ParaZero Technologies Readies $ 16 Million US IPO

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A Quick Take On ParaZero Technologies Ltd.

ParaZero Technologies Ltd. (PRZO) (PRZOW) has filed to raise $ 15.7 million in an IPO of its units consisting of one ordinary share and two warrants, according to and F-1 registration statement.

The firm designs and sells autonomous parachute systems for unmanned aerial systems.

A high-priced IPO for a tiny revenue-producing firm in a moderate-growth industry forecast leads me to remain cautious about PRZO.

I’m on Hold for the IPO, although the stock may see some early trading volatility from day traders due to its low nominal price.

ParaZero Overview

Kiryat Ono, Israel-based ParaZero was founded to develop parachute-based safety systems to minimize drone loss and human injury risks in case of malfunction or other damage.

Management is headed by Chief Executive Officer, Boaz Shetzer, who has been with the firm since August 2018 and was previously co-founder and CEO of TypeIV, a digital health startup.

The company’s primary offerings include a variety of parachute safety system models for F3322-18 certified drones.

ParaZero has booked fair market value investment of $ 6.4 million as of December 31, 2021 from investors including Medigus Ltd., Avdinco Ltd. and Tamarid Ltd.

ParaZero – Customer Acquisition

The firm sells ready-to-use systems to original equipment manufacturers (OEMs) and to original design manufacturers (ODMs).

ParaZero also sells directly to end-users via direct sales, resellers and its online store channels.

Selling & Marketing expenses as a percentage of total revenue have risen slightly as revenues have decreased, as the figures below indicate:

Selling & Marketing

Expenses Vs. Revenue

Period

Percentage

2021

23.3%

2020

22.1%

(Source)

The Selling & Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling & Marketing spend, was negative (0.2x) in the most recent reporting period. (Source)

ParaZero’s Market & Competition

According to a market research report by Straits Research, the global market for parachute recovery systems was an estimated $ 97 million in 2019 and is forecast to reach nearly $ 154 million by 2026.

This represents a forecast CAGR of 6.8% from 2019 to 2026.

Below is a chart showing the historical and projected growth rate of the global UAV parachute recovery market:

Global UAV Parachute Recovery Market

Global UAV Parachute Recovery Market (Straits Research)

The main drivers for this expected growth are a significant increase in the use of drones in consumer, commercial and military applications.

Also, below is a table of various parachute recovery systems market applications in commercial sectors:

Drone Parachute Commercial Markets

Drone Parachute Commercial Markets (Straits Research)

Major competitive or other industry participants include:

  • Indemnis

  • Fruity Chutes

  • Butler Parachute Systems

  • Drone Rescue Systems GmbH

ParaZero’s Financial Performance

The company’s recent financial results can be summarized as follows:

  • Slightly contracting heat revenue;

  • Positive gross profit in 2021;

  • Reduced operating loss;

  • Increasing cash used in operations.

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance Vs. Prior

2021

$ 724,391

-5.0%

2020

$ 762,410

Gross Profit (Loss)

Period

Gross Profit (Loss)

2021

$ 260,136

2020

$ (85,684)

Gross Margin

Period

Gross Margin

2021

35.91%

2020

-11.24%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

2021

$ (985,359)

-136.0%

2020

$ (1,316,058)

-172.6%

Net Income (Loss)

Period

Net Income (Loss)

No Margin

2021

$ (571,566)

-78.9%

2020

$ (1,965,903)

-271.4%

Cash Flow From Operations

Period

Cash Flow From Operations

2021

$ (934,720)

2020

$ (776,626)

(Glossary Of Terms)

(Source)

As of December 31, 2021, ParaZero had $ 33,024 in cash and $ 7.5 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2021, was negative ($ 940,292).

ParaZero’s IPO Details

ParaZero intends to raise $ 15.7 million in gross proceeds from an IPO of its units consisting of one ordinary share and two warrants, offering 2,525 million units at a proposed midpoint price of $ 6.20 per unit.

The warrants will be exercisable at the IPO price of the units and upon the date of issuance.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $ 47.5 million, excluding the effects of underwriter over-allotment options.

The float to outstanding shares ratio (excluding underwriter over-allotments) will be approximately 29.05%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

Management says it will use the net proceeds from the IPO as follows:

approximately $ 7 million for research and development of new technologies as well as existing products;

approximately $ 4 million for marketing and sales efforts in new territories; and

the remainder for working capital and general corporate purposes and possible future acquisitions.

Based on our current plans, we believe that our existing cash, cash equivalents and short-term deposits, together with the net proceeds of this offering, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through June 2022. We anticipate that these funds, together with the net proceeds of this offering, will be sufficient to fund our operating expenses and capital expenditure requirements for the next five years.

(Source)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management says the firm is currently not subject to any material legal proceedings.

The sole listed bookrunner of the IPO is Aegis Capital Corp.

Valuation Metrics For ParaZero

Below is a table of relevant capitalization and valuation figures for the company:

Measure (TTM)

Amount

Market Capitalization at IPO

$ 53,884,783

Enterprise Value

$ 47,481,470

Price / Sales

74.39

EV / Revenue

65.55

EV / EBITDA

-48.19

Earnings Per Share

– $ 0.06

Operating Margin

-136.03%

No Margin

-78.90%

Float To Outstanding Shares Ratio

29.05%

Proposed IPO Midpoint Price per Share

$ 6.20

Net Free Cash Flow

– $ 940,292

Free Cash Flow Yield Per Share

-1.75%

Debt / EBITDA Multiple

-8.52

Revenue Growth Rate

-4.99%

(Glossary Of Terms)

(Source)

Commentary About ParaZero’s IPO

PRZO is seeking US public market investment for its continued product development and commercialization plans.

The company’s financials show contracting heat revenue, gross profit in 2021, lowered operating loss but higher cash used in operations.

Free cash flow for the twelve months ended December 31, 2021, was negative ($ 940,292).

Selling & Marketing expenses as a percentage of total revenue have risen slightly as revenue has dropped; its Selling & Marketing efficiency multiple fell to negative (0.2x) in 2021.

The firm currently plans to pay no dividends on its shares.

The market opportunity for parachute recovery systems for drone markets is still relatively small with moderate growth prospects.

Aegis Capital is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (78%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

The primary risk to the company’s stock’s outlook is the firm’s lack of revenue history or track record in producing strong growth.

So, valued at an EV / Revenue (TTM) of over 65x, the IPO is priced for high future growth with low operating losses.

A high priced IPO for a moderate growth industry forecast leads me to remain cautious about PRZO.

I’m on Hold for the IPO, although the stock may see some early trading volatility from day traders due to its low nominal price.

Expected IPO Pricing Date: To be announced.

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