Common Stock and (iii) 176,429 shares of Common Stock held in the Company’s 401(k) Plan (on December 31, 2019) as to which Mr. Heckman has voting power as trustee of the 401(k) Plan. Mr. Heckman has pledged 143,059 shares of Common Stock to financial institutions as collateral for personal loans.

 

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

We engaged in no reportable transactions with related persons since the years ended December 31, 2019, 2018 and 2017 that involved an amount that exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years, other than the following:

 

We entered into an agreement that required us to make monthly payments that will be applied to future commissions and/or consulting fees to be earned by the provider. The agreement is with a limited liability company (“LLC”) that is minority owned by a relative of our chief financial officer. Under the agreement, dated January 15, 2016 and as amended on February 13, 2017, the LLC provides consulting services for developing a new distribution channel outside of law enforcement for our body-worn camera and related cloud storage products to customers in the United States. We advanced amounts to the LLC as advance against commissions ranging from $5,000 to $6,000 per month plus necessary and reasonable expenses for the period through June 30, 2017, which can be automatically extended based on the LLC achieving minimum sales quotas. The agreement was renewed in January 2017 for a period of three years, subject to yearly minimum sales thresholds that would allow us to terminate the contract if such minimums are not met. As of the date of this filing, we had advanced a total of $274,731 pursuant to this agreement and established an allowance reserve of $224,731 for a net advance of $50,000. The minimum sales threshold has not been met and we have discontinued all advances, although the contract has not been formally terminated. However, the exclusivity provisions of the agreement have been terminated.

 

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DESCRIPTION OF SECURITIES

 

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 this prospectus is a part and incorporated by reference into this prospectus. 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 May 21, 2020, we had 16,127,110 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.

 

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Listing

 

Our Common Stock trades on Nasdaq under the symbol “DGLY.”

 

Pre Funded Warrants and Warrants to be Issued in this Offering

 

The following summary of certain terms and provisions of Pre-funded Warrants and Warrants that are being offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the Pre-funded Warrants and Warrant, the forms of which are filed as an exhibit to the registration statement of which this prospectus forms a part. Prospective investors should carefully review the terms and provisions of the forms of Pre-funded Warrants and Warrant for a complete description of the terms and conditions of the Pre-funded Warrants and the Warrants.

 

Warrants

 

Duration and Exercise Price

 

Each Warrant will be exercisable to purchase one share of Common Stock at a price of $[  ] per share of Common Stock (which price is equal to 120% of the public offering price per share of Common Stock). The Warrants will be immediately exercisable and will expire on the fifth anniversary of the original issuance date. The exercise price and number of shares of Common Stock issuable upon exercise is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our Common Stock and the exercise price. The Warrants will be issued separately from the Common Stock, and may be transferred separately immediately thereafter. A Warrant to purchase one share of our Common Stock will be issued for every one share of Common Stock sold in this offering.

 

Exercisability

 

The Warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of our Common Stock purchased upon such exercise (except in the case of a cashless exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of the Warrant to the extent that the holder would own more than 4.99% of the outstanding Common Stock after exercise, except that upon at least 61 days’ prior notice from the holder to us, the holder may increase the amount of ownership of outstanding stock after exercising the holder’s Warrants up to 9.99% of the number of shares of our Common Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrants.

 

Cashless Exercise

 

If, at the time a holder exercises its Warrant, there is no effective registration statement registering, or the prospectus contained therein is not available for an issuance of the shares underlying the Warrant to the holder, then in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of Common Stock determined according to a formula set forth in the Warrant.

 

Fundamental Transactions

 

In the event of any fundamental transaction, as described in the Warrants and generally including any merger with or into another entity, sale of all or substantially all of our assets, tender offer or exchange offer, or reclassification of our Common Stock, then upon any subsequent exercise of a Warrant, the holder will have the right to receive as alternative consideration, for each share of our Common Stock that would have been issuable upon such exercise immediately prior to the occurrence of such fundamental transaction, the number of shares of Common Stock of the successor or acquiring corporation or of our company, if it is the surviving corporation, and any additional consideration receivable upon or as a result of such transaction by a holder of the number of shares of our Common Stock for which the Warrant is exercisable immediately prior to such event.

 

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Transferability

 

Subject to applicable laws and the restriction on transfer set forth in the Warrant, the Warrant may be transferred at the option of the holder upon surrender of the Warrant to us together with the appropriate instruments of transfer.

 

Listing

 

We do not intend to list the Warrants to be sold in this offering on any stock exchange or other trading market.

 

Right as a Stockholder

 

Except as otherwise provided in the Warrants or by virtue of such holder’s ownership of shares of our Common Stock, the holders of the Warrants do not have the rights or privileges of holders of our Common Stock, including any voting rights, until they exercise their Warrants.

 

Waivers and Amendments

 

Subject to certain exceptions, any term of the Warrants may be amended or waived with our written consent and the written consent of the holders of at least a majority of the then-outstanding Warrants.

 

Pre-Funded Warrants

 

Duration and Exercise Price

 

Each Pre-Funded Warrant offered hereby will have an initial exercise price per share equal to $0.01. The Pre-Funded Warrants will be immediately exercisable and may be exercised at any time until the Pre-Funded Warrants are exercised in full. The exercise price and number of shares of Common Stock issuable upon exercise is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our Common Stock and the exercise price.

 

Exercisability

 

The Pre-Funded Warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of our Common Stock purchased upon such exercise (except in the case of a cashless exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of the Pre-Funded Warrant to the extent that the holder would own more than 4.99% (or at the election of the holder, 9.99%) of the outstanding Common Stock immediately after exercise, except that upon at least 61 days’ prior notice from the holder to us, the holder may increase the amount of ownership of outstanding stock above 4.99% after exercising the holder’s Pre-Funded Warrants. No fractional shares of Common Stock will be issued in connection with the exercise of a Pre-Funded Warrant. In lieu of fractional shares, we will pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price.

 

Cashless Exercise

 

In lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of Common Stock determined according to a formula set forth in the Pre-Funded Warrants.

 

  42  

 

 

Fundamental Transaction

 

In the event of a fundamental transaction, as described in the Pre-Funded Warrants and generally including any reorganization, recapitalization or reclassification of our Common Stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding Common Stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding Common Stock, the holders of the Pre-Funded Warrants will be entitled to receive upon exercise of the Pre-Funded Warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the Pre-Funded Warrants immediately prior to such fundamental transaction.

 

Transferability

 

Subject to applicable laws, a Pre-Funded Warrant may be transferred at the option of the holder upon surrender of the Pre-Funded Warrant to us together with the appropriate instruments of transfer.

 

Exchange Listing

 

We do not intend to list the Pre-Funded Warrants on any securities exchange or nationally recognized trading system.

 

Rights as a Stockholder

 

Except as otherwise provided in the Pre-Funded Warrants or by virtue of such holder’s ownership of shares of our Common Stock, the holders of the Pre-Funded Warrants do not have the rights or privileges of holders of our Common Stock, including any voting rights, until they exercise their Pre-Funded Warrants.

 

Outstanding Options and Warrants

 

As of May 21, 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 6,097,947 shares of Common Stock at a weighted average exercise price of $4.35 per share with a weighted average remaining contractual life of 2.9 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, 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.

 

  43  

 

 

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:

 

  the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the corporation; or
     
  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.

 

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.

 

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UNDERWRITING

 

We have entered into an underwriting agreement with Roth Capital Partners, LLC, as representative of the underwriters named below with respect to the offering of the shares of Common Stock or Pre-Funded Warrants and related warrants. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and the underwriters have agreed to purchase at the public offering price, less the underwriting discounts set forth on the cover page of this prospectus, the number of the shares of Common Stock and related warrants opposite each underwriter’s name below:

 

Underwriters  

Number of

Shares of

Common Stock

   

Number of

Pre-funded

Warrants

   

Number of

Shares Subject

to Warrants

 
Roth Capital Partners, LLC                  
Lake Street Capital Markets, LLC                        
Total                               

 

A copy of the underwriting agreement will be filed as an exhibit to the registration statement of which this prospectus is part.

 

The underwriting agreement provides that the obligations of the underwriters to pay for and accept delivery of the shares of Common Stock or Pre-Funded Warrants and related Warrants offered by us in this prospectus are subject to various representations and warranties and other customary conditions specified in the underwriting agreement, such as receipt by the underwriters of officers’ certificates and legal opinions.

 

We have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect thereof.

 

We have granted the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriters to purchase a maximum of $[●] of additional shares of Common Stock and/or Warrants (up to an aggregate of 15% of the number of shares of Common Stock, 15% of the number of shares of Common Stock underlying the Pre-funded Warrants and 15% of the number of shares of Common Stock underlying the Warrants sold in the primary offering) from us to cover over-allotments, if any. If the underwriters exercise all of this option, they will purchase                   shares of Common Stock at a price of $              per share and/or Warrants to purchase                   shares of Common Stock covered by the option at a price of $               per share, less the underwriting discounts and commissions. If this option is exercised in full, the total price to the public will be $             and the total net proceeds, before expenses, to us will be $            .

 

Discounts and Commissions

 

The underwriters have advised us that they propose to offer the shares of Common Stock or Pre-Funded Warrants and related Warrants offered by us to the public at the public offering price set forth on the cover of this prospectus. The underwriters may offer the shares of Common Stock to securities dealers at that price less a concession of not more than $                per share of our Common Stock or $0.01 per Pre-Funded Warrant and related Warrants, of which up to $      per share of Common Stock or $0.01 per Pre-Funded Warrant and related Warrants may be reallowed to other dealers. After the offering is initially made to the public, the public offering price and other selling terms may be changed by the underwriters.

 

  45  

 

 

The following table summarizes the underwriting discounts and commissions and proceeds, before expenses, to us, assuming both no exercise and full exercise by the underwriters of their over-allotment option:

 

                Total  
    Per Share of
Common Stock and Accompanying Warrant
     Per Pre-
Funded
Warrant and Accompanying Warrant
    Without
Over-allotment
Option
    With
Over-allotment
Option
 
Public offering price   $

[●]

     $ [●]      $      [●]      $     [●]   
Underwriting discounts and commissions paid by us   $ [●]

     $ [●]      $ [●]      $ [●]   
Proceeds, before expenses, to us   $ [●]      $ [●]      $ [●]      $ [●]   

 

If all of the shares of Common Stock and related Warrants offered by us are not sold at the public offering price, the underwriters may change the offering price and other selling terms by means of a supplement to this prospectus.

 

We have also agreed to reimburse certain expenses of the underwriters relating to this offering as set forth in the underwriting agreement, including the fees and expenses of the underwriters’ legal counsel and expenses associated with the review of this offering by FINRA. However, the maximum amount that we have agreed to reimburse the underwriters for their accountable expenses will not exceed $              .

 

We estimate that the total expenses of the offering payable by us, excluding the total underwriting discount and expense reimbursement, will be approximately $[●].

 

Determination of Offering Price

 

Our Common Stock is currently traded on Nasdaq under the symbol “DGLY.” On May 21, 2020, the closing price of our Common Stock was $0.804 per share. We do not intend to apply for the Warrants on any securities exchange or other trading system.

 

The public offering price of the securities offered by this prospectus will be determined by negotiation between us and the underwriters among the factors considered in determining the public offering price of the shares were;

 

  our history and our prospects;
     
  the industry in which we operate;
     
  our past and present operating results;
     
  the previous experience of our executive officers; and
     
  the general condition of the securities markets at the time of this offering, including discussions between the underwriters and prospective investors.

 

The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the securities sold in this offering. That price is subject to change as a result of market conditions and other factors and we cannot assure you that the securities sold in this offering can be resold at or above the public offering price.

 

Lock-up Agreements

 

We and each of our directors and officers have agreed for a period of (i) 90 days after the date of this prospectus in the case of our directors and officers and (ii) 90 days after the date of this prospectus in the case of the Company, without the prior written consent of the underwriters, not to directly or indirectly:

 

  issue (in the case of us), offer, pledge, assign, encumber, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company;
     
  in the case of us, file or cause the filing of any registration statement under the Securities Act with respect to any shares of Common Stock or other capital stock or any securities convertible into or exercisable or exchangeable for our Common Stock or other capital stock;

 

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  complete any offering of debt securities of the Company, other than entering into a line of credit, term loan arrangement or other debt instrument with a traditional bank;
     
  enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Company’s securities, whether any such transaction is to be settled by delivery of shares of Common Stock or such other securities, in cash or otherwise;
     
  sell, agree to sell, offer or sell, solicit offers to purchase, grant any call option, warrant or other right to purchase, purchase any put option or other right to sell, pledge, borrow or otherwise dispose of Company’s securities;
     
  establish or increase any “put equivalent position” or liquidate or decrease any “call equivalent position” (in each case within the meaning of Section 16 of the Exchange Act) with respect to any Company security;
     
  make any demand for or exercise any right with respect to, the registration of any Company security;
     
 

make any transaction pursuant to an existing trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of the Company’s securities;

     
  otherwise enter into any swap, derivative or other transaction or arrangement that transfers to another, in whole or in part, any economic consequence of ownership of a Company security, whether or not such transaction is to be settled by delivery of Company securities, other securities, cash or other consideration; or
     
  publicly announce an intention to do any of the foregoing.

 

The lock-up restrictions described above do not apply to, among other things:

 

    any transactions for the purposes of meeting certain Nasdaq continued listing requirements; and
     
    any issuances (or contemplated issuances) of common stock (including securities convertible into or exercisable or exchangeable for common stock) or debt financings in connection with an acquisition or strategic or minority investment transaction.

  

Transfer Agent and Registrar

 

The transfer agent and registrar for our Common Stock is Action Stock Transfer Corporation.

 

Electronic Offer, Sale and Distribution of Securities

 

A prospectus in electronic format may be made available on the websites maintained by the underwriters or selling group members. The underwriters may agree to allocate a number of securities to selling group members for sale to its 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 in electronic format, the information on these websites is not part of, nor incorporated by reference into, this prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us, and should not be relied upon by investors.

 

Stabilization

 

In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate-covering transactions, penalty bids and purchases to cover positions created by short sales.

 

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 this offering is in progress.

 

Over-allotment transactions involve sales by the underwriters of securities in excess of the number of securities 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 securities over-allotted by the underwriters is not greater than the number of securities that they may purchase in the over-allotment option. In a naked short position, the number securities involved is greater than the number of securities in the over-allotment option. The underwriters may close out any short position by exercising its over-allotment option and/or purchasing securities in the open market.

 

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Syndicate covering transactions involve purchases of securities in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of securities to close out the short position, the underwriters will consider, among other things, the price of securities available for purchase in the open market as compared with the price at which it may purchase securities through exercise of the over-allotment option. If the underwriters sell more securities than could be covered by exercise of the over-allotment option and, therefore, have a naked short position, the position can be closed out only by buying securities 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 securities in the open market that could adversely affect investors who purchase in this offering.

 

Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the securities originally sold by that syndicate member are purchased in stabilizing or syndicate covering transactions to cover syndicate short positions.

 

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our shares of common stock or preventing or retarding a decline in the market price of shares of Common Stock. As a result, the price of 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 makes any representation or prediction as to the effect that the transactions described above may have on the price of Common Stock. These transactions may be effected in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time.

 

Other Relationships

 

Certain of the underwriters and their affiliates have provided in the past to us and our affiliates and may provide from time to time in the future certain commercial banking, financial advisory, investment banking and other services for us and such affiliates in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.

 

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 shares of Common Stock and related Warrants offered by this prospectus in any jurisdiction where action for that purpose is required. The shares of Common Stock and related Warrants offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus 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 comes are advised to inform themselves about and to observe any restrictions relating to this offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

 

Australia

 

This prospectus is not a disclosure document under Chapter 6D of the Australian Corporations Act, has not been lodged with the Australian Securities and Investments Commission and does not purport to include the information required of a disclosure document under Chapter 6D of the Australian Corporations Act. Accordingly, (i) the offer of the shares of Common Stock and related Warrants under this prospectus is only made to persons to whom it is lawful to offer the shares of Common Stock and related Warrants without disclosure under Chapter 6D of the Australian Corporations Act under one or more exemptions set out in section 708 of the Australian Corporations Act, (ii) this prospectus is made available in Australia only to those persons as set forth in clause (i) above, and (iii) the offeree must be sent a notice stating in substance that by accepting this offer, the offeree represents that the offeree is such a person as set forth in clause (i) above, and, unless permitted under the Australian Corporations Act, agrees not to sell or offer for sale within Australia any of the shares of Common Stock and related Warrants sold to the offeree within 12 months after its transfer to the offeree under this prospectus.

 

  48  

 

 

China

 

The information in this document does not constitute a public offer of the shares of Common Stock and related Warrants, whether by way of sale or subscription, in the People’s Republic of China (excluding, for purposes of this paragraph, Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan). The shares of Common Stock and related Warrants may not be offered or sold directly or indirectly in the PRC to legal or natural persons other than directly to “qualified domestic institutional investors.”

 

European Economic Area — Belgium, Germany, Luxembourg and Netherlands

 

The information in this document has been prepared on the basis that all offers of securities will be made pursuant to an exemption under the Directive 2003/71/EC (“Prospectus Directive”), as implemented in Member States of the European Economic Area (each, a “Relevant Member State”), from the requirement to produce a prospectus for offers of securities.

 

An offer to the public of securities has not been made, and may not be made, in a Relevant Member State except pursuant to one of the following exemptions under the Prospectus Directive as implemented in that Relevant Member State:

 

  to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
     
  to any legal entity that has two or more of (i) an average of at least 250 employees during its last fiscal year; (ii) a total balance sheet of more than €43,000,000 (as shown on its last annual unconsolidated or consolidated financial statements) and (iii) an annual net turnover of more than €50,000,000 (as shown on its last annual unconsolidated or consolidated financial statements);
     
  to fewer than 100 natural or legal persons (other than qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive) subject to obtaining the prior consent of the Company or any underwriter for any such offer; or
     
  in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of securities shall require the Company to publish a prospectus pursuant to Article 3 of the Prospectus Directive.

 

France

 

This document is not being distributed in the context of a public offering of financial securities (offre au public de titres financiers) in France within the meaning of Article L.411-1 of the French Monetary and Financial Code (Code monétaire et financier) and Articles 211-1 et seq. of the General Regulation of the French Autorité des marchés financiers (“AMF”). The shares of Common Stock and related Warrants have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France.

 

This document and any other offering material relating to the shares of Common Stock and related Warrants have not been, and will not be, submitted to the AMF for approval in France and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in France.

 

Such offers, sales and distributions have been and shall only be made in France to (i) qualified investors (investisseurs qualifiés) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-1 to D.411-3, D. 744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation and/or (ii) a restricted number of non-qualified investors (cercle restreint d’investisseurs) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-4, D.744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation.

 

  49  

 

 

Pursuant to Article 211-3 of the General Regulation of the AMF, investors in France are informed that the shares of Common Stock and related Warrants cannot be distributed (directly or indirectly) to the public by the investors otherwise than in accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of the French Monetary and Financial Code.

 

Ireland

 

The information in this document does not constitute a prospectus under any Irish laws or regulations and this document has not been filed with or approved by any Irish regulatory authority as the information has not been prepared in the context of a public offering of securities in Ireland within the meaning of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 (the “Prospectus Regulations”). The shares of Common Stock and related Warrants offered by this prospectus have not been offered or sold, and will not be offered, sold or delivered directly or indirectly in Ireland by way of a public offering, except to (i) qualified investors as defined in Regulation 2(l) of the Prospectus Regulations and (ii) fewer than 100 natural or legal persons who are not qualified investors.

 

Israel

 

The shares of Common Stock and related Warrants offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (the ISA), or ISA, nor have such shares of Common Stock and related Warrants been registered for sale in Israel. They may not be offered or sold, directly or indirectly, to the public in Israel, absent the publication of a prospectus. The ISA has not issued permits, approvals or licenses in connection with this offering or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the shares of Common Stock and related Warrants being offered. Any resale in Israel, directly or indirectly, to the public of the shares of Common Stock and related Warrants offered by this prospectus is subject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and regulations.

 

Italy

 

The offering of the shares of Common Stock and related Warrants in the Republic of Italy has not been authorized by the Commissione Nazionale per le Società e la Borsa, the Italian Securities and Exchange Commission (“CONSOB”), pursuant to Italian securities legislation and, accordingly, no offering material relating to the shares of Common Stock and related Warrants may be distributed in Italy and such shares of Common Stock and related Warrants may not be offered or sold in Italy in a public offer within the meaning of Article 1.1(t) of Legislative Decree No. 58 of 24 February 1998 (“Decree No. 58”), other than:

 

  to Italian qualified investors, as defined in Article 100 of Decree no.58 by reference to Article 34-ter of CONSOB Regulation no. 11971 of 14 May 1999 (“Regulation no. 1197l”) as amended (“Qualified Investors”); and
     
  in other circumstances that are exempt from the rules on public offer pursuant to Article 100 of Decree No. 58 and Article 34-ter of Regulation No. 11971 as amended.

 

Any offer, sale or delivery of the shares of Common Stock and related Warrants or distribution of any offer document relating to the shares of Common Stock and related Warrants in Italy (excluding placements where a Qualified Investor solicits an offer from the issuer) under the paragraphs above must be:

 

  made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with Legislative Decree No. 385 of 1 September 1993 (as amended), Decree No. 58, CONSOB Regulation No. 16190 of 29 October 2007 and any other applicable laws; and
     
  in compliance with all relevant Italian securities, tax and exchange controls and any other applicable laws.

 

  50  

 

 

Any subsequent distribution of the shares of Common Stock and related Warrants in Italy must be made in compliance with the public offer and prospectus requirement rules provided under Decree No. 58 and the Regulation No. 11971 as amended, unless an exception from those rules applies. Failure to comply with such rules may result in the sale of such shares of Common Stock and related Warrants being declared null and void and in the liability of the entity transferring the shares of Common Stock and related Warrants for any damages suffered by the investors.

 

Japan

 

The shares of Common Stock and related Warrants have not been and will not be registered under Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948), as amended (the “FIEL”) pursuant to an exemption from the registration requirements applicable to a private placement of securities to Qualified Institutional Investors (as defined in and in accordance with Article 2, paragraph 3 of the FIEL and the regulations promulgated thereunder). Accordingly, the shares of Common Stock and related Warrants may not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan other than Qualified Institutional Investors. Any Qualified Institutional Investor who acquires the shares of Common Stock and related Warrants may not resell them to any person in Japan that is not a Qualified Institutional Investor, and acquisition by any such person of the shares of Common Stock and related Warrants is conditional upon the execution of an agreement to that effect.

 

Portugal

 

This document is not being distributed in the context of a public offer of financial securities (oferta pública de valores mobiliários) in Portugal, within the meaning of Article 109 of the Portuguese Securities Code (Código dos Valores Mobiliários). The shares of Common Stock and related Warrants have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in Portugal. This document and any other offering material relating to the shares of Common Stock and related Warrants have not been, and will not be, submitted to the Portuguese Securities Market Commission (Comissăo do Mercado de Valores Mobiliários) for approval in Portugal and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in Portugal, other than under circumstances that are deemed not to qualify as a public offer under the Portuguese Securities Code. Such offers, sales and distributions of securities in Portugal are limited to persons who are “qualified investors” (as defined in the Portuguese Securities Code). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.

 

Sweden

 

This document has not been, and will not be, registered with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority). Accordingly, this document may not be made available, nor may the shares of Common Stock and related Warrants be offered for sale in Sweden, other than under circumstances that are deemed not to require a prospectus under the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag (1991:980) om handel med finansiella instrument). Any offering of securities in Sweden is limited to persons who are “qualified investors” (as defined in the Financial Instruments Trading Act). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.

 

Switzerland

 

The shares of Common Stock and related Warrants may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering material relating to the shares of Common Stock and related Warrants may be publicly distributed or otherwise made publicly available in Switzerland.

 

Neither this document nor any other offering material relating to the shares of Common Stock and related Warrants have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of the shares of Common Stock and related Warrants will not be supervised by, the Swiss Financial Market Supervisory Authority (FINMA).

 

  51  

 

 

This document is personal to the recipient only and not for general circulation in Switzerland.

 

United Arab Emirates

 

Neither this document nor the shares of Common Stock and related Warrants have been approved, disapproved or passed on in any way by the Central Bank of the United Arab Emirates or any other governmental authority in the United Arab Emirates, nor has the Company received authorization or licensing from the Central Bank of the United Arab Emirates or any other governmental authority in the United Arab Emirates to market or sell the shares of Common Stock and related Warrants within the United Arab Emirates. This document does not constitute and may not be used for the purpose of an offer or invitation. The Company may not render services relating to the shares of Common Stock and related Warrants within the United Arab Emirates, including the receipt of applications and/or the allotment or redemption of such shares of Common Stock and related Warrants.

 

No offer or invitation to subscribe for the shares of Common Stock and related Warrants is valid or permitted in the Dubai International Financial Centre.

 

United Kingdom

 

Neither the information in this document nor any other document relating to the offer has been delivered for approval to the Financial Services Authority in the United Kingdom and no prospectus (within the meaning of section 85 of the Financial Services and Markets Act 2000, as amended (“FSMA”)) has been published or is intended to be published in respect of the shares of Common Stock and related Warrants. This document is issued on a confidential basis to “qualified investors” (within the meaning of section 86(7) of FSMA) in the United Kingdom, and the shares of Common Stock and related Warrants may not be offered or sold in the United Kingdom by means of this document, any accompanying letter or any other document, except in circumstances which do not require the publication of a prospectus pursuant to section 86(1) FSMA. This document should not be distributed, published or reproduced, in whole or in part, nor may its contents be disclosed by recipients to any other person in the United Kingdom.

 

Any invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) received in connection with the issue or sale of the shares of Common Stock and related Warrants has only been communicated or caused to be communicated and will only be communicated or caused to be communicated in the United Kingdom in circumstances in which section 21(1) of FSMA does not apply to the Company.

 

In the United Kingdom, this document is being distributed only to, and is directed at, persons (i) who have professional experience in matters relating to investments falling within Article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (“FPO”), (ii) who fall within the categories of persons referred to in Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the FPO or (iii) to whom it may otherwise be lawfully communicated (together “relevant persons”). The investments to which this document relates are available only to, and any invitation, offer or agreement to purchase will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.

 

Canada

 

The shares of Common Stock and related Warrants may be sold in Canada only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the shares of Common Stock and related Warrants must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws. Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor. Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI33-105 regarding an underwriter’s conflicts of interest in connection with this offering.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

 

The following is a general discussion of material U.S. federal income considerations relating to the purchase, ownership and disposition of our Common Stock, Pre-Funded Warrants or Warrants. This discussion is based on current provisions of the Internal Revenue Code on payment, existing and proposed U.S. Treasury Regulations promulgated or proposed thereunder and current administrative and judicial interpretations thereof, all as in effect as of the date of this prospectus and all of which are subject to change or to differing interpretation, possibly with retroactive effect. We have not sought and will not seek any rulings from the Internal Revenue Service (the “IRS”) regarding the matters discussed below. There can be no assurance that the IRS or a court will not take a contrary position.

 

This discussion is limited to U.S. holders and non-U.S. holders who hold our Common Stock, Pre-Funded Warrants or Warrants as capital assets within the meaning of Section 1221 of the Internal Revenue Code (generally, as property held for investment). This discussion does not address all aspects of U.S. federal income taxation, such as the U.S. alternative minimum income tax and the additional tax on net investment income, nor does it address any aspect of state, local or non-U.S. taxes, or U.S. federal taxes other than income taxes, such as federal estate taxes. This discussion does not consider any specific facts or circumstances that may apply to a holder and does not address the special tax considerations that may be applicable to particular holders, such as:

 

  insurance companies;
     
  tax-exempt organizations;
     
  financial institutions;
     
  brokers or dealers in securities;
     
  regulated investment companies;
     
  pension plans;
     
  controlled foreign corporations;
     
  passive foreign investment companies;
     
  corporations that accumulate earnings to avoid U.S. federal income tax;
     
  certain U.S. expatriates;
     
  U.S. persons that have a “functional currency” other than the U.S. dollar;
     
  persons that acquire our Common Stock as compensation for services;
     
  owners that hold our Common Stock, Pre-Funded Warrants or Warrants as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment;
     
  entities that are treated as disregarded entities for U.S. federal income tax purposes (regardless of their places of organization or formation) and their investors; and
     
  partnerships or other entities treated as partnerships for U.S. federal income tax purposes and their investors.

 

If any entity taxable as a partnership for U.S. federal income tax purposes holds our Common Stock, Pre-Funded Warrants or Warrants, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner level. An investor in a partnership or entity treated as disregarded for U.S. federal income tax purposes should consult his, her or its own tax advisor regarding the applicable tax consequences relating to the purchase, ownership and disposition of our Common Stock, Pre-Funded Warrants or Warrants.

 

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For purposes of this discussion, the term “U.S. holder” means a beneficial owner of our Common Stock, Pre-Funded Warrants or Warrants that is, for U.S. federal income tax purposes:

 

  an individual who is a citizen or resident of the United States;
     
  a corporation created or organized in or under the laws of the United States or of any political subdivision of the United States;
     
  an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
     
  a trust, if (i) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust or (ii) the trust has a valid election to be treated as a U.S. person under applicable U.S. Treasury Regulations.

 

A “non-U.S. holder” is a beneficial owner of our Common Stock, Pre-Funded Warrants or Warrants that is, for U.S. federal income tax purposes, an individual, corporation, estate or trust that is not a U.S. holder.

 

Prospective investors should consult their own tax advisors regarding the U.S. federal, state, local and non-U.S. income and other tax considerations of purchasing, holding and disposing of our Common Stock, Pre-Funded Warrants or Warrants.

 

Treatment of Pre-Funded Warrants

 

Although it is not entirely free from doubt, a Pre-Funded Warrant should be treated as a share of our Common Stock for U.S. federal income tax purposes and a holder of Pre-Funded Warrants should generally be taxed in the same manner as a holder of Common Stock, as described below. Accordingly, no gain or loss should be recognized upon the exercise of a Pre-Funded Warrant and, upon exercise, the holding period of a Pre-Funded Warrant should carry over to the share of Common Stock received. Similarly, the tax basis of the Pre-Funded Warrant should carry over to the share of Common Stock received upon exercise, increased by the exercise price of $0.001. Each holder should consult his, her or its own tax advisor regarding the risks associated with the acquisition of Pre-Funded Warrants pursuant to this offering (including potential alternative characterizations). The balance of this discussion generally assumes that the characterization described above is respected for U.S. federal income tax purposes.

 

Tax Consequences to U.S. Holders

 

Distributions on Common Stock

 

As discussed above under “Market For Common Equity and Related Stockholder Matters — Dividend Policy,” we do not currently expect to make distributions on our Common Stock. In the event that we do make distributions of cash or other property, distributions paid on Common Stock, other than certain pro rata distributions of Common Stock, will be treated as a dividend to the extent paid out of our current or accumulated earnings and profits and will be includible in income by the U.S. Holder and taxable as ordinary income when received. If a distribution exceeds our current and accumulated earnings and profits, the excess will be first treated as a tax-free return of the U.S. Holder’s investment, up to the U.S. Holder’s tax basis in the Common Stock. Any remaining excess will be treated as a capital gain. Subject to applicable limitations, dividends paid to certain non-corporate U.S. Holders may be eligible for taxation as “qualified dividend income” and therefore may be taxable at rates applicable to long-term capital gains. U.S. Holders should consult their tax advisers regarding the availability of the reduced tax rate on dividends in their particular circumstances. Dividends received by a corporate U.S. Holder will be eligible for the dividends-received deduction if the U.S. Holder meets certain holding period and other applicable requirements.

 

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Constructive Dividends on Warrants

 

Under Section 305 of the Code, an adjustment to the number of shares of Common Stock that will be issued on the exercise of the Warrants, or an adjustment to the exercise price of the Warrants, may be treated as a constructive distribution to a U.S. Holder of the Warrants if, and to the extent that, such adjustment has the effect of increasing such U.S. Holder’s proportionate interest in our “earnings and profits” or assets, depending on the circumstances of such adjustment (for example, if such adjustment is to compensate for a distribution of cash or other property to our stockholders). Adjustments to the exercise price of a Warrant made pursuant to a bona fide reasonable adjustment formula that has the effect of preventing dilution of the interest of the holders of the Warrants should generally not result in a constructive distribution. Any constructive distributions would generally be subject to the tax treatment described above under “Distributions on Common Stock”.

 

Sale or Other Disposition of Common Stock

 

For U.S. federal income tax purposes, gain or loss realized on the sale or other disposition of common stock will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder held the common stock for more than one year. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the common stock disposed of and the amount realized on the disposition. Long-term capital gains recognized by non-corporate U.S. Holders will be subject to reduced tax rates. The deductibility of capital losses is subject to limitations.

 

Sale or Other Disposition, Exercise or Expiration of Warrants

 

For U.S. federal income tax purposes, gain or loss realized on the sale or other disposition of a Warrant (other than by exercise) will be capital gain or loss and will be long-term capital gain or loss if the U.S. Holder held the Warrant for more than one year at the time of the sale or other disposition. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the Warrant disposed of and the amount realized on the disposition.

 

In general, a U.S. Holder will not be required to recognize income, gain or loss upon the exercise of a Warrant by payment of the exercise price, except to the extent of cash paid in lieu of a fractional share. A U.S. Holder’s tax basis in a share of Common Stock received upon exercise will be equal to the sum of (1) the U.S. Holder’s tax basis in the Warrant and (2) the exercise price of the Warrant. A U.S. Holder’s holding period in the Common Stock received upon exercise will commence on the day or the day after such U.S. Holder exercises the Warrant. No discussion is provided herein regarding the U.S. federal income tax treatment on the exercise of a Warrant on a cashless basis, and U.S. Holders are urged to consult their tax advisors as to the exercise of a Warrant on a cashless basis.

 

If a Warrant expires without being exercised, a U.S. Holder will recognize a capital loss in an amount equal to such U.S. Holder’s tax basis in the Warrant. This loss will be long-term capital loss if, at the time of the expiration, the U.S. Holder’s holding period in the Warrant is more than one year. The deductibility of capital losses is subject to limitations.

 

Tax Consequences to Non-U.S. Holders

 

Distributions

 

As discussed in the section entitled “Market For Common Equity and Related Stockholder Matters — Dividend Policy,” we do not anticipate paying any dividends on our Common Stock in the foreseeable future. If we make distributions on our Common Stock or on our Warrants (as described above under “Constructive Dividends on Warrants”), those payments will constitute dividends for U.S. federal income tax purposes to the extent we have current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed both our current and our accumulated earnings and profits, they will constitute a return of capital and will first reduce a Non-U.S. Holder’s basis in our Common Stock or Warrants, as applicable, but not below zero. Any excess will be treated as capital gain and will be treated as described below under the “—Gain on Sale or Other Disposition of Common Stock or Warrants” section. Any such distributions would be subject to the discussions below regarding back-up withholding and Foreign Account Tax Compliance Act, or FATCA.

 

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Subject to the discussion below on effectively connected income, any dividend paid to a Non-U.S. Holder generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable income tax treaty. To receive a reduced treaty rate, a Non-U.S. Holder must provide us or our agent with an IRS Form W-8BEN, IRS Form W-8 BEN-E or another appropriate version of IRS Form W-8 (or a successor form), which must be updated periodically, and which, in each case, must certify qualification for the reduced rate. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.

 

Dividends paid to a Non-U.S. Holder that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States and that are not eligible for relief from U.S. (net basis) income tax under an applicable income tax treaty, generally are exempt from the (gross basis) withholding tax described above. To obtain this exemption from withholding tax, the Non-U.S. Holder must provide the applicable withholding agent with an IRS Form W-8ECI or successor form or other applicable IRS Form W-8 certifying that the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States. Such effectively connected dividends, if not eligible for relief under a tax treaty, would not be subject to a withholding tax, but would be taxed at the same graduated rates applicable to U.S. persons, net of certain deductions and credits and if, in addition, the Non-U.S. Holder is a corporation, may also be subject to a branch profits tax at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty).

 

If you are eligible for a reduced rate of withholding tax pursuant to a tax treaty, you may be able to obtain a refund of any excess amounts withheld if you timely file an appropriate claim for refund with the IRS.

 

Exercise or Expiration of Warrants

 

In general, a Non-U.S. Holder will not be required to recognize income, gain or loss upon the exercise of a Warrant by payment of the exercise price, except to the extent of cash paid in lieu of a fractional share. However, no discussion is provided herein regarding the U.S. federal income tax treatment on the exercise of a Warrant on a cashless basis, and Non-U.S. Holders are urged to consult their tax advisors as to the exercise of a Warrant on a cashless basis.

 

If a Warrant expires without being exercised, a Non-U.S. Holder that is engaged in a U.S. trade or business to which any income from the Warrant would be effectively connected or who is present in the United States for a period or periods aggregating 183 days or more during the calendar year in which the expiration occurs (and certain other conditions are met) will recognize a capital loss in an amount equal to such Non-U.S. Holder’s tax basis in the Warrant.

 

Gain on Sale or Other Disposition of Common Stock or Warrants

 

Subject to the discussion below regarding backup withholding and FATCA, a Non-U.S. Holder generally will not be required to pay U.S. federal income tax on any gain realized upon the sale or other disposition of our Common Stock or common warrants unless:

 

  the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States and not eligible for relief under an applicable income tax treaty, in which case the Non-U.S. Holder will be required to pay tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates, and for a Non-U.S. Holder that is a corporation, such Non-U.S. Holder may be subject to the branch profits tax at a 30% rate (or such lower rate as may be specified by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items;

 

  the Non-U.S. Holder is an individual who is present in the United States for a period or periods aggregating 183 days or more during the calendar year in which the sale or disposition occurs and certain other conditions are met, in which case the Non-U.S. Holder will be required to pay a flat 30% tax on the gain derived from the sale, which tax may be offset by U.S. source capital losses (even though the Non-U.S. Holder is not considered a resident of the United States) (subject to applicable income tax or other treaties); or

 

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  we are a “U.S. real property holding corporation” for U.S. federal income tax purposes, or a USRPHC, at any time within the shorter of the five-year period preceding the disposition or the Non-U.S. Holder’s holding period for our Common Stock or Warrants. We believe we are not currently and do not anticipate becoming a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our United States real property interests relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however, gain arising from the sale or other taxable disposition by a Non-U.S. Holder of our Common Stock will not be subject to United States federal income tax if (A) in the case of our Common Stock, (a) shares of our Common Stock are “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, such as Nasdaq, and (b) the Non-U.S. Holder owns or owned, actually and constructively, 5% or less of the shares of our Common Stock throughout the five-year period ending on the date of the sale or exchange; and (B) in the case of our Warrants, either (a)(i) shares of our Common Stock are “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, such as Nasdaq, (ii) our Warrants are not considered regularly traded on an established securities market and (iii) the Non-U.S. Holder does not own, actually or constructively, Warrants with a fair market value greater than the fair market value of 5% of the shares of our Common Stock, determined as of the date that such Non-U.S. Holder acquired its Warrants, or (b)(i) our Warrants are considered regularly traded on an established securities market, and (ii) the Non-U.S. Holder owns or owned, actually and constructively, 5% or less of our Warrants throughout the five-year period ending on the date of the sale or exchange. Our Warrants are not expected to be regularly traded on an established securities market. If the foregoing exception does not apply, such Non-U.S. Holder’s proceeds received on the disposition of shares will generally be subject to withholding at a rate of 15% and such Non-U.S. Holder will generally be taxed on any gain in the same manner as gain that is effectively connected with the conduct of a U.S. trade or business, except that the branch profits tax generally will not apply.

 

Information Reporting and Backup Withholding

 

Information returns may be filed with the IRS in connection with distributions on our Common Stock or constructive dividends on Warrants, and the proceeds of a sale or other disposition of Common Stock or Warrants. A non-exempt U.S. Holder may be subject to U.S. backup withholding on these payments if it fails to provide its taxpayer identification number to the withholding agent and comply with certification procedures or otherwise establish an exemption from backup withholding.

 

A Non-U.S. Holder may be subject to U.S. information reporting and backup withholding on these payments unless the Non-U.S. Holder complies with certification procedures to establish that it is not a U.S. person (within the meaning of the Code). The certification requirements generally will be satisfied if the Non-U.S. Holder provides the applicable withholding agent with a statement on the applicable IRS Form W-8BEN or IRS Form W-8BEN-E (or suitable substitute or successor form), together with all appropriate attachments, signed under penalties of perjury, stating, among other things, that such Non-U.S. Holder is not a U.S. Person. Applicable Treasury Regulations provide alternative methods for satisfying this requirement. In addition, the amount of distributions on Common Stock or constructive dividends on Warrants paid to a Non-U.S. Holder, and the amount of any U.S. federal tax withheld therefrom, must be reported annually to the IRS and the Non-U.S. Holder. This information may be made available by the IRS under the provisions of an applicable tax treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides.

 

Payment of the proceeds of the sale or other disposition of Common Stock or Warrants to or through a non-U.S. office of a U.S. broker or of a non-U.S. broker with certain specified U.S. connections generally will be subject to information reporting requirements, but not backup withholding, unless the Non-U.S. Holder certifies under penalties of perjury that it is not a U.S. person or an exemption otherwise applies. Payments of the proceeds of a sale or other disposition of Common Stock or Warrants to or through a U.S. office of a broker generally will be subject to information reporting and backup withholding, unless the Non-U.S. Holder certifies under penalties of perjury that it is not a U.S. person or otherwise establishes an exemption.

 

Backup withholding is not an additional tax. The amount of any backup withholding from a payment generally will be allowed as a credit against the holder’s U.S. federal income tax liability and may entitle the holder to a refund, provided that the required information is timely furnished to the IRS.

 

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Foreign Account Tax Compliance Act

 

FATCA imposes withholding tax on certain types of payments made to foreign financial institutions and certain other non-U.S. entities. The legislation imposes a 30% withholding tax on dividends on, or, subject to the discussion of certain proposed Treasury Regulations below, gross proceeds from the sale or other disposition of, our Common Stock or Warrants paid to a “foreign financial institution” or to certain “non-financial foreign entities” (each as defined in the Code), unless (i) the foreign financial institution undertakes certain diligence and reporting obligations, (ii) the non-financial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (iii) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in (i) above, it must enter into an agreement with the U.S. Treasury requiring, among other things, that it undertake to identify accounts held by “specified United States persons” or “United States-owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on payments to account holders whose actions prevent it from complying with these reporting and other requirements. If the country in which a payee is resident has entered into an “intergovernmental agreement” with the United States regarding FATCA, that agreement may permit the payee to report to that country rather than to the U.S. Department of the Treasury. The U.S. Treasury recently released proposed Treasury Regulations which, if finalized in their present form, would eliminate the federal withholding tax of 30% applicable to the gross proceeds of a sale or other disposition of our common stock. In its preamble to such proposed Treasury Regulations, the U.S. Treasury stated that taxpayers may generally rely on the proposed regulations until final regulations are issued. Prospective investors should consult their own tax advisors regarding the possible impact of these rules on their investment in our Common Stock or Common Warrants, and the possible impact of these rules on the entities through which they hold our Common Stock or Warrants, including, without limitation, the process and deadlines for meeting the applicable requirements to prevent the imposition of this 30% withholding tax under FATCA.

 

The preceding discussion of U.S. federal tax considerations is for general information only. It is not tax advice. Each prospective investor should consult its tax advisor regarding the particular U.S. federal, state and local and non-U.S. tax consequences of purchasing, holding and disposing of our Common Stock or Warrants, including the consequences of any proposed change in applicable laws.

 

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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. Pryor Cashman LLP, New York, New York, is acting as counsel for the underwriters in connection with certain legal matters 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 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 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 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 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

 

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 securities 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. 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.

 

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 or any subsequently filed document incorporated by reference herein as described below:

 

  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;
     
  our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 20, 2020;
     
  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 6, 2020, April 8, 2020, April 20, 2020, April 21, 2020 and April 24, 2020.
     
  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.

 

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.

 

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Digital Ally, Inc.

 

[●] Shares of Common stock

[●] Warrants to Purchase up to [●] Shares of Common Stock
Pre-funded Warrants to Purchase Shares of Common Stock

Shares of Common Stock Underlying the Pre-funded Warrants

 

 

 

 

PRELIMINARY PROSPECTUS

 

 

 

 

                  , 2020

 

Joint Book-Running Managers

 

Roth Capital Partners Lake Street

 

Until        , 2020 (25 days after the date of this prospectus), all dealers that buy, sell or trade our 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.

 

   

 

 

PART II — INFORMATION NOT REQUIRED IN THE PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution.

 

SEC Registration Fee   $ 1,791.24  
FINRA Filing Fee     [  ]  
Accounting Fees and Expenses     [  ]  
Legal Fees and Expenses     [  ]  
Transfer Agent and Registrar Fees     [  ]  
Printing Expenses     [  ]  
Miscellaneous     [  ]  
Total   $ [  ]  

 

The table above sets forth the estimated costs and expenses to be incurred in connection with the issuance and distribution of the securities registered under this Registration Statement. All amounts are estimates other than the SEC’s registration fee and the FINRA filing fee.

 

Item 14. Indemnification of Directors and Officers.

 

Under Nevada law, a corporation may include in its articles of incorporation a provision that eliminates or limits the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director, but no such provision may eliminate or limit the liability of a director (a) for any breach of his or her fiduciary duty as a director, (b) for acts or omissions not in good faith or that involve intentional misconduct, fraud or a knowing violation of law, (c) for conduct violating the Nevada Revised Statutes (“NRS”), or (d) for any transaction from which the director will personally receive a benefit in money, property or services to which the director is not legally entitled.

 

Section 78.7502 of the NRS provides, in general, that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with the action, suit or proceeding if the person acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful.

 

NRS Section 78.4502 also provides, in general, that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by the person in connection with the defense or settlement of the action or suit if the person acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation; provided, however, that indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.

 

  II-1  

 

 

Any indemnification pursuant to the above provisions may be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made: (a) by the stockholders; (b) by the Board of Directors by majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding; (c) if a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding so orders, by independent legal counsel in a written opinion; or (d) if a quorum consisting of directors who were not parties to the action, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion.

 

Our Articles of Incorporation and Bylaws provide, among other things, that a director or officer of the corporation may be indemnified against expenses, liability, and loss (including attorneys’ fees inclusive of any appeal), judgments, fines and amounts paid in settlement reasonably incurred by such person in connection with any claim, action, suit or proceeding, whether civil, criminal, or investigative, to the fullest extent permitted under the NGCL, unless it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. Directors and officers of the corporation cannot be personally liable for damages for breach of fiduciary duty, except (a) for acts of omissions involving intentional misconduct, fraud, or knowing violation of law, or (b) the payment of dividends in violation of Section 78.300 of the NRS.

 

Insofar as indemnification for liabilities arising under the Securities Act may be provided for directors, officers, employees, agents or persons controlling an issuer pursuant to the foregoing provisions, the opinion of the Securities and Exchange Commission (the “SEC”) is that such indemnification is against public policy as expressed in the Securities Act, and is therefore unenforceable. In the event that a claim for indemnification by such director, officer or controlling person of us in the successful defense of any action, suit or proceeding is asserted by such director, officer or controlling person in connection with the securities being offered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

At the present time, there is no pending litigation or proceeding involving a director, officer, employee or other agent of ours in which indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding, which may result in a claim for such indemnification.

 

Item 15. Recent Sales of Unregistered Securities.

 

During the last three completed fiscal years and to date in the current fiscal year, we sold the following unregistered securities:

 

  Sale of Unregistered Securities   Number of shares   Date
           
Detachable warrants issued in connection with 8% notes payable with an exercise price of $3.65 per share   200,000 (Upon exercise)   June 30, 2017
           
Warrants issued in connection with an extension of the maturity date on 8% notes payable with an exercise price of $2.75 per share   100,000 (Upon exercise)   September 30, 2017
           
Warrants issued in connection with an extension of the maturity date on 8% notes payable with an exercise price of $2.60 per share   100,000 (Upon exercise)   November 15, 2017
           
Detachable warrants issued in connection with 8% notes payable with an exercise price of $3.25 per share   120,000 (Upon exercise)   December 29, 2017
           
12% secured convertible debentures issued with a conversion price of $3.25 per share   76,923 (Upon conversion)   March 7, 2018
           
Warrants issued in connection with an extension of the maturity date on 8% notes payable with an exercise price of $3.50 per share   36,000 (Upon exercise)   March 7, 2018

 

  II-2  

 

 

Warrants issued in connection with an extension of the maturity date on 8% notes payable with an exercise price of $3.25 per share   60,000 (Upon exercise)   March 16, 2018
           
8% Senior convertible debentures issued with a conversion price of $2.50 per share (Roth Capital Partners served as placement agent)   2,775,000 (Upon conversion)   April 3, 2018
           
Warrants issued in connection with 8% notes payable with an exercise price of $3.00 per share (Roth Capital Partners served as placement agent)   916,667 (Upon exercise)   April 3, 2018
           
8% Senior convertible debentures issued with a conversion price of $2.50 per share (Roth Capital Partners served as placement agent)   330,000 (Upon exercise)   May 11, 2018
           
Warrants issued in connection with 8% notes payable with an exercise price of $3.00 per share (Roth Capital Partners served as placement agent)   110,000 (Upon exercise)   May 11, 2018
           
8% senior convertible debentures issued with a conversion price of $1.40 per share   1,160,327 (Upon conversion)   August 5, 2019
           
Detachable warrants issued in connection with 8% notes with an exercise price of $1.8125 per share   571,428 (Upon exchange)   August 5, 2019
           
Detachable warrants issued in connection with 8% notes payable with an exercise price of $1.40 per share   107,000 (Upon exercise)   December 23, 2019
           
Detachable warrants issued in connection with 8% notes payable with an exercise price of $1.40 per share   35,750 (upon exercise)   January 17, 2020
           
8% Senior convertible debentures issued with a conversion price of $1.01 per share   1,155,115 (upon exercise)   April 17, 2020
           
Detachable warrants issued in connection with 8% notes payable with an exercise price of $1.31 per share   1,237,624 (upon exercise)   April 17, 2020

 

Except as stated above, no underwriters were involved in the foregoing sales of securities. The issuances of the securities described above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act or Regulation D promulgated under the Securities Act. The recipients of securities in such transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the stock certificates and option agreements issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us.

 

  II-3  

 

 

Item 16. Exhibits.

 

  (a) The following exhibits are filed as part of this registration statement.

 

Exhibit Number   Description of Exhibit    
         
1.1   Form of Underwriting Agreement   **
2.1   Plan of Merger among Vegas Petra, Inc. and Digital Ally, Inc. and its stockholders, dated November 30, 2004.   (1)
3.1(i)   Amended and Restated Articles of Incorporation of Digital Ally, Inc. (see the Amended and Restated Articles of Incorporation included in the Plan of Merger, filed as Exhibit 2.1 hereto).   (1)
3.1(ii)   Certificate of Change of Digital Ally, Inc., dated August 24, 2012.   (5)
3.1(iii)   Certificate of Amendment of Digital Ally, Inc., dated July 27, 2018.   (34)
3.2(i)   Amended and Restated Bylaws of Digital Ally, Inc.   (1)
3.2(ii)   Amendment to Amended and Restated Bylaws of Digital Ally, Inc.   (32)
3.3   Audit Committee Charter, dated September 22, 2005.   (1)
3.4   Compensation Committee Charter, dated September 22, 2005   (1)
3.5   Nominating Committee Charter dated December 27, 2007.   (2)
3.6   Corporate Governance Guidelines.   (3)
3.7   Nominating and Governance Charter, Amended and Restated as of February 25, 2010.   (4)
3.8   Strategic Planning Committee Charter, dated June 28, 2009.   (4)
4.1   Form of Common Stock Certificate.   (6)
4.2   Form of Common Stock Purchase Warrant.   (6)
4.3   Form of Series A Common Stock Purchase Warrant.   (7)
4.4   Form of Series B Common Stock Purchase Warrant.   (7)
4.5   Form of Series C Common Stock Purchase Warrant.   (7)
4.6   Unrestricted Senior Secured Convertible Promissory Note due April 16, 2021.   (33)
4.7   Restricted Senior Secured Convertible Promissory Note due April 16, 2021.   (33)
4.8   Form of Common Stock Purchase Warrant.   (33)
4.9   Form of Common Stock Purchase Warrant.   **
4.10   Form of Pre-funded Warrant.   **
5.1   Opinion of Sullivan & Worcester LLP.   **
10.1   2005 Stock Option and Restricted Stock Plan.   (6)
10.2   2006 Stock Option and Restricted Stock Plan.   (6)
10.3   Form of Stock Option Agreement (ISO and Non-Qualified) 2005 Stock Option Plan.   (6)
10.4   Form of Stock Option Agreement (ISO and Non-Qualified) 2006 Stock Option Plan.   (6)
10.5   Promissory Note Extension between Registrant and Acme Resources, LLC, dated May 4, 2006, in the principal amount of $500,000.   (6)
10.6   Promissory Note between Registrant and Acme Resources, LLC, dated September 1, 2004, in the principal amount of $500,000.   (8)
10.7   Promissory Note Extension between Registrant and Acme Resources, LLC, dated October 31, 2006.   (8)
10.8   Software License Agreement with Ingenient Technologies, Inc., dated March 15, 2004.   (8)
10.9   Software License Agreement with Ingenient Technologies, Inc., dated April 5, 2005.   (8)
10.10   Stock Option Agreement with Daniels & Kaplan, P.C., dated September 25, 2006.   (8)
10.11   Memorandum of Understanding with Tri Square Communications (Hong Kong) Co., Ltd. dated November 29, 2005.   (8)
10.12   2007 Stock Option and Restricted Stock Plan.   (9)
10.13   Form of Stock Option Agreement (ISO and Non-Qualified) 2007 Stock Option Plan.   (2)
10.14   Amendment to 2007 Stock Option and Restricted Stock Plan.   (2)
10.15   2008 Stock Option and Restricted Stock Plan.   (2)
10.16   Form of Stock Option Agreement (ISO and Non-Qualified) 2008 Stock Option Plan.   (2)
10.17   Promissory Note with Enterprise Bank dated February 13, 2009.   (2)
10.18   First Amendment to Promissory Note with Enterprise Bank dated February 13, 2009.   (10)
10.19   First Amendment to Promissory Note with Enterprise Bank dated June 30, 2009.   (10)
10.20   Modification and Renewal of Promissory Note with Enterprise Bank dated February 1, 2010.   (11)
10.21   Forms of Restricted Stock Agreement for 2005, 2006, 2007 and 2008 Stock Option and Restricted Stock Plans.   (11)
10.22   Loan Modification or Renewal Agreement of Promissory Note with Enterprise Bank dated March 2, 2011.   (12)
10.23   2011 Stock Option and Restricted Stock Plan.   (13)
10.24   Form of Stock Option Agreement for 2011 Stock Option and Restricted Stock Plan.   (13)
10.25   8% Subordinated Promissory Note in principal amount of $1,500,000.   (14)
10.26   Common Stock Purchase Warrant.   (14)

 

  II-4  

 

 

10.27   8% Subordinated Promissory Note in principal amount of $1,000,000.   (15)
10.28   Common Stock Purchase Warrant.   (15)
10.29   Allonge to 8% Subordinated Promissory Note in principal amount of $1,000,000.   (15)
10.30   Amendment to Common Stock Purchase Warrant.   (15)
10.31   Second Allonge to 8% Subordinated Note, dated July 24, 2012.   (16)
10.32   Allonge to 8% Subordinated Note ($1.0 million) dated July 24, 2012.   (16)
10.33   Second Amendment to Common Stock Purchase Warrants (300,000 shares) dated July 24, 2012.   (16)
10.34   Amendment to Common Stock Purchase Warrants (150,000 shares) dated July 24, 2012.   (16)
10.35   Third Allonge to 8% Subordinated Note, dated December 4, 2013.   (17)
10.36   Second Allonge to 8% Subordinated Note ($1.0 million) dated December 4, 2013.   (17)
10.37   Common Stock Purchase Warrant (40,000 shares), dated December 4, 2013.   (17)
10.38   Securities Purchase Agreement.   (18)
10.39   Registration Rights Agreement.   (18)
10.40   Form of Senior Secured Convertible Note.   (18)
10.41   Form of Warrant to Purchase Common Stock.   (18)
10.42   Pledge and Security Agreement.   (18)
10.43   Patent Assignment for Security.   (18)
10.44   Trademarks Assignment for Security.   (18)
10.45   Guaranty.   (18)
10.46   Deposit Account Control Agreement.   (18)
10.47   Form of Voting Agreement.   (18)
10.48   Form of Lock-Up Agreement.   (18)
10.49   Securities Purchase Agreement.   (19)
10.50   Registration Rights Agreement.   (19)
10.51   Form of Senior Secured Convertible Note.   (19)
10.52   Form of Warrant to Purchase Common Stock.   (19)
10.53   Amended and Restated Pledge and Security Agreement.   (19)
10.54   Patent Assignment for Security.   (19)
10.55   Trademarks Assignment for Security.   (19)
10.56   Amended and Restated Guaranty Agreement.   (19)
10.57   Deposit Account Control Agreement-incorporated by reference to Exhibit 10.46 to the Company’s Current Report on Form 8-K filed on March 25, 2014.   (19)
10.58   Form of Voting Agreement.   (19)
10.59   Form of Lock-Up Agreement.   (19)
10.60   Reaffirmation Agreement.   (19)
10.61   Senior Secured Convertible Note.   (19)
10.62   Warrant to Purchase Common Stock.   (19)
10.63   Fourth Allonge to 8% Subordinated Note ($1.5 million) dated May 27, 2015.   (20)
10.64   Third Allonge to 8% Subordinated Note ($1.0 million) dated May 27, 2015.   (20)
10.65   Fifth Allonge to 8% Subordinated Note ($1.5 million) dated July 15, 2015.   (21)
10.66   Fourth Allonge to 8% Subordinated Note ($1.0 million) dated July 15, 2015.   (21)
10.67   Common Stock Purchase Warrant.   (21)
10.68   Securities Purchase Agreement.   (22)
10.69   Amended and Restated 2015 Stock Option and Restricted Stock Plan.   (23)
10.70   Series A Warrant Amendment Agreement.   (24)
10.71   Series B Warrant Amendment Agreement.   (24)
10.72   Series C Warrant Amendment Agreement.   (24)
10.73   Securities Purchase Agreement.   (25)
10.74   8% Senior Secured Convertible Debenture.   (25)
10.75   Common Stock Purchase Warrant.   (25)
10.76   Security Agreement.   (25)
10.77   Subsidiary Guarantee.   (25)
10.78   Form of Series A-1 Warrant.   (26)
10.79   Form of Series A-2 Warrant.   (26)

 

  II-5  

 

 

10.80   Form of Series B Warrant.   (26)
10.81   Form of Securities Purchase Agreement, dated as of August 21, 2017, by and among Digital Ally, Inc. and the purchasers signatory thereto.   (26)
10.82   Form of Securities Purchase Agreement, by and among the Company and the purchaser signatories thereto.   (27)
10.83   Form of Secured Convertible Promissory Note.   (27)
10.84   Form of Common Stock Purchase Warrant.   (27)
10.85   Form of Security Agreement, by and among the Company and each of the secured parties thereto.   (27)
10.86   Form of Intellectual Property Security Agreement, between the Company and the secured lender thereto.   (27)
10.87   Form of Subsidiary Guarantee, by and among the Company, the purchasers under the Securities Purchase Agreement, and each of the Company’s subsidiaries.   (27)
10.88   Common Stock Purchase Warrant of Digital Ally, Inc.   (29)
10.89   Proceeds Investment Agreement, dated as July 31, 2018, by and between Digital Ally, Inc. and Brickell Key Investments LP.   (29)
10.90   Letter Agreement, dated as July 31, 2018, by and between Digital Ally, Inc. and Brickell Key Investments LP.   (29)
10.91   Form of Lock-Up Agreement.   (30)
10.92   Form of Senior Secured Convertible Promissory Note due August 4, 2020.   (31)
10.93   Form of Common Stock Purchase Warrant.   (31)
10.94   Form of Securities Purchase Agreement, dated as of August 5, 2019, by and between the Company and the Investors.   (31)
10.95   Form of Security Agreement, dated August 5, 2019, by and among the Company, certain of the Company’s subsidiaries and the Secured Parties.   (31)
10.96   Form of IP Security Agreement, dated August 5, 2019, by the Company, in favor of the Agent and the Secured Parties.   (31)
10.97   Form of Subsidiary Guarantee, dated August 5, 2019, made by certain of the Company’s subsidiaries in favor of the Investors.   (31)
10.98   Securities Purchase Agreement, dated as of April 17, 2020, by and between the Company and the Investors.   (33)
10.99   Security Agreement, dated April 17, 2020, by and among the Company, the Company’s subsidiary and the Secured Parties.   (33)
10.100   IP Security Agreement, dated April 17, 2020, by the Company, in favor of the Agent and the Secured Parties.   (33)
10.101   Subsidiary Guarantee, dated April 17, 2020, made by the Company’s subsidiary in favor of the Investors.   (33)
10.102   Common Stock Warrant issued to Michael Doherty on December 23, 2019   (35)
10.103   Common Stock Warrant issued to Cory Royer on January 17, 2020  

(35)

14.1   Code of Ethics and Code of Conduct.   (2)
21.1   Subsidiaries of Registrant.   (28)
23.1   Consent of RBSM LLP.   *
23.2   Consent of RSM US LLP.   *
23.3   Consent of Sullivan & Worcester LLP (included in Exhibit 5.1).   **

 

*Filed herewith.

** To be filed by amendment.

 

  (1) Filed as an exhibit to the Company’s Form SB-2, filed October 16, 2006, No. 333-138025.
  (2) Filed as an exhibit to the Company’s Annual Report on Form 10KSB for the Year ending December 31, 2007.
  (3) Filed as an exhibit to the Company’s Current Report on Form 8-K dated November 20, 2009.
  (4) Filed as an exhibit to the Company’s Annual Report on Form 10K for the Year ending December 31, 2009.

 

  II-6  

 

 

  (5) Filed as an exhibit to the Company’s Form 8-K filed August 30, 2012.
  (6) Filed as an exhibit to the Company’s October 2006 Form SB-2.
  (7) Filed as an exhibit to the Company’s Form 8-K filed July 17, 2015.
  (8) Filed as an exhibit to the Company’s Amendment No. 1 to Form SB-2, filed January 31, 2007, No. 333-138025.
  (9) Filed as an exhibit to the Company’s Form S-8, filed October 23, 2007, No. 333-146874.
  (10) Filed as an exhibit to the Company’s Annual Report on Form 10K for the Year ending December 31, 2008.
  (11) Filed as an exhibit to the Company’s Annual Report on Form 10K for the Year ending December 31, 2009.
  (12) Filed as an exhibit to the Company’s Annual Report on Form 10K for the Year ending December 31, 2010.
  (13) Filed as an exhibit to the Company’s Form 8-K filed June 1, 2011.
  (14) Filed as an exhibit to the Company’s Form 8-K filed June 3, 2011.
  (15) Filed as an exhibit to the Company’s Form 8-K filed November 10, 2011.
  (16) Filed as an exhibit to the Company’s Form 8-K filed July 30, 2012.
  (17) Filed as an exhibit to the Company’s Form 8-K filed December 9, 2013.
  (18) Filed as an exhibit to the Company’s Form 8-K filed March 21, 2014.
  (19) Filed as an exhibit to the Company’s Form 8-K filed August 25, 2014.
  (20) Filed as an exhibit to the Company’s Form 8-K filed May 28, 2015.
  (21) Filed as an exhibit to the Company’s Form 8-K filed July 15, 2015.
  (22) Filed as an exhibit to the Company’s Form 8-K filed July 17, 2015.
  (23) Filed as an exhibit to the Company’s Form S-8 filed May 23, 2016.
  (24) Filed as an exhibit to the Company’s Form 8-K filed November 16, 2016.
  (25) Filed as an exhibit to the Company’s Form 8-K filed January 3, 2017.
  (26) Filed as an exhibit to the Company’s Form 8-K filed August 25, 2017.
  (27) Filed as an exhibit to the Company’s Form 8-K filed April 4, 2018.
  (28) Filed as an exhibit to the Company’s Annual Report on Form 10-K for the Year ending December 31, 2019.
  (29) Filed as an exhibit to the Company’s Form 8-K filed August 2, 2018.
  (30) Filed as an exhibit to the Company’s Form 8-K filed September 26, 2018.
  (31) Filed as an exhibit to the Company’s Form 8-K filed August 5, 2019.
  (32) Filed as an exhibit to the Company’s Form 8-K filed December 10, 2007.
  (33) Filed as an exhibit to the Company’s Form 8-K filed April 20, 2020.
  (34) Filed as an exhibit to the Company’s Amendment No. 1 to Form S-1 filed February 7, 2020, No. 333-235998.
  (35) Filed as an exhibit to the Company’s to Form S-1 filed May 6, 2020, No. 333-238035.

 

  (b) No financial statement schedules have been provided because the information is not required or is shown either in the financial statements or the notes thereto.

 

  II-7  

 

 

Item 17. Undertakings.

 

The undersigned registrant hereby undertakes:

 

  (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

  i. To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
     
  ii. To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
     
  iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

 

  (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
     
  (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
     
  (4) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

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