Napco Security’s stock (NSSC) is priced to perfection. Trading at >9x Sales, Napco’s premium valuation resembles a booming tech company rather than an old-school industrial company in a highly competitive industry. Napco has reported 26 straight quarters of revenue growth (excluding two quarters in Covid) and has reported beating EPS estimates in 14 out of the last 16 quarters. That is a feat that not even Apple, Google, and Nvidia have achieved and which raised our suspicions.
When something seems too good to be true, it usually is.
In an explosive new lawsuit, multiple former employees allege Napco committed accounting fraud for years. Former employees say the alleged financial manipulation was “directed by Napco’s CFO” and was “well known within the company.”
Napco’s business is not complicated. Yet, we found some of the most opaque accounting we have ever come across.
We interviewed former employees, competitors, and industry leaders who repeatedly cast doubt on Napco’s reported financials and corroborated one another. The experts consistently told us they found Napco’s reported gross margins to be unbelievable.
- Former employees allege accounting fraud & financial manipulation.
- The complaint states the alleged fraud occurred for multiple years.
- The CFO issued the directive to do so.
- The alleged fraudulent business practice is characterized as “well-known within the company” and with employees being “afraid to complain.”
- The CFO wasn’t fired, instead he was promoted to COO & CFO.
- Management’s internal joke was that they had 15 months to sell stock before investors figured out that recurring revenue growth would slow.
- Management Sold! – Significant Insider Selling Started ~18 months ago
- CEO & CFO sold 70-80% of shares they owned. >$200 million in last 18 Months.
- CEO & CFO dumped >$108 million right after two of the misreported earnings beats.
- CEO & CFO sold an additional ~$98 million after adding a major distributor and jamming the distribution channel full of inventory which masked declining equipment sales.
- Leading indicator for Recurring Revenue turned Negative 6 quarters ago.
- Declining at an average rate of -18% YoY.
- Napco’s Accounting department consists of:
- VP of Finance, whom the SEC accused of insider trading.
- New Chief Accounting Officer who was Napco’s Audit engagement partner from Baker Tilly, who Napco dismissed and blamed for the restatement—a detail hidden from investors.
- Additional controllers who joined Napco directly from their auditor.
- CFO, who former employees allege directed accounting manipulation.
- Deloitte, Napco’s new auditor, Expressed an Adverse Opinion on the company’s internal controls over financial reporting. The adverse opinion was related to inventory! Former employees accused management of manipulating inventory to hide costs.
- Industry experts & competitors think Napco’s 90% recurring revenue margins are “Unfeasible”
- They allege Napco could be hiding more costs from the income statement on the balance sheet, perhaps explaining the “unfeasible” margins.
- No pricing power. We heard “pricing only goes down” and that Napco is lowering monthly pricing.
- We discovered Balance Sheet anomalies that could unravel Napco’s too good to be true numbers.
- The BS has a growing “non-current inventory balance” that equates to 30% of inventory.
- Could this be a ticking time bomb for a large write-down?
- Napco gives away radios and years of service for free, but is not clear on how they account for these costs.
- These significant costs might be hiding on the Balance Sheet as a “refund liability.”
- The BS has a growing “non-current inventory balance” that equates to 30% of inventory.
- Napco’s Board of Directors displays low quality corporate governance and consists of:
- The CEO’s wife
- One director from the board of an alleged fraud charged by the SEC.
- Another from the board of an alleged pyramid scheme.
- Lapping large one-time revenue boosts NOW:
- The 3G sunset 2022-2023 made Napco temporarily appear to be a growth company.
- A large one-time sell-in to new distributor (which increased distribution by 65%) has been masking the extent of declining equipment sales. That sell-in started in September 2023.
- Napco is set-up to miss their long-term 2026 revenue guidance.
Management boasts about the company’s consistent growth and earnings beats. The restatements have shown this to be false and are just the first alarm to sound. When a growth story seems too good to be true & former employees alleged fraud, investors should run fast.
We are short Napco because:
- We think the management team, which sold >$200 million of stock while misreporting their COGS, is likely hiding more costs on their balance sheet.
- We have never encountered a company that only lies once and only manipulates one accounting metric.
- We believe the former employees who allege years of financial fraud are telling the truth.
- We trust the industry experts who find Napco’s reported numbers unbelievable.
- Napco’s impossible future comparisons mean this growth story is set to break.
Napco is a rare opportunity to short a high multiple boring business (9x Sales!) where the growth is gone, former employees allege fraud, and investors don’t seem to know yet.
Fuzzy Panda Research is Short Napco Security (NSSC)
Fuzzy Panda Research and Fuzzy Panda “Affiliates” are short securities of Napco (NSSC). Please see additional disclosures at end of report and in our terms of service.
Attention Napco Former Employees – We are looking for additional former Napco Employees brave enough to be whistleblowers and expose the truth. Email us at [email protected] if you have tips or want to expose management’s lies. Your anonymity will be fully protected.
What Does Napco Do?
The RadioShack for Commercial Buildings!
Napco is known in the industry as the “free radio company.” Their core business is manufacturing & selling radios. Yes, radios! 9x Sales for a radio company.
Napco’s radios are for commercial buildings and alert emergency services if a fire or break-in is occurring. Napco also sells fire and alarm panels, building access control products, and a locks business (door handles, locks, electronic keypads, etc). Napco also has a recurring revenue service business which comes from customers paying monthly fees to keep their fire and security radios connected to local dispatchers & responders, as is required by law in many jurisdictions.
Does this sound like a competitive, boring, and crowded space? It is!
The business is known for being cut-throat. Distributors push companies hard for quarter-end discounts—there is virtually no room for price increases. Competition includes multiple major industrial conglomerates as direct competitors, such as Honeywell, United Technologies, Johnson Controls, Siemens, etc..
We need to applaud Napco as they found a way to carve out a niche and become an industry leader in the radio segment via two key strategies:
1) A key small innovation was to develop a radio with a dual sim card that also worked with any of the competition’s panels (Instead of one sim card, Napco had two, both a Verizon & AT&T sim card).
2) Napco pushed “free radio” promotions—get the product (or multiple months of service) for free!
They also had some luck. Napco was hurt less badly than their competition by the covid supply chain crises since Napco’s factory was in the Dominican Republic while the competition produced their product in China. Better supply of product plus giving away “free radios” led to Napco winning significant market share during the 3G upgrade cycle. This is when all buildings with 3G panels/radios were forced to install new ones.
Competition has caught up – Our research shows that the competition has caught up. Not only do competitors now offer their own dual-sim card radios, but they also have increased the competitiveness of their own pricing.
Even worse for Napco’s investors, the 3G upgrade cycle that supercharged the company’s growth from 2021-early 2023 is now long gone.
Part I: Former Employees Allegations of Accounting Fraud & Financial Manipulation
New filings in a Napco lawsuit reveal damning allegations by multiple former employees. The former employees state that they witnessed a “Fraudulent Scheme to Manage Napco’s Net Income.”
The three former employees allege in the complaint that:
- Senior Management directed the scheme. CFO & Sr VPs instructed employees to conduct this “fraudulent scheme.”
- Scheme inflated Napco’s net income by understating COGS and overstating inventory.
- Napco engaged in the practice for years.
- Employees were told to keep the practice “quiet”
These allegations provide a shocking contrast to the explanation that Napco gave investors for their accounting restatement, which they passed off as a FIFO vs LIFO mistake during a time of fluctuating COGS. Napco also blamed their auditor, Baker Tilly.
How the Alleged Scheme Worked:
“Financial Manipulation to Inflate Net Income” – booking COGS for Product Sales as Inventory
The complaint states that senior Napco leadership (CFO and VPs of Sales & Operations) instructed employees to “withhold shipments of sold inventory.” Napco’s leadership allegedly instructed employees not to ship sold product until after quarter end. Somehow Napco’s weak financial controls enabled the CFO to recognize revenue for the product sales yet categorize the associated COGS as inventory.
The directive was issued by [Kevin] Buchel (Napco’s CFO):
“Napco had been engaging in the practice for years” … it wasn’t just the 3 quarters they restated
Napco only restated 3 quarters of inventory and COGS in 2023 from Q1 to Q3, yet former employees claim Napco has engaged in this practice for YEARS.
The complaint states that the alleged fraudulent business practice was “well-known within the company” & “characterized as intentional.” Former employees said they were “afraid to complain” and were “instructed to keep this shady practice “quiet””
Industry Experts Said “Someone Should’ve Went to Jail” … Instead of Being Prosecuted, They Were Promoted
Management blames their accounting restatement on their former auditors, Baker Tilly. They told investors it was an honest mistake and their own accounting systems accidentally did not capture the correct COGS during a period with volatile input costs. Management essentially tries to pass it off as an innocent LIFO vs FIFO issue.
When we spoke to Industry experts and asked if the restatement could have been accidental. They told us that someone at Napco “Should’ve went to jail.”
“they weren’t reporting, the cost of goods sold properly and the excuse I read in one of the trade magazines I thought was ridiculous … Someone [at Napco] should’ve went to jail. That’s what I was thinking. I mean, seriously, a few of my friends in the industry were like, somebody’s going to go to jail over this, right? I mean this.People have gone to jail for a lot less.
CFO Was NOT Fired, Instead He was PROMOTED to COO + CFO!
Kevin Buchel, the CFO, who former employees alleged issued the directive to manipulate shipments and COGS, was promoted to President & COO in addition to his CFO duties in May 2024 after the restatement. Kevin is now fully in charge of both Finance and Operations.
Napco’s founder and CEO called Kevin’s promotion “well deserved.”
Part II: Growth is Done
Lead Indicator for Recurring Revenue Has Been DECLINING for 6 quarters!
“you want to make sure that the hardware radio wise continues to keep growing because that’s an early indicator of your recurring.”
~Former Senior Napco Employee – A
Investors have given Napco a premium multiple for past impressive recurring revenue growth ~36% a year from FY 2020 to FY 2023. This growth has come from cellular carriers’ 3G sunset, which forced commercial real estate customers to upgrade all of their buildings’ emergency radios. We believe those impressive growth rates have come to an end.
In fact, for the past 6 quarters, Napco’s business segment (Intrusion & Access Alarms) that is the leading indicator for recurring revenue, radio sales, has been DECLINING at -18% YoY.
Recurring revenue’s growth has already shown signs of starting to slow going from consistent HSD QoQ to just 4.4% QoQ in Q4. Management’s extrapolation of July recurring revenue for Q1-2025 indicates they expect it to continue to fall and only grow 3-4%.
Formers Say Recurring Revenue Lags by ~15 Months — Expected to Slow Dramatically for The Foreseeable Future
Napco formers told us that recurring revenue lags sales of radios by an estimated 15 months.
“[Recurring revenue] punches in like 15 months after [Napco] sold the unit”
~ Former Senior Napco Employee – A
Source – Graphic Created by www.fuzzypandaresearch.com
There’s a long delay in the recurring revenue from the radio unit sale. This recurring revenue delay has been explained as being due to the long sales cycle (Napco -> Distributor -> Dealer/Installer -> End Customer). Napco’s accounting and disclosure is very opaque, but we think there might be an additional delay due to Napco giving away “free months of service” when you buy a radio.
Radio Sales slowed ~6 quarters or 18 months ago. This means that Napco’s recurring revenue growth rate is set to slow dramatically in these next 2 quarters.
“If the recurring falters, it’s hard to make it up with hardware … So, I guess what I’m saying is when it does go down, recurring, it’s going to be accelerated because you’re not going to be able to make it up with hardware”
~ Former Senior Napco Employee – A
Likely to Miss Long-Term 2026 Guidance for Recurring Revenue.
Meanwhile, management is indicating to the street that Napco can get to $150 million of recurring revenue in their long-term projections. This would equate to service revenue increasing by 92% and continuing to grow at the same pace as during the 3G upgrade cycle, which we find highly unlikely.
We’ll take the under against that bet. And it appears so will Napco’s Management as they have been dumping shares of Napco’s stock hand over fist.
Could the decline in radio sales explain why management would be willing to manipulate the financials?
Does it explain the massive insider sales?
Part III: The Joke’s on Investors – Management Joked They Had “15 Months to Sell Stock Before Investors Discovered the Slow-Down”
- Large Insider Sales Started > 15 Months Ago
- >$200 Million Sold by CEO and CFO
- 70-80% of Their Holdings
Napco management had always been major owners of their own stock. At least until recently. Large insider sales began during the period when the alleged accounting fraud was occurring and right as the leading indicator of recurring revenue growth, radio sales, was beginning to decline.
We don’t think this is a coincidence.
In fact, a former employee told us that management would joke that they would always have a “good head start to run out of here.” The former employee clarified that a drop in radio unit sales would give senior employees a 15 month heads up before the stock market realized a slowdown in recurring revenues was going to occur. That decline started >15 months ago.
“I used to tell Dick, you know, I said, you know, we’ll have a good head start to run out of here.When the units go down, you’ll know that 15 months from now recurring is going down. So yeah, [Dick] liked that one…I don’t know, call it, call it a year. Maybe a little more. Now I call it a year and a half because. Because fire is more.”
~ Former Senior Napco Employee – A
Timeline:
- October 2022 to March 2023 – Recurring Rev’s Leading indicator slows then goes negative
- November 2022 – Q1-2023 – Napco announces a False EPS beat (later restated to an EPS miss)
- February 2023 – Q2-2023 – Napco announces a False EPS beat (later restated to an EPS miss)
- August 2023 – Restatement of Q1-Q3 2023 financial results; stock collapses.
- September 2023 – Adds “bad distributor” out of desperation – # of Distributors increases by 65%
- Stock rebounds on Q4-2023 and Q1-2024 EPS beats & Equipment sales recovering
In total CEO sells ~77% of his shares and CFO sells ~69% of his shares.
“Dick (CEO) is very much a gamer. And, you know, he doesn’t like to lose.
~ Former Senior Napco Employee – A
Large sudden insider sales by management are an early sign of trouble, especially in a business that obscures its leading indicators of growth from investors.
Part IV – More Peculiar Accounting Issues
- Recurring Revenue’s “Unfeasible” Gross Margins
- Where are the Free Radio Costs Hiding? Are More COGS on the Balance Sheet?
- WTF is Non-Current Inventory? Sounds Like a Large Write-Down in Waiting
How can you trust the financials of a company with opaque accounting and whose former employees allege has manipulated their financials?
In our experience companies that commit accounting fraud never manipulate only one metric.
Through the restatement, Napco is already admitting to filing incorrect financials. But are investors really supposed to believe they have come clean on everything?
90% Gross Margins that Industry Experts Think Are “NOT Feasible”
Napco reports its gross margins for their services segment are currently running greater 90%. When we asked competitors, experts, and other industry participants what Napco was doing differently to earn such high gross margins in their recurring segment, they were all bewildered. Not only could no one explain it, they told us that 90% Services Gross Margins were “Not Feasible.”
“the (margins) for monitoring, which is sponsored by people like Napco certainly would be high, but 90%, I don’t see it because you still have to have a manned station. You still have to match all the other requirements for central station monitoring. And that’s not going to be replaced by AI. That’s a human intervention. You have to have somebody sit there and answer the phone and dispatch the police or fire. So. I don’t see how 90% is really feasible for services … it’s just NOT feasible. It’s not feasible”
~Industry Executive – F
We asked another industry expert at a monitoring company who partners with Napco, Honeywell, etc. to explain to us how Napco is able to earn 90% Gross Margins on their services business, and the expert said that “Nobody has an answer.”
For the life of me, I don’t understand [Napco’s] numbers, and I have been told that people have inquired with Napco as to how this can be, and it’s a consistent answer that nobody has gotten an answer to.
~ Fire & Security Monitoring Executive – C
Alarm.com has 800% the amount of recurring SaaS & license revenue as Napco, yet it has margins that are 500bps lower than Napco.
The 2024 10-K is the first time we’ve seen Napco add any disclosure on the COGS they book for their recurring revenue. Napco says that COGS include “the cost of operating our network operations center” which is strange given former employees and experts told us the COGS should also include fees paid to AT&T and Verizon for spectrum usage as well as any human monitoring costs in locations where they don’t have 3rd party monitoring.
We especially don’t understand how Napco can report 90% gross margins for their services segment when they give away the radio or the first year of service for free. Is Napco failing to recognize the negative costs associated with the months of service they are giving away?
Where are the Free Radio/Service Rebates? Are More COGS Hiding on the Balance Sheet?
Napco’s opaque accounting neglects to disclose how the company accounts for their “free radio” promotion. But it appears that they could be booking the costs from the “free radio” program as a current liability on the balance sheet.
Napco is known in the industry as the “free radio company.” They drive sales by giving their product away for free.
Sometimes the free radio promotions took the form of free future service months: “it almost equated to either getting a free radio or let’s say the first year free.” At other times the promotions were based on a rebate post purchase, “you got a big credit that almost zeroed [the cost] out.”
The rebates on specific radios can be even higher than that. A sales video shows a large stack of Napco radios being sold on a BOGO (Buy 1, Get 1 Free) promotion where the radios get a $100 rebate and only have a $2.95 monthly fee. That’s almost 3 years of service for free excluding the BOGO.
Is Napco Hiding The “Free Radio” Costs on their Balance Sheet?
Napco does not disclose how they account for their promotional giveaways. However, their limited financial disclosures indicate that Napco could be hiding their giveaway promotions on the balance sheet as a “refund liability.”
It appears this practice is instead of either taking a reduction in the revenue recorded or taking a hit to gross margins in the Equipment Sales or the Services Segments.
We’re concerned Napco might be recognizing revenue when they ship a “free radio” to a distributor, but never accounting for the associated costs and negative gross margins on the income statement for giving those radios away.
Does Pricing Power Explain the High Margins? No!
- Experts State there is No Pricing Power
- Reports of Pricing Declining ~20%
We investigated whether Napco’s great service gross margins can be attributed to pricing power once the device was installed and customers were on auto bill.
Competitors told us they heard of Napco lowering monthly prices by ~20%:
“I was just meeting with a customer. They said that Napco is lowering their monthly fee to $9, I think it used to be 11 or 12”
~ Industry Executive – H
Industry experts told us Pricing Only Goes Down
“you make a slight price increase, [customers] panic… And in fact, it really hasn’t. It’s never gone up. It’s gone down… the thing about this industry is that they’re cheap. So, you know, everybody looks at pennies, not dollars.
~ Fire & Security Monitoring Executive – D
“No, I mean and increase it. No, it’s. You know, it’s a very competitive market that is going to be, like I said, in my opinion, it’s only going to the price is going to trend down”
~ Industry Executive – F
“No, it’s a mystery. I’m going to tell you that is a mystery because. I asked a buddy of mine. I said Has Napco had a rate increase. They said no, no they haven’t.”
~ Fire & Security Monitoring Executive – C
What is this BS Asset? Non-Current Inventory
Napco reports a large and growing line item on their balance sheet called “Non-current inventory.” Our first thought is “What is this BS on the Balance Sheet?”
Basic accounting rules state inventory should be reported as a current asset and when it’s obsolete it should be written down. Inventory is almost always a current asset.
We believe that the growing non-current inventory balance represents a potential large write-down hiding on Napco’s Balance Sheet.
- Non-Current inventory is $15.1 million
- It has grown by 166%! From ~14% of total inventory in FY 2020 to ~30% today.
Inventory Obsolesce Controls – Material Weakness: A material weakness in Napco’s accounting that their auditor previously flagged when Napco had to issue a restatement for FY 2021, 2020, 2019 was around their Inventory obsolesce controls.
We searched competitors’ filings and we found that:
- None of Napco’s competitors report “Non-Current Inventory” on their own balance sheets.
- Less than 1.5% of companies report a similar line item. We searched all SEC filings for companies >$300m and found very few companies reporting “non-current inventory.” Of those 1/3 were pharma/bio-tech; 1/3 were Oil & Gas/Metal & Mining and others were foreign companies.
If Napco’s finance team allegedly thinks it’s ok to hide their COGS in inventory, what assurance can investors possibly have that Napco will properly write down obsolete inventory?
Part V: The Accounting Team – New Chief Accounting Officer = Dismissed Audit Partner! VP of Finance Caught for Illegal Insider Trading
- Dismissed Audit Engagement Partner from Baker Tilly Quietly Named the Chief Accounting Officer
- He was Granted $1 million of Stock Options
- VP of Finance Charged for Illegal Insider Trading by the SEC
Napco announced in May 2024 they hired Andrew Vuono to be Chief Accounting Officer. Napco conveniently forgot to mention to investors that Andrew had previously been their auditor. Andrew was Napco’s audit engagement partner at Baker Tilly’s from FY 2019 to FY 2023 who they dismissed and blamed for the restatement.
The Auditor joined Napco & was granted $1 million in options < 1 year after signing off on Audit!
Conflict of Interest = Definitely; Sarbanes-Oxley Violation = Probably?
The timeline of Andrew Vuono’s hiring appears to be in direct violation of Sarbanes-Oxley’s explicit definition of Conflicts of Interest. There is a 1 year cooling off period during which executives such as the Chief Accounting Officer CANNOT have been employed by the company’s audit firm during the prior 1 year.
- October 2023 – Dismissed as Napco’s Audit Partner
- May 2024 – Hired as Napco’s Chief Accounting Officer
Napco’s Audit Partners Also Connected to $1 Billion Fraud
Andrew Vuono’s background before Baker Tilly is interesting. Mr. Vuono was at Holtz Rubenstein Reminick & joined Baker Tilly via a merger. At Holtz, webarchive shows the Mr. Vuono was one of two audit partners in Holtz’s public companies practice. The other Holtz partner also previously worked as Napco’s engagement partner. Holtz Rubenstein Reminick was the auditor in an alleged $1 billion fraud called Synergy Brands where the CEO went to prison. Holtz was sued by banks and investors for negligent audits. A PCAOB inspection of Holtz Rubenstein uncovered significant deficiencies including performing insufficient procedures to test revenue.
Napco’s VP of Finance and Controller caught for Insider Trading by SEC & remained employed at Napco
Napco quietly disclosed that its VP of Finance and Controller was charged with insider trading by the SEC for dumping stock while under position of MNPI right before Napco missed quarterly earnings. Astonishingly, Napco says that as of the date of that filing, he remained a Napco employee.
Other Napco finance employees worked at their former auditor:
Napco’s current controller also previously worked at Baker Tilly, Napco’s long-time auditor and the auditor that was dismissed and blamed for the financial restatements. The former assistant controller also joined Napco directly from Baker Tilly.
Are Accounting Systems Fixed? Recent Napco Job Post Reveals NO!
Employees Wanted “To Select & Implement A New Accounting System”
It appears Napco has not implemented a new accounting system considering a job post from 1 month ago declares they are looking to hire an Accounting Manager that has “Experience with implementing a new accounting system, including system selection…”
Deloitte – New Auditor – Napco “Upgraded” from Material Weaknesses in Financial Controls to “Adverse Opinion”
Napco first audit with their new auditor Deloitte just occurred and Napco’s list of material weaknesses in financial controls by Baker Tilly got “upgraded” by Deloitte to an “adverse opinion.”
Deloitte Expressed Adverse Opinion on Financial Controls – Inventory Related!
Deloitte’s adverse opinion on Napco’s financial controls for the 2024 10K was related to material weaknesses in how Napco calculated the reserves for excess and slow-moving inventory.
It seems like a very large coincidence that former employees also stated that Napco was manipulating their COGS and inventory levels.
Higher risk of write-downs? We believe the new auditor increases the likelihood that Napco could need to take significant write-downs on obsolete inventory and could be forced to properly account for additional costs that could be hiding on their balance sheet.
While undergoing their first audit review with Deloitte Napco also reported a Q4-2024 EPS miss for the first time in a long-time. We think that going forward having a big four auditor increases the risk of Napco not being able to be “creative” with their quarterly numbers and will create increased scrutiny on their opaque accounting.
Formers Say Management Is Meticulous with Numbers Yet Management Blamed the Auditor
We could see a major accounting error like Napco’s happening at a company where the management team is completely checked out, but former employees told us the exact opposite about the CEO & CFO.
Dick Soloway has been described to us as a CEO who micromanages purchasing and is well aware of all input costs.
- “here’s some insight into Dick…he literally was in charge of purchasing. So here he is, right. He’s the CEO of the company or whatever… but he was literally micromanaging purchasing since I got there. ~Former Senior Napco Employee – A
Kevin Buchel (CFO, COO, and President), Dick’s right-hand man, has been was described by a former Napco VP as a CFO that is exceptional with numbers.
- “Kevin (CFO) is meticulous in terms of statistics and numbers” ~Former Senior Napco Employee – B
- “They (CEO & CFO) question the cost of everything…these guys are very cost conscious” ~Former Senior Napco Employee – B
How could a CEO who micromanages purchasing and a CFO (& now COO) who is meticulous with numbers accidentally book the incorrect cost of goods sold? We believe it is even more suspicious that the restated quarters coincidentally came at times where Napco was set to miss Wall Street’s earnings estimates.
We believe the explanation offered by the former employees that management perpetrated a scheme to manipulate their financials seems like a more obvious answer.
We Don’t Expect the Board to Stop Fraud:
Napco’s Board Members include:
- The CEO’s Wife
- Director of Company Alleged to be a Pyramid Scheme
- Director of Company Accused of Fraud & Charged by the SEC
Napco’s Board constitutes multiple members who do not inspire confidence in their ability to hold the CEO and CFO accountable. Not only are Napco’s CEO and CFO both on the board of directors with the CEO being Chairman, but so is his wife!
Donna Soloway, Wife of CEO and Board Member
CEO Dick Soloway’s wife, Donna Soloway, has sat on the board of directors since 2001. She’s been involved in some industry associations and magazines, but her relationship to the Chairman and CEO presents a clear conflict of interest, undermining her ability to provide unbiased oversight.
Audit Committee’s Financial Expert – Previously Director at Alleged Pyramid Scheme
Andy Wilder is Chairman of the Audit Committee and the board member at Napco that is deemed a financial expert. Andy Wilder’s only other public company board service included being the Chairman of the Audit Committee at YTB International (YTBL).
YTB International settled accusations of being an alleged Pyramid Scheme with the California AG. The company filed for bankruptcy in 2013 (link).
A Former Politician That Previously was Director of Company Charged with Fraud by SEC
David Paterson, NY State’s former blind governor, is one of Napco’s Board Members. We are will refrain from making jokes about a blind board member trying to “find” the alleged accounting fraud because there is nothing funny about independent board members who fail to stop fraud. Luckily SNL & David Paterson himself made jokes for our readers.
Paterson’s resume also includes being:
- Director of a company charged by the SEC with defrauding investors. David Paterson also settled his own charges with the SEC for failing to report stock transactions.
Other Board Members include:
- Rick Lazio – Former US House member who was on the Board of United Guarantee Company. While Rick was on the Board, the CFPB brought an enforcement action against them to stop improper kickbacks paid by the mortgage insurers to mortgage lenders in exchange for business.
- Robert A. Ungar – Local Lobbyist who is listed in a NY Board hearing as being cited for “misuse of office.”
- Paul S. Beeber – a NY lawyer specializing in divorce, family law, and will & trust. We are not sure how any of those legal specialties relate at all to Napco’s business.
Part VI: Absurd Valuation at >9x Sales for a Declining Radio Business + Slowing Recurring Revenue -45% to >70% Downside!
“How are they going to grow from 170 to 300 million? To grow the EBITDA. I would, I would run. I mean, if [the stock] is high now, I’d sell it and get out, I guess is what I’m saying.
~Industry Executive – F
Napco’s valuation implies they are a successful software company, not an industrial company. Peer multiples show that Napco’s stock currently is overvalued vs comparable companies and has significant downside — 45% to >70% Downside.
Normally we would value Napco off of a P/E or EV/EBITDA multiple, but that seems like a poor choice of metric given all the restatements and the allegations of financial manipulation. Thus, we think a FCF Yield or a P/Sales multiple leaves less room for creativity.
Part VII: Set-Up for Future Disappointment – Lapping Large One-Time Items
- Cellular 3G Sunset = Radio Mania;
- Major Distributor Sell-In Started September 2023
The End of “Radio Mania”
Napco’s extreme overvaluation stems from a perfect storm of events leading to multiple one-time boosts in sales. Industry experts told us those events are done. Napco’s market share has stabilized and should be growing at the same rate as their competition, which experts say in best case should grow at ~5% a year.
We give credit to Napco’s management team for having created what our sources say is a very good and reliable product in their Starlink Radio. The dual sim cards that access both the AT&T and Verizon networks were essential for Napco to gain significant market share. The price Napco was charging– “free” –also helped Napco win lots of business during the 3G sunset.
Fire and security radios alert emergency services if a building is on fire or if there is a break-in. Municipalities’ commercial building codes often require buildings to have a fire radio system. The radios alert emergency services either via landline’s (POT lines) or via cellular networks. Most buildings have transitioned to cellular since the monthly service cost is significantly cheaper. When cellular networks (AT&T, Verizon, Sprint/T-Mobile) canceled service for 3G devices, suddenly all of the devices became obsolete. Every commercial building with a 3G emergency radio was forced to upgrade at the same time.
- AT&T’s & T-Mobile/Sprint’s 3G sunset happened in early 2022 (Feb 2022 & March 2022)
- Verizon’s 3G sunset was the last in January 2023
Napco benefited even more than their competitors from the 3G sunset because:
- Better Product – Napco had a better product (dual sim cards) at the time.
- Better Price – Napco sold it for a better price – “Free Radio”
- Better Supply – Had a better supply and availability of product – Since Napco had its own manufacturing facility in the Dominican Republic, this allowed them to better manage through the manufacturing supply chain crisis that resulted from covid and from having manufacturing in China.
Competitors have since caught up on all three of these competitive advantages with most offering a dual sim radio and similar promotional pricing. We have heard M2M’s radio is great, and they are the OEM supplier for Honeywell and Johnson Controls.
Why does this still matter? – The long lag between original equipment radio sales turning into recurring revenue means that the post 3G sunset should finally start showing up in their recurring revenue too.
Lapping a One Time Sell-In Boost That Started in September 2023!
Did Desperation Cause Napco to Add Back ADI “The 800 Pound Gorilla”?
“ADI used extortionist tactics on every other manufacturer…(ADI was) the 800 pound gorilla that was pushing everybody around…they were notorious for demanding the largest percentage discount and cut for taking your product line out there.”
~ Former Senior Napco Employee – A
Napco dropped ADI back in 2004 after working with them for 17 years because they thought ADI was stealing their customers. ADI was known as one of the toughest distributors who pushed for the largest discounts. Independent distributors lauded the fact that Napco dropped ADI and that resulted in increased loyalty from the non-ADI distributors.
However, in the face of slowing equipment sales and a restatement that sent their stock -50% we think management made the decision to bring ADI back out of desperation to prop up their equipment sales.
This increased Napco’s distributor count by 65% overnight and generated a significant one-time sell-in benefit through FY 2024.
Napco added ADI in September 2023 according to a webarchive of ADI’s website and Napco’s distributor list. Even with this one-time boost from adding a new distributor, Napco’s intrusion & access product sales were -17% for the last 4 quarters YoY.
Comparing ADI’s locations to existing distributors we only found 10 locations that were in new markets and didn’t overlap with their current distributors.
We believe adding ADI will be detrimental to long-term profits. More importantly Napco has set themselves up with impossible comparisons as they lap this major one-time sales boost to equipment revenues.
Our Conclusion = Short Napco (NSSC)
We are short Napco because:
- Former employees allege accounting fraud occurred for years.
- Industry experts and competitors say Napco’s growth and margins are “unfeasible.”
- Leading indicator for recurring revenue has been negative for six quarters.
- Napco is lapping extremely tough comps from a desperate decision to add a tough distributor.
- We discovered multiple questionable items within Napco’s opaque accounting.
- Napco’s accounting team is riddled with conflicts
- Deloitte, the new auditor, gave Napco an adverse opinion for their internal financial controls, which is a critical audit matter.
- Napco has a board consisting of members more fit for the company’s microcap beginnings.
- Management sold >$200 million of stock
Napco is a rare opportunity to short a high multiple boring business (9x Sales!) where the growth is gone, former employees allege fraud, and investors don’t seem to know yet.
Fuzzy Panda Research is Short Napco Security Technologies (NSSC)
Appendix A – Some Prima Thesis Creep – A Long-Shot Consumer Hope Story of Napco vs. Amazon & Google
With the 3G sunset in the past the long thesis for many investors has creeped to Napco suddenly winning significant share of the consumer market.
We think it’s highly unlikely that Napco’s Prima product portfolio is going to win out against the DIY security giants from Amazon’s Ring and Google’s Nest. We would be betting on the tech giants with well-established consumer brands. Napco’s own website for Prima reveals some basic tech challenges the company faces. The website is “Powered by GoDaddy.”
In our opinion it’s more likely that Prima products will sell about as well as their new Prima Panic Watch. Napco’s marketing it as “Wearable Panic” and it can cost up to $75.
“Help! I’ve fallen and I need to sell my Napco Stock.”
Remembering iBridge – Napco already tried this and failed
Investors seem to have forgotten that Napco already has a portfolio of consumer cameras, doorbells, and clunky apps in their previous attempt to win in this market. The Napco iBridge portfolio, which management called out iBridge’s products as having a “very bright future” in November 2018.
Meanwhile consumers call the iBridge products “hot garbage” and “junk.” The iBridge has a 2.4 rating on the Apple & a 2.9 rating on Google Play. Napco’s own website for Prima reveals some basic tech challenges the company faces. The website is “Powered by GoDaddy.”
Unnecessary Shoutout to Dr Napco – if somehow you still find yourself in the market for buying a Napco prima product. Don’t hit your wearable panic button; instead call Dr. Napco!
After spending months & months with the horrible atrocities occurring over at Globe Life and on the AIL agents Instagram & TikTok pages we find Dr. Napco a refreshing breath of fresh air. He seems like a lovely sales guy + he has cool hats. Promote this man!
Appendix B: A Long History of Accounting Issues & Material Weaknesses in Financial Controls at Napco
Napco lacking sufficient financial controls and reporting various material weaknesses in their accounting and financial controls has basically become a regular occurrence in their financial filings.
FY 2024 10-K: “Adverse opinion on the company’s internal control over financial reporting”
FY 2024 Q1-Q3: Napco lists THREE Material Weaknesses in internal control over financial reporting. The material weaknesses are regarding:
- Calculation of COGS and inventory.
- Calculation of reserves for excess and slow-moving inventory
- Ineffective control of access for employees & IT related to the financial controls and regarding their financial reporting process. impacts financial controls.
FY 2023 Q1-Q3 – Restatement – due tocalculating COGS incorrectly. Restatement results in Q1 & Q2 reported earnings beats actually being earnings misses.
FY2019-FY 2021 – Restatement – Restatement due to miscalculating reserves for obsolete inventory. Napco restated FY 2021, FY 2020, and FY 2019
2020 – SEC Insider Trading by Napco VP of Finance and Controller – Napco quietly disclosed that its VP of Finance and Controller, was subject of an insider investigation by the SEC for selling stock while under position of MNPI about Napco missing quarterly earnings. Napco says they changed his role at the Company, but he remains an employee.
January FY 2018 – Material weakness in financial controls – “Adverse Opinion on Internal Control over Financial Reporting” – the Company has not maintained effective internal control over financial reporting as of June 30, 2018. The following material weakness has been identified and included in management’s assessment: a material weakness related to the lack of supervision and review to ensure proper internal control over financial reporting.
FY 2017 – Material weakness in financial controls Napco Security Technologies, Inc. and Subsidiaries did not maintain, in all material respects, effective internal control over financial reporting as of June 30, 2017, based on the COSO criteria.
FY 2016 & FY 2017 – IRS audits. Napco has been subject to multiple IRS audits during past years where they paid very low tax rates 11.1% in FY 2017 and 6% in FY 2016. This resulted in paying penalties & fines.
- FY 2017’s IRS audit was settled in FY 2021 for $564,000 in penalties, taxes, and interest (FY 2023 10K pg FS-20).
- FY 2016 IRS audit was settled in 2020 and Napco paid $832,000 (FY 2022 10K pg FS-20).
- Paying these slightly higher tax rates in FY 2017 and FY 2016 would’ve resulted in Napco Missing EPS estimates in both FY 2016 & FY 2017
These issues actually occurred well before 2016 & 2017 and happened the decade before as well.
FY 2007-FY 2009 – Material weaknesses – 1) regarding costing of inventory valuation and 2) weakness related to estimation methods for quantifying cost of goods sold. f inventory & quantifying cost of goods sold and inventory amounts.
“(1) With respect to the valuation of inventories, management uses certain estimation methods for the capitalization of overhead costs and for quantifying reserves for obsolete and slow-moving inventories. These estimation methods being utilized by management were not effective; and (2) Management does not have adequate controls in place to properly classify its inventories in accordance with Accounting Research Bulletin 43.”~FY 2007
Appendix C – Locking Business is Essentially a Commodity Business
Napco’s locking business is NOT why the company trades at >9x SALES. The locking business does not contribute to recurring revenue. Former employees told us that the fact that recent Napco quarterly revenue beats which were the result of unexpectedly high growth in the locking segment is actually a negative.
Formers and competitors have told us that Napco’s locking business is essentially focused on reselling low value add products that were made in China. They say Locking is essentially a commodity business:
- “Dick realized three years ago that, you know, just selling locks is a commodity business. People love it. But wanting to sell one lock every 25 years. What good is that?” ~Former Senior Napco Employee – B
- “[Napco’s] got heavy competition on the lock side” ~Industry Executive – F
- “You don’t want to sell the 10% gross margin locks*” ~Former Senior Napco Employee – A
*Note – Recent comments from Management conflict with what this former employee told us. Management addressed gross margins in the locking business for the first time on Q4-2024 CC. They referred to the locking products business as having “great margins” and “higher gross margins than intrusion products.”
Import-export data confirms Napco’s Locks come from “China”
Import-Export Data shows that the products are made in China and shipped directly to Napco’s Amityville, NY facility to then be sent to distributors. Import data shows that most of their locking products do not even go to the Napco factory in the Dominican Republic indicating that they arrive ready to ship.
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