We Believe More Than 100% of FFRI’s Profit Increase Is Due to Questionable Accounting from Government Subsidies

We are short FFRI because we think it is using misleading accounting to give the appearance to investors that it has made a turnaround in revenues and profits. However, our research shows FFRI’s revenues would have fallen by 1% without this questionable accounting. The accounting firm that approved these practices was later banned for six-months for “grossly improper” operations. We believe the real key to FFRI’s apparent success is the use of a private consortium led by FFRI’s President as a conduit for its government subsidies that obscures real expenses associated with these funds.  

FFRI is a recipient of “K Program” funds from the New Energy and Industrial Technology Development Organization (NEDO) which offers subsidies that “strengthen advance cyber-defense functions and analytical capabilities” for Japan. However, FFRI does not receive the funds directly. The conduit for its funds is the Cyber Research Consortium (CRC), which was founded by FFRI and is managed by FFRI’s President. CRC income represented 20.5% of FFRI’s revenues in FY3/25. We calculate that without these funds, intended as an R&D offset, FFRI would have reported losses instead of profits.

We analyzed 9 other government subsidy recipients. In each case, subsidies offset R&D expenses and had no material impact on profits. FFRI is different. While FFRI’s revenues increased by ¥623 million from CRC payments, shockingly, its R&D expenses decreased by 13% in FY3/25. We believe there are two likely explanations; either FFRI is receiving subsidies intended to increase R&D while cutting R&D spend (which would be very bad behavior); or FFRI is recording their reimbursements as revenues while obfuscating the related R&D expenses by capitalizing them or running them through the CRC.