Sex, lawsuits, and millions down the drain: the secrets behind Aerodrome's value destruction
Sex, lawsuits, and millions down the drain: the secrets behind Aerodrome's value destruction
A staggering 95% plunge in value merely scratches the surface of the tumultuous events that have unfolded at this UAV manufacturer in recent years. One instance involved an employee who, while providing training in Kazakhstan, violated security protocols by bringing a local woman to his hotel room, resulting in severe damage to the company's collaboration with Elbit
In February 2018, Elbit's security officer sent an unusual email to the head of the company's flight administration, who was responsible for a project named "Irbis" involving the integration of unmanned aerial vehicles (UAV) in the Asian Republic of Kazakhstan. In the email, the subject line of which included the name of a senior instructor on the team who operates an aircraft on behalf of the publicly-traded company Aerodrome, Elbit's security officer wrote: "The matter in question blatantly deviates from the instructions and security rules that were passed on to him (I won't go into detail here), in a way that endangers him and the other team members. I request that action be taken to return him to Israel as soon as possible. His departure to this site will not be approved."
"This is a very rare email; I don't remember when was the last time I received an email from the company's security officials regarding one of our employees," wrote the project manager in Kazakhstan in a follow-up email. In a subsequent lawsuit filed by Aerodrome against that employee, they claimed that the exceptional event led to a reduction in Elbit's contracts with Aerodrome, resulting in "actual harm to the company's operations and its revenues, which decreased by a million shekels," according to the lawsuit. Moreover, this event opened up a real Pandora's box.
As the senior operator admitted in a lawsuit filed against Aerodrome, he met a local young woman whom he brought to his room and engaged in sexual relations with. The operator claimed he met the young woman at a local gym. At Aerodrome, they alleged that all indications pointed to her being an escort girl, although this claim was not proven. In any case, it was a violation of the strict guidelines surrounding the defense project, which took place in a predominantly Muslim country with limited diplomatic relations with Israel. These guidelines included not allowing a foreign individual into the hotel, exercising caution and discretion when interacting with foreign parties, maintaining a low profile, preserving one's identity, and avoiding solitary walks.
The reason for implementing strict security procedures was the fear that hostile elements would expose the team's location and potentially attempt to harm or kidnap one of them. Security sources state that intelligence organizations from enemy countries employ intimate encounters with local women as decoys as a method to gather intelligence or later recruit sources through blackmail. "The operator on behalf of the Aerodrome disregarded the majority of the instructions, sometimes in a blatant manner," stated the person in charge of physical security abroad in Elbit's intelligence division, who attached the updated guidelines.
The operator of the aircraft, whose claim for compensation was partially accepted in a labor court conducted behind closed doors a few months ago, argued in his defense that engaging with local women for sexual relations as part of security projects abroad was not uncommon. Among other things, he mentioned a project called "Uranus" in Chile, where he also served as a guide and together with another worker hosted women in the hotel where they were staying.
He further claimed that operators' relationships with local women, even in the form of continuous relationships, were not rare. "Not only was this not prohibited, it was customary and routine," the operator revealed. "Many others managed or are managing such and other relationships during their stay abroad as part of work (employees of the company and service providers)."
The operator stated that a senior official at Aerodrome "not only knew about it, considering the increase in bills at the hotel when another guest stayed in the room, but also boasted about the girls abroad during his time at the Aeronautics company and the girls in Chile to which I was assigned to fly." The operator added, "As far as we know, at least four other employees of Elbit company even married or became engaged to foreign women whom they met while working abroad." In his court testimony, the senior official denied the allegations made against him and claimed ignorance regarding the rest.
Aerodrome's involvement in the project in Kazakhstan is only the tip of the iceberg of lawsuits and unusual events in recent years, in a company that has become a symbol of value destruction on the Tel Aviv Stock Exchange. Those who have invested in sectors such as high-tech, technology, and defense companies under the allure of glamor and promise have discovered that not everything that glitters is gold. Aerodrome, which went public in May 2020 after a merger with Noam Lanir's stock exchange shell company Apply valued at NIS 50 million (approximately $13.5 million), is now trading at a value of approximately NIS 30 million ($8 million). This represents a 95% decrease in value within three years from its peak trading value of NIS 670 million ($180 million).
According to the company's financial reports, controlled by founder, CEO, and director Roi Degani (39%), it experienced a decrease in gross profit rate from 37% to 34% in 2022 compared to the previous year, and incurred a deeper loss of NIS 11.8 million despite a 31% increase in revenue, reaching NIS 24.4 million. The company attributes the deepening loss to increased salary expenses and professional services. Meanwhile, it appears that institutional investors More Investment House and Harel Insurance, who attempted to halt the distribution of NIS 400,000 bonuses to Degani and another director at the shareholder meeting in late 2021, have given up. Currently, there are no institutional holdings in the company.
According to its reports, Aerodrome operates in two main areas. The first is the collection, processing, and analysis of information using drones in the civil and security sectors. This is carried out through operating customer fleets in various projects, including those of Elbit in Chile and Kazakhstan, as a subcontractor. The second area, referred to as "transfer of knowledge and technology" in its reports, involves the use of security software from a subsidiary company called SGC, which Aerodrome acquired in February 2021 for an immediate and future consideration of NIS 30 million. This acquisition has resulted in a conflict between the parties and an ongoing lawsuit in the Tel Aviv District Court.
However, with all due respect to its software activities, Aerodrome gained recognition among investors primarily for its operation and maintenance services of UAVs. According to its reports, these services accounted for two-thirds of its revenues in 2022, totaling approximately NIS 16 million. This field is familiar to CEO Degani as he previously served as an IDF officer and operated an Elbit Hermes 450 UAV. In an interview with the "Globes" newspaper, Degani shared his past experience at Aeronautics, which also operates in this field. Afterward, he co-founded Aerodrome with three partners, two of whom were former senior officers in the Air Force, and the other a civilian pilot.
Five wage claims submitted to the labor courts by aircraft operators, most of whom provided services to Elbit, reveal documents and testimonies about some of the 18 countries where Aerodrome operates independently or as a subcontractor, or was in negotiations to secure contracts. According to one operator, Aerodrome employs 20 pilots who are graduates of the Air Force and serve in the reserves. These pilots provide services to customers, making up a significant percentage of the company. Some of the countries mentioned where operators served as instructors for flying manned aircraft remotely include Rwanda and Zambia in Africa, South Korea, Thailand, and Kazakhstan in Asia, and Chile in South America.
For instance, in one of the filed lawsuits, a UAV operator who worked as a freelancer on a two-week project for the company in Zambia claimed that Aerodrome failed to fulfill its financial obligations. In response, Aerodrome stated in its defense that the employee submitted an inflated and false invoice.
In another lawsuit, regarding an operator who worked for approximately 13 months at the company and served as a pilot in Elbit projects in Israel and abroad, the company claimed that his resignation damaged its reputation. The company said various clients expressed dissatisfaction with the employee's departure. The clients claimed that it negatively impacted their ability to rely on the company's employees for occupational stability and their desire to add additional employees to the service pool for Elbit projects. This claim ultimately led to a financial settlement. Two additional wage claims were resolved confidentially, while in two other claims, the operators were partially compensated.
Moreover, it appears that the company also experienced conflicts with one of its founders who departed before it went public. The founder, a helicopter pilot from Caesarea who owns two factories and two consulting companies, was contacted by Degani to assist in reaching understandings for a tripartite agreement involving the marketing of a new drone between Aerodrome, the Israeli company Flying Production, and a South Korean company called Keva Drone. According to the lawsuit, the former founder stated that he successfully resolved the South Korean matter but encountered disputes between Degani and the other Israeli CEO. The consultant testified in court last September and presented documents demonstrating that he was only paid half of his salary. Aerodrome did not submit a defense letter nor attend the hearings. As a result, the judge awarded the former partner compensation of NIS 18,000.
Furthermore, Aerodrome is currently involved in another legal dispute with the three founders of SGC, a company it acquired in February 2021. Along with SGC, the acquisition also included rights to the security activities of the NPO company it owns, which developed software called Next Plus. This software assists engineers in assembling machines such as airplanes or UAVs and provides instructional videos, 3D diagrams, and verbal aids for maintenance and operation conducted by production personnel.
The list of customers, both active and inactive, of NPO's software in the three years prior to its acquisition by Aerodrome included 275 names. Among the active clients listed are notable entities such as the offensive cyber company NSO, defense companies Elbit and Israel Aerospace Industries (under IMI), the IDF Air Force, the Prime Minister's Office, and Unit 105 for the protection of children in the Israel Police. Additionally, as mentioned in the claim letter, there are also civilian companies like Strauss that utilize the software.
In the lawsuit filed in March at the Tel Aviv district court, the three founders of SGC claim that Aerodrome has violated their agreements and refuses to pay them the full consideration, which was dependent on meeting qualitative and quantitative goals amounting to 10 million shekels. The lawsuit alleges that “SGC, under Degani's leadership, deteriorated after the purchase deal was executed, and through negligent actions prevented the achievement of the goals."
SGC puts forth two claims. The first claim, supported by an expert opinion, is that Aerodrome markets two programs similar to Next Plus to its customers. The claim states that "Aerodrome's deliberate and malicious action is evident in freezing NPO's software in the defense market (the primary market for the software). This malice resulted in a lack of marketing, while claiming exclusivity for this market, and not providing sales and support personnel. It caused significant damage to the software's reputation and that of NPO."
The second claim is that Aerodrome financially drained NPO and failed to provide customer support and professional response, leading to employee resignations. The claim argues that Aerodrome's conduct intentionally deteriorated SGC's activities, with examples cited such as not paying suppliers for services rendered, making it impossible to fulfill the company's commitments to its customers. The plaintiffs claim that several companies, including the Strauss Group, Elbit, and IAI, decided not to order additional services or significantly reduced their orders due to Aerodrome's conduct.
Aerodrome has yet to file a statement of defense. Email correspondence between the parties before the lawsuit indicates that Aerodrome denies the allegations. In an email response from Aerodrome's lawyers, it is stated: "This is an illegal and blatant attempt to terrorize the company. The claims have no basis and are nothing more than serious slander. It appears that your client’s purpose is to retroactively change the terms of the deal and unlawfully receive money from Aerodrome." In a report to investors following the lawsuit filing, Aerodrome expressed the opinion of its legal advisors that the claims are baseless, estimating that the chances of success for the lawsuit are low.
In response to the claims made by former employees, Aerodrome stated: "Over the years, the company has employed over 230 employees and contracted with dozens of service providers. Disputes on a small scale may unfortunately arise from time to time. The cases mentioned in the article were settled out of court for negligible amounts. These events occurred before the company went public."
Regarding the claim that an employee's violation of rules in Kazakhstan harmed the engagement with Elbit and the company's revenues, Aerodrome stated: "The company's revenues and distribution among its key customers are reported in the annual reports. These issues were brought before the court in 2017-2020, so their effect on the company's current results is not relevant." Aerodrome also emphasized that it has numerous paying customers, and that with Elbit being one of the largest defense companies in Israel, working with it requires compliance with stringent standards, in particular in regard to activities in foreign countries.
Regarding the data indicating that administrative and general expenses impacted the profit line, Aerodrome explained: "During 2021-2022, the company recognized the administrative and general expenses of two acquired companies for the first time, resulting in an increase compared to the previous year. The company is implementing efficiency measures." Aerodrome further stated its rejection of all claims made by the SGC subsidiary.
