May 14, 2010      

What is one to make of Sanswire Corp.? The company (OTCBB:SNSR) is a producer, in partnership with Sanswire-Tao Corp., of “patented lighter-than-air (LTA) unmanned aerial systems (UAS) with the goal of providing intelligence, surveillance, and reconnaissance (ISR) support in various applications.”  Sanswire’s technical vision has much to its credit. Also, following the military successes of small unmanned ground systems and unmanned aerial vehicles in the wars in Iraq and Afghanistan, governments across the globe have become enamored with all things unmanned, including unmanned LTA platforms. But vision and a primed market do not a product make (or a company). Unsavory past business practices complicate matters further. For a relaunched Sanswire, the unmanned LTA opportunity is great. Still, after reviewing the technology, the company, and the target market, the question remains, “What is one to make of Sanswire?”

Compelling Story
To be sure, Aventura, Fla.-based Sanswire has a compelling story in a compelling market. Initially, however, a significant market for LTA technology was lacking. Over the years, a number of companies have pitched LTA vehicles for a variety of uses, including advertising, surveillance, and as a platform for wireless telecommunications and cargo transport, but nothing really “stuck” and a significant market never materialized. Companies and technology came and went. Blame for the lagging market was placed on unfamiliarity with the technology, or outright misperceptions relating to the robustness and safety of LTA vehicles (the Hindenburg disaster looms large). The primary reason for the lack of progress, however, was that there was no “killer” application, and thus no sizable market, for LTA vehicles.

The acts of September 11, 2001, and the follow-on wars in Iraq and Afghanistan, changed all that. Governments deemed that LTA vehicles could provide a number of useful functions in a military and security context, primarily as sources of high-altitude surveillance. For example, consider the process of “backtracking.” Backtracking requires unbroken, persistent surveillance of large geographic areas. When an event occurs, such as the explosion of an IED, the surveillance record can be played backward until the time the explosive was planted. Running the record back further allows one to follow the bomb makers to their hideouts. Persistent surveillance would also provide soldiers on the ground with a constant, unblinking eye to watch over them while on missions.

Origins as a Communications Platform
Sanswire was founded in 2002 as Sanswire Technologies, which had the intent to build a wireless broadband network for the United States. In 2004, the majority of Sanswire Technologies’ assets were sold to GlobeTel Communications Corp. On paper the acquisition appeared to be a win-win. GlobeTel, a provider of VoIP and wireless telecommunications products and services, was a company on the move. It was publically traded on the American Stock Exchange (AMEX, now NYSE Amex Equities) and in 2003 was ranked 27th on Deloitte’s Technology Fast 500.

Following the acquisition, the company, operating as Sanswire Networks LLC, one of five GlobeTel divisions, focused on the construction of “Stratellites” (a combination of stratosphere and satellite), high-altitude airships capable of carrying communications payloads that allow for the transmission of various types of wireless communications signals (broadband, 3G/4G mobile phone, digital television, and radio signals).

The value proposition for the Stratellite platform was multifaceted and very compelling. The concept called for a Stratellite to remain hovering at approximately 60,000 to 65,000 feet (13 miles) at a fixed GPS coordinate. At this height (the low stratosphere), the Stratellite would be a disruptive technology, providing, at low cost, the wide area of coverage of a satellite system and the two-way communications capabilities of towers. Stratellites, the story went, could act as surrogate satellites that could be set up more quickly and cheaply than satellites, or even terrestrial build out, to provide communications to unserviced areas.

Troubling Times
The Stratellite concept captured the imagination of both the technology and business press. Stratellite articles and GlobeTel speaking engagements followed. Sales of GlobeTel stock were pulling in millions for the company. But all was not well at GlobeTel/Sanswire.

While technology and science publications continued to pump the GlobeTel Stratellite story, the financial press, company investors, and knowledgeable industry insiders turned skeptical. Many wondered how a small company could compete with aviation giants such as Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), Raytheon (NYSE:RTN), and BAE Systems, as well as international communications companies including Cisco (NASDAQ:CSCO), Motorola (NYSE:MOT), Qualcomm (Nasdaq:QCOM), Verizon (NYSE:VZ), and AT&T (NYSE:T). An announcement that the initial Stratellite wireless installation would be in Columbia raised eyebrows. Delays and deal cancellations further increased misgivings.

Figure 1. A Long and Winding Road for Sanswire
2002
Company founded as Sanswire Technologies
Mar 2004
Assets sold to GlobeTel Communications Corp.
Dec 2005
GlobeTel agrees to build WiMAX network for Russia’s Internafta
May 2006
GlobeTel cancels Internafta deal; shareholders file class action suit
Fall 2006
AMEX delists GlobeTel; SE C investigates GlobeTel’s accounting practices
May 2008
SE C files formal charges against GlobeTel and some former executives
June 2008
GlobeTel Communications and TAO Technologies GmbH form LLC Sanswire-TAO Corp.
Oct 2008
GlobeTel Communications changes name to Sanswire Corp.
Jan 2009
GlobeTel former CFO Thomas Y. Jimenez pleads guilty to obstructing and impeding administration of U.S. tax laws
April 2009
Major General (Ret.) Wayne P. Jackson joins Sanswire board of directors
May 2009
Captain (Ret.) David A. Christian elected Chairman of the board of directors
May 2009
Jimenez receives three-year sentence and is ordered to pay roughly $587,000 in restitution
June 2009
Thomas Seifert named CFO
Aug 2009
Sanswire moves from Pink Sheets to the Over the Counter Bulletin Board (OTCBB)
Aug 2009
David Christian becomes Sanswire CEO
Oct 2009
Former GlobeTel CEO Timothy J. Huff named in a 16-count indictment
Dec 2009
STS-111 “Stratellite” airship demonstrated in Germany
Dec 2009
Sanswire receives funding commitment from Global Telesat, through the purchase of Sanswire common stock, for the completion of the STS-111
Feb 2010
CEO and board chairman David Christian, and board member William J. Hotz, resign; Wayne Jackson becomes board chairman and John Robusto joins as executive adviser
Apr 2010
Global Telesat purchases a 50 percent interest in SkySat airship
July 2010
Sentencing date set for Huff

Skepticism turned to cynicism and distrust following a December 2005 agreement between GlobeTel and Russia’s Internafta for a $600 million project to build a WiMAX network for the 30 largest cities in Russia. GlobeTel’s stock soared, but industry observers found little in the announcement to overcome their suspicions and uncertainties. Five months later GlobeTel cancelled the deal. Recriminations on both sides followed, and GlobeTel stock plummeted. Shareholders filed a class action suit that GlobeTel eventually settled for $2.3 million.

Scathing articles in the financial and general press followed the dissolution of the Russian WiMAX deal highlighting GlobeTel’s origin as a home builder, medical supply company, and computer company. The articles were full of tales of shady stock analysts; shadier consultants, owners, and advisers; missed deadlines; convoluted partnership and financing schemes; and on and on. All through the mess the press releases from GlobeTel continued to pour forth. Some analysts described the company as a classic “pump and dump,” the term given to the practice of inflating the price of a stock by owners of the company through misleading or false claims, which is then followed by a sell-off of the overvalued stock by the same owners.

In the fall of 2006, the real trouble began. First, AMEX delisted GlobeTel (GlobeTel moved to the Pink Sheets over-the-counter electronic quotation system). Then the Securities and Exchange Commission (SEC) announced an investigation into GlobeTel’s accounting practices. Suits and counter suits between GlobeTel and former employees began to fly. Resignations of executives and board members followed.

The SEC inquiries eventually led to multiple formal charges being leveled at GlobeTel and a number of former executives and directors in May 2008. A year later, GlobeTel Communications’ former CFO, Thomas Y. Jimenez, pleaded guilty and was sentenced to 36 months imprisonment and ordered to pay $587,000 in restitution. This sentence followed a January 2009 plea to one count of obstructing and impeding the due administration of the U.S. tax laws. According to court documents, Jimenez failed to report to the IRS approximately $2.8 million in stock compensation paid to him and other corporate heads by GlobeTel.

Former GlobeTel CEO Timothy J. Huff was named in a 16-count indictment charging him with conspiracy to commit securities fraud, falsifying financial reports, wire fraud, and lying to the company’s outside auditor. Huff pleaded guilty to securities and tax fraud conspiracy. Sentencing has been set for July 26, 2010.

New Business Plan
In the midst of the GlobeTel meltdown, the remaining executives and board members began the long process, still under way, of rebuilding the Sanswire brand and relegitimizing the company. This effort began with a major restructuring in 2007, which included the shedding of GlobeTel divisions to focus exclusively on unmanned airships.

Since the majority of current spending on LTA vehicles comes from governments for defense applications, the company made the strategic decision to focus on the military and security markets. With regard to applications, in the near term the company would focus on low- to mid-altitude unmanned airships and lead with surveillance. Airships as wireless communication platforms, while not downplayed, was second in the GlobeTel application hierarchy.

In June 2008, Sanswire, still a subsidiary of GlobeTel Communications, partnered with Stuttgart, Germany-based TAO Technologies GmbH to form a joint venture, Sanswire-TAO Corp., which would exclusively own, market, and sell all the technology and intellectual property associated with TAO’s LTA unmanned aerial vehicles in North America. The TAO contribution was considerable, consisting of more than 14 years’ worth of R&D and patents for segmented, nonrigid airships, propulsion systems, and flight control technology. The formation of the joint venture followed a 2007 agreement involving the conveyance of certain airship and sales rights.

In October 2008, the company formally changed its name from GlobeTel Communications Corp. to Sanswire Corp. In less than a year, Sanswire announced that it ended trading on Pink Sheets in favor of the Over the Counter Bulletin Board (OTCBB). The Pink Sheets system is not a registered stock exchange and lists stocks that cannot meet the regulatory requirements of major stock exchanges such as the NASDAQ. Pink Sheets stocks are not regulated by the SEC, and there are no requirements for publishing financial data.

Typically, Pink Sheets stocks are small, high risk, and rarely traded issues. The OTCBB is the electronic trading system offered by the National Association of Securities Dealers. All securities quoted on the OTCBB are subject to periodic filing requirements with the SEC or other regulatory authority. This move by Sanswire management increased the legitimacy of the company, making it more attractive to more sophisticated individual and institutional investors.

Throughout 2009, Sanswire continued to rebuild. It retained the services of Investor Relations Group (IRG), a New York-based corporate communications firm, to manage investor relations and provide general outreach. The company also added a new CFO, Thomas Seifert.

In the fall of the same year, Sanswire announced that it had signed a memo of understanding (MOU) with the Command & Control Systems and Software division (C2S2) of L-3 Communications (NYSE:LLL), a leading (and quite large) defense contractor. The good news continued when Sanswire received a commitment of $800,000 from Global Telesat Corp. to accelerate the completion of the STS-111. According to the funding announcement, Global Telesat arranged the funding through the purchase of Sanswire common stock.

The Plan for Products
The Sanswire product plan, through the joint venture Sanswire-TAO, is to develop a series of airships that can operate at altitudes ranging from 3,000 to 45,000 feet, with the ultimate goal of producing a Stratellite platform capable of reaching 65,000 feet. The company currently has three separate aerial vehicles under development. The cigar-shaped SkySat is a mid-altitude vehicle, while the solar-powered, autonomously controlled SAS-51 is designed for low altitudes. The third platform, and the current focus of the company, is the development of the STS-111, a 111-foot Stratellite designed to operate between 10,000 and 30,000 feet as a surveillance platform.

As part of its rebuilding effort, Sanswire needed to demonstrate that it could produce a working STS-111 prototype. In December 2009, Sanswire-TAO privately demonstrated a test version of its STS-111 unmanned airship in Stuttgart, Germany. Video of the flight can be found on the Sanswire website. Following the success of the Stuttgart demonstration, Sanswire announced that it would unveil and demonstrate the STS-111 LTA vehicle in the second quarter of 2010 in Orlando, Fla.

In addition to airships, Sanswire officials note that the company has developed other technologies, some patented, that represent opportunities for future commercialization as standalone products. These include the company’s fuel gas engine and autonomous airship control system. A third Sanswire technology, the patented Precision Air Drop Delivery System (PADDS), is a paraglider-type delivery system that incorporates a GPS-based autonomous flight control technology that allows for the precision delivery of payload. Using PADDS, payloads can be dropped from overhead and land at a predetermined destination with great accuracy, even in poor weather.

Sanswire Approach
Sanswire envisions an autonomous LTA vehicle that provides capabilities superior to that of both traditional blimps and heavier-than-air, fixed-wing designs (unmanned or not). Unlike tethered airships (aerostats), the Sanswire LTA systems are capable of movement. Blimps can also move, but are controlled through onboard piloting. The Sanswire systems under development move, but are unmanned. The airships can be teleoperated from ground control stations (“human-in-the-loop” control), or they can maneuver autonomously, moving from one GPS waypoint to another.

The STS-111 differs from airships in another significant way. Basically, there are two types of LTA vehicles. The first is a rigid airship like Goodyear’s famous blimp. In contrast, Sanswire’s STS-111 platform is based on a novel, multisegmented airship design. The first segment contains a 360-degree vector thrust engine that propels and guides the remaining segments (similar to a train engine pulling the following cars). According to Sanswire, the flexible articulating structure provides for a more stable platform compared with traditional blimps, allowing the STS-111 to stay on station in the face of wind gusts or wind shear. Segmented airships can stay up and in place longer than traditional LTA designs, making them better suited for persistent surveillance.

Sanswire believes that its propulsion system also provides a competitive advantage over other airship designs. Older airships that burn costly and heavy liquid fuels lose weight and rise during flight unless gas is vented to maintain neutral buoyancy. The STS-111 runs on a neutrally buoyant mixture of propane and ethane to power the airship’s engine and electronics. Sanswire’s fuel gas is inexpensive and is the same weight and buoyancy as air. The airship’s buoyancy is provided by helium, which is housed in the first section only. The remaining segments are filled with the fuel gas, which has the same density as the surrounding air. As the engine burns the gas, the ship does not become lighter. Air is pumped into the trailing segments to maintain the airship’s mass and shape.

Advantages over Fixed-Wing Solutions
Sanswire claims that its LTA systems offer certain advantages over fixed-wing unmanned aerial systems for ISR applications. First, they can perform active surveillance for longer periods of time than UAS. Most unmanned aerial systems are propeller driven and run on heavy fuel, requiring that they land often to refuel. They also require constant maintenance.

Developers of airships state that they are much stealthier than winged systems. According to Sanswire representatives, the company’s LTA systems are much quieter than the typical winged UAS, and their nylon outer covering and carbon fiber frame present a low radar signature. Airships are also more difficult to see at high altitude. The visual footprint of a large LTA surveillance vehicle stationed at 60,000 feet is much less than, say, a winged UAS at 40,000 feet, the normal operating altitude of Northrop Grumman’s Global Hawk, or the 19,000-foot altitudes for General Atomics Aeronautical Systems’ Predator UAS.

The primary advantage of LTA vehicles over winged UAS is cost. Large unmanned aerial vehicles, as well as many smaller systems, require runways, expansive hangers, expensive fuel, and large maintenance teams. According to Sanswire officials, however, the company’s lighter-than-air products do not compete at all with larger UAS such as the Predator. Large unmanned aerial systems have payload capacities that can support multiple sensor suites, while Sanswire platforms have a lower payload capacity than large, fixed-wing systems and typically support only a single sensor. Sanswire airships, the company notes, compete on payload and price with small unmanned aerial systems such as AeroVironment’s (NASDAQ:AVAV) Raven and Boeing’s ScanEagle.

Large, Established Competition
Sanswire is not without competition for either military or commercial airship applications. A 2006 report to the U.S. Congress noted that approximately 32 companies are involved in the design or manufacture of more than 100 commercially available airships and aerostats in Europe, Asia, and North America. In the defense arena, Sanswire faces competition from some of the largest defense contractors in the world, including Raytheon Corp. and Lockheed Martin, for lighter-than-air vehicles capable of providing surveillance and acting as a communications relay. Smaller defense contractors, too, such as UAS developer AeroVironment, are in the hunt for developing unmanned LTA systems for the military.

Contracts have been awarded and programs are already under way to provide the militaries across the world with tethered systems (aerostats), manned blimps, and unmanned LTA vehicles. Raytheon recently tested two 233-foot aerostats at 10,000 feet as part of a $1.4 billion contract the U.S. Army awarded Raytheon in 2007. The aerostat’s raison d’etre-long-term, persistent ISR at a fraction of the cost of aircraft based efforts-is exactly the same as Sanswire’s pitch. Unmanned airships are also under development. For example, the U.S. Army Space and Missile Defense Command is receiving bids for a Long Endurance Multi-Intelligence (LEMV) unmanned airship demonstrator that will carry 2,000 pounds of payload, provide persistent surveillance, and remain airborne at 20,000 feet for three weeks. Prime defense contractors such as Lockheed Martin, Northrop Grumman, and others plan to bid.

Cultural Resistance
Another competitive threat to Sanswire comes from its primary target customer-the U.S. military services themselves. At this time, unmanned aerial vehicles of the winged variety have found huge favor in military circles worldwide. While the programs for LTA technology development have been funded, they are dwarfed by winged UAS programs. Some LTA programs, such as the U.S. Defense Advanced Research Projects Agency’s (DARPA) WALRUS heavy lift air vehicle program, have been cancelled. The winged-LTA funding disparity has been criticized by industry observers, who blame the disproportion not on a lack of suitable technology or applications, but on politics and cultural resistance to airships in general by those in the military (primarily the U.S. Air Force).

Critics warn that persistent surveillance is a critical military need and that lagging LTA systems development efforts are reducing operational effectiveness-and even costing lives. But methods and technologies for persistent surveillance systems using winged, heavier-than-air systems are under way. DARPA, for example, is preparing a Phase 2 contract for $155 million for the development of a new aircraft known as Vulture that would be able to carry a 1,000-pound payload and spend up to five years on station at 60,000 to 90,000 feet. Other approaches include teams of different classes of UAS systems coupled with satellite surveillance, perching aerial drones, and micro unmanned aerial systems that operate close to surveillance targets.

Lingering Doubts
Sanswire was correct in its decision to target the lucrative defense market applications area where unmanned systems and persistent surveillance intersect, particularly with two asymmetric wars under way in Afghanistan and Iraq. Still, even if Sanswire were able to compete with defense industry stalwarts like Boeing and Lockheed Martin, as well as overcome the cultural resistance to airships in the military markets it servestwo major hurdles unto themselves-lingering doubts remain concerning the company’s ability to execute on its technology and business vision.

Questions remain as to whether Sanswire can actually deliver on a working autonomous airship that can function as a surveillance platform for defense and security applications. According to TAO, the company has been developing segmented airship designs for more than a decade, and GlobeTel/Sanswire has been promoting the concept for years. The high-water mark for this work was the December STS-111 demonstration in Germany, which while commendable, did not appear earth-shattering.

The complexity and novelty of the STS-111 technology require serious R&D budgets. The $800,000 from Global Telesat Corp. (funded through the purchase of Sanswire common stock) would go a long way, but is only a beginning. Sanswire itself is not in a position to supplement the funding. In its annual report for the 2009 fiscal year, Sanswire reported a net loss of $9.4 million, or $0.04 per share, on no revenue. The FY2009 figures are in keeping with those for fiscal years 2008 and 2007. For FY2008, Sanswire reported a net loss of $4.6 million with no revenue (a loss of $0.03 per share), while for FY2007 the company reported a loss of $11.6 million on revenues of $53,700 (a loss of $0.10 per share).

Until quite recently, Sanswire could not even say that it had a paying customer or had sold a product. Shareholder Global Telesat, however, has agreed to purchase a 50 percent interest in one Sanswire SkySat mid-altitude airship for the price of $250,000 (paid in installments). The agreement calls for Sanswire to complete work on the LTA vehicle so that it can be tested and demonstrated to potential customers. Global Telesat also has the option to purchase the remaining 50 percent for an additional $750,000. This would account for half a sale. In keeping with the agreement, Sanswire quickly announced an agreement with contract electronics engineering firm Eastcor Engineering LLC to integrate a variety of ISR technologies into the SkySat.

As part of its reorganization, Sanswire has made significant executive moves, most notably adding officers with strong military ties (a solid and oft-copied strategy for defense contractors). In April 2009, Sanswire raised the level of its profile within U.S. defense circles with the addition of Major General Wayne P. Jackson (USA-Ret.) to its board of directors. The following month, Captain David A. Christian (USA-Ret.) was named chairman of the board of directors, and in August he was named Sanswire’s CEO. In February 2010, however, Sanswire announced Christian’s resignation (“for personal and health reasons”) along with board member William J. Hotz. Jackson became the Sanswire board chairman. The company did bring on decorated defense expert John Robusto as executive adviser to counsel the company on its strategic direction, but the continued executive churn remains troubling.

A Second Chance?
American poet and writer Anthony Walton once said, “America’s greatest strength, and its greatest weakness, is our belief in second chances, our belief that we can always start over, that things can be made better.” In this context, Sanswire could be the poster child for second chances.

Sanswire’s process of rebuilding is commendable, but only if it creates a solid business that serves its customers and shareholders. There is no reason to doubt this (and I do not), but each step forward, and there have been some, comes with a caveat, or at least unanswered questions. The L3 MOU is a great win, but why no mention in a press release or on either party’s website? The SkySat sale to Global is another plus, but why a contingent sale (and to a major stockholder)? Are unmanned aerial vehicles, persistent surveillance, and border security just replacement memes for WiMAX and broadband now that plans for stratospheric wireless communications stations fell through and the really big money is on the Obama administration’s (and militaries worldwide) plans for opening wide the funding spigots for unmanned systems?

Basically, it comes down to the question: Is Sanswire just another South Florida penny stock operation, or a legitimate LTA solution provider that has struggled mightily to put its past behind it and has a novel technology (segmented airships) in an expanding market (unmanned systems) that can solve a real need (military/security persistent surveillance applications)? I lean to the latter, but that might not be enough. The technical and competitive hurdles are daunting. The announced Q2 demonstration of the STS-111 system should go a long way to resolving the issue. Until that time, I still must ask, “What is one to make of Sanswire?”

The Bottom Line
After a series of business mishaps, Sanswire Corp. has reinvented itself to focus on delivering a series of unmanned airships that support persistent ISR operations and other applications. The company has a unique technical approach for delivering workable solutions, and has made progress on its vision. But it must provide convincing demonstrations if only to attract more funding for further development. Even if it does so, Sanswire faces considerable competition from large, established aeronautics defense contractors with deep and longstanding contacts among government funding agencies in the United States and elsewhere.