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DRNE: Drone Aviation is Well-Positioned in the Tethered Aerostat Industry

08/11/2014
By Steven Ralston, CFA

OTC:DRNE

Summary

·         Drone Aviation Holding Corp. is a highly focused, tethered aerostat company
·         Management is focused on executing its strategy of penetrating new commercial markets
·         The company’s WASP continues to be a high profile System Under Evaluation by the U.S military
·         A recent private placement is helping fund management’s strategy
·         Investors should be closely monitoring Drone Aviation for the announcement of new BiB orders

Drone Aviation Holding

With headquarters in Jacksonville, Florida, Drone Aviation Holding Corp. (OTC:DRNE) designs, develops, markets and sells lighter-than-air tethered aerostats and tethered drones for military and commercial markets.

An aerostat (which is sometimes referred to as a blimp or balloon) is a lighter-than-air (LTA), floating platform that uses gases, such as helium, for buoyancy. The key structural components include a lightweight skin envelope to contain LTA gas, tether system, winch motor, power generator, mission payload(s), mooring platform and a ground control station. Depending on the application, the payloads could be an electro-optical camera, a thermal imaging (infrared) camera and/or communications equipment, among others. Electrical power is provided through the tethering system, which allows for persistent monitoring during the flight. 

Tethered aerostats are regulated by the FAA under FAR 101 Subpart B concerning moored balloons and kites. The operation limitations and requirements are far less restrictive than those for untethered, unmanned aerostats and untethered, free-flying drones. Also, by incorporating the data, control and power conduits into the tether, the company’s drones may fly within the FAA’s guidelines.

Though the company’s lighter-than-air systems appear to have fulfilled critical requirements of the military in recent field exercises, management’s strategic plan is not only to further develop the military market, but also to penetrate the commercial, government and law enforcement markets with lower-cost and easier-to-handle versions of its aerostat and drone systems. Leveraging the experience from its military model, Drone Aviation has developed specialized aerostats for the commercial market, along with launchers that are equipped with power systems, mooring arms, helium tank bays, all of which ease the launch, mooring and recovery processes. The company’s compact Blimp in a Box™ aerostat system is housed in a trailer, from which it can be rapidly deployed and quickly recovered. In addition, the company’s tethered lighter-than-air systems can be fielded and safely deployed from light trucks, like from the bed of a pickup truck.

Background 

Drone Aviation Holding Corp. (DRNE) was formed on April 17, 2014 and merged with MacroSolve (previously MCVE) on April 30, 2014, with Drone Aviation being the surviving entity. Previously, MacroSolve pursued settlements (in the form of perpetual paid-up licenses or royalties) on U.S. patent #7,822,816, which it received in October 2010. The patent covered certain mobile information collection systems over wireless networks. In total, MacroSolve received 68 settlements However, in March 2014, the US Patent Office rejected all the claims concerning the patent, and the majority of shareholders voted upon a plan to merge with and into Drone Aviation Holding Corp. through a series of stock and debt exchange agreements, along with the cancellation of prior options and warrants. The CEO (James McGill) and several Directors resigned, and an interim CEO (Michael Haas) was appointed.

A few weeks after merging with MacroSolve, in May 2014, Drone Aviation acquired Lighter Than Air Systems Corp. (LTAS) from World Surveillance Group (WSGI: OTC Pink) for $335,000 and 10 million shares of Drone Aviation, which were later converted into 10 million shares of Series D convertible preferred stock. Since World Surveillance was being strategically re-focused on larger, mid-altitude, untethered lighter-than-air systems, the management of World Surveillance decided to exit the tactical tethered lighter-than-air market. Felicia Hess, founder and owner of LTAS prior to its acquisition by World Surveillance Group in March 2013, was appointed CEO and President of Drone Aviation. 

Concurrent with the share exchange on June 5, 2014, Drone Aviation closed a private placement of 2.7 million Units, each consisting of one share of Series E preferred stock and one 3-year warrant exercisable at $1.00. The gross proceeds of the private placement were $1.35 million, from which the net proceeds are being used towards for sales and marketing, R&D and G&A expenses. 

The following month, on July 15th, Drone Aviation Holding’s stock was up-listed to the OTCQB, which should benefit the company through better institutional investor awareness and increased share liquidity.

The Aerostat Industry 

According to MarketsandMarkets in Dallas, the aerostat industry is projected to grow at an estimated CAGR of 16.68% over the next six years from $3.93 billion in 2014 to $9.96 billion in 2020. The industry is segmented by class (small, medium and large), by balloon type (spheroidal, ellipsoidal), by payload and by geography. Drone Aviation is targeting the small spheroidal segment for military, governmental and commercial applications, while larger companies [like Lockheed Martin (LMT), Raytheon (RTN) and Northrop Grumman (NOC)] tend to concentrate on the large ellipsoidal military and government markets.

Though strong demand for medium-large aerostat systems is expected, small tethered aerostats are gaining favor due to  performance features and mobility, along with their lower acquisition and operating costs. Small aerostats can be easily towed to a mission, even to remote locations, and quickly inflated and launched by as few as two operators within minutes. Also, they can be retracted by the same two-man crew in short order.  

Aerostats provide airborne platforms to deploy sensing devices (e.g. cameras), monitor activity, detect threats, gather intelligence and conduct reconnaissance missions. Just a few of the current applications include:

·         Military battlefield ISR (Intelligence, reconnaissance and surveillance) and communications network platform
·         Border security through visual and infrared aerial surveillance
·         Natural disaster situational awareness allowing First Responders to respond properly
·         Energy infrastructure security, especially nuclear facilities, dams, refineries and pipelines
·         Public event (demonstrations, sports events, fairs, etc.) surveillance for crowd management
·         Law enforcement IAA (Incident Awareness and Assessment): illegal activities, search & rescue, disaster management (especially evacuations) and traffic management
·         Forestry management, including forest fire detection and surveillance of on-going fires
·         Mapping and research applications (topographic research, land surveying and land management)

For the military, these “eye in the sky” aerial platforms provide security and ISR (Intelligence, Surveillance and Reconnaissance) functions and have proved to be valuable assets in the Iraq and Afghanistan. Aerostats provide real-time situational awareness to on-the-move forces and precision targeting capabilities on combatant and weapon locations, especially when embedded in dense population centers. The ISR critical observation capabilities include tracking hostile enemy movements as they set up for attacks on convoys, place IEDs (Improvised Explosive Devices) and conduct nefarious meetings. Aerostats are expected to be increasingly important to the military by providing safer ISR functionality, along cost-effective deployment versus fixed wing aircraft and helicopters. 

Products

Drone Aviation's flagship product is the Blimp in a Box™ (BiB), a tethered, lighter-than-air system designed to provide semi-persistent ISR (Intelligence, Surveillance and Reconnaissance) functionality. The highly mobile system provides real-time observation capabilities up to 1,000 feet (300 meters) at a low cost and with a limited operational footprint. The company’s current R&D effort is mostly focused on further development of a “nonmilitary spec” BiB system for use in civil and commercial applications that do not require the level of durability and ruggedness of the company’s military model.  

The BiB system is offered in a series of versions denominated as System 50, 100, 200, 250 and 300, each with different payload capabilities (60 – 300 pounds) for various applications. The least-cost BiB 50 is appropriate for forestry and traffic management applications while the BiB 250 all-weather system can provide border security and strategic asset surveillance with gyro-stabilized gimbals for dual sensor systems, including a cooled-thermal Mid-Wave Infrared (MWIR) camera.



Drone Aviation has distribution agreements for its aerostat systems and related sustainment equipment with two U.S. Government contractors: ADS Inc. (Advanced Defense Systems, Inc.) and US Technik. ADS provides a wide array of defense systems, system upgrades and subsystem products to the world defense market, including the U.S. military, other defense contractors, law enforcement entities and foreign governments. Headquartered in Colorado Springs, US Technik is a veteran-owned, small business corporation that specializes in tactical aerostat product placement and operational training & support.

In addition, Drone Aviation is developing a tethered drone system. Powered by four rotors, the Electric Tethered Aerial Platform (ETAP) has been designed for long endurance operations (up to 18 hours) and cost-effectiveness. The tether serves as the conduit for data relay, control functionality and electrical energy transmission. The system can operate up to an altitude of 500 feet, lift a payload up to 35 pounds and function in almost all weather environments.  Management anticipates offering a self-contained launcher system for the tethered quad-rotor drone system.

Sales

Drone Aviation’s wholly-owned subsidiary, Lighter Than Air Systems Corp. generated sales of $390,098 during calendar 2012 and $411,148 between March 28, 2013 (the date acquired by World Surveillance) and December 31, 2013. Due to the sale of Lighter Than Air Systems Corp. to Drone Aviation in May, revenues for the first half of 2014 are unavailable until Drone Aviation reports second quarter results.

During the last three quarters of 2013, World Surveillance Group announced several deliveries by its Lighter Than Air Systems (LTAS) subsidiary that contributed to the LTAS revenue stream. In January 2013, LTAS received a contract award for a complete, trailer-mounted BiB 250 aerostat launcher system to provide semi-persistent, mobile ISR at the platoon level for the U.S. Army. By April, that system, along with a subsequently ordered second complete BiB 250 system, was delivered. Follow-on orders for upgrades, powered tethers and various other components were received soon thereafter. The U.S. Army refers to the LTAS system as the Winch Aerostat Small Platform (WASP). During May, US Technik, a distributor LTAS products and services, completed BiB training and fielding support to the Joint Improvised Explosive Device Defeat Organization (JIEDDO) at Fort Polk, Louisiana.

During the third quarter of 2013, it was announced that LTAS received orders for an aerostat and subsystem from Eglin Air Force Base and a land-based surveillance mast system from the Emergency Medical Services division of the Ventura County Public Health Department.

In the fourth quarter, the two WASP aerostat launcher systems (previously delivered to the U.S. Army) participated in the U.S. Army Network Integration Experiment (NIE) 14.1 at the White Sands Missile Range in New Mexico as a System Under Evaluation. The NIE is semi-annual series of field exercises designed to evaluate and integrate existing and prototype products in order to achieve a higher-quality tactical communications network for the U.S. Army. During NIE 14.1, the WASP systems were each operated by four signal soldiers whose primary mission was to extend the communications network by elevating radio payloads to altitudes up to 1,000 feet. Evaluations under the NIE serve to drive requirements and procurement. 

Early in 2014, LTAS received an order for a BiB 100 aerostat system, along with onsite training and test operations, by the Ohio Department of Transportation (ODOT) to support various public safety initiatives. The $180,000 system was delivered to the Ohio/Indiana Unmanned Aircraft Systems Center in June and was immediately demonstrated to over 50 state officials representing various state departments, including Corrections, Agriculture and Air National Guard. State officials commented that potential initial projects may include perimeter security for prisons by the Department of Corrections and construction site mapping and surveillance by the Department of Transportation. Follow-on purchase orders were awarded for an electro-optical, infrared sensor payload and aerial imaging & mapping equipment. We assume the aerial photogrammetry system with a gimbaled high-resolution digital camera that was delivered in August was to the ODOT.

During April and May 2014, the WASP systems again were invited to and participated in NIE 14.2 at Fort Bliss, Texas and the White Sands Missile Range. The two systems served as a Baseline System during the evaluation of joint force network capabilities on a brigade level that included communications nodes based on aircraft and unmanned aerial vehicles. The militarized WASP launcher systems served as a platforms for Harris PRC-117G radios and antennae.

In June 2014, Drone Aviation received an order valued at over $250,000 from ADS Inc., a prime contractor to the U.S. Department of Defense, for BiB-250 sustainment kits to be delivered to the U.S. Army Garrison at Fort Polk in the third quarter.

Outlook 

Drone Aviation, along with the three predecessor/associated companies (Lighter Than Air Systems Corp., MacroSolve and World Surveillance Group) have had decent balance sheets with positive working capital.  Though Drone Aviation Holding Corp. has the usual risks associated with many small-cap companies, such as a history of operating losses and the need to raise additional capital, the operating company, Lighter Than Air Systems Corp., has been operating since its founding in 2009. Moreover, the company has viable products that not only have been generating revenue, but also have met stringent US military requirements thus far proven under ongoing evaluation. 

Management is executing its strategy of continuing to work closely with U.S. defense customers and of opening new commercial and civil markets for the company’s products. The recent delivery of a BiB 100 system to the Ohio Department of Transportation and the ongoing evaluation by the U.S. military of the WASP system potentially could lead to significant orders on both national and state levels. Drone Aviation merits close monitoring, especially for the announcement of substantial orders. If management successfully executes on its focused strategy, the company’s stock offers significant upside for investors.

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