Deal for Fort Worth drone company crashes and burns

Aero Kinetics developed and built a number of drones, including this quad-copter.
Aero Kinetics developed and built a number of drones, including this quad-copter. Courtesy photo

Aero Kinetics founder W. Hulsey Smith thought his drone company was about to take off when he sold it to a British company late last year for about $24 million.

Strat Aero Llc. promised to pump hundreds of thousands of dollars into the company, along with cutting-edge expertise, at a time when the buzz about unmanned aircraft was hitting a fever pitch.

But by the end of last month the deal had crashed, with Smith being fired and sued by Strat Aero for making misrepresentations about his company during the sale. Smith countersued, accusing Strat Aero of breach of contract and fraud among other things.

“They promised to take our technology and turn it into a household name, not only in the U.S. but abroad,” said Smith, who is seeking more than $1 million in damages. “I was dismayed, shocked and angry.”

Repeated attempts by the Star-Telegram to contact Strat Aero’s Fort Worth attorneys have been unsuccessful. Efforts to reach company executives also have not produced any response.

But in a news release posted on the London Stock Exchange website, the company says it has a strong claim and will have a robust defense against Smith, saying his counterclaim is “without merit.”

Taking flight

Aero Kinetics and Strat Aero US Holdings announced the sale of the Fort Worth company in December. Smith started a forerunner of Fort Worth-based Aero Kinetics in 2003 and already had contracts with several Fortune 100 companies, he said.

When the deal was made public, Smith said joining forces with London-based Strat Aero would allow his company to take flight with the goal of making drones a daily part of everyone’s life. Aero Kinetics has offices in Fort Worth and Denton.

Aero Kinetics develops, designs, builds and leases drones and shows three unmanned aerial vehicles on its website. The company filed for FAA certification so the devices could be used in commercial applications. (Smith declined to name his customers, citing the ongoing litigation.)

“We are excited about moving forward with Strat Aero, widening our global reach and breaking new ground in the unmanned aircraft space,” Smith said then. “Our company has been at the leading edge in one of the most promising and fastest-growing sectors of aerospace in decades.”

Strat Aero leaders were equally excited about the synergy between the two companies. The British company described itself in a news release as a multidivisional international aerospace services firm focused on the unmanned aerial systems market.

“Strat Aero has significant unmet demand in our sales pipeline, along with operation and flight training expertise that will further enhance Aero Kinetics proven business model and market share,” Strat Aero CEO Tony Dunleavy said in a statement.

In January, Strat Aero said it was entering the Chinese and Asian UAV markets after signing master franchise agreements with a Hong Kong-based company to roll out a training program for companies that want to use drones.

In February, the company said it expected $430,000 in revenues in 2015 and had a cash balance of $1.13 million at year’s end, according to a news release. While predicting a brighter future, it still expected a loss of $3.9 million.

The deal also came at a time when market research indicated that the drone industry was about to take off. In January, the Consumer Technology Association said it expected sales of drones weighing more than 250 grams — the minimum for FAA-mandated registration — to reach 1 million in 2016, a 145 percent increase from last year.

Smith, who said the two companies started negotiations in July, was to remain chairman of Aero Kinetics while also serving as president of mission systems for Strat Aero. He was to be paid a $150,000 base salary with incentives that could boost his pay to $325,000, according to court records.

But the wheels quickly came off the deal, with Strat Aero filing a lawsuit in Tarrant County civil court in late March, contending that Smith had made “misrepresentations to induce (Strat Aero) to enter into the deal,” court records show.

“Smith became cloaked with some apparent authority over the operations and management of the now combined companies” and began “a series of bizarre, almost inexplicable acts which disrupted the operations of the companies,” the lawsuit states.

On Feb. 17, Strat Aero terminated Smith and asked the court to declare the purchase agreement null and void, according to court documents.

Crash and burn

Smith blames Strat Aero for making the deal go down in flames.

“Shortly after executing the sale, we were disappointed with the failure to follow through. The capital was not available and the support we were promised was not delivered,” he said.

For example, Strat Aero had promised to pay $505,000 in cash, and provide another $1.6 million in secured and non-secure notes for Smith’s companies, court records show. But during a meeting in Dublin in January, Smith allegedly discovered Strat Aero’s capital was “restrained” and that the company was nearly insolvent, court records state.

“I never had access to any of the private books or other corporate documentation,” Smith said. “We relied upon the reputation of the regulators in the United Kingdom as well as the reputations of the board of directors.

“When we started asking tough questions about the financial status of the company and the overall business model that would allow us to bring our dreams to reality ... they came up short, they shot the messenger,” he added.

In his lawsuit, Smith accuses Strat Aero of, among other things, operating a “ponzi-like operation” that announces it is entering into transactions with Aero Kinetics and other companies to induce investors to infuse additional capital into the company. In its April 11 pleading, Smith’s attorney contends Strat Aero owes almost $782,000, plus interest.

Smith claims he was wrongfully terminated and has not been allowed to attend Strat Aero board meetings. He also said that Strat Aero has improperly taken control of certain hardware, computer equipment and servers that were owned by another company Smith owns.

Despite having Aero Kinetics tied up in litigation, Smith said he continues to work in the unmanned aircraft industry.

“I’m not going to let some foreigners (diminish) our desire to bring the technology forward,” Smith said. “There is way too much at stake to have some speed bump like this stop us.”

Max B. Baker: 817-390-7714, @MaxbakerBB