Since our last update on Strat Aero, the AIM listed Unmanned Aerial Vehicle specialist, there have been several important developments.
Firstly, the litigation with the CEO of acquired business Aero Kinetics Holdings, Mr. W. Hulsey Smith, on counts of alleged fraud and breach of contract, has been settled ahead of the previously set October court date. The settlement has several elements:
– the disclaiming of any allegations of fraud against Mr. Smith.
– a cash payment to Mr. Smith of $75,000.
– the issue of 44,750,645 new shares in Strat Aero to Mr. Smith, equating to c.11.75% of the company’s enlarged share capital. There are no lock in clauses on the shares, as per the original acquisition agreement, although we expect the company will work closely with its brokers to minimise any impact on the share price should Smith want to sell a large stake.
Litigation settlement balance sheet enhancing
Strat Aero and Smith are now released from all claims relating to the Aero Kinetics acquisition, with all debt and loan obligations deemed to be satisfied or written off and all pending litigation agreed to be dismissed subject to procedural formalities. We believe the effects of the settlement will have a modestly positive effect on the company’s balance sheet, with the debt elimination being higher than the cash payment.
While not the ideal outcome for the company and its investors, we are pleased to see that the matter has now been resolved. The previous strain on management and financial resources is now over and the threat of a potentially larger settlement, which could have, in extermis, bankrupted the company, has been removed.
Secondly, Strat Aero has released its results for the six months to 30th June 2016, a period which reflected the ongoing litigation and a slower than expected take up of the company’s services. Revenues for the half were $410,740, up from $57,411 but below expectations as inspection, survey and consultancy services continued to see a slower than anticipated adoption rate by larger customers. The loss for the period was $2.21 million, up from $1.31 million as working capital from the acquisitions of Aero Kinetics and Geocurve added to expenses.
Strat Aero ended the period with cash of $275,428 although this was boosted by a £370,000 (gross) placing at the end of August. Nevertheless, in its outlook statement the company commented that it, “…will require additional funding during the fourth quarter to provide working capital…”.
Time to move on
Shares in Strat Aero reacted positively to the litigation settlement news, rising to over 1p on the announcement but falling back to the current 0.575p after the release of the interims. Including the new shares to be issued to Smith as part of the litigation settlement, that gives a current market cap of just over £2 million.
While the interim results did not make for pleasant reading in some areas, investors must remember that these events are now all in the past. In fact, developments since the year end have put Strat Aero on a much stronger footing in our view. As we discussed in our last update, Geocurve was awarded the largest contract in its history in September, for the Environment Agency’s Thames Estuary Asset Management 2100 (TEAM2100) programme, worth up to £2.5 million over its life. Other developments include the granting of National Qualified Entity (NQE) status by the UK’s Civil Aviation Authority to Strat Aero and the signing of a Master Franchise Agreement with the Limkokwing University of Creative Technology to roll out UAV training services.
The main risk to the investment case in the short-term has now been shifted towards the company’s funding issue, news on which we look forward to seeing in the coming weeks and expect that the company will be successful in raising funds for, hopefully, the last time as they move to cash flow positivity. We continue to believe that there could be long-term growth potential should the company manage to successfully deliver on its strategy, albeit one where risks remain. We expect the company to present a concise business strategy as a platform for a complete recapitalisation of the business that allows them to execute on the new plan.
We will be releasing a concise research note in the weeks ahead updating further on the company’s plans and estimates with the new CEO going forward.
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