Message from the CEO

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Date: February 10, 2010

Aeroquest had a very, very difficult year both operationally and financially in fiscal 2009. As a direct result of the Global Financial Crisis (now referred to as the GFC), the world's economies began to contract and the bottom fell out of our market - greenfield exploration for minerals and petroleum. Aeroquest is heavily dependent on exploration spending to drive its Airborne Geophysics Survey businesses. The uncertainty created in the minds, and reflected in the actions, of our clients resulted in revenue declining across all of our companies: UTS Aeroquest (Australia), Aeroquest Surveys (Canada), and Geophex (United States) on the order of 50% in one year.

Oddly, gold averaged about $975 an oz. for the 2009 year, copper averaged $2.30 per pound, and oil averaged over $62 per barrel.  Similarly, the prices of silver, nickel, zinc and other major industrial and precious metals have, for the most part, recovered dramatically from their lows in the first quarter of 2009.  The average 2009 prices for all these major resource commodities would, in normal times, stimulate greenfield exploration spending.  Throughout 2009, however, they did not.

The 2009 fiscal year ended pretty much as we expected it would - with an increase from the activity levels of our third quarter, but without a return to the activity levels we need to regain profitability with the size and scope of business we have today. 

Over the course of the year, we responded as we had to in the face of this reality.  The initiatives we undertook included a reduction in our workforce of 45%, a clamp-down on discretionary expenditures, a temporary roll-back of senior management salaries, the closure of one of our regional offices, and severe restrictions to our capital expenditure program in the last half of the year.  The cumulative effect of the operational changes is over $4 million in annual expense reduction.  This will serve us well as we go into 2010, but it is not enough - we have to grow our revenue again.  More on that in a moment.

When we look back on 2009, there are four items that I believe beg further explanation and that, taken together, largely help explain our change in financial position during the year:

1. Revenue. Our revenue was down by $27 million, or 49% from last year. As I said above, we saw this decline in all of our businesses - helicopter, fixed wing, and contract R&D. This was, of course, due to the GFC.
    
2. Gross Margin. We had lower than expected gross margins - especially in our helicopter business. Helicopter Services margins came in at less than 17% for the year. Fixed Wing Services, by contrast, generated a 30% gross margin. Our margin performance in helicopters reflects both the reduced revenue level and the fact that we have more fixed costs on this side of the business. There is a greater requirement for operational and technical support, and a higher level of post-acquisition processing required in our Electromagnetic systems, which are flown on helicopters, as compared to our mag or gravity systems, which are flown with fixed wing. Our focus during this past year has been on trying to keep our team together. Keeping our operational, technical and processing teams intact to the extent possible is critically important in our business. We've worked hard to find and train our people and we continue to work hard to try to keep them.
    
3. Bad Debt. We recorded in excess of $2.1 million of bad debt expense in the year - again resulting from the fallout of the GFC. This level of bad debt is $2 million higher than what we would expect under normal conditions, given our level of revenue. While we are very unsatisfied with ourselves over this performance, I take small comfort from the fact that approximately two thirds of this bad debt related to a single account - a single very bad decision on our part, if you will.
4. Capital Expenditures. We spent over $4 million in capital in a year where we had negative cash flow, which on the surface seems unusual. However, in our case, over 80% of that expenditure went to the purchase of two gravity meters that we committed to in 2008 and took delivery of in early 2009. These meters are a critical part of our oil and gas strategy and are important contributors to revenue even in bad times, as evidenced by the fact that over $8 million of the $28 million in revenue for 2009 came from gravity surveys, approximately half of which were done with these new meters.
    
    

These last three items, our gross margin shortfall, bad debt expense, and capital expenditures combine to explain most of our change in cash over the course of the year.

2009 wasn't all bad though. There were at least two bright spots in our year. The first is our performance in the petroleum market. We continue to make significant in-roads in this market. In 2009, it represented approximately 40% of our revenue and is a higher percentage of our backlog. We are developing important relationships in key frontier areas, where either a lack of information or the existence of a complex geological environment lends itself well to the type of work we do.

The second bright light is our most recent acquisition - Optimal Geomatics, which closed on the last day of our fiscal year.  Optimal is in aerial geomatics - aerial photography and LiDAR.  Despite some differences in the technology, Optimal's business is very similar to that of Aeroquest's.  We each fly contract surveys - we collect data, add value to that data through sophisticated post-acquisition processing, and deliver information to our clients that help them understand something about the ground over which we flew.  What Optimal also gives us is exposure to a completely new market of customers and sows the seeds for continued sustainable growth.   We are very happy to have successfully acquired Optimal and enthusiastically welcome them into our business.

One year ago, we established four priorities for 2009.   Here is how we did against them:

We have been operating for the past year in an environment of zero visibility.  This has been especially difficult regardless of whether you are a shareholder, an employee, a member of our board of directors, or one of our senior managers.  At this point, it seems that things are beginning to settle down and there is room for cautious optimism.  I earnestly hope so.  But to all of the people that have stuck with the Company over the past year - shareholders, employees, and others - I extend my sincere thanks and appreciation for your support and commitment.

Thank you for your continued support.

Roy T. Graydon