Iain McLure, CEO of Strat Aero PLC LON:AERO, said: “I believe that Unmanned Aerial Vehicles (‘UAVs‘) will transform the everyday business practices of companies operating in a wide range of industries, thanks to the increased functionality, safety, speed, accuracy and significant cost savings they offer. I also believe that the team at Strat Aero has the relevant skillset, extensive experience and contacts in both the wider aviation market, as well as the rapidly growing Unmanned Aerial Services (‘UAS’) sector, to play a key role in this technological revolution. The combination of these two important criteria played an important part in my decision to join Strat Aero as CEO in April of this year – I believe we have a world class team in place to succeed.
“To achieve this however and at the same time build a sustainable business, we need to refine our strategy to concentrate on those areas of the UAS market where Strat Aero is already established, has experience and can add significant value to customers. These areas include training and education, survey, security and data analytics. In parallel with this, a focus on operating costs and capital expenditure is required to optimise resources. I believe these are all achievable goals, and as a result I am confident Strat Aero has the key foundations in place to become a leading provider of UAV based services and solutions.”
Strat Aero Plc, the AIM quoted international aerospace company focused on the Unmanned Aerial Vehicle (“UAV”) sector, announces its audited final results for the period ended 31 December 2015.
The report and accounts for the period ended 31 December 2015 have been posted to shareholders today and will be available shortly for download on the Company’s website at www.strat-aero.com.
OVERVIEW
• Acquisition of Geocurve, a specialist in the provision of UAV operated surveys and inspection services to a blue chip customer base, including the UK’s Environment Agency, EDF Energy, and Carillion
• Geocurve’s pipeline revenue generation has been in line with expectations set at the time of acquisition – improving operating profitability remains a key priority
• Revenues of US$433,001 during 2015 (2014: US$630,685) generating a gross profit of US$345,747 (2014: US$309,999)
o Revenues from inspection, survey and consultancy services were below expectations due to slower conversion of Military Training and Wind Inspection service opportunities
• Cash balances at the year-end amounted to US$1,485,257 (2014: US$106,817)
• Acquisition of Aero-Kinetics and subsequent litigation
POST PERIOD
• Secured first UAV Wind Turbine Inspection Contract
• Secures US$375,000 Proprietary Software Contract with Readyjet, a leading service provider to the aviation sector
• Appointment of Iain McLure as CEO with strong operational experience to develop and execute a business plan with identifiable targets, measures, planning, financial processes and clear lines of accountability in order to mobilise core strengths, maximise potential, and in the process generate value for shareholders, customers and employees
• Master franchise agreement signed with I-Coach in Hong Kong
CHAIRMAN’S STATEMENT
The year under review saw Strat Aero Plc (“Strat Aero” or the “Company”) look to grow through a series of acquisitions and partnerships. This strategy has produced mixed results with the positive additions of Geocurve and I-Coach offsetting the disappointment of the Aero Kinetics acquisition. However, with limited resources both in terms of capital and personnel, the strategy of pursuing new acquisitions and markets is not sustainable for a company of our size, at least not until a solid cash generative foundation has been established. It is clear we need to have a robust strategy which translates into an executable business plan with identifiable targets, measures, planning, financial processes and clear lines of accountability. This is precisely what our new CEO, Iain McLure, who has a strong operational and management background, is looking to deliver.
The breadth of the opportunity presented by Unmanned Aerial Systems (“UAS”) is widely acknowledged to be substantial. However, there is always the risk that in looking to enter multiple new markets concurrently, resources can be spread too thinly. With this in mind, the Board recognised that a renewed focus on our core strengths and capabilities offered the optimal route, in terms of risk and costs, to build recurring annualised revenue streams without having to commit considerable sums of capital. Iain has therefore spent the first few weeks of his tenure as CEO evaluating the business to identify those areas where we believe Strat Aero has the potential to become a world class provider of UAV based services and solutions.
Encouragingly, there is no shortage of sub-sectors within the UAS space where we believe we can become a leading UAV services and solutions provider. These sectors include: Commercial UAS Training & Education; Survey & Inspection Services; Security; Data Analytics; and Consultancy. The Strat Aero team has extensive experience and contacts in all these fields. We therefore have an excellent platform in place upon which we can build profitable businesses without having to invest significant amounts of capital.
Commercial UAV Training & Education
With UAVs increasingly taking to the skies, the need for pilots to be professionally trained and accredited is more important than ever. The Strat Aero team has practical aviation experience, including direct classroom based teaching as well as developing and managing digital-based training platforms. In the last year we have invested in developing commercial training applications and we intend to capitalise on this. Our vision is to create a professional UAV career path and association for UAV pilots. By developing an educational “ecosystem” not only will we lock Start Aero into repeatable revenue opportunities, but we will also have access to a resource pool of pilots trained and accredited by Strat Aero. This resource pool along with the training programmes will allow us to create and leverage excellent purchasing and partnership arrangements with UAV manufacturers.
The Master Franchise Agreement we signed with Hong Kong based I-Coach in January 2016 (the “Master Agreement”) provides an example of the capital-light opportunity we have to position Strat Aero as a world leader in UAV pilot training and accreditation. The Master Agreement involves the roll-out of Strat Aero’s proprietary UAV Training Programme to capitalise on the rapidly growing base of UAV operators in Hong Kong, The People’s Republic of China, the Taiwanese Republic of China and Macao. Under the terms of the Master Agreement, Strat Aero will receive a sign on fee, annual recurring fees based on student numbers and other standard franchise terms in return for granting I-Coach the exclusive rights to operate our training programme in the agreed territories. We secured the Master Agreement thanks to the first rate training pedigree of our team of aviation specialists. We are looking to replicate the Master Agreement with other partners as we focus on positioning Strat Aero as a world class provider of UAV pilot training and accreditation. Relevant course ware has been developed in the first half and revenue generation is expected to commence in H2 2016.
Survey & Inspection Services
One area where UAVs are today transforming traditional business practices is the field of surveying and inspection services. We know this is the case as our Geocurve subsidiary, which is a specialist in the provision of UAV operated topographical surveys and inspection services to a blue chip customer base, including the UK’s Environment Agency, EDF Energy, Carillion, and the RSPB, is already playing a leading role in the UK. Geocurve was one of the first companies to be authorised by the Civil Aviation Authority to fly UAVs in congested urban areas and conduct surveys, inspections and various other projects in previously prohibited areas; and it has successfully completed a pioneering survey over the Norfolk Broads National Park using UAVs.
Geocurve has a proven track record both in the field and in analysis and reporting delivered by a highly competent team of professionals. Geocurve provides us with the capability to target other sub-sectors without having to invest significant amounts of capital. Targeted areas include civil engineering; land surveys and inspection services for quarries and boundaries; flood defences; buildings; tunnels; energy assets including oil and gas, water, solar, wind turbines, water towers; wildlife habitat monitoring; insurance services; and cell towers. All of these fit well with Geocurve’s established surveying and inspection services and we therefore believe they represent a natural development for the business.
Geocurve customer contracts have to date tended to be short term in nature and in the revised strategy the company will continue to focus on longer term annualised customer relationships and broadening the customer base.
Security
Importantly, we have identified a number of other large sectors outside of inspection and surveys which are well suited to Strat Aero’s skillsets and offerings which can be targeted at minimal expense. For example, security. A UAV based security service can be offered to undertake border and perimeter patrols, cover public events, play a role in emergency disaster / search & rescue operations and detection.
Data Analytics
We believe the combination of UAVs and software to gather data and generate 3D models and analysis on its own is not enough to build and retain value. Commercially available software is able to capture the large quantities of information gathered by UAVs however the end product is typically full of ‘noise’, difficult to interpret and therefore does not always add value to end customers. To make sense of it, Strat Aero applies a human touch and intelligence to the process: experienced data managers and analysts, a number of whom are qualified civil engineers, apply education and experience to clean up the data and produce results that can be easily interpreted and add real value to the end user. Being able to offer a superior value adding product is something that sets Strat Aero apart from its competitors and presents us with an opportunity we are keen to capitalise on through our Data Analytics capability. In keeping with our capital-light growth strategy, we already have the technology through our in-house developed Digital Data Management (“DDM”) system which we use as the foundation of data capture, processing and reporting back to customers. In addition, DDM has core functionality in aviation management software which is used in general aviation in North America. Finally, DDM is the core software behind our computer-based training application, again used in North America.
Consultancy
Our breadth of experience in a range of relevant disciplines and activities such as training and regulation, data gathering and modelling can also be put to profitable use on a consultancy basis by offering bespoke services to individual customers on both a regular and ad hoc basis. Strat Aero’s active influence and involvement in the industry, via professional trade associations and participation in the legislative process and lobbying, uniquely positions us to offer consultancy services. As well as generating revenues, consultancy services also provide scope for cross selling opportunities across all our divisions which can lead to repeat, regular business.
Financial Overview
The Group recorded revenues of US$433,001 during the year ended 31 December 2015 (2014: US$630,685) generating a gross profit of US$345,747 (2014: US$309,999). Revenues for the year generated from the Company’s inspection, survey and consultancy services were below expectations. In particular, conversion of Military Training and Wind Inspection service opportunities proved to be slower than anticipated.
The loss for the year to 31 December 2015, the second year of trading, before and after taxation was US$5,931,933 (2014: US$1,200,844). The loss for 31 December 2015 includes a US$2,028,235 impairment of goodwill arising from the acquisition of the Aero Kinetics business.
Following the acquisition of Aero Kinetics in December 2015, the Company filed a legal action on 1 April 2016 in Texas, USA against Mr W. Hulsey Smith (“Mr. Smith”), the vendor of Aero Kinetics on counts of fraud and breach of contract arising from misrepresentations made by Mr. Smith upon which the Company relied and were material in the Company’s decision to acquire Aero Kinetics. Strat Aero also terminated the services of Mr. Smith in relation to Aero Kinetics.
On 6 April 2016, the Company and its directors received a defence and counterclaim from Mr. Smith. The Company continues to believe and has been advised that it has a strong claim and a robust defence against Mr. Smith. The Company intends to continue to vigorously pursue its claims against Mr. Smith and believe his counterclaims and purported defence to be without merit.
There are a number of potential resolutions available to the Company in relation to the legal action including a settlement, rescission of the purchase of Aero Kinetics as well as actual and consequential damages. Unless settled, the court has set a date of October 2016 for the case to be heard.
As a consequence of these material events regarding Aero Kinetics, the Board have taken the prudent action to fully impair the investment in Aero Kinetics as at 31 December 2015 which amounts to an impairment charge of US$2,028,235.
Administrative expenses during the year amounted to US$4,180,769 (2014: US$1,539,403), a large portion of these costs comprised of wages and salaries, consultancy and professional fees and travelling expenses. The increase in expenses is attributable to growth in headcount and business development activities in support of the commercial opportunities identified during 2015. This cost base is being rationalised in line with the new management’s strategic priorities.
Consolidated net assets at 31 December 2015 amounted to US$721,546 (2014: US$818,376). Cash balances at the year-end amounted to US$1,485,257 (2014: US$106,817).
During 2015, the Company attracted aggregate investment of US$5.52 million to implement the Group’s operational plans, and to fund the acquisitions of Geocurve and Aero Kinetics. Final deferred consideration for Geocurve is expected to be made in the near term and a further announcement regarding this will be made in due course.
Post year end the Company raised an additional £877,250 pre-expenses, through the issue of new shares to investors.
Outlook
The UAV industry is undeniably a dynamic and rapidly growing space to operate in but, as with all new technologies, translating this opportunity into a profitable business is a lengthy process. Before government departments and large companies adopt UAV technologies, they typically require proof of concept trials to demonstrate the benefits and robustness of UAS before contracts are signed. It is also essential to focus on areas where we can add real value to customers, using our professional experience and expertise. With these challenges in mind, the Board is working to establish a new corporate structure, integrating the whole business to exploit our assets sharing resources, skills and experience. It is also important to make a clear statement of intent on what we are aiming to achieve. As well as building a solid foundation based on revenue growth, it is critical that we continue to closely manage and control costs as well as developing cross selling opportunities, as we look to drive revenues and profitability going forward.
We believe Strat Aero is well positioned in the new and emerging UAS market place. We have the people, skills and experience along with the technology to become a world class provider of UAV services. We are now focused on creating a revised integrated structure which will allow us to effectively mobilise our core strengths, maximise our potential, and in the process generate value for our shareholders, customers and employees.
Acknowledgments
On behalf of the Board, I would like to extend our thanks to our business partners, customers, associates and valued shareholders for their continued support throughout the course of the year. We also wish to thank our management and staff for their continued hard work and we look forward to working with you all in the forthcoming year.
