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  • Image Sensing Systems’ (ISNS) meteoric rise on the heels of DGLY is totally unwarranted. INSY does not sell ANY body-worn cameras, a fact we confirmed after contacting its personnel.
  • Managers of a special situation fund that disclosed ownership of 859,646 ISNS shares in July 2014 may agree with our conclusion, recently liquidating 57% of the fund’s position. (source 3).
  • ISNS’s recent financial growth has been unexciting and the company is expected to lose money both in 2015, and for the next six quarters. (source 1).
  • Shares of Vicon Industries, Inc. (VII) have also been riding the Digital Ally, Inc. (DGLY) hype. We also confirmed they have nothing to do with body-worn cameras.
  • We think it is only a matter of time before investors send ISNS shares back to earth, and we caution that we believe there will be bag holders.

Unfortunately, many investors are rallying shares of ISNS as a play related to DGLY and GoPro (NASDAQ:GPRO). Both of these companies make body-worn camera/video products that have been pushed into the spotlight due to recent police conflicts with public protesters.

Wearable video cameras for police officers, serving a similar function to that of dashboard cameras, are becoming more commonplace and potentially an industry standard.. For this reason, DGLY is aggressively targeting law enforcement agencies as potential customers of the company’s products.

But there is one problem: ISNS’s product line is totally different than DGLY’s and has nothing to do with the body-worn camera/video products that capture live action. The company does absolutely nothing in the new innovative body-worn camera market segment. We contacted the company to confirm this fact and we suggest investors do the same. The company’s products are largely geared towards reading licensing plates for data analysis, traffic management, and parking solutions.

DGLY reported reduced sales and significant losses for its Q1 & Q2 (source 4), as budgetary issues at law enforcement agencies are partly to blame for these poor results (source 6). ISNS is also plagued by this issue and since it can be argued that license plate recognition (“LPR”) products infringe on rights to privacy (as opposed to DGLY products that can protect citizen’s rights), law enforcement will be more inclined to loosen the purse strings for DGLY products. In its SEC filings, ISNS discusses the “risk and the negative impacts” these factors are having on its sales. We can add to these observations that ISNS is losing money, has not meaningfully grown its sales in three years, has been missing analyst estimates, is expected to continue to post losses in 2015 and has limited visibility into future financial performance.

On a side note, shares of Vicon Industries, Inc. (NYSEMKT:VII) have more than doubled in recent days amid the Digital Ally, Inc. (NASDAQ:DGLY) hype. We e-mailed the company who told us they “do not manufacture cameras worn on the person” and that they have “no plans that [they] are aware of” to do so in the future. VII is losing money and its revenue has been in falling sharply since 2007 (source 5).

We believe it’s just a matter of time before the momentum investors who have no clue what ISNS and VII actually do will run for the exits.

So, why have ISNS shares risen over 125% in the last 3 months alone and why should they retrace a good deal of this move?

What’s All the Hype About?

The initial public offering of GPRO in June 2014 is one of the reasons we published a bullish article on Voxx International (NASDAQ:VOXX) on July 30, 2014 which has introduced its own body-worn camera to compete with GPRO.

“Under-the-radar catalysts in fiscal Q3 2015, when VOXX launches its 360Fly, a 360-degree panoramic video camera (“action cameras”), which has been described internationally online as not only a threat to GoPro, but possibly a GoPro killer. The product has received rave reviews at CES.”

The August 9, 2014 police shooting death of Michael Brown in Ferguson Missouri has added considerable attention to the body-worn camera/video sector.

The performance of DGLY over the past several days continues to highlight the excitement investors have over the body-worn device sector. As a product of this excitement, shares have risen over 700%, since the Michael Brown incident. DGLY makes body-worn camera/video products that it sells to law enforcement agencies and other security organizations, as well as to consumer and commercial fleet operators through direct sales and third-party distributors.

DGLY management has secured some key contacts and provided bullish guidance for 2014. Here is a quote from an August 29, 2014 8-K:

“In an article in USA Today on August 28, 2014, Stanton E. Ross, Chairman, President and Chief Executive Officer of Digital Ally, Inc. (the “Company”) was quoted as stating that the Company’s revenues in fiscal 2014 will approach $22.5 million. Mr. Ross made such forecast based on current and expected level of future activity and other information currently available. He stated that inquiries from potential customers regarding the Company’s audio/video surveillance products had increased approximately fivefold in the period immediately following the events in Ferguson, MO.”

This guidance, combined with the “hype” has helped push the stock to the highs that investors are currently enjoying.

Special Situation Fund Exits More Than Half its Position

If investors don’t want to heed our warning they may want to consider that Austin W. Marxe and David M. Greenhouse (collectively AD), managers of several special situation funds, have used the move higher in ISNS to begin dumping ISNS shares held in some of their funds.

On July 9, 2014 a 13G was flied disclosing that three AD funds owned 859,646 shares of ISNS, or a 17.3% ownership interest. Now, just about two months later, a form 4 filed on August 28, 2014 shows that AD has liquidated 488,892 of these shares. We don’t think many investors are aware of this event, since form 4 filings are not shown as a default view at In essence, these major inside holders seem to think that this run up in ISNS stock is a good enough impetus to sell, and they are offloading their shares onto the public at what we believe to be inflated prices.

The ISNS Party Should Not Last

Investors seem to be latching onto shares of any company that sells security products, even though they have nothing to do with the DGLY hype based around wearables.

The genesis of ISNS’s product line-up centers around traffic management and License Plate Recognition applications, not around taking live action video or pictures of officers in the line of duty. Here is the company’s product list from its web site:

“Traffic Management: Overwhelming road traffic and its attendant problems are among every city’s most challenging issues. To move traffic safely and efficiently, you need a company that’s out front, accelerating toward more effective ITS solutions. That’s Image Sensing Systems.

Crime: Image Sensing Systems offers you the most sophisticated above-ground fixed and mobile cameras, capable of reading hundreds of plates simultaneously and, in some cases, capturing details like the vehicle’s make, model and color. CitySync Safety is an innovative LPR back office system. CitySync Mobile is a turn-key, automated license plate recognition (LPR) for police departments.

Parking: Our above-ground Autoscope cameras coupled with our back office software solutions give you a clear-eyed look at all the goings-on at your facility.

Security: Our high-fidelity above-ground cameras capture license plate numbers while working seamlessly with our back office analytics. Data is superbly managed and analyzed. Access is automated. Vehicle images are logged. Frequent visitors are tagged. Vehicles of interest trigger alarms. Text alerts can be sent. And that’s just the beginning.”

The company does absolutely nothing in the new innovative body-worn camera market segment.

As The Street said (source 7):

“The shooting sparked weeks of protests and civil unrest. More than 147,000 citizens have signed a White House petition to demand legislation that would require state, county and local police to wear cameras while on duty.”

The appeal of some of DLGY’s law enforcement body-worn products is that action is recorded once police officers exit their vehicles making them accountable for their actions. ISNS’s crime/police product is more like a standalone “Big Brother is watching you product,” with the purpose of reading license plates for data aggregation and analysis. While useful, it is certainly not the new “sexy” explosive growth story DGLY is pitching. We believe this to be an extremely important distinction that investors need to wrap their heads around.

What that Street story didn’t mention, interestingly enough, was peoples’ views towards license plate identification activities. We would bet that the majority of people would be opposed to broad types of surveillance, versus the personalized accountability that comes with individual police cameras. We believe this to be the tulip mania craze all over again.

Many citizens oppose Big Brother spy tactics, but would welcome a product where law enforcement is seemingly held in check. In a time where budgets are tight, government agencies need to consider this reality when doling out money for law enforcement products.

In fact, ISNS acknowledges this risk factor in its 10-K for the period ended December 31, 2013.

“The use of video and LPR products and systems has been challenged, limited and banned under existing laws, ordinances and regulations and constitutional provisions protecting privacy rights. In addition, governments and governmental agencies have stopped or suspended their use of LPR systems. For example, Maine, New Jersey and Virginia have laws limiting the use of LPR systems; New Hampshire bans their use; legislation has been proposed in Minnesota limiting the use of data collected by LPR systems; and the Boston Police Department has indefinitely halted its use of LPR systems. In addition, laws, ordinances, regulations and constitutional provisions may be adopted in the future to limit the use of video and LPR products and systems. These existing and new laws, ordinances, regulations and constitutional provisions could negatively affect the acceptance and sale of our video and LPR products and systems and thus have a negative effect on our financial condition and results of operations.”

We don’t know when the party is going is to end, but once investors realize that they are not getting anything remotely close to DGLY by owning ISNS, we believe they may run for the exits.

Investigation Matter

Additionally, in Note 15 of ISNS’s 2013 10-K filing (source 2), the company disclosed a Polish investigation into the its’s subsidiary. The investigation is a result of alleged violations of Polish law involving tender and corruption relating to a project in Lodz.

“As previously disclosed, Polish authorities are conducting an investigation into violations of Polish law related to tenders in the City of Łodź, Poland. In December 2012, the regional prosecutor charged two employees of Image Sensing Systems Europe Limited SP.Z.O.O., our Polish subsidiary (“ISS Poland”), with, among other things, criminal violations of Polish tender and corruption law related to a project in Łodź. Neither the Company nor any of our subsidiaries has been charged with any offense. A Special Subcommittee of our Audit Committee comprised solely of independent directors has retained independent counsel and accounting advisors to conduct an investigation focusing on possible violations of Company policy, internal controls, and laws, including the Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act and Polish law. This investigation is ongoing, and we have voluntarily disclosed this matter to the Securities and Exchange Commission and the Department of Justice.

We are cooperating with the Polish prosecutor and intend to cooperate with any other governmental investigation into these matters. We have taken remedial actions, including ending the employment of the two Polish employees, and we are assessing and implementing enhancements to our internal policies, procedures and controls. We cannot predict the outcome of this matter at this time or whether it will have a material adverse impact on our business prospects, financial condition, operating results or cash flows.”

The company spent $3.7 million on this expense in 2013 and gives itself a pat on the back saying they’ve “voluntarily disclosed” this matter. We believe anything costing a company of this size $3.7M annually is material enough to have been disclosed in the first place.

Further, the company goes on to comment that it is unsure of how much money this matter could cost them in the future:

“General and administrative expense increased to $6.3 million or 23.9% of total revenue in 2013, from $5.2 million or 20.7% of total revenue in 2012. General and administrative expenses increased in 2013 mainly as a result of legal and other professional fees related to the investigation and remediation actions described in Note 15 of our Notes to Consolidated Financial Statements set forth elsewhere in this Annual Report on Form 10-K and severance costs related to the separation from former employees. Our direct costs related to the investigation were approximately $3.7 million for the year ended December 31, 2013 and immaterial in 2012. We are unable to determine the likely outcome or range of loss, if any, from the investigation, or predict with certainty the timeline for resolution of the investigation. We anticipate that annual general and administrative expenses will decrease as a percentage of revenue in 2014 as compared to 2013.”

We’re sure that these risks, buried deep in the 10-K, are cloaked behind the hype of the stock’s recent run. Paying up for a stock with this type of uncertainty is a risky proposition.

ISNS Near-Term Growth Outlook

ISNS experienced respectable growth in sales between 2003 and 2010. Since 2010, sales growth has been anemic, culminating in a non-GAAP loss of $10.4 million in 2013. Losses have continued into 2014.

Period Ending Full Year Dec 31, 2013 Q1 March 31, 2014 Q2 June 30, 2014
Non-GAAP (Loss) ($10.4M) ($3.2M) ($1.0M)
Earnings per share (loss) ($2.10) ($0.64) ($0.20)

While management expects financial performance to improve going forward, analysts only expect a modest increase in sales to $27.4million in 2015, and that the company will still lose money to the tune of $0.69 per share (source 1). Investors with expectations that ISNS will easily meet analysts’ estimates and that it is in a position to experience operational consistently may be taking a leap of faith.

Additionally, ISNS missed Q1 and Q2 2014 EPS estimates by a large margin (source 1):

Earnings History Sep 13 Dec 13 Mar 14 Jun 14
EPS Estimate (0.08) (0.19) (0.22) (0.05)
EPS Actual (0.21) (1.95) (0.56) (0.22)
Missed By 0.13 1.76 0.34 0.17

The following commentary from the company’s 2013 10K filing highlights the difficulty in blindly assuming that ISNS is in position to report consistent growth sales and earnings:

“Because the majority of our end users are governmental entities, we are faced with challenges related to potential delays in purchase decisions by those entities and changes in budgetary constraints. These contingencies could result in significant fluctuations in our revenue between periods. The ongoing difficult economic environment in Europe and the United States is further adding to the unpredictability of purchase decisions, creating more delays than usual and decreasing governmental budgets, and it is likely to continue to negatively affect our revenue.


To be fair, we don’t think ISNS is touting itself as a body-worn camera player to begin with, it is the misinformed investors that have enabled this story to spiral out of control. We would not be surprised if the company issued a press release specifically stating that it has no ties to the body-worn camera industry in order to try and restore some normalcy to its trading.

We believe that once the hype over DGLY subsides, investors in ISNS will quickly come to the harsh reality that they are buying this stock for all the wrong reasons. Finally, we think a large “in the know” institutional player has taken advantage of this unique information arbitrage opportunity to lock in profits before the market comes to the same conclusion that we have.


  1. ISNS Analyst Estimates (source: Yahoo! Finance)
  2. 10-K For the fiscal year ended December 31, 2013
  3. Insider Transactions (source: Yahoo! Finance)
  4. DGLY Quarterly Results (source: Yahoo! Finance)
  7. – “Why Image Sensing Systems (NASDAQ:ISNS) Stock Hit a One-Year High Today

Disclosure: Short ISNS


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