New York-based analysts Wasserman Morris has significantly downgraded its share price forecasts for unmanned systems and airship manufacturer Cyber Defense Systems, warning that the company faces continued uncertainties due to the slow development of the global UAV sector coupled with increasing funding pressures.
However, Wasserman Morris also continue to recommend the stock as a speculative buy, arguing that it has the potential to generate annual sales revenues in the order of $250 million - $300 million in 2011 based on current UAV market growth projections.
In a commissioned analysts report released 3 January Wasserman Morris argues that “the company has a good chance of turning into a major multimillion dollar sales UAV player in the next five years”.
Wasserman Morris commenced its coverage of the St Petersburg, Florida-based Cyber Defense in October 2005, finding that the company share price, traded on a quotation service rather than on a major exchange, had the potential reach $1.60 within one year and $11.00 within five years.
The 3 January report says that the reduction of the twelve month forecast price to $0.77/share is “primarily due to delays in winning both government and commercial contracts for both of their product lines…After 12 months of product development and numerous training and test exercises the company has only recently begun to see a rising interest from both military and law enforce buyers [sic]”.
The analysts report also warns that the company is at risk of significant stock dilution as it continues to issues share options to cover debts and raise new working capital.
Individual Cyber Defense shares have been trading between $0.11 and $0.85 between January and September 2006 and were valued at $0.15 as at 3 January this year. Quarterly trading volumes average around the 60,000. The company is likely to have some 120 million shares issued by 2011 the report says, with 63.68 million issued at 16 November 2006.
Cyber Defense is developing three different types of UAV, comprising Cyberbug, a hand launched parasail system; the CyberScout vertical take-off and landing system, and the Techsphere family of airship-based systems.
The company has reported an accumulated deficit of $34.595 million as at 30 September 2006, $14.113 million of which is a shareholders deficit. Total liabilities had reached $18.509 million against total assets of $4.395 million. Total revenues for the nine months of trading to 30 September 2006 were just $438, 031, against expenses of $19.037 million, resulting in an operating loss of $18.802 million.
Wasserman Morris advise that the “limited liquidity position and a high debt to assets ratio may limit its [Cyber Defense’s] ability to continue as a going concern.”
It says that “the bulk of these deficits are paper losses created through the recent changes in how derivative financial instruments are valued” with Cyber Defense funding its ongoing operations “utilising a number of these alternative investments”.
Notwithstanding, Cyber Defense “is likely to face financial difficulties in the foreseeable future (next twelve months). There are signs of interest in Cyber Defense product line from governmental institutions and there is a good change for a private consumer market, however mass production for Cyber Defense specific products is unlikely to start in the next twelve months. Therefore analysing the current cost base of the company we reached the conclusion that the company is unlikely to be able to generate enough case from operations to cover its running costs. Therefore the continuance of operations will depend primarily on the ability of management to attract new financing sources. Historically financing came in the form of debt (usually convertible) and stock issuance”.
The company has succeeded in “managing its finances for more than two years and it is possible that management will be able to continue juggling with various funding sources until a strong enough market develops to supports company’s sales to the break-even point”.
The report characterises the UAV sector as “nascent and full scale development is still some years away. UAV is an emerging industry with a huge potential – a market expected to reach $17 billion by 2011, but the full market acceptance is still a few years away and it is hard to judge the pace at which the market will grow in the foreseeable future.”
Wasserman Morris claims that Cyber Defense’s main competitors are major US defence conglomerates but argues that these are “focussed on the more expensive, primarily military UAVs”. Other new start operations in the US and internationally are acknowledged but the report claims these “do not seem to have any advantage in relation to Cyber Defense”.
It characterises Cyber Defense as having major advantages as an “early entrant” into the sector with a “committed, experienced management team”.