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ParaZero (ASX:PRZ) – Blue Skies Ahead

Article written by Pitt Street Research. For the full report click here

Safety systems for the fast growing drones market

ParaZero Limited (ASX:PRZ) is an Israeli company that listed on the ASX in June 2018 to raise A$ 5M in capital and to increase its visibility with international customers, distributors and channel partners. PRZ has developed and is commercializing proprietary UAV (Unmanned Aerial Vehicles) recovery systems, called SafeAir, to be mounted or integrated on commercial and consumer drones. These safety systems prevent drones from crashing in the event of critical malfunctions.

The drone revolution is here and now

PwC estimates that the value of businesses and labour displaced by commercial drones, e.g. for asset inspection, transportation, delivery of goods, law enforcement, filming and data capture, amounted to more than US$ 147BN in 2015. In other words, drones are already a big part of our everyday lives.

Drones need parachutes like cars need airbags

The global drone market for civilian use is expected to grow from US$ 13.5BN today to US$ 40BN by 2025. However, the vast majority of drones, including commercial drones, are shipped without any safety system to prevent them from crashing if their operators lose control. In the US alone there are ~270 drone incidents a month reported to the FAA and we see the regulatory environment continuing to move in a favourable direction. PRZ has a full range of safety systems from OEMs to consumers, which enables it to meet the impending demand over the coming years.

New prosumer model will be a game-changer

In December 2018 PRZ will launch a new SafeAir model aimed at the prosumer market for drones used in “light” commercial work, such as filming weddings, real estate etc. This high-end consumer segment is by far the largest market by unit sales. We expect PRZ to be able to sell significant volumes of SafeAir in this market going forward.

Safety systems for the fast-growing drone market

While large drones for military applications have been in operation for more than a decade, smaller drones for commercial and consumer use have been around less than five years. Market penetration is currently very limited and we believe this market is only at the very early stages of development.

Number of drones to grow to more than 13 million by 2025

The value of the global drone market is estimated to be around US$ 13.5BN in 2018, but is set to grow by 17% CAGR through 2025 to US$ 40BN according to ResearchAndMarkets. Assuming an average price of US$ 3,000 per drone (commercial and consumer drones combined), this would represent more than 13M drones sold in 2025.

The problem with drones: they aren’t completely crash-proof

In the last few years a lot of attention has been given to the many application areas for commercial drones in particular, e.g. goods delivery, asset inspection, professional film and photography etc. However, an aspect that has not been very well highlighted is the risk element of commercial drone operations, i.e. drones crashing over groups of people/bystanders. Typically, drone manufacturers have focused on key metrics that buyers of drones focus on, such as battery/flight time and cargo capacity. And while
they are obviously concerned with making drones as safe as possible, relatively little development and design effort has gone into ensuring drones can come down safely when operators lose control of the drone. Most drones do not have a factory-fitted safety system on board.

ParaZero provides drone safety systems

PRZ’s founders recognised the need for drone safety and started developing a proprietary Unmanned Aerial Vehicle (UAV)recovery system more than four
years ago. Today, PRZ’s SafeAir drone recovery system can be mounted on top of drones or integrated into them. In case of critical malfunction, it can save payloads, protect people in a drone’s crash path and prohibit the drone from flying into restricted airspace. Importantly, SafeAir can protect the drone itself from damage.

Technology: how it works

The essence of PRZ’s solution is a parachute that deploys if SafeAir’s sensors detect a critical malfunction that will cause the drone to crash. When a critical malfunction is detected the power to the rotors is terminated and a parachute will deploy within a fraction of a second, triggered by a pyrotechnic release, which blows off the cover and pushes out the parachute. Additionally, an audio buzzer is activated to warn bystanders to move out of harms’ way.

Monitoring and detection

PRZ’s SafeAir module (Figure 2) monitors 26 different parameters including speed, altitude, temperature, acceleration along the three axes, vibration, gyration, location based on GPS data etc. All this data is recorded and analysed on a real-time basis. PRZ’s on-board algorithms are continuously looking for two things:

1) Abnormalities in a drone’s flight profile as compared to previous flight behaviour of the drone and its pilot, and
2) Critical malfunctions, defined as any combination of parameters that will result in the drone no longer being able fly.

Taking action in case of a critical malfunction

Once a critical malfunction has been detected, SafeAir will go through five different phases in order to land a drone safely. The entire process is performed autonomously, i.e. without any action required from the operator.
1) Firstly, SafeAir will start the flight termination process by shutting down battery power to the rotors.

2) As the drone is shut down, SafeAir will send out alerts to professional drone platforms/landing pads in the vicinity through on-board cellular connectivity. This will allow other professional drone operators to take appropriate measures. This feature is only available in SafeAir modules for the OEM and professional markets.

3) Additionally, SafeAir will give audio visual warning signals (siren and flashing lights) to alert the people below.

4) SafeAir will then deploy a parachute to ensure a safe landing and minimize damage to the drone and its payload upon landing.
5) Lastly, all collected in-flight data is stored in the on-board Black Box and can be used for post-incident analysis.

SafeAir can be fully integrated or mounted on top of a drone

Similar to an airbag in a car, SafeAir can be fully integrated into the drone from the design stage. For instance, PRZ is working with various drone manufacturers to fully integrate SafeAir into high-end, professional drone models.

There are three options for sales, as follows:

1. Full integration into high end professional drones. The revenue model for this OEM business stream is twofold:
a. Unit sales
b. Contract revenues

2. After-market sales to commercial end users. (SafeAir can be fitted to the drone in approximately 15 minutes). Revenue are generated from:
a. Unit sales

3. After-market sales to consumer / prosumer end users. (SafeAir can be fitted onto the drone almost immediately). Revenue are generated from:
a. Unit sales

The OEM model differs from the after-market model in which PRZ sells various versions of SafeAir for the most common off-the-shelf professional drones (DJI drones). These systems are sold to commercial end-users through distributors and PRZ’s own online store. Given that the professional version of SafeAir uses a pyrotechnic trigger to deploy the parachute in the event of a critical malfunction, it will need to be repackaged by a certified repacker. Pilots and users of the consumer version will be able to repack the parachutes themselves.

The deployment technology is patented

By regulation, drone safety systems need to be separate from the operating systems of the drone itself. PRZ’s SafeAir solution has three elements;
• SmartAir, which houses all computational aspects of the system, including computer hardware and PRZ’s proprietary algorithms:
• TerminateAir, the termination system that stops the power to the rotors, and
• The patented pyrotechnic deployment mechanism plus the parachute (for professional and commercial drones only).

While algorithms are proprietary, they are very difficult to patent. However, PRZ has patented its pyrotechnic deployment mechanism in several regions and has patents pending in others. This patent essentially revolves around very rapid deployment of a parachute’s canopy, i.e. in a fraction of a second, as opposed to traditional parachute deployment, which can take up to 5 seconds. Given that drones typically operate at low altitudes, 5 seconds is extremely long as the drone may lose several tens of meters in altitude during this time, and crash before the canopy is fully deployed. Propelled by a ballistic reaction, SafeAir fires off multiple projectiles in different, upward, directions (Figure 3). This extends the canopy, allowing ambient air to flow into the canopy much more quickly than traditional deployment.

Tapping in to a very high-growth market

PRZ is well positioned to meet the demands of a very high-growth market in which the competition appears to be lagging and does not share PRZ’s holistic approach to drone safety systems. OEM contracts are testament to the quality of PRZ’s product offering. The large sales volumes expected in the consumer segment, combined with the high margin professional drone market, are likely to provide a balanced revenue mix longer term. We have refrained from providing a full financial model, and hence a valuation range, given PRZ is still in the early stages of commercialization. We will endeavour to publish a full model and valuation range when further sales materialize.

SWOT Analysis

Strengths:

• Due to its proprietary technology, PRZ is among the most advanced, if not the most advanced, providers of UAV rescue systems, giving the company strong inroads into tier 1 drone manufacturers.
• PRZ has a multi-year development lead over its competitors.
• The company’s senior management and advisory board members have extensive networks, extending as far as the relevant regulatory bodies.

Weaknesses:

• PRZ is a small company with relatively limited balance sheet strength. This may inhibit growth as tier 1 drone manufacturers may prefer to work with more established players or with companies that have a stronger financial backing.

Opportunities:

• Growth of both the consumer and the professional drone segments is expected to be in excess of 17% through 2025.
• The market for UAV rescue systems is largely undeveloped as most drones are shipped without any safety modules.
• Tightening regulation around drone safety is expected to drive the uptake of separate UAV safety systems. It seems the logical next step for the regulatory bodies to mandate usage of drone safety systems for drones that fly over populated areas.
• Drone manufacturers typically source parts and modules for drones, including UAV safety systems, from OEMs, much like car manufacturers source from OEMs. This presents large commercial opportunities for companies such as PRZ.

Threats:

• Should drone manufacturers insource development and integration of drone safety systems, this could substantially limit PRZ’s market upside.
• Adverse regulatory developments, e.g. around flying restrictions, could affect the market uptake of drones, limiting PRZ’s addressable market.
• Potential future drone safety systems from large, deep-pocketed consumer electronics companies may inhibit PRZ’s growth in the consumer segment.

Conclusion

PRZ is a market leader in a very high-growth market as it has taken an holistic approach to drone safety systems. OEM contracts with companies such as Airobotics are testament to the quality of PRZ’s product offering. The large sales volumes expected in the consumer segment, combined with the high-margin professional drone market, are likely to provide a balanced revenue mix longer term. We have refrained from providing a full financial model, and hence a valuation range, given PRZ is still in the early stages of commercialization. We will endeavour to publish a full model and valuation range when further sales materialize.

Please note, the usual disclaimers apply – click here

Pitt Street Research work is commissioned by the listed companies it covers, and Pitt Street Research has received or will receive payment for the preparation of such work. Please refer to the bottom of the research notes as published on Pitt Street Research’s web site for risks related to the companies being covered, as well our General Advice Warning, disclaimer and full disclosures. Also, please be aware that the investment opinion in this report is current as at the date of publication but that the circumstances of the company may change over time, which may in turn affect our investment opinion.

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