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EX-5.1 - Avantair, Incv172078_ex5-1.htm
EX-23.1 - Avantair, Incv172078_ex23-1.htm
EX-10.18 - Avantair, Incv172078_ex10-18.htm
EX-10.19 - Avantair, Incv172078_ex10-19.htm
EX-10.17 - Avantair, Incv172078_ex10-17.htm
EX-10.13 - Avantair, Incv172078_ex10-13.htm
EX-10.14 - Avantair, Incv172078_ex10-14.htm
EX-10.16 - Avantair, Incv172078_ex10-16.htm
EX-10.15 - Avantair, Incv172078_ex10-15.htm

As filed with the Securities and Exchange Commission on January 26, 2010
Registration No. ____333-163152____

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 

 
AMENDMENT NO. 1
TO
FORM S-1
Registration Statement
Under
The Securities Act of 1933
 

 
Avantair, Inc.
(Exact name of Registrant as specified in its charter)
 

 
Delaware
(State or other jurisdiction of
incorporation or organization)
  
4522
(Primary Standard Industrial
Classification Code number)
  
20-1635240
(I.R.S. Employer
Identification No.)
 

 
4311 General Howard Drive
Clearwater, FL 33762
(727) 539-0071
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 

 
Steven Santo
Chief Executive Officer
Avantair, Inc.
4311 General Howard Drive
Clearwater, FL 33762
(727) 539-0071
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 

  
Copies to:
Jamie Knox, Esq.
Douglas Rappaport, Esq.
DLA Piper LLP (US)
1251 Avenue of the Americas
New York, NY 10020
(212) 335-4500
 

 
Approximate date of commencement of proposed sale to the public:
From time to time after the Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  þ
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement number for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
Large accelerated filer o
Accelerated filer o
   
Non-accelerated filer o
Smaller reporting company þ
CALCULATION OF REGISTRATION FEE

 
Title of
securities to
be registered
 
Amount to be
Registered (1)
   
Proposed maximum
aggregate offering
price (2)
   
Amount of
registration fee
 
Common Stock, Par value $0.0001 per share
   
11,425,307
   
$
18,280,491
   
$
1,020
 
Total
   
11,425,307
     
18,280,491
     
1,020
(3)

(1)        Pursuant to Rule 416, this Registration Statement also covers such additional securities that may be issuable as a result of stock splits, stock dividends and similar transactions. Includes 455,887 shares issuable upon the exercise of warrants.
(2)       Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended, based upon the average bid and asked prices of the Common Stock on November 12, 2009.
(3)       Previously Paid.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 
 
PROSPECTUS

11,425,307 Shares
Avantair, Inc.
 
This prospectus relates solely to the sale or other disposition of up to an aggregate of 11,425,307 shares of common stock of Avantair, Inc., including 455,887 shares of common stock underlying warrants  issued by Avantair, to the Selling Stockholders identified in the section entitled “Selling Stockholders” on page 47 of this prospectus or their transferees.
 
The Selling Stockholders may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. For additional information, you should refer to the section entitled “Plan of Distribution” on page 63 of this prospectus. We will not receive any proceeds from the sale or other disposition of the shares of common stock covered hereby by the Selling Stockholders. We are contractually obligated to pay all expenses of registration incurred in connection with this offering, except any underwriting discounts and commissions incurred by the Selling Stockholders.
 
Our common stock is currently quoted on the Over-the-Counter Bulletin Board under the symbol “AAIR.OB”. On January 21, 2010 the last reported sale price of our shares was $2.10 per share. You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with different information.
 
You should consider carefully the risks that we have described in “Risk Factors” beginning on page 7 before deciding whether to invest in our common stock.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful and complete. Any representation to the contrary is a criminal offense.
 
This prospectus is dated                         , 2010.
 
You should rely only on the information contained in this prospectus or contained in any free writing prospectus filed with the Securities and Exchange Commission, or SEC. We have not authorized anyone to provide you with information different from that contained in this prospectus. The Selling Stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale or other disposition of our common stock.
 

 
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion, dated January 26, 2010
 

 
 

 
 
TABLE OF CONTENTS

 
PAGE
   
PROSPECTUS SUMMARY
1
   
SELECTED FINANCIAL DATA
5
   
RISK FACTORS
7
   
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
15
   
MARKET AND INDUSTRY DATA
15
   
USE OF PROCEEDS
15
   
PRICE RANGE OF SECURITIES AND DIVIDENDS
16
   
DIVIDEND POLICY
16
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
17
   
BUSINESS
26
   
MANAGEMENT
34
   
SELLING STOCKHOLDERS
47
   
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS RELATED PARTY TRANSACTIONS
55
   
DESCRIPTION OF CAPITAL STOCK
57
   
SHARES ELIGIBLE FOR FUTURE SALE
62
   
PLAN OF DISTRIBUTION
63
   
LEGAL MATTERS
64
   
EXPERTS
64
   
WHERE YOU CAN FIND MORE INFORMATION
64
   
CONSOLIDATED FINANCIAL STATEMENTS
F-1
 
 

 

 
This summary highlights selected information more fully described elsewhere in this prospectus. You should read the following summary together with the entire prospectus, including the more detailed information regarding us and the common stock being sold in this offering and our financial statements and the related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in the section entitled “Risk Factors” beginning on page 7 before deciding to invest in our common stock. Unless otherwise stated or the context requires otherwise, references in this prospectus to “we,” “our,” “us,” “Avantair” or the Company refer to Avantair, Inc., and its subsidiaries.
 
Overview
 
Avantair is engaged in the sale of fractional ownership interests and flight hour card usage of professionally piloted aircraft for personal and business use and the management of its aircraft fleet. According to AvData, Avantair is the fifth largest company in the North American fractional aircraft industry. As of January 21, 2010, Avantair operated 55 aircraft within its fleet, which is comprised of 46 aircraft for fractional ownership, 5 company owned core aircraft and 4 leased and company managed aircraft.
 
Avantair also operates fixed flight based operations (FBO) in Camarillo, California and effective August 1, 2008, in Caldwell, New Jersey. Through these FBO’s and its headquarters in Clearwater, Florida, Avantair provides aircraft maintenance, concierge and other services to its customers as well as to the Avantair fleet.
 
Avantair generates revenues primarily through the sale of fractional ownership shares of aircraft, by providing maintenance and management services related to these aircraft, and from the sale of flight hour cards providing either 15 or 25 hours of flight time per year of access to its aircraft fleet (either individually or through the Company’s Axis Club Membership program). The Company markets and sells fractional ownership interests to individuals and businesses with a minimum share size of a one-sixteenth ownership interest. Under maintenance and management agreements with fractional owners, Avantair provides pilots, maintenance, fuel and hangar space for the aircraft.
 
In response to the general economic downturn and the resulting growth of flight hour card sales over fractional share sales industry-wide, in January 2009, Avantair initiated the Axis Club Membership program. This program is designed to bridge the gap between the financial commitment of a fractional share and flight hour cards. This new product offers access to blocks of flight hours for a three year membership fee of $75,000. The program requires Axis Club members to purchase a minimum of three 25 hour flight hour cards for $80,000 or less, dependent upon the type of membership purchased, over a three year period. The program also allows for the conversion of club membership into fractional ownership. Members are not charged a management fee until they are fractional owners.
 
Avantair presently sources all of its aircraft from a single manufacturer, Piaggio America, Inc. (“Piaggio”). As of January 21, 2010, Avantair had contractual commitments to purchase 52 additional Piaggio Avanti II aircraft through 2013. The total commitment, including a recently proposed price escalation, is valued at approximately $330 million. The Company’s agreement with Piaggio permits it some flexibility to defer a portion of the aircraft deliveries and the Company has exercised this flexibility at certain times in order to take deliveries in line with the Company’s sales expectations. During the second quarter of fiscal 2010, the Company, through an arms-length transaction, transferred its rights to purchase four Piaggio Avanti II aircraft to LW Air LLC pursuant to the existing aircraft purchase agreement between the Company and Piaggio. Upon delivery of the aircraft, Piaggio returned to the Company $2.6 million of deposits previously paid on the aircraft by the Company.  Simultaneous with this transaction, the Company entered into an eight-year management agreement for those aircraft and the Company issued 2,373,260 warrants to Lorne Weil, the Managing Member of LW Air LLC.  Pursuant to the agreement between the parties, the Company will manage each aircraft for a monthly fee which is variable based upon aircraft flight hours but will not exceed $56,500 per month. The agreement also allows the Company to enter into short-term leases for the use of the aircraft at a specified dry lease rate per flight hour.  These aircraft are anticipated to be utilized to satisfy fleet demands of the growing flight hour card and Axis Club Membership Program product lines.
 
In October 2009, the Company consummated a private sale of its common stock to investors generating net proceeds of approximately $8.0 million. Together with the proceeds of the private placements consummated in June and September 2009, the Company received total net proceeds of approximately $9.9 million. (See recent developments below.)
 
The Company’s primary sources of operating funds are the collection of management and maintenance fees from fractional share owners as well as the sale of fractional ownership shares, flight hour cards and, effective January 2009, Axis Club Memberships. Sales by product category follow:

   
FY 2009 Unit Sales for the Three Months Ended
   
FY 2010
 
  
 
September 30, 2008
   
December 31, 2008
   
March 31, 2009
   
June 30, 2009
   
Total
   
September 30, 2009
 
New Fractional shares
   
19.5
     
16.5
     
-
     
2
     
38
     
2
 
Flight hour cards
   
27
     
53
     
29
     
51
     
160
     
86
 
Axis Club Memberships
   
N/A
     
N/A
     
2
     
8
     
10
     
3
 
 
 
1

 

Avantair’s primary growth strategy is to continue to increase the number of fractional share owners and aircraft under management as well as increase the number of flight hour cards and Axis Club Memberships sold. At January 21, 2010, the Company had 29 fractional aircraft shares available for sale. In addition to the cost of acquiring aircraft, Avantair’s primary expenses are related to fuel, aircraft repositioning (i.e., moving an aircraft to another location to accommodate a customer’s need and for demonstration flights for sales purposes), maintenance, charters and insurance. To finance its growth strategy, the Company may continue to actively pursue additional funds through equity financing, including the sale of additional shares of common and preferred stock, asset sales, accelerated payments of maintenance and management fees, debt financing, or a combination thereof.
 
At September 30, 2009 and June 30, 2009, Avantair had assets of approximately $155.2 million and $164.0 million, respectively. For the fiscal quarter ended September 30, 2009 and the fiscal year ended June 30, 2009, the Company had revenue of approximately $35.2 million and $136.8 million, respectively, and net losses of approximately $1.4 million and $4.5 million, respectively. Avantair has incurred losses since inception and may not be able to generate sufficient net revenue from its business in the future to achieve or sustain profitability. At December 31, 2009, the Company had approximately $6.8 million of unrestricted cash on hand and assuming there is no change in sales and expense trends experienced since the fourth quarter of fiscal 2009, the Company believes that its cash on hand is sufficient to continue operations for the foreseeable future.

Recent Developments
 
The Company entered into a sale and leaseback agreement, dated August 11, 2006, with JMMS, LLC (“JMMS”). Under the sale and leaseback agreement, the Company sold 100.0% of its interest in a core aircraft for $4.2 million and leased back 68.8% of the aircraft for a five year term. The proceeds of the sale and leaseback arrangement were used to pay down a line of credit. In March 2007, the Company amended the lease agreement to include a provision for the Company to buy back the aircraft at the expiration of the term. As a result of the amendment, the Company has accounted for the sale and leaseback transaction as a finance lease. JMMS notified the Company of its intention to terminate the sale and leaseback agreement between the parties effective March 1, 2009, at which date, pursuant to the agreement, the Company was required to purchase the aircraft at a cost of no more than the $4.2 million. The closing date of the transaction was extended past March 1, 2009, in consideration for monthly payments to JMMS totaling $1.25 million through December 1, 2009. The total amount of the monthly payments made to JMMS by the Company since March 1, 2009 were deducted from the aircraft purchase price. On December 14, 2009, the Company sold the aircraft to a third party for $2.9 million and paid the remaining outstanding balance of the purchase price to JMMS.
 
On June 30, 2009, Avantair sold 567,200 units at a price of $2.50 per unit to investors in a private placement, generating net proceeds of approximately $1.3 million. Each unit consisted of two shares of common stock and one warrant to purchase one common share. The warrants had an exercise price of $4.00 per share and were exercisable until June 30, 2012. The sale was consummated under the terms of a Securities Purchase Agreement between Avantair and each of the private placement investors. Pursuant to a registration rights agreement, Avantair has agreed to use it best efforts to register the shares issued to the private placement investors and the shares underlying the warrants issued to the private placement investors for sale under the Securities Act of 1933, as amended. By agreement between Avantair, the investors in the June 30, 2009 private placement and that offering’s placement agent, the period for additional sales of units was extended until October 15, 2009. On September 25, 2009, the Company sold an additional 250,000 units at a price of $2.50 per unit generating net proceeds of approximately $0.6 million. On October 19, 2009, the Company sold 8,818,892 shares of common stock to new investors at a price per share of $0.95 for net proceeds of approximately $8.0 million pursuant to the October 16, 2009 Securities Purchase and Exchange Agreement. In addition, pursuant to the October 16, 2009 Securities Purchase and Exchange Agreement, on October 19, 2009 the Company exchanged the 817,200 outstanding warrants that had been issued to existing investors in the June and September private placements for an aggregate of 516,127 shares of common stock. The October 2009 Securities Purchase and Exchange Agreement terminated the Securities Purchase and Registration Rights Agreements entered into in connection with the June and September 2009 private placements.
 
In connection with the transactions contemplated by the Securities Purchase and Exchange Agreement, Avantair entered into a Registration Rights Agreement with the parties to the Securities Purchase and Exchange Agreement. The Registration Rights Agreement requires the Company promptly, but not later than November 18, 2009, to file a registration statement registering for sale the shares issued to the investors and to cause the registration statement to be declared effective prior to the earlier of (i) five business days after the Securities and Exchange Commission (“SEC”) has informed the Company   that no   review of the registration statement will be made or that it has no further comments on the registration statement or (ii) January 17, 2010 (March 18, 2010, if the registration statement is reviewed by the SEC). Under the terms of the Registration Rights Agreement, the Company is obligated to maintain the effectiveness of the sale registration statement, subject to certain exceptions, until all securities registered thereunder are sold or otherwise can be sold pursuant to Rule 144, without restriction and to promptly register the securities covered thereby on a “short-form” registration statement once the Company becomes eligible to do so. The Company is required to pay to each investor an amount in cash, as liquidated damages, 1.5% of the aggregate amount invested by such investor for each 30-day period or pro rata for any portion thereof that the Company fails to be in compliance with the requirements of the Registration Rights Agreement. The registration statement incorporating this prospectus has been filed in partial satisfaction of the Company’s obligations under the October 2009 Registration Rights Agreement.

 
2

 

On October 16, 2009, pursuant to an agreement between EarlyBirdCapital, Inc. and the Company, in consideration for services rendered as placement agent for the Company’s June, September and October 2009 private placements, the Company issued to EarlyBirdCapital, Inc. and its affiliates 455,887 fully vested warrants which expire on June 30, 2012. Each warrant permits the holder to purchase one share of the Company’s common stock at an exercise price of $1.05 per share. The shares issuable upon exercise of the warrants are entitled to registration rights under the October 2009 Registration Rights Agreement. The Company may redeem the warrants at any time on or after October 16, 2011 at the price of $0.01 per warrant, provided that the volume weighted average price of the Company’s common stock has been at least 200.0% of the exercise price of a warrant for any twenty trading days during any consecutive thirty trading day period ending on the third trading day preceding the date of the notice of redemption. The fair value of the warrants (which will be completed in connection with the preparation of the Company’s financial statements for the quarter ended December 31, 2009) will be charged to additional paid-in capital.

During the second quarter of fiscal 2010, the Company, through an arms-length transaction, transferred its rights to purchase four Piaggio Avanti II aircraft to LW Air LLC pursuant to the existing aircraft purchase agreement between the Company and Piaggio. Upon delivery of the aircraft, Piaggio returned $2.6 million of deposits previously paid on the aircraft by the Company.  Simultaneous with this transaction, the Company entered into an eight-year management agreement for those aircraft and the Company issued 2,373,260 warrants to Lorne Weil, the Managing Member of LW Air LLC.  Pursuant to the agreement between the parties, the Company will manage each aircraft for a monthly fee which is variable based upon aircraft flight hours but will not exceed $56,500 per month. The agreement also allows the Company to enter into short-term leases for the use of the aircraft at a specified dry lease rate per flight hour. 
 
The warrants issued in conjunction with the LW Air transactions to Lorne Weil, Managing Member of LW Air, provide for the purchase of 2,373,620 shares of the Company’s common stock at an exercise price of $1.25 per share. The warrants expire on October 16, 2012, and the warrants and any underlying shares purchased upon exercise of the warrants may not be sold, transferred, assigned or hypothecated, in whole or in part, at any time on or prior to October 16, 2011, other than to an affiliate of the warrant holder. The Company may redeem the warrants held by Lorne Weil at any time on and after October 16, 2011 at the price of $0.01 per warrant, provided that the volume weighted average price of the Company’s common stock has been at least 300.0% of the exercise price of a warrant for any twenty trading days during any consecutive thirty trading day period ending on the third trading day preceding the date of the notice of redemption. On December 15, 2009, LW Air took delivery of the fourth aircraft and as such, has satisfied the conditions for vesting of all the warrants. The Company will account for the LW Air transaction and the issuance of the warrants by recording the charges paid to the owner (including the fair value of the warrants which will be completed in connection with the preparation of the Company’s financial statements for the quarter ended December 31, 2009) to the Cost of Flight Operations on a straight-line basis ratably over the initial term of the agreement.

On October 19, 2009, the Company repaid the outstanding balance of approximately $2.7 million of the promissory note entered into with CNM in August 2007.

On October 19, 2009, the Company repaid the aircraft deposit agreement entered into with MidSouth of approximately $0.5 million. The aircraft deposit agreement was entered into on November 18, 2008 was for a term of twelve months and provided for up to approximately $0.6 million of financing for the payment to the aircraft manufacturer of deposits on future deliveries.

Industry Overview

The Company believes that fractional aircraft ownership provides customers with the convenience and flexibility of private air service without the more significant costs associated with sole ownership of an aircraft. Additionally, fractional aircraft companies generally provide the same conveniences and benefits to individuals and businesses through their various flight hour card programs. Commercial flight delays can be costly and tiresome, commercial hubs are increasingly crowded, major commercial airports may be far from final destinations and commercial air travel is increasingly subject to threats and security-related inconveniences. Attempting to divide the use of a plane among multiple parties to maximize its value can be logistically challenging. For businesses and high net worth individuals, fractional ownership and flight hour card programs often offer a balance between convenience and cost.
 
A fractional aircraft company assembles a fleet of planes with each of these planes available for a certain number of revenue generating flight hours per year. Those hours are then divided into partial ownership shares and these partial ownership shares are sold to individuals and businesses. Avantair’s customers typically purchase one-sixteenth or one-eighth shares in an aircraft, although in some cases the purchases are one-quarter shares or more. The purchase of a one-eighth share means that the owner will pay approximately one-eighth of the aircraft retail price initially and receive one-eighth of the total number hours of flying time per year for the initial term of the contract, which is five years for a new shareowner. An Avantair fractional share owner agrees to pay Avantair an additional predetermined monthly fee to cover the various costs of maintaining and operating the aircraft. Avantair is responsible for all of these services.
 
According to AvData, the North American fractionally owned aircraft fleet has grown from 8 aircraft in 1986 to an aggregate of 1,054 aircraft as of October 2009. According to AvData, five companies have 10.0% or more of the total market for fractional aircraft, based upon the units in operation - NetJets, Flight Options, FlexJet, CitationShares, and Avantair, with NetJets having a market share of approximately 50.0% and Flight Options, FlexJet, CitationShares having a combined market share of approximately 35.0%. According to AvData, as of October 2009, Avantair had an approximate market share of 10.0%.

 
3

 

The general aviation industry builds and sells aircraft ranging from single passenger, single engine propeller planes to multimillion dollar transoceanic jets costing $50.0 million or more. The fractional aircraft industry has primarily concentrated on the middle to upper end of that market. Most fractionally owned aircraft have a capacity of between four and seven passengers and a minimum range of 1,250-1,500 nautical miles. The list prices of these types of aircraft are generally $5.0 million to $50.0 million. Avantair’s Piaggio aircraft have a capacity of eight passengers and a minimum range of 1,200-1,500 nautical miles. The list price of a 1/16th share of an Avantair Piaggio aircraft is $425,000 or $6.8 million for all 16 of the shares in one aircraft. There are numerous manufacturers and models in most categories of aircraft. Both providers of fractional aircraft shares and purchasers of these shares consider the choice of aircraft based upon a variety of factors including:

 
·
price;
 
·
availability;
 
·
operating costs;
 
·
reliability;
 
·
speed;
 
·
range;
 
·
cabin size and features;
 
·
safety features and record;
 
·
environmental impact;
 
·
efficiency;
 
·
maintenance cost;
 
·
manufacturer; and
 
·
runway requirements.

Some of Avantair’s principal competitors are wholly or partially owned by aircraft manufacturers and/or their affiliated parent companies, which have resulted in their fleets being largely comprised of aircraft built by their respective parent companies. Although Avantair operates exclusively one aircraft type, the Company is not owned by any manufacturer.
 
Fractional operators must have sufficient numbers of aircraft in the fleet to provide the service required. Since fractional share buyers desire to enter the program as soon as possible after purchasing shares, operators are obligated to provide access to aircraft when the shareowner requests it. If the operator does not have ample capacity available, it must charter that capacity, a practice that can be very costly. As a result, fractional operators tend to place orders for aircraft in advance, and only sell shares within a few weeks prior to taking delivery of the aircraft. Fractional operators may also offer various flight hour card programs, which provide a certain number of flight hours to be used during a specific period of time, generally one year. The flight hour card programs subject the fractional operators to similar capacity requirements as fractional shareowners.
 
The capital requirements for ordering aircraft require the operator to place deposits well in advance of receiving its planes. Progress payments are made as certain milestones are achieved. The amounts of the deposits and progress payments are a function of several factors including the price of the underlying plane, the creditworthiness of the buyer, and the time until delivery. The majority of the payments are generally made upon delivery.

Corporate Information

Avantair’s principal executive offices are located at 4311 General Howard Drive, Clearwater, Florida 33762 and its telephone number is (727) 539-0071. The Company’s website address is www.avantair.com. The information on, or that can be accessed through, its website is not part of this prospectus. In 2007, the Company changed its fiscal year end from December 31st to June 30th.
 
The Offering
 
Common stock covered hereby
 
Up to 11,425,307 shares
Use of Proceeds
 
The Company will not receive any proceeds from the sale or other disposition of the shares of common stock covered by this prospectus.
OTC Bulletin Board symbol for our Common Stock
 
“AAIR.OB”
 
As of January 21, 2010, the Company had 26,384,603 shares of common stock outstanding, 1,058,166 shares of common stock available for future issuance under its 2006 Long-Term Stock Incentive Plan, and warrants to purchase 2,829,507 shares outstanding. In addition, as of January 21, 2010, the Company has 152,000 shares of Series A Preferred Shares outstanding.  The Company has 4,251,857 shares of common stock reserved on its books and records for issuance upon the conversion of the outstanding Series A Preferred Shares. As a result of the sales of shares consummated on June 30, September 25, and October 16, 2009, the conversion price of the Series A Preferred Shares was reduced from $5.15 to $3.57.
 
The Company is contractually obligated to pay all expenses of registration incurred in connection with this offering, except any underwriting discounts and commissions incurred by the Selling Stockholders.

 
4

 

SELECTED FINANCIAL DATA
 
The following table presents the Company’s summary historical consolidated financial information. The summary consolidated statements of operations data for each of the two fiscal years in the period ended June 30, 2009 and the consolidated balance sheet data as of June 30, 2009 and 2008 have been derived from our audited consolidated financial statements included elsewhere in this report. The consolidated statement of operations data for each of the fiscal years ended June 30, 2007, and 2006 and the consolidated balance sheet information as of June 30, 2007 and 2006 was derived from our audited consolidated financial statements. The summary consolidated statement of operations data for the three-month period ended September 30, 2009 and 2008 and the consolidated balance sheet data as of September 30, 2009 are derived from unaudited condensed consolidated financial statements which are included elsewhere in this prospectus. These historical results are not necessarily indicative of results to be expected in any future period.
 
Avantair, Inc. and Subsidiaries
Consolidated Statement of Operations

   
Three Months Ended
   
Years Ended June 30,
 
   
September 30, 2009
   
September 30, 2008
   
2009
   
2008
   
2007
   
2006
 
Consolidated Statement of Operations Data
                                   
Revenue
                                   
Fractional aircraft sold
 
$
11,978,836
   
$
12,493,716
   
$
51,864,010
   
$
43,426,696
   
$
29,695,175
   
$
23,756,070
 
Maintenance and management fees
   
17,974,569
     
17,077,139
     
70,693,367
     
58,211,457
     
38,787,596
     
22,824,940
 
Flight hour card and Axis membership revenue
   
3,858,470
     
1,844,126
     
9,384,110
     
7,236,151
     
3,607,831
     
210,900
 
Other revenues
   
1,393,009
     
1,261,480
     
4,885,563
     
6,744,679
     
4,302,630
     
1,603,470
 
Total revenue
   
35,204,884
     
32,676,461
     
136,827,050
     
115,618,983
     
76,393,232
     
48,395,380
 
Operating expenses
                                               
Cost of fractional aircraft shares sold
   
10,200,603
     
10,605,023
     
44,118,352
     
36,637,959
     
24,370,988
     
19,166,722
 
Cost of flight operations
   
12,420,238
     
11,810,384
     
46,723,184
     
50,058,692
     
35,665,057
     
25,362,985
 
Write-off of aircraft deposit
   
-
     
-
     
-
     
-
     
300,000
     
-
 
Gain on sale of asset
   
-
     
-
     
(1,394,164
)
   
(861,410
)
           
(207,544
)
Cost of fuel
   
3,638,902
     
4,512,406
     
13,349,084
     
16,489,422
     
10,192,406
     
6,419,835
 
General and administrative expenses
   
6,252,381
     
5,660,787
     
23,628,541
     
20,703,120
     
18,540,610
     
10,757,280
 
Selling expenses
   
985,765
     
907,751
     
3,736,424
     
4,670,246
     
4,333,268
     
3,672,754
 
                                                 
Depreciation and amortization
                                               
     
1,457,917
     
1,082,265
     
5,233,250
     
3,624,710
     
2,013,530
     
2,649,096
 
Total operating expenses
   
34,955,806
     
34,578,616
     
135,394,671
     
131,322,739
     
95,415,859
     
67,821,128
 
Income (loss) from operations
   
249,078
     
(1,902,155
)
   
1,432,379
     
(15,703,756
)
   
(19,022,627
)
   
(19,425,748
)
Other income (expenses)
                                               
Interest income
   
5,163
     
24,702
     
46,073
     
482,666
     
444,179
     
557,508
 
Other income
   
2,250
     
1,200
     
2,848
     
252
     
284,723
     
230,438
 
Interest expense
   
(1,623,454
)
   
(1,459,481
)
   
(5,942,221
)
   
(3,661,227
)
   
(3,406,181
)
   
(2,110,119
)
Total other expenses
   
(1,616,041
)
   
(1,433,579
)
   
(5,893,300
)
   
(3,178,309
)
   
(2,677,279
)
   
(1,322,173
)
Net loss
   
(1,366,963
)
   
(3,335,734
)
   
(4,460,921
)
   
(18,882,065
)
   
(21,699,906
)
   
(20,747,921
)
Preferred stock dividend and accretion of expenses
   
(402,115
)
   
(391,513
)
   
(1,488,071
)
   
(903,851
)
   
-
     
-
 
Net loss attributable to common stockholders
 
$
(1,769,078
)
 
$
(3,727,247
)
 
$
(5,948,992
)
 
$
(19,785,916
)
 
$
(21,699,906
)
 
$
(20,747,921
)
Loss per common share:
                                               
Basic and diluted
 
$
(0.11
)
 
$
(0.24
)
 
$
(0.39
)
 
$
(1.30
)
 
$
(2.47
)
 
$
(6.31
)
                                                 
Weighted- average common shares outstanding:
                                               
Basic and diluted
   
16,468,122
     
15,287,694
     
15,306,725
     
15,230,482
     
8,780,234
     
3,288,590
 
 
 
5

 
 
   
Three Months Ended
   
As of June 30,
 
   
September 30, 2009
   
2009
   
2008
   
2007
   
2006
 
Consolidated Balance Sheet Data
                             
                               
Total assets
 
$
155,197,812
   
$
164,065,403
   
$
204,477,455
   
$
160,490,260
   
$
105,154,683
 
                                         
Long-term liabilities
 
$
78,301,720
   
$
88,229,537
   
$
123,018,837
   
$
112,509,063
   
$
72,844,665
 
                                         
Stockholders' deficit
 
$
(37,199,063
)
 
$
(36,007,683
)
 
$
(31,651,546
)
 
$
(11,959,024
)
 
$
(35,030,607
)
 
 
6

 
 
RISK FACTORS
 
You should carefully consider the risks described below before making a decision to buy our common stock. If any of the following risks actually occurs, our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock. You should also refer to the other information set forth in this prospectus, including our financial statements and the related notes.
 
Risks Related to Our Common Stock
 
There will be a substantial number of shares of Avantair’s common stock available for sale in the future that may be dilutive to its current stockholders and may cause a decrease in the market price of its common stock.
 
As of January 21, 2010, the Company had 26,384,603 shares of common stock outstanding, 1,058,166 shares of common stock available for future issuance under its 2006 Long-Term Stock Incentive Plan and warrants to purchase 2,829,507 shares outstanding. In addition, as of January 21, 2010, the Company has 152,000 shares of Series A Preferred Shares outstanding.  As of January 21, 2010, the Company has 4,251,857 shares of common stock reserved on its books and records for issuance upon the conversion of the outstanding Series A Preferred Shares. The 11,425,307 shares of common stock registered pursuant to this Registration Statement will be freely tradable once this Registration Statement is declared effective by the Securities and Exchange Commission without restriction or further registration under the Securities Act, unless the shares are purchased by “affiliates” as that term is defined in Rule 144 under the Securities Act. Any shares purchased by an affiliate may not be resold except pursuant to an effective registration statement or an applicable exemption from registration, including an exemption under Rule 144 of the Securities Act. These restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act. As a result of the sales of shares consummated on June 30, September 25, and October 16, 2009, the conversion price of the Series A Preferred Shares was reduced from $5.15 to $3.57. Options to purchase a total of 300,000 units at an exercise price of $9.90 per unit (with each unit consisting of one share of the Company’s common stock and two warrants, each to purchase one share of its common stock at an exercise price of $6.25 per share) were issued in connection with the underwriting of its initial public offering and will expire on February 23, 2010.

Future sales or issuances of the Company’s common stock or securities convertible into common stock, the perception such sales or issuances may occur or the availability for sale in the public market of substantial amounts of our common stock could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through future sales of equity securities at a time and price that we deem appropriate.

Avantair’s shares of common stock may become subject to the SEC’s penny stock rules and broker-dealers may experience difficulty in completing customer transactions and trading activity in its securities may be adversely affected.
 
If at any time Avantair has net tangible assets of $5.0 million or less and its ordinary shares have a market price per share of less than $5.00, transactions in its ordinary shares may be subject to the “penny stock” rules promulgated under the Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
 
 
·
make a special written suitability determination for the purchaser;
 
·
receive the purchaser’s written agreement to a transaction prior to sale;
 
·
provide the purchaser with risk disclosure documents that identify certain risks associated with investing in “penny stocks” and that describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and
 
·
obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.
 
If Avantair’s shares of common stock become subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in its securities may be adversely affected. As a result, the market price of the securities may be depressed, and you may find it more difficult to sell the securities. 

Avantair has been unable to receive a listing of its securities on NASDAQ or another national securities exchange, and this may make it more difficult for its stockholders to sell their securities.
 
Shares of Avantair’s common stock and units are currently traded in the over-the-counter market and quoted on the OTCBB. The Company’s common stock and units are not currently eligible for inclusion in The NASDAQ Stock Market. If the Company is unable to receive a listing or approval of trading of securities on NASDAQ or another national securities exchange, then it may be more difficult for stockholders to sell their securities.

 
7

 

Under the October 16, 2009 Securities Purchase and Exchange Agreement, the Company has agreed to use its commercially reasonable best efforts to qualify for the listing of the outstanding common stock on the NASDAQ Capital Market as promptly as practicable. In order to complete a listing on the NASDAQ Capital Market, the Company may be required to complete a reverse split of its common stock to satisfy the minimum per share price requirement for initial listing on that market. The consummation of a reverse split will reduce the number of outstanding shares of the Company’s common stock and may adversely affect the trading price and liquidity of the Company’s common stock. The Company cannot provide assurance that a reverse stock split will increase the trading price of its common stock. Even if a reverse stock split is completed, the Company may be unable to qualify its common stock for listing on the NASDAQ Capital Market, or to maintain such a listing if initially qualified.

Risks Related to Our Business
 
Avantair has a history of losses and may not be able to generate sufficient net revenue from its business in the future to achieve or sustain profitability.
 
Avantair has incurred losses since inception. To date, Avantair’s revenues have largely come from sales of fractional interests and flight hour cards in aircraft and monthly management fees. Avantair’s primary expenses - cost of aircraft, cost of flight operations and overhead - have increased over the past several years and significantly exceeded revenues. Avantair’s consolidated financial statements have been prepared assuming that Avantair will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. Successful transition to profitable operations is dependent upon obtaining a level of sales adequate to support the Company’s cost structure and an uninterrupted delivery of aircraft. The Company has suffered recurring losses resulting in a stockholders’ deficit of approximately $37.2 million and a working capital deficiency of $52.0 million as of September 30, 2009 and a stockholders’ deficit of $36.0 million and a working capital deficiency of $49.2 million as of June 30, 2009. Historically, the Company has been able to finance operations from the capital obtained through the Reverse Merger which was completed on February 22, 2007 and the capital obtained through the November 2007 private placement of Series A Convertible Preferred Stock which raised gross proceeds of $15.2 million and the June, September and October 2009 private placements of Common Stock which raised net proceeds of $1.3 million, $0.6 million and $8.0 million, respectively. Management intends to continue to finance the operations of the Company through future cash flows from operations and future financings. However, Avantair’s expenses are expected to increase as it acquires additional aircraft and expands its operations, and there is no assurance that Avantair will be able to obtain sufficient financing (or financing on acceptable terms) or earn sufficient revenues to generate positive cash flow and attain profitability.
 
If Avantair is unable to fund its operations and capital expenditures, Avantair may not be able to continue to acquire additional inventory of aircraft, which would have a material adverse effect on its business.
 
Avantair has experienced significant negative cash flow since its inception. In order to fund Avantair’s operations and capital expenditures, Avantair may be required to incur borrowings or raise capital through the sale of debt or equity securities. The Company’s ability to borrow or access the capital markets for future offerings may be limited by its financial condition at the time of any such offering as well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. Avantair’s failure to obtain the funds for necessary future capital expenditures would limit its ability to acquire additional inventory of aircraft and could have a material adverse effect on our business, results of operations and financial condition.
 
Avantair is dependent upon key personnel whose loss may adversely impact Avantair’s business.
 
Avantair depends on the expertise, experience and continued services of its senior management employees, especially Steven Santo, its Chief Executive Officer (CEO), Richard Pytak, its Chief Financial Officer (CFO) and Kevin Beitzel, its Chief Operating Officer (COO). Mr. Santo has acquired specialized knowledge and skills with respect to Avantair and its operations and most decisions concerning the business of Avantair will be made or significantly influenced by him. Avantair does not maintain life insurance with respect to Messrs. Santo, Pytak or Beitzel or any other of its executives. The loss of Messrs. Santo, Pytak, Beitzel or other senior management employees, or an inability to attract or retain other key individuals, could materially adversely affect the Company. The Company seeks to compensate and incentivize its key executives, as well as other employees, through competitive salaries and bonus plans, but there can be no assurance that these programs will allow Avantair to retain key or hire new employees. As a result, if Messrs. Santo, Pytak and/or Beitzel were to leave Avantair, the Company could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any such successors obtain the necessary training and experience. On September 29, 2006, Avantair entered into a three year employment agreement with Mr. Santo which expired in September 2009. On September 24, 2009, Avantair entered into a new three- year employment agreement effective that same day. However, there can be no assurance that a successor employment agreement will be entered into with Mr. Santo following this three year term or that the terms of this employment agreement will be sufficient to retain Mr. Santo.
 
Avantair’s management systems and personnel may not be sufficient to effectively manage its growth.

Avantair’s growth strategy involves increasing the number of available aircraft, fractional share owners, flight hour card and membership program participants and fixed base operations. Achieving Avantair’s growth strategy is critical in order for its business to achieve economies of scale and to achieve profitability. Any condition that would deny, limit or delay its ability to acquire additional aircraft, sell fractional shares, flight hour cards and/or memberships and open additional fixed base operations in the future will constrain Avantair’s ability to grow. Acquiring additional aircraft, selling fractional shares, flight hour cards and/or memberships and opening fixed base operations requires Avantair to commit a substantial amount of resources. Expansion is also dependent upon Avantair’s ability to maintain a safe and secure operation and will require additional personnel, equipment and facilities.

 
8

 
 
An inability to hire and retain personnel, timely secure the required equipment and facilities in a cost-effective manner, efficiently operate Avantair’s expanded facilities, or maintain the necessary regulatory requirements may adversely affect Avantair’s ability to achieve its growth strategy. There can be no assurance that Avantair will be able to successfully expand its business in this increased competitive environment, and if Avantair fails to do so, its business could be harmed.

Expansion of Avantair’s business will also strain its existing management resources and operational, financial and management information systems to the point that they may no longer be adequate to support its operations, requiring Avantair to make significant expenditures in these areas. Avantair will need to develop further financial, operational and management reporting systems and procedures to accommodate future growth and reporting requirements under Section 404 of the Sarbanes Oxley Act of 2002 (including pursuant to other applicable securities laws). There can be no assurance that Avantair will be able to develop such additional systems or procedures to accommodate its future expansion on a timely basis, and the failure to do so could harm its business.
 
The aviation industry has inherent operational risks that may not be adequately covered by Avantair’s insurance.
 
Avantair maintains insurance on its aircraft for risks commonly insured against by aircraft owners and operators, including hull physical damage liability, third-party liability, airport premises liability, war risk liability and ground hangar keepers’ liability coverage. Avantair can give no assurance that Avantair will be adequately insured against all risks or that its insurers will pay a particular claim. Even if its insurance coverage is adequate to cover its losses, Avantair may not be able to timely obtain a replacement aircraft in the event of a loss. Furthermore, in the future, Avantair may not be able to obtain adequate insurance coverage at reasonable rates for its fleet. Avantair’s insurance policies will also contain deductibles, limitations and exclusions which, although the Company believes that such policies are standard in the aviation industry, may nevertheless increase its costs. Moreover, certain accidents or other occurrences may result in intangible damages (such as damages to reputation) for which insurance may not provide an adequate remedy.
 
Avantair may not be able to generate sufficient cash flows to meet its debt service obligations or other financial obligations.
 
Avantair’s ability to make payments on its indebtedness and acquire additional aircraft will depend on its ability to generate cash from its future operations. As of September 30, 2009 and June 30, 2009, Avantair had incurred an aggregate of approximately $40.2 and $42.6 million, respectively, in short and long term indebtedness to third party lenders. Much of this indebtedness is secured by some or all of Avantair’s assets. In addition, as of January 21, 2010, the Company has commitments valued at $330 million to purchase 52 additional aircraft through 2013. Avantair’s business may not generate sufficient cash flow from operations or from other sources sufficient to enable it to repay its indebtedness and to fund its other liquidity needs, including capital expenditure and aircraft acquisition requirements. Avantair may need to refinance or restructure all or a portion of its indebtedness or other financial obligations on or before maturity. Avantair may not be able to refinance any of its indebtedness on commercially reasonable terms, or at all. If Avantair cannot service or refinance its indebtedness or restructure its other financial obligations, it may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, any of which could have a material adverse effect on our operations. Additionally, Avantair may not be able to effect such actions, if necessary, on commercially reasonable terms, or at all.
 
A default under Avantair’s indebtedness may have a material adverse effect on Avantair’s financial condition.
 
In the event of a default under certain of Avantair’s indebtedness, the holders of the indebtedness generally would be able to declare all of such indebtedness, together with accrued interest, to be due and payable. In addition, borrowings under certain of Avantair’s indebtedness are secured by a first priority lien on all of its assets, and, in the event of a default, the lenders generally would be entitled to seize the collateral. In addition, default under certain debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those other instruments to be due and payable pursuant to cross default clauses. Accordingly, the occurrence of a default under any debt instrument, unless cured or waived, would likely have a material adverse effect on Avantair’s business and Avantair’s results of operations.
 
Avantair’s loan agreements contain restrictive covenants that will limit Avantair’s liquidity and corporate activities.

Avantair’s loan agreements impose operating and financial restrictions that will limit Avantair’s ability to:
 
 
·
create additional liens on its assets;
 
·
make investments;
 
·
engage in mergers or acquisitions;
 
·
pay dividends; and
 
·
sell any of Avantair’s aircraft or any other assets outside the ordinary course of business.

 
9

 
 
Therefore, Avantair will need to seek permission from its lenders in order for Avantair to engage in some corporate actions. Avantair’s lenders’ interests may be different from those of Avantair, and no assurance can be given that Avantair will be able to obtain its lenders’ permission when needed. This may prevent Avantair from taking actions that are in its best interest.
 
Avantair’s dependence on Piaggio Avanti aircraft manufacturers poses a significant risk to its business and prospects.
 
As part of the Company’s business strategy, Avantair has historically sold and flown only Piaggio Avanti aircraft. The type of aircraft sold and operated by Avantair is the product of a single manufacturer. If the Piaggio Avanti manufacturer faced production delays due to, for example, natural disasters or labor strikes, Avantair may experience a significant delay in the delivery of previously ordered aircraft, which would adversely affect its revenues and profitability and could jeopardize its ability to meet the demands of its customers. Although Avantair could choose to operate aircraft of other types, such a change would involve substantial expense to the Company and could disrupt the Company’s business activities. Avantair has limited alternatives to find alternate sources of new aircraft.
 
Avantair’s dependence on the importation of foreign aircraft poses a significant risk to its business prospects.
 
Avantair’s revenue and profitability are based in part on current laws and regulations regarding the exportation from Italy by Piaggio Aero Industries S.p.A, the country of manufacture and importation into the United States of the aircraft. Current laws and regulations do not preclude the exportation from the subject manufacturers’ countries of operation or importation of the aircraft into the United States, provided that all applicable statutory and regulatory requirements are satisfied. Modification of such statutes and regulations by any foreign government or any agency thereof with respect to the exportation of the aircraft or modification of such statutes and regulations by the federal government of the United States or any agency thereof affecting the importation of the aircraft, could pose a significant risk to Avantair’s business operations. The risks for Avantair associated with the modification of the exportation and importation statutes and regulations are increased due to Avantair’s current dependence on the importation of foreign aircraft for the operation of its business. Piaggio America, Inc. ensures compliance with the statutory and regulatory requirements for the importation of the aircraft into the United States prior to the Company taking delivery of the aircraft in the United States.
 
Avantair’s reputation and financial results could be harmed in the event of an accident or incident involving its aircraft, or aircraft of the same type.
 
An accident or incident involving one of Avantair’s aircraft could involve significant potential claims of injured passengers or others in addition to repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. Although Avantair believes it currently maintains liability insurance in amounts and of the type generally consistent with industry practice, the amount of such coverage may not be adequate and Avantair may be forced to bear substantial losses from an accident. Substantial claims resulting from an accident in excess of Avantair’s related insurance coverage would harm its business and financial results. Moreover, any aircraft accident or incident, even if fully insured, could cause a public perception that Avantair or the Piaggio Avanti aircraft is less safe or reliable than other competitors, which would harm Avantair’s business. In addition, any accident involving the Piaggio Avanti aircraft type, even if the aircraft involved is not operated by Avantair, could also cause a public perception that Avantair or the Piaggio Avanti aircraft is less safe or reliable than other competitors, which would harm Avantair’s business.

The fractional aircraft industry is competitive.
 
Avantair competes with national airlines, regional airlines, charter carriers, other fractional aircraft ownership operators, and particularly on shorter routes, ground transportation. According to AvData, five companies have 10.0% or more of the total market for fractional aircraft, based upon the units in operation - NetJets, Flight Options, FlexJet, CitationShares, and Avantair, with NetJets having a market share of approximately 50.0% and Flight Options, FlexJet, CitationShares having a combined market share of approximately 35.0%. According to AvData, as of October 2009, Avantair had an approximate market share of 10.0%. Many of Avantair’s competitors have been in business far longer than Avantair and have significantly greater financial stability, access to capital markets and name recognition. In addition, some of our competitors offer a greater selection of aircraft (including jet aircraft), some of which permit owners to fly greater distances or at greater speeds, travel with a greater number of passengers and on shorter advance notice before flying. Unanticipated shortfalls in expected revenues as a result of price competition or in delivery delays by suppliers would negatively impact our financial results and harm Avantair’s business. There is no assurance that Avantair will be able to successfully compete in this industry.

 
10

 

Restriction on foreign ownership and possible required divestiture of stock may impact Avantair’s stock price.

In some cases, including all current international operations, Avantair is deemed to transport persons or property by air for compensation, and Avantair accordingly is regulated by the FAA and the U.S. Department of Transportation as an on demand air carrier. Therefore, to comply with restrictions imposed by U.S. aviation laws on foreign ownership of air carriers, the Company’s certificate of incorporation and bylaws have been amended to reflect that at least 75.0% of its voting stock is required to be held by U.S. citizens. Although Avantair’s amended and restated certificate of incorporation contains provisions limiting non-citizen ownership of its voting stock, Avantair could lose its operating certificate, which allows it to conduct aircraft operations in the U.S., if such provisions prove unsuccessful in maintaining the required level of citizen ownership. Such loss would have a material adverse effect on Avantair. If Avantair determines that persons who are not citizens of the U.S. own more than the permitted percentage, currently 25.0%, of Avantair’s voting stock, Avantair may redeem such stock or, if redemption is not permitted by applicable law or Avantair’s Board of Directors, in its discretion, elects not to make such redemption, the Company may restrict the voting rights of such excess shares. The required redemption would be at a price equal to the average closing price during the preceding 10 trading days, which price could be materially different from the current price of the common stock, or if the Company’s common stock is not traded or quoted,  at a price equal to the fair market value as determined in good faith by Avantair’s Board of Directors, in each case, plus the amounts of any dividends or other distributions which may be owed to the stockholder. Avantair’s Board of Directors has not adopted a formula for determining fair market value as the Company’s common stock is currently traded and quoted. If a non-citizen purchases the voting stock, there can be no assurance that their stock will not be redeemed, which redemption could result in a material loss, or that they will be able to exercise full voting rights with respect to such voting stock. Such restrictions and redemption rights may make Avantair’s equity securities less attractive to potential investors, which may result in Avantair’s publicly traded voting stock having a lower market price than it might have in the absence of such restrictions and redemption rights.
 
Future acquisitions of fixed base operations (“FBO”) businesses or other assets by Avantair would subject Avantair to additional business, operating and industry risks, the impact of which cannot presently be evaluated, and could adversely impact Avantair’s capital structure.
 
In the future, Avantair may intend to pursue other acquisition opportunities to the extent reasonably feasible. While Avantair is not presently committed to any additional acquisition, it may in the future consider acquisitions of other types of businesses. Acquisitions may be of fixed base operations businesses, operations in the aircraft industry or other businesses that may be complementary to Avantair’s business. In addition, Avantair is not limited to any particular industry or type of business for potential acquisitions. Accordingly, there is no current basis to evaluate the possible merits or risks of the particular business or assets that Avantair may acquire, or of the industry in which such business operates. If Avantair acquires a business in an industry characterized by a high level of risk, it may be affected by the currently unascertainable risks of that industry. Although Avantair’s management will endeavor to evaluate the risks inherent in a particular industry or target business, there can be no assurance that Avantair will properly ascertain or assess all of the significant risk factors.
 
In addition, the financing of any acquisition could adversely impact Avantair’s capital structure as any such financing would likely include the issuance of additional equity securities and/or the borrowing of funds. The issuance of additional equity securities may significantly reduce the equity interest of existing stockholders and/or adversely affect prevailing market prices for Avantair’s common stock. If Avantair incurs indebtedness, it could increase the risk of a default that would entitle the holder to declare such indebtedness due and payable and/or to seize any collateral securing the indebtedness. In addition, default under one debt instrument could in turn permit lenders under other debt instruments to declare borrowings outstanding under those other instruments to be due and payable pursuant to cross default clauses. Accordingly, the financing of future acquisitions could adversely impact the capital structure and equity interest in Avantair.

Except as required by law or the rules of any securities exchange on which Avantair’s securities might be listed at the time Avantair seeks to consummate an acquisition, shareholders will not be asked to vote on any proposed acquisition and will not be entitled to exercise conversion rights in connection with any such acquisition.
 
Avantair’s business is subject to extensive government regulation, which can result in increased costs, delays, limits on its operating flexibility and competitive disadvantages.
 
Commercial aircraft operators are subject to extensive regulatory requirements. Many of these requirements result in significant costs. For example, the Federal Aviation Administration (FAA) from time to time issues directives and other regulations relating to the maintenance and operation of aircraft, and compliance with those requirements drives significant expenditures.
 
Moreover, additional laws, regulations, taxes and airport rates and charges have been enacted from time to time that have significantly increased the costs of commercial aircraft operations, reduced the demand for air travel or restricted the way the Company can conduct its business. For example, the Aviation and Transportation Security Act, which became law in 2001, mandates the federalization of certain airport security procedures and imposes additional security requirements on airlines. Similar laws or regulations or other governmental actions in the future may adversely affect Avantair’s business and financial results.
 
Avantair’s results of operations may be affected by changes in law and future actions taken by governmental agencies having jurisdiction over Avantair’s operations, including:

 
·
changes in the law which affect the services that can be offered by commercial aircraft operators in particular markets and at particular airports;
 
·
restrictions on competitive practices (for example court orders, or agency regulations or orders, that would curtail a commercial aircraft operator’s ability to respond to a competitor);
 
·
the adoption of regulations that impact customer service standards (for example, new passenger security standards); or
 
·
the adoption of more restrictive locally-imposed noise restrictions.

 
11

 
 
The FAA has jurisdiction over many aspects of Avantair’s business, including personnel, aircraft and ground facilities. Avantair is required to have an FAA Air Carrier Operating Certificate to transport personnel and property for compensation in aircraft it operates directly. The FAA certificate contains operating specifications that allow Avantair to conduct its present operations, but it is potentially subject to amendment, suspension or revocation in accordance with procedures set forth in federal aviation laws. The FAA is responsible for ensuring that Avantair complies with all FAA regulations relating to the operation of its aviation business, and conducts regular inspections regarding the safety, training and general regulatory compliance of its aviation operations. Additionally, the FAA requires Avantair to file reports confirming our continued compliance.
 
Avantair is also subject to various federal and state environmental laws. The Company does not anticipate that the costs of compliance with current environmental regulations will have a material adverse effect on our business. However, the cost of compliance with any future environmental regulations is unknown and may have a material effect.  Although the Company believes its aircraft produce 35.0% less carbon emissions than competitors’ aircraft, the Company could be impacted significantly if more stringent environmental laws and regulations related to aircraft emissions were imposed.

Avantair could be adversely affected by a failure or disruption of its computer, communications or other technology systems.
 
Avantair is highly dependent on its computer systems and call center software to operate its business. The systems and software on which Avantair relies to manage the scheduling and monitoring of its flights could be disrupted due to events beyond Avantair’s control, including natural disasters, power failures, terrorist attacks, equipment failures, software failures and computer viruses and hackers. Further, the vendor of Avantair’s scheduling software is a small business and highly dependent on the services of its founder. Any substantial or repeated failure of Avantair’s systems or software could impact Avantair’s operations and customer service, result in a disruption in flight scheduling, the loss of important data, loss of revenues, increased costs and generally harm its business. Moreover, a catastrophic failure of certain of Avantair’s vital systems could limit its ability to operate flights for an indefinite period of time, which would have a material adverse impact on Avantair’s business.
 
Avantair may not be able to obtain acceptable customer contracts covering all of the fractional interests of its new airplanes, a sufficient number of flight hour cards and/or Axis Club Memberships, or a combination thereof, which could adversely affect our profitability.
 
Since the beginning of the current economic recession, the Company has experienced a decrease in the number of fractional aircraft share sales, resulting in an unsold inventory of fractional aircraft shares.  As a result, the Company is paying finance charges on floor-plan arrangements used to secure aircraft for fractional share sales until the related aircraft are fully fractionalized. The Company believes that the decrease in fractional aircraft share sales is due to capital constraints on, and reluctance to commit to long-term expenditures by, individuals and companies who are potential customers.  In contrast, the Company has experienced an increase in flight hour time card sales which allow customers to fly privately without the capital commitment or long-term obligations of fractional ownership.  This increase in flight hour time card sales requires an increase in the Company’s aircraft fleet in order to meet demand, with the Company bearing all of the financing risk in respect of the additional aircraft.  The Company may not be able to secure sufficient financing for its fleet expansion or generate sufficient revenue from short-term flight hour time card sales to satisfy the cost of financing the acquisition of additional aircraft. If the Company is unable to continue to generate sufficient revenue from flight hour time cards sales to cover the costs of such additional aircraft, the Company’s financial performance may be adversely affected.

Sales of fractional interests and flight hour cards in excess of available fleet capacity could adversely affect Avantair’s business.
 
Since fractional shareowners generally desire to enter a fractional program when they make their decision to purchase a fractional share, it is difficult for a fractional operator to pre-sell many shares in advance of receipt of additional aircraft. Flight hour card as well as Axis Club Membership program participants often likewise purchase their flight hour cards and begin utilizing the services within a short time thereafter. An aircraft fleet provides a finite level of capacity, and the addition of significant additional share owners and flight hour card users to the usage base may require an increase in charter usage, which may not be economical. If Avantair does not adequately manage the sales process and sells shares or timecards in excess of its available capacity, its business could be adversely affected.
 
Avantair’s business could be adversely affected by a failure to attract and retain qualified pilots and other operations personnel.
 
Avantair’s ability to attract and retain qualified pilots, mechanics, and other highly trained personnel will be an important factor in determining Avantair’s future success. Many of Avantair’s customers require pilots of aircraft that service them to have high levels of flight experience. The market for these experienced and highly trained personnel is extremely competitive. If Avantair is unable to attract and retain such persons, flight operations may be disrupted, which could have a negative effect on its results.

 
12

 

Avantair’s business is affected by many changing economic conditions beyond its control which may adversely affect its results of operations.

Ownership of fractional shares and flight hour cards is likely considered a luxury item to consumers, especially compared to the costs associated with commercial air travel. As a result, a general downturn in economic, business and financial conditions, including the current recession, inflation and higher interest rates, could have an adverse effect on consumers’ spending habits and could cause them to travel less frequently and, to the extent they travel, to travel using commercial air carriers or other means considered to be more economical than owning a fractional interest, flight hour card, and/or membership in a fractional aircraft program.
 
The operation of aircraft is dependent on the price and availability of fuel. Continued periods of historically high fuel costs may materially adversely affect Avantair’s operating results.
 
Avantair’s operating results may be significantly impacted by changes in the availability or price of fuel for aircraft operated by Avantair. Fuel prices have fluctuated significantly since 2004, and have been especially volatile over the past year. Although Avantair is currently able to obtain adequate supplies of fuel, it is impossible to predict the price of fuel. Political disruptions or wars involving oil-producing countries, changes in government policy, changes in fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages and additional fuel price increases in the future. Furthermore, Avantair bears the entire cost of fuel when repositioning aircraft and for satisfying flight hour card sale demands. There can be no assurance that Avantair will be able to fully recover its increased fuel costs by passing these costs on to its customers. In the event that Avantair is unable to do so, Avantair’s operating results will be adversely affected.
 
Avantair’s reliance on current laws and regulations with respect to the opportunity to conduct sales with foreign customers and flights to currently permitted areas poses a significant risk to its business prospects.
 
Avantair’s revenue and profitability are based in part on current laws and regulations by the federal government of the United States and the agencies thereof, including but not limited to the Department of Homeland Security, the Department of State, the Department of Commerce and the Department of the Treasury, allowing sales to and provision of services for foreign persons and flights to foreign locations that are permissible under current laws and regulations. Modification of such statutes and regulations could pose a significant risk to Avantair’s business operations by reducing the pool of potential customers through the preclusion of foreign persons and the locations of permissible flights.

Risks Related to this Offering

The trading price of Avantair’s common stock is likely to be volatile, and you might not be able to sell your shares at or above the public offering price.
 
The trading price of Avantair’s common stock is likely to be subject to wide fluctuations. Factors, in addition to those outlined elsewhere in this prospectus, that may affect the trading price of the Company’s common stock include:
 
 
·
actual or anticipated variations in the Company’s operating results;
 
·
announcements of technological innovations, new products or product enhancements, strategic alliances or significant agreements by the Company or its competitors;
 
·
changes in recommendations by any securities analysts that elect to follow the Company’s common stock;
     
 
·
the financial projections the Company may provide to the public, any changes in these projections or its failure to meet these projections;
 
·
the loss of a key customer;
 
·
the loss of a key supplier;
 
·
the loss of key personnel;
 
·
government regulations affecting our industry;
 
·
lawsuits filed against the Company;
 
·
changes in operating performance and stock market valuations of other companies that sell similar products and services;
 
·
price and volume fluctuations in the overall stock market;
 
·
market conditions in our industry, the industries of our customers and the economy as a whole; and
 
·
other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
 
Substantial future sales of Avantair’s common stock in the public market could cause its stock price to fall.
 
As of January 21, 2010, the Company had 26,384,603 shares of common stock outstanding, 1,058,166 shares of common stock available for future issuance under its 2006 Long-Term Stock Incentive Plan and warrants to purchase 2,829,507 shares outstanding. Additional sales of Avantair’s common stock in the public market after this Registration Statement is declared effective by the SEC, or the perception that these sales could occur, could cause the market price of its common stock to decline. The 11,425,307 shares of common stock registered pursuant to this Registration Statement will be freely tradable once this Registration Statement is declared effective by the Securities and Exchange Commission without restriction or further registration under the Securities Act, unless the shares are purchased by “affiliates” as that term is defined in Rule 144 under the Securities Act. Any shares purchased by an affiliate may not be resold except pursuant to an effective registration statement or an applicable exemption from registration, including an exemption under Rule 144 of the Securities Act. These restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act.

 
13

 
 
If securities analysts do not publish research or reports about Avantair’s business or if they downgrade its stock, the price of its stock could decline.
 
The research and reports that industry or financial analysts publish about Avantair or its business will likely have an effect on the trading price of its common stock. If an industry analyst decides not to cover the Company, or if an industry analyst decides to cease covering the Company at some point in the future, the Company could lose visibility in the market, which in turn could cause its stock price to decline. If an industry analyst downgrades Avantair’s stock, its stock price would likely decline rapidly in response.
 
The concentration of Avantair’s capital stock ownership with insiders will likely limit your ability to influence corporate matters.
 
Avantair’s insiders, (its executive officers, directors, current five percent or greater stockholders and affiliated entities) together beneficially own approximately 80.7% of our outstanding common stock.  As a result, these stockholders, acting together, will have significant influence over all matters that require approval by the Company’s stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders, including those who purchased shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control that other stockholders may view as beneficial.
 
Provisions of the Company’s amended and restated certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of or changes in its management and, as a result, depress the trading price of its common stock.
 
Avantair’s certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control or changes in its management that its stockholders may deem advantageous. These provisions:
 
 
·
require super-majority voting to amend some provisions in the Company’s certificate of incorporation and bylaws;
 
·
authorize the issuance of “blank check” preferred stock that the Company’s board could issue to increase the number of outstanding shares and to discourage a takeover attempt;
 
·
limit the ability of the Company’s stockholders to call special meetings of stockholders;
 
·
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of its stockholders;
 
·
provide that the board of directors is expressly authorized to make, alter or repeal the Company’s bylaws; and
 
·
establish advance notice requirements for nominations for election to the Company’s board or for proposing matters that can be acted upon by stockholders at stockholder meetings.
 
In addition, the Company is subject to Section 203 of the Delaware General Corporation Law, which, subject to some exceptions, prohibits “business combinations” between a Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15.0% or more of a Delaware corporation’s voting stock for a three-year period following the date that the stockholder became an interested stockholder. Section 203 could have the effect of delaying, deferring or preventing a change in control that the Company’s stockholders might consider to be in their best interests. See “Description of Capital Stock.”
 
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take corporate actions other than those you desire.
 
The Company does not expect to pay any cash dividends for the foreseeable future.
 
The Company does not anticipate that it will pay any cash dividends to holders of its common stock in the foreseeable future. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends in the foreseeable future should not purchase the Company’s common stock.

 
14

 

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
 
This Form S-1 contains forward-looking statements relating to future events and the future performance of the Company, including, without limitation, statements regarding the Company’s expectations, beliefs, intentions or future strategies that are signified by the words “expects,” “anticipates,” “intents,” “believes,” or similar language. You should read statements that contain these words carefully because they:
 
 
·
discuss future expectations;
 
·
contain information which could impact future results of operations or financial condition; or
 
·
state other “forward-looking” information.
 
We believe it is important to communicate our expectations to the Avantair stockholders. However, there may be events in the future that we are not able to accurately predict or over which we have no control and which could cause our actual results to differ materially from the information contained in the forward-looking statements contained in this document. The risk factors and cautionary language discussed in this Registration Statement and in our Annual Report on Form 10-K provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by Avantair in its forward-looking statements, including among other things:
 
 
(1)
our inability to generate sufficient net revenue in the future;
 
(2)
our inability to fund our operations and capital expenditures;
 
(3)
our inability to acquire additional inventory of aircraft from our single manufacturer;
 
(4)
the loss of key personnel;
 
(5)
our inability to effectively manage our growth;
 
(6)
our inability to generate sufficient cash flows to meet our debt service obligations;
 
(7)
competitive conditions in the fractional aircraft industry;
 
(8)
extensive government regulation;
 
(9)
the failure or disruption of our computer, communications or other technology systems;
 
(10)
increases in fuel costs;
 
(11)
changing economic conditions; and
 
(12)
our failure to attract and retain qualified pilots and other operations personnel.
 
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document.
 
All forward-looking statements included herein attributable to Avantair or any person acting on Avantair’s behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, Avantair undertakes no obligations to update these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.
 
You should be aware that the occurrence of the events described in the “Risk Factors” section and elsewhere in this Registration Statement could have a material adverse effect on Avantair.
 
MARKET AND INDUSTRY DATA
 
This prospectus includes market and industry data and forecasts that we have developed from independent consultant reports, publicly available information, various industry publications, other published industry sources and our internal data and estimates. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable.
 
Our internal data and estimates are based upon information obtained from our investors, trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Although we believe that such information is reliable, we have not had this information verified by any independent sources.
 
USE OF PROCEEDS
 
The Company will not receive any proceeds from the sale or other disposition of the shares of common stock covered by this prospectus. The maximum proceeds the Company could receive upon the exercise of all the warrants with respect to which the underlying shares of common stock have been registered on this Registration Statement is  $455,888.

 
15

 

PRICE RANGE OF SECURITIES AND DIVIDENDS
 
Avantair’s common stock is traded on the Over-the-Counter Bulletin Board under the symbol AAIR. The following table sets forth the range of high and low closing bid prices for the common stock for the periods indicated. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions. On January 21, 2010, the last reported sale price of our shares was $2.10 per share. As of January 21, 2010, the Company had approximately 75 shareholders of record for its common stock.
 
   
Common Stock
 
Quarter Ended
 
High
   
Low
 
             
2008
           
First Quarter
 
$
5.25
   
$
4.47
 
Second Quarter
   
5.30
     
4.23
 
Third Quarter
   
5.15
     
2.80
 
Fourth Quarter
   
3.00
     
1.94
 
                 
2009
               
First Quarter
   
2.20
     
1.50
 
Second Quarter
   
1.90
     
0.57
 
Third Quarter
   
1.75
     
0.80
 
Fourth Quarter
   
1.90
     
1.15
 
                 
2010
               
First Quarter
   
1.65
     
1.20
 
 
DIVIDEND POLICY
 
The Company has never declared or paid cash dividends on our common stock. The Company currently expects to retain all future earnings for use in the operation and expansion of our business and does not anticipate paying cash dividends in the foreseeable future. The declaration and payment of any dividends in the future will be determined by our board of directors, in its discretion, and will depend on a number of factors, including our earnings, capital requirements and overall financial condition.

 
16

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under the heading “Risk Factors” and in our Annual Report on Form 10K.
 
Overview
 
Avantair is engaged in the sale of fractional ownership interests and flight hour card usage of professionally piloted aircraft for personal and business use and the management of its aircraft fleet. According to AvData, Avantair is the fifth largest company in the North American fractional aircraft industry. As of January 21, 2010, Avantair operated 55 aircraft within its fleet, which is comprised of 46 aircraft for fractional ownership, 5 company owned core aircraft and 4 leased and company managed aircraft.
 
Avantair also operates fixed flight based operations (FBO) in Camarillo, California and effective August 1, 2008, in Caldwell, New Jersey. Through these FBO’s and its headquarters in Clearwater, Florida, Avantair provides aircraft maintenance, concierge and other services to its customers as well as to the Avantair fleet.
 
Avantair generates revenues primarily through the sale of fractional ownership shares of aircraft, by providing maintenance and management services related to these aircraft, and from the sale of flight hour cards providing either 15 or 25 hours of flight time per year of access to its aircraft fleet (either individually or through the Company’s Axis Club Membership program). The Company markets and sells fractional ownership interests to individuals and businesses with a minimum share size of a one-sixteenth ownership interest. Under maintenance and management agreements with fractional owners, Avantair provides pilots, maintenance, fuel and hangar space for the aircraft.
 
In response to the general economic downturn and the resulting growth of flight hour card sales over fractional share sales industry-wide, in January 2009, Avantair initiated the Axis Club Membership program. This program is designed to bridge the gap between the financial commitment of a fractional share and flight hour cards. This new product offers access to blocks of flight hours for a three year membership fee of $75,000. The program requires Axis Club members to purchase a minimum of three 25 hour flight hour cards for $80,000 or less, dependent upon the type of membership purchased, over a three year period. The program also allows for the conversion of club membership into fractional ownership. Members are not charged a management fee until they are fractional owners.
 
Avantair presently sources all of its aircraft from a single manufacturer, Piaggio America, Inc. (“Piaggio”). As of January 21, 2010, Avantair had contractual commitments to purchase 52 additional Piaggio Avanti II aircraft through 2013. The total commitment, including a recently proposed price escalation, is valued at approximately $330 million. The Company’s agreement with Piaggio permits it some flexibility to defer a portion of the aircraft deliveries and the Company has exercised this flexibility at certain times in order to take deliveries in line with the Company’s sales expectations. During the second quarter of fiscal 2010, the Company, through an arms-length transaction transferred its rights to purchase four Piaggio Avanti II aircraft to LW Air LLC pursuant to the existing aircraft purchase agreement between the Company and Piaggio. Upon delivery of the aircraft, Piaggio returned $2.6 million of deposits previously paid on the aircraft by the Company.  Simultaneous with this transaction, the Company entered into an eight-year management agreement for those aircraft and the Company issued 2,373,260 warrants to Lorne Weil, the Managing Member of LW Air LLC.  Pursuant to the agreement between the parties, the Company will manage each aircraft for a monthly fee which is variable based upon aircraft flight hours but will not exceed $56,500 per month. The agreement also allows the Company to enter into short-term leases for the use of the aircraft at a specified dry lease rate per flight hour.  These aircraft are anticipated to be utilized to satisfy fleet demands of the growing flight hour card and Axis Club Membership Program product lines.
 
In October 2009, the Company consummated a private sale of its common stock to investors generating net proceeds of approximately $8.0 million. Together with the proceeds of the private placements consummated in June and September 2009, the Company received total net proceeds of approximately $9.9 million.
 
The Company’s primary sources of operating funds are the collection of management and maintenance fees from fractional share owners as well as the sale of fractional ownership shares, flight hour cards and, effective January 2009, Axis Club Memberships. Sales by product category follow:

   
FY 2009 Unit Sales for the Three Months Ended
   
FY 2010
 
  
 
September 30, 2008
   
December 31, 2008
   
March 31, 2009
   
June 30, 2009
   
Total
   
September 30, 2009
 
New Fractional shares
   
19.5
     
16.5
     
-
     
2
     
38
     
2
 
Flight hour cards
   
27
     
53
     
29
     
51
     
160
     
86
 
Axis Club Memberships
   
N/A
     
N/A
     
2
     
8
     
10
     
3
 
 
 
17

 
 
Avantair’s primary growth strategy is to continue to increase the number of fractional share owners and aircraft under management as well as increase the number of flight hour cards and Axis Club Memberships sold. At January 21, 2010, the Company had 29 fractional aircraft shares available for sale. In addition to the cost of acquiring aircraft, Avantair’s primary expenses are related to fuel, aircraft repositioning (i.e., moving an aircraft to another location to accommodate a customer’s need and for demonstration flights for sales purposes), maintenance, charters and insurance. To finance its growth strategy, the Company may continue to actively pursue additional funds through equity financing, including the sale of additional shares of common and preferred stock, asset sales, accelerated payments of maintenance and management fees, debt financing, or a combination thereof.
 
At September 30, 2009 and June 30, 2009, Avantair had assets of approximately $155.2 million and $164.0 million, respectively. For the fiscal quarter ended September 30, 2009 and the fiscal year ended June 30, 2009, the Company had revenue of approximately $35.2 million and $136.8 million, respectively, and net losses of approximately $1.4 million and $4.5 million, respectively. Avantair has incurred losses since inception and may not be able to generate sufficient net revenue from its business in the future to achieve or sustain profitability. At December 31, 2009, the Company had approximately $6.8 million of unrestricted cash on hand and assuming there is no change in sales and expense trends experienced since the fourth quarter of fiscal 2009, the Company believes that its cash on hand is sufficient to continue operations for the foreseeable future.

Critical Accounting Policies and Estimates

As discussed in our Form 10-K for the fiscal year ended June 30, 2009, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgement and estimation. The judgments, or the methodology on which the judgments are made, are reviewed with the Audit Committee.

Revenue Recognition
 
Avantair is engaged in the sale and management of fractional ownerships of professionally piloted aircraft for personal and business use and access to its aircraft fleet through either 15 or 25 hour flight hour cards (either individually or through the Company’s Axis Club Membership program). In the case of fractional ownership sales, the aircraft are sold in one-sixteenth shares or multiples thereof. The purchase agreement grants the customer the right to the use of the aircraft for a specified number of hours each year the aircraft is in service. When a customer purchases a fractional share, they are also required to enter into a five-year management and maintenance agreement. Under the terms of the maintenance and management agreement, the Company agrees to manage, operate and maintain the aircraft on behalf of the customer in exchange for a fixed monthly fee which is recognized ratably over the term of the agreement, usually five years. If a customer prepays its management and maintenance fee for a period of one year or longer, the prepayment is recorded as unearned revenue and amortized into revenue on a monthly basis in accordance with the schedule provided for within each agreement. Flight hour cards provide customers with flight hours for a fixed fee. The Company defers the entire amount paid and recognizes revenue on an incremental basis as aircraft hours are flown. Axis Club Membership fees are paid in advance, deferred and recognized over the three year membership term. Similar to standard flight hour card sales, payment for flight hour cards sold through the Axis Club Membership program are collected in advance of access to the aircraft fleet, deferred and recognized as revenue on an incremental basis over the three year membership term.
 
Fractional Aircraft Shares Sales
 
The Company does not have objective evidence to determine the fair value and allocate fractional share revenue from that generated from the management and maintenance agreement, and, as a result, has adopted the provisions of FASB ASC Topic 605-25  “Revenue Multiple Element Arrangement”  to account for the sale of fractional shares of aircraft. Accordingly, as the sales of the fractional shares cannot be separated from the underlying maintenance and management agreement, fractional share sale revenue is recognized ratably over the five-year life of the maintenance and management agreement. The period in which revenue is recognized will be evaluated on a periodic basis. Factors that impact management’s assessment of the most appropriate period of revenue recognition will include, but not be limited to, customer turnover, terms and conditions of the related fractional share sale, maintenance arrangements as well as any other factor that could impact revenue.
 
Aircraft Costs Related To Fractional Sales
 
The Company reflects aircraft costs related to the sale of fractional aircraft shares. As a result of the adoption of FASB ASC Topic 605-25 “Revenue Multiple Element Arrangement,” the Company recognizes revenue from the sale of fractional shares as income over the five-year period. The aircraft costs related to sales of fractional shares consist of the cost of the aircraft and are recorded as an asset and recognized as the cost of aircraft shares sold over the five-year period.

 
18

 

Maintenance Expense Policy
 
The Company uses the direct expensing method of accounting for non-refurbishment aircraft maintenance. Engine maintenance is performed by third parties under contracts which transfer risk, and related costs are expensed as incurred. Airframe maintenance is performed in-house and related costs are expensed as incurred. Refurbishments of the interiors of the aircraft, which extend the life of the aircraft, are capitalized and amortized over the estimated life of three years.
 
Stock-Based Compensation
 
The Company accounts for share-based compensation to employees and directors in accordance with FASB ASC Topic 718 “Compensation- Stock Compensation,” which requires the recognition of compensation expense for employee stock options and other share-based payments. Under ASC 718, expense related to employee stock options and other share-based payments is recognized over the relevant service period based on the fair value of each stock option grant. In addition, the Company recognizes in its Condensed Consolidated Statements of Operations the grant-date fair value of stock options and other equity-based compensation issued to employees and directors. Compensation expense for equity-based awards is recognized over the requisite service period, usually the vesting period on a straight line basis, while compensation expense for liability-based awards (those usually settled in cash rather than stock) is measured to fair-value at each balance sheet date until the award is settled.
 
Results of Operations
 
Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008
 
Revenues for the three months ended September 30, 2009 were $35.2 million, an increase of 7.7% from $32.7 million for the three months ended September 30, 2008. This increase was the result of a 4.1% decrease in the revenue generated from the sale of fractional aircraft shares to $12.0 million for the three months ended September 30, 2009 from $12.5 for the comparable 2008 period, offset by an increase of 5.3% in maintenance and management fees to $18.0 million for the three months ended September 30, 2009 from $17.1 for the comparable 2008 period, an increase of 109.2% in flight hour card and Axis Club Membership revenue to $3.9 million for the three months ended September 30, 2009 from $1.8 million for the comparable 2008 period, and an increase of 10.4% in other revenue to $1.4 million for the three months ended September 30, 2009 from $1.3 million for the comparable 2008 period.
 
Revenue from the sale of fractional aircraft shares decreased due to the full amortization of revenue from shares sold in prior periods, partially offset by an increase of 4.4% in the average number of total fractional shares sold through September 30, 2009 from the comparable 2008 period.

The increase in revenue from maintenance and management fees is primarily due to a 4.4% increase in the average number of fractional shares sold through September 30, 2009 from the comparable 2008 period, coupled with an increase in the average monthly management fee per shareowner.

Flight hour card revenue and Axis Club Membership revenue increased $2.0 million primarily as a result of an increase in flight hour card revenue due to increased flight hour card sales as a result of the greater acceptance of time card travel in the existing economy compared to fractional ownership and the timing of flight hour card utilization by owners during the three months ended September 30, 2009 from the comparable 2008 period.

Other revenue was relatively consistent between the two periods due to increased fuel and remarketing revenue offset by a decrease in demonstration revenue.

Operating expenses for the three months ended September 30, 2009 were 1.2% higher than the three months ended September 30, 2008, with total operating expenses of $35.0 million compared to $34.6 million, respectively. The cost of fractional aircraft shares sold decreased to $10.2 million for the three months ended September 30, 2009 from $10.6 million for the three months ended September 30, 2008, due to a 4.4% increase in the average number of fractional shares sold through September 30, 2009 from fractional shares sold through September 30, 2008. The cost of flight operations, together with the cost of fuel, decreased 1.6% to $16.1 million for the three months ended September 30, 2009 from $16.3 million for the three months ended September 30, 2008, primarily due to:

 
·
an increase in maintenance expense as a result of an increase in fleet size and flight hours, partially offset by decreases in insurance expense and aircraft lease expense as a result of the conversion of a Company leased aircraft to a Company core aircraft; and
 
·
a $0.9 million decrease in cost of fuel due to a 34.0% decrease in the per gallon cost of fuel (as a result of Avantair negotiating lower fuel rates and also due to the global decrease in fuel costs) coupled with improved aircraft utility;

General and administrative expenses increased 10.5% to $6.3 million for the three months ended September 30, 2009 from $5.7 million for the three months ended September 30, 2008, primarily due to a $0.2 million increase in payroll and related expenses, a $0.2 million increase in expenses related to fixed based operations primarily as a result to increased volume of fuel sales, and a $0.2 million increase in other expenses due to Company growth.

Selling expenses increased 8.6% to $1.0 million for the three months ended September 30, 2009 from $0.9 million for the three months ended September 30, 2008 due to an increase in commission expenses as a result of increased flight hour card sales.

 
19

 

Income from operations was $0.2 million for the three months ended September 30, 2009, an increase from $1.9 million loss from operations for the three months ended September 30, 2008 for the reasons set forth above.

Interest expense was $1.6 million for the three months ended September 30, 2009 was relatively consistent with the $1.5 million for the three months ended September 30, 2008, due to the relative consistency of the short and long- term debt balances between the two periods.

Net loss decreased to $1.4 million for the three months ended September 30, 2009 compared to $3.3 million for the three months ended September 30, 2008 due to the decrease in loss from operations partially offset by the increase in total other expense discussed above.
 
Fiscal year ended June 30, 2009 compared to the fiscal year ended June 30, 2008

Revenues for the fiscal year ended June 30, 2009 were $136.8 million, an increase of 18.3% from $115.6 million for the fiscal year ended June 30, 2008. This increase was the result of a 19.4% increase in the revenue generated from the sale of fractional aircraft shares to $51.9 million for the fiscal year ended June 30, 2009 from $43.4 million for the comparable 2008 period, an increase of 21.4% in maintenance and management fees to $70.7 million for the fiscal year ended June 30, 2009 from $58.2 million for the comparable 2008 period, an increase of 29.7% in flight hour card and Axis Club Membership revenue to $9.4 million for the for the fiscal year ended June 30, 2009 from $7.2 million for the comparable 2008 period, and a decrease of 27.6% in other revenues to $4.9 million for the fiscal year ended June 30, 2009 from $6.7 million for the comparable 2008 period.

Revenue from the sale of fractional aircraft shares increased primarily due to an increase in the average number of fractional shares sold through June 30, 2009 from the comparable 2008 period. The increase in the average number of fractional shares sold reflected the results of enhanced sales initiatives, including an emphasis on a national market, marketing of the fuel efficiency of the Piaggio aircraft and the cost value of an Avantair fractional share compared to light-jet fractional shares of competitors.
 

The increase in revenue from maintenance and management fees is primarily due to a 14.0% increase in the average number of fractional shares sold through June 30, 2009 from the comparable 2008 period, coupled with an increase in the average monthly management fee per shareowner.

Flight hour card and Axis Club Membership revenue increased $2.1 million primarily as a result of an increase in Flight hour card revenue due to increased flight hour card sales as a result of the greater acceptance of time card travel in the existing turbulent economy compared to fractional ownership and the timing of flight hour card utilization by owners during the fiscal year ended June 30, 2009 from the comparable 2008 period.

Other revenue decreased $1.9 million primarily as a result of the $1.6 million decrease in demonstration revenue as a result of the reduction in fractional share sales activity during the fiscal year ended June 30, 2009 from the comparable 2008 period.

Operating expenses for the fiscal year ended June 30, 2009 increased 3.1% to $135.4 million compared to $131.2 million, for the comparable 2008 period. The cost of fractional aircraft shares sold increased 20.4% to $44.1 million for the fiscal year ended June 30, 2009 from $36.6 million for the fiscal year ended June 30, 2008, due to an increase in the average number of fractional shares sold through June 30, 2009 from fractional shares sold through June 30, 2008. Gain on sale of assets increased 61.9% to $1.4 million related to a nonrecurring gain recognized on the sale of one of the Company’s core aircraft in fiscal year 2009 as compared to $0.8 million nonrecurring gain recognized in the comparable 2008 period. The cost of flight operations, together with the cost of fuel decreased 9.7% to $60.0million for the fiscal year ended June 30, 2009 from $66.5million for the fiscal year ended June 30, 2008, primarily due to:

 
·
a $3.5 million reduction in chartering expenses as a result of the increased use of the Company's core aircraft to alleviate scheduling conflicts, use of enhanced flight optimization software and flight staff training;
     
 
·
a $3.1 million decrease in cost of fuel due to a 19.0% decrease in the per gallon cost of fuel (as a result of Avantair negotiating lower fuel rates in fiscal year 2009 and also due to the global decrease in fuel costs) coupled with improved aircraft utility; and
     
 
·
a $1.3 million decrease in maintenance expense primarily as a result of the replacement of the Company’s former engine service vendor with another nationally recognized, FAA certified engine maintenance vendor in January 2009, offset by general increases in operating costs due to an increase in fleet size.
     
 
·
The above were partially offset by a $1.2 million increase in pilot expenses related to pilot salaries and training costs as a result to flight crew expansion and a $0.6 million increase in insurance coverage and other expenses to an increase in fleet size.

General and administrative expenses increased 14.1% to $23.6 million for the fiscal year ended June 30, 2009 from $20.7 million for the fiscal year ended June 30, 2008, primarily due to a $1.3 million increase in payroll and related expenses due to hiring and rate increases in 2009, and a $1.1 million increase in other expenses due to company growth.

 
20

 

Selling expenses decreased 20.0% to $3.7 million for the fiscal year ended June 30, 2009 from $4.7 million for the fiscal year ended June 30, 2008 primarily due to a decrease of $0.7 million in marketing expenses as a result of a more direct approach to marketing implemented during fiscal year 2009.
 
Income from operations was $1.4 million for the fiscal year ended June 30, 2009, an increase of 109.1% from the $15.7 million loss from operations for the fiscal year ended June 30, 2008 for the reasons set forth above.

Interest expense was $5.9 million for the fiscal year ended June 30, 2009 compared to $3.6 million for the fiscal year ended June 30, 2008, primarily due to an increase in floor plan borrowing agreements incurred to acquire aircraft and $0.4 million of interest expense relating to the financing arrangements with Jet Support Services, Inc., partially offset by decrease in interest due to the reduction in outstanding principal balances. 
 
Net loss decreased to $4.5 million for the fiscal year ended June 30, 2009 compared to $18.9 million for the fiscal year ended June 30, 2008 due to the decrease in loss from operations partially offset by the increase in total other expense discussed above.
  
Liquidity and Capital Resources

Avantair’s primary sources of liquidity have been cash provided by operations, cash raised from its equity offering as Ardent Acquisition Corp., cash provided from its debt facilities, cash raised in the preferred and common stock offerings, and other asset- based borrowing (see Notes 4 and 5 to the Company’s condensed consolidated financial statements for the period ended September 30, 2009). The Company uses its cash primarily to fund losses from operations, deposits made on aircraft, leasehold improvements, and to fund the purchase of core aircraft and aircraft which are to be fractionalized. Cash generated from operations has not been sufficient to provide for all the working capital needed to meet Avantair’s requirements. At September 30, 2009 and June 30, 2009, Avantair had a working capital deficit of approximately $52.0 million and $49.2 million, respectively, and a stockholders’ deficit of approximately $37.2 million and $36.0 million, respectively. As of September 30, 2009, cash and cash equivalents amounted to approximately $5.1 million and total assets to $155.2 million. The cash and cash equivalent balance increased $1.3 million from June 30, 2009 and total assets decreased $8.9 million. The increase in cash and cash equivalents occurred primarily as a result of cash received from the sale of fractional shares, flight hour cards, Axis Club Memberships, fuel and rent, collection of maintenance and management fees and other receipts including proceeds from the sale of the Company’s common stock. On June 30 and September 25, 2009, Avantair sold 567,200 and 250,000 units, respectively, at a price of $2.50 per unit to investors in a private placement, generating net proceeds of approximately $1.3 and $0.6 million, respectively (See Notes 4 and 5 to the Company’s condensed consolidated financial statements for the period ended September 30, 2009). By agreement between Avantair, the investors in the June 30, 2009 private placement and that offering’s placement agent, the period for additional sales of units was extended until October 15, 2009. In October 2009, the Company sold an additional 8,818,892 shares at a price of $0.95 per share generating net proceeds of approximately $8.0 million. Partially offsetting these receipts are cash disbursements of $1.2 million in payments for deposits on future aircraft deliveries, and $3.6 million repayment of debt, in addition to expenditures for the cost of operations, including insurance and capital and leasehold improvements.
 
In January 2009, the Company introduced the Axis Club Membership Program designed to bridge the gap between the financial commitment of a fractional share and flight hour card. The current rate of flight hour card sales including those through the Axis Club Membership will require the Company to acquire aircraft to satisfy the increased flight hour demands on its core aircraft fleet if its core utility is strained. During October 2009, Avantair entered into an agreement with a third party to whom it sold its rights to purchase three Piaggio Avanti II aircraft in exchange for the $2.6 million cost of the deposits paid on the aircraft by the Company. In connection with this transaction, the Company entered into an eight-year management agreement with the third party. Pursuant to the agreements, the Company will manage the aircraft for a monthly fee; the agreement also allows the Company to enter into short-term leases for the use of the aircraft at a specified dry lease rate per flight hour. The third party has also agreed to purchase one additional aircraft during the remainder of calendar 2009 under the same terms with the Company. These aircraft are anticipated to be utilized to satisfy fleet demands of the growing flight hour card and Axis Club Membership Program product lines. However, there can be no assurance that membership program sales will be sufficient to compensate for a decrease in fractional share sales, or that financing of additional aircraft to be acquired to service this program will be available.

The Company’s primary sources of operating funds are the collection of management and maintenance fees from fractional share owners as well as the sale of fractional ownership shares, flight hour cards and, effective January 2009, Axis Club Memberships. Sales by product category follow:
 
   
Unit Sales for the Three Months Ended
 
   
September 30, 2009
   
September 30, 2008
 
New Fractional shares
    2       19.5  
Flight hour cards
    86       27  
Axis Club Memberships
    3       N/A  

Avantair’s primary growth strategy is to continue to increase the number of fractional share owners and aircraft under management as well as increase the number of flight hour cards and Axis Club Memberships sold. At January 21, 2010, the Company had 29 fractional aircraft shares available for sale. In addition to the cost of acquiring aircraft, Avantair’s primary expenses are related to fuel, aircraft repositioning (i.e., moving an aircraft to another location to accommodate a customer’s need and for demonstration flights for sales purposes), maintenance, charters and insurance. To finance its growth strategy, the Company may continue to actively pursue additional funds through equity financing, including the sale of additional shares of common and preferred stock, asset sales, accelerated payments of maintenance and management fees, debt financing, or a combination thereof.

 
21

 
 
At September 30, 2009 and June 30, 2009, Avantair had assets of approximately $155.2 million and $164.0 million, respectively. For the fiscal quarter ended September 30, 2009 and the fiscal year ended June 30, 2009, the Company had revenue of approximately $35.2 million and $136.8 million, respectively, and net losses of approximately $1.4 million and $4.5 million, respectively. Avantair has incurred losses since inception and may not be able to generate sufficient net revenue from its business in the future to achieve or sustain profitability. At December 31, 2009, the Company had approximately $6.8 million of unrestricted cash on hand and assuming there is no change in sales and expense trends experienced since the fourth quarter of fiscal 2009, the Company believes that its cash on hand is sufficient to continue operations for the foreseeable future.

Fiscal year ended June 30, 2009 compared to fiscal year ended June 30, 2008.

Net cash used in operating activities was $5.8 million for the year ended June 30, 2009 compared to cash used in operating activities of $15.5 million for the same period last year. Net cash used in operating activities during the year ended June 30, 2009 is primarily attributable to the $4.5 million net loss, combined with depreciation expense of $5.2 million and stock based compensation expense of $0.4 million, less the gain on sale of assets of $1.4 million, $12.0 million of unsold aircraft costs including $1.4 million expended to acquire four fractional shares on a floor planned aircraft upon expiration of the floor plan on June 30, 2009 (of which approximately $1.0 million was collected subsequent to June 30, 2009 from the sale of two of these fractional shares), a decrease of $1.6 million due to the collection of notes receivable in accordance with normal payment terms, a $0.9 million decrease in prepaid expenses, a $0.7 net increase in accounts payable and accrued expenses, a net decrease of approximately $1.6 resulting from decreases in deferred maintenance, other assets and restricted cash and a $0.4 million decrease in other liabilities.
 
Net cash provided by investing activities was $1.0 million for the year ended June 30, 2009 compared to cash used in investing activities of $2.7 million for the same period last year. Net cash provided by investing activities during the year ended June 30, 2009 resulted primarily from $1.9 million from the sale of one of the Company’s core aircraft, net of capital expenditures on leasehold improvements and computer systems. Cash used in investing activities for the year ended June 30, 2008 resulted from $2.5 million in proceeds from rights to purchase 18 Embraer Phenom 100 Positions, net of capital expenditures.

Net cash used in financing activities was $10.5 million for the year ended June 30, 2009 compared to cash used in operating activities of $24.8 million for the same period last year. Net cash used in financing activities for the year ended June 30, 2009 results primarily from net proceeds from the issuance of stock of $1.3 million and net additional borrowings. On June 30, 2009, Avantair sold 567,200 units at a price of $2.50 per unit to investors in a private placement. The sale was consummated under the terms of a securities purchase agreement between Avantair and each of the investors. Pursuant to a registration rights agreement, Avantair agreed to use it best efforts to register the shares issued to the investors and the shares underlying the warrants issued to the investors for sale under the Securities Act of 1933, as amended. During the fiscal year ended June 30, 2009, the Company had additional net borrowings under short-term notes payable, comprised of floor plan agreements, of $17.4 million and a net decrease of long-term debt of $7.5 million.
 
Financing Arrangements

Avantair’s financing arrangements at September 30, 2009, are described below:

Wells Fargo Equipment Finance, Inc.
  $ 2,994,149  
CNM, Inc.
    2,725,345  
Jet Support Services, Inc.
    3,240,641  
JMMS, Inc.
    3,312,304  
Century Bank, F.S.B.
    1,869,695  
Wachovia Bank
    2,500,000  
Midsouth Services, Inc
    12,025,004  
    $ 28,667,138  

Wells Fargo Equipment Finance, Inc.: In February 2005, the Company entered into financing arrangements for the purchase of three aircraft under various notes payable with Wells Fargo Equipment Finance, Inc. In January 2008, the Company sold one of these aircraft and repaid the outstanding balance on the related note payable. The notes outstanding at September 30, 2009 totaled approximately $3.0 million and are payable in monthly installments ranging from $10,644 to $38,480 with interest ranging from 5.96% to 6.12% per annum, through 2012. The notes are collateralized by the aircraft.
 
CNM, Inc.: In August 2007, the Company and CNM executed a new note agreement which converted an outstanding note obligation of approximately $7.0 million into a term loan payable monthly over three years and bearing interest at 10.0% per annum. CNM also assumed a promissory note due to Wells Fargo Bank for $2.9 million which was included as part of this new note agreement. Borrowings outstanding under these arrangements at September 30, 2009 totaled approximately $2.7 million. During October 2009, the Company repaid the outstanding balance of the promissory note of approximately $2.7 million.

 
22

 

Jet Support Services, Inc.: On April 24, 2006, Avantair financed an aircraft maintenance program contract with Jet Support Services, Inc. (“JSSI”) in the amount of $3.4 million. The promissory note provided for seven monthly installments of $145,867 and 53 monthly installments of $45,867, respectively, including interest at 7.0% per year. On April 15, 2008, the Company entered into a financing arrangement with JSSI by means of a $5.5 million promissory note. The new note matures on April 1, 2011 and bears interest at the rate of 10.0% per annum, with 35 monthly payments of principal and interest in an amount of $185,127 beginning on June 2, 2008. The new note covered the remaining balance of the aforementioned promissory note of $0.4 million, other costs and fees to be paid by the Company under service agreements with JSSI and related deferred financing costs of approximately $1.0 million which will be amortized over the life of the note using the effective interest method. Upon entering into this payment arrangement and the $5.5 million promissory note, the parties terminated the airframe maintenance contract and have agreed to apply the unamortized prepayment ($1,538,175 at June 30, 2009) under the airframe maintenance contract to the engine maintenance program and will amortize this amount over the remaining 37 month term of that program. Borrowings outstanding under this arrangement at September 30, 2009 totaled approximately $3.2 million.

In addition, the Company entered into another payment arrangement with JSSI by means of a $525,000 promissory note dated July 31, 2008 with five monthly payments of $105,000 commencing August 1, 2008. The note constituted payment of the purchase of airframe parts inventory by the Company from JSSI. The Company repaid the full amount of the term loan in December 2008.
 
JMMS, Inc.: On August 11, 2006, the Company entered into a sale and leaseback agreement with JMMS, LLC (“JMMS”). The lease transaction has been accounted for as finance lease and provides for monthly payments of $39,500 through July 11, 2011. Borrowings outstanding under this arrangement at September 30, 2009 totaled approximately $3.3 million. JMMS notified the Company of its intention to terminate the sale and leaseback agreement between the parties effective March 1, 2009, at which date, pursuant to the agreement, the Company was required to purchase the aircraft at a cost of no more than the $4.2 million. The closing date of the transaction was extended past March 1, 2009, in consideration for monthly payments to JMMS totaling $1.25 million through December 1, 2009. The total amount of the monthly payments made to JMMS by the Company since March 1, 2009 were deducted from the aircraft purchase price. On December 14, 2009, the Company sold the aircraft to a third party for $2.9 million and paid the remaining outstanding balance of the purchase price to JMMS.

Century Bank, F.S.B.: In August 2007, the Company and Century Bank F.S.B. executed a $2.2 million note agreement for the purchase of one aircraft. The note outstanding at September 30, 2009 totaled approximately $1.9 million and is payable in monthly installments of $27,175 with interest of 8.25% per annum, through August 3, 2012. The note is collateralized by the aircraft.

Wachovia Bank: On October 31, 2007, the Company entered into a financing arrangement for the purchase of one used aircraft at a total purchase price of approximately $4.5 million (inclusive of the value of a flight hour card of 100 hours). Financing was obtained from Wachovia through a note payable of $3.9 million. This debt will be repaid monthly over 7 years at an interest rate of the LIBOR rate plus 4.0%. Borrowings outstanding under this arrangement at September 30, 2009 totaled approximately $2.5 million.

Midsouth Services, Inc.: On October 10, 2007, Avantair acquired a core aircraft under a capital lease obligation with Midsouth Services, Inc. Under the lease agreement, Midsouth provided funding for the $4.7 million purchase of a pre-owned Piaggio Avanti aircraft and holds title to the Aircraft. Midsouth leases the Aircraft exclusively to Avantair on a five year lease at 15.0% interest per annum. The monthly lease payments for the term of the lease are $89,000. At the end of the five year lease, Avantair shall purchase the Aircraft from Midsouth at the guaranteed residual value in the amount of approximately $2.3 million. Avantair also has the option to purchase the Aircraft anytime during the lease term at the then current guaranteed residual value as set forth on the amortization schedule without penalty. The obligation outstanding under this agreement at September 30, 2009 totaled approximately $4.1 million.
 
In April 2009, the Company amended the Lease Agreement previously accounted for as an operating lease, dated as of July 31, 2006 between the Company and Midsouth. Pursuant to the amendment, the Company is required to pay $74,900 monthly until August 2011, the expiration of the Lease Agreement. In addition, the Company has agreed to purchase the leased aircraft for approximately $3.0 million from Midsouth within sixty days following the expiration of the term of the Lease Agreement. The lease, as amended, has been classified as a capital lease. The obligation outstanding under this agreement at September 30, 2009 totaled approximately $3.8 million.

In April 2009, the Company entered into a Lease Agreement, effective April 6, 2009, pursuant to which Midsouth leases a Piaggio Avanti aircraft to the Company for a ten year lease term at a rate of $75,000 per month, plus taxes if applicable. The Company is required to provide Midsouth with 100 hours of flight time per year during the lease term. Hours have been accounted for at their fair value and are liquidated as hours are flown. Midsouth has the sole option to terminate the lease at the end of the fifth year of the term and to require the Company to purchase the leased aircraft for approximately $3.8 million within ninety days of that date. If this option is not exercised by Midsouth, the lease will continue for the remaining five years of the term and, at the end of the ten year lease, the Company will be required to purchase the aircraft from Midsouth for $0.3 million. The obligation outstanding under this agreement at September 30, 2009 totaled approximately $4.8 million.

For additional information regarding these financing arrangements, see Note 3 to the Company’s condensed consolidated financial statements.

 
23

 
 
The following table represents long-term debt obligations, contractual obligations and aircraft purchase commitments, each as of June 30, 2009:

Obligations as of June 30, 2009(1)
 
Long-Term
Debt
Obligations
   
Operating
Leases(2)
   
Aircraft
Purchase
Commitments(3)
 
2010
  $ 11,020,590     $ 2,572,756     $ 48,947,371  
2011
    3,740,793       2,578,862       61,184,214  
2012
    6,816,198       2,614,835       55,065,793  
2013
    4,778,576       2,686,368       42,828,950  
2014
    4,589,401       2,779,275       53,100,000  
After 2014
    186,043       18,999,302       92,925,000  
Total minimum payment
  $ 31,131,601     $ 32,231,398     $ 354,051,328  
Less obligation prepayment as of June 30, 2009
                8,600,000  
    $ 31,131,601     $ 32,231,398     $ 345,451,328  
 
(1) 
Amounts shown in table are not necessarily representative of, and may vary substantially from, amounts that will actually be paid in future years as Avantair may incur additional or different obligations subsequent to June 30, 2009.
(2) 
Includes hangar, office and auto leases.
(3) 
Includes purchase commitments for 56 Piaggio Avanti II aircraft through 2013.

Quantitative and Qualitative Disclosures about Market Risk

Avantair is exposed to various market risks, including changes in interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. Avantair does not enter into derivatives or other financial instruments for trading or speculative purposes. Avantair has also not entered into financial instruments to manage and reduce the impact of changes in interest rates and foreign currency exchange rates, although Avantair may enter into such transactions in the future.
 
Interest Rate Risk

Avantair is subject to market risk from exposure to changes in interest rates associated with its debt facility with Wachovia Bank. The current liability, pursuant to which Avantair is obligated to pay Wachovia Bank, has an interest rate that is equal to the LIBOR rate plus 4.0%. At September 30, 2009, the liabilities of Avantair with exposure to interest rate risk were approximately $2.5 million.
 
   
June 30, 2009
Expected Maturity Date
             
   
2010
   
2011
   
2012
   
2013
   
2014
   
Thereafter
   
Total
 
Liabilities
                                         
Long term debt:
                                         
Fixed Rate
 
$
10,462,461
   
$
3,182,664
   
$
6,258,070
   
$
4,220,448
   
$
4,031,273
   
$
-
   
$
28,154,916
 
Average interest rate
   
9.6
%
   
9.6
%
   
9.4
%
   
9.4
%
   
9.4
%
   
7.3
%
       
Variable Rate
 
$
558,129
   
$
558,129
   
$
558,128
   
$
558,128
   
$
558,128
   
$
186,043
   
$
2,976,685
 
Average interest rate
   
6.5
%
   
6.5
%
   
6.5
%
   
6.5
%
   
6.5
%
   
6.5
%
       
 
Off-Balance Sheet Arrangements

Avantair has no off-balance sheet obligations nor guarantees and has not historically used special purpose entities for any transactions.
 
Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures

As of September 30, 2009, under the direction of the Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a — 15(e) under the Securities Exchange Act of 1934, as amended. Based on the evaluation, it was concluded that the Company’s disclosure controls and procedures are effective at a reasonable assurance level and are designed to ensure that the information required to be disclosed in SEC reports is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms, and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 
24

 

Limitations on the Effectiveness of Controls and Other Matters

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Notwithstanding the foregoing limitations on the effectiveness of controls, the Company has nonetheless reached the conclusions set forth above on the Company’s disclosure controls and procedures and its internal control over financial reporting.

The Company assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2009. In making this assessment, management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
Based on the assessment, management believes that, as of September 30, 2009, the Company’s internal control over financial reporting was effective.
 
Changes to Internal Control Over Financial Reporting
 
There has been no change, other than those noted above, in the internal controls over financial reporting during the three months ended September 30, 2009, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
CEO and CFO Certifications

Exhibits 31.1 and 31.2 are the Certifications of the CEO and the CFO, respectively. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This item of this report is the information concerning the Evaluation referred to in the Section 302 Certifications and should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

 
25

 

BUSINESS
 
Overview
 
Avantair is engaged in the sale of fractional ownership interests and flight hour card usage of professionally piloted aircraft for personal and business use and the management of its aircraft fleet. According to AvData, Avantair is the fifth largest company in the North American fractional aircraft industry. As of January 21, 2010, Avantair operated 55 aircraft within its fleet, which is comprised of 46 aircraft for fractional ownership, 5 company owned core aircraft and 4 leased and company managed aircraft.
 
Avantair also operates fixed flight based operations (FBO) in Camarillo, California and effective August 1, 2008, in Caldwell, New Jersey. Through these FBO’s and its headquarters in Clearwater, Florida, Avantair provides aircraft maintenance, concierge and other services to its customers as well as to the Avantair fleet.
 
Avantair generates revenues primarily through the sale of fractional ownership shares of aircraft, by providing maintenance and management services related to these aircraft, and from the sale of flight hour cards providing either 15 or 25 hours of flight time per year of access to its aircraft fleet (either individually or through the Company’s Axis Club Membership program). The Company markets and sells fractional ownership interests to individuals and businesses with a minimum share size of a one-sixteenth ownership interest. Under maintenance and management agreements with fractional owners, Avantair provides pilots, maintenance, fuel and hangar space for the aircraft.
 
In response to the general economic downturn and the resulting growth of flight hour card sales over fractional share sales industry-wide, in January 2009, Avantair initiated the Axis Club Membership program. This program is designed to bridge the gap between the financial commitment of a fractional share and flight hour cards. This new product offers access to blocks of flight hours for a three year membership fee of $75,000. The program requires Axis Club members to purchase a minimum of three 25 hour flight hour cards for $80,000 or less, dependent upon the type of membership purchased, over a three year period. The program also allows for the conversion of club membership into fractional ownership. Members are not charged a management fee until they are fractional owners.
 
Avantair presently sources all of its aircraft from a single manufacturer, Piaggio America, Inc. (“Piaggio”). As of January 21, 2010, Avantair had contractual commitments to purchase 52 additional Piaggio Avanti II aircraft through 2013. The total commitment, including a recently proposed price escalation, is valued at approximately $330 million. The Company’s agreement with Piaggio permits it some flexibility to defer a portion of the aircraft deliveries and the Company has exercised this flexibility at certain times in order to take deliveries in line with the Company’s sales expectations. During the second quarter of fiscal 2010, the Company, through an arms-length transaction transferred its rights to purchase four Piaggio Avanti II aircraft to LW Air LLC pursuant to the existing aircraft purchase agreement between the Company and Piaggio. Upon delivery of the aircraft, Piaggio returned $2.6 million of deposits previously paid on the aircraft by the Company.  Simultaneous with this transaction, the Company entered into an eight-year management agreement for those aircraft and the Company issued 2,373,260 warrants to Lorne Weil, the Managing Member of LW Air LLC.  Pursuant to the agreement between the parties, the Company will manage each aircraft for a monthly fee which is variable based upon aircraft flight hours but will not exceed $56,500 per month. The agreement also allows the Company to enter into short-term leases for the use of the aircraft at a specified dry lease rate per flight hour.  These aircraft are anticipated to be utilized to satisfy fleet demands of the growing flight hour card and Axis Club Membership Program product lines.
 
In October 2009, the Company consummated a private sale of its common stock to investors generating net proceeds of approximately $8.0 million. Together with the proceeds of the private placements consummated in June and September 2009, the Company received total net proceeds of approximately $9.9 million.
 
The Company’s primary sources of operating funds are the collection of management and maintenance fees from fractional share owners as well as the sale of fractional ownership shares, flight hour cards and, effective January 2009, Axis Club Memberships. Sales by product category follow:
 
   
FY 2009 Unit Sales for the Three Months Ended
   
FY 2010
 
  
 
September 30, 2008
   
December 31, 2008
   
March 31, 2009
   
June 30, 2009
   
Total
   
September 30, 2009
 
New Fractional shares
    19.5       16.5       -       2       38       2  
Flight hour cards
    27       53       29       51       160       86  
Axis Club Memberships
    N/A       N/A       2       8       10       3  
 
Avantair’s primary growth strategy is to continue to increase the number of fractional share owners and aircraft under management as well as increase the number of flight hour cards and Axis Club Memberships sold. At January 21, 2010, the Company had 29 fractional aircraft shares available for sale. In addition to the cost of acquiring aircraft, Avantair’s primary expenses are related to fuel, aircraft repositioning (i.e., moving an aircraft to another location to accommodate a customer’s need and for demonstration flights for sales purposes), maintenance, charters and insurance. To finance its growth strategy, the Company may continue to actively pursue additional funds through equity financing, including the sale of additional shares of common and preferred stock, asset sales, accelerated payments of maintenance and management fees, debt financing, or a combination thereof.

 
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At September 30, 2009 and June 30, 2009, Avantair had assets of approximately $155.2 million and $164.0 million, respectively. For the fiscal quarter ended September 30, 2009 and the fiscal year ended June 30, 2009, the Company had revenue of approximately $35.2 million and $136.8 million, respectively, and net losses of approximately $1.4 million and $4.5 million, respectively. Avantair has incurred losses since inception and may not be able to generate sufficient net revenue from its business in the future to achieve or sustain profitability. At December 31, 2009, the Company had approximately $6.8 million of unrestricted cash on hand and assuming there is no change in sales and expense trends experienced since the fourth quarter of fiscal 2009, the Company believes that its cash on hand is sufficient to continue operations for the foreseeable future.
 
Industry Overview
 
The Company believes that fractional aircraft ownership provides customers with the convenience and flexibility of private air service without the more significant costs associated with sole ownership of an aircraft. Additionally, fractional aircraft companies generally provide the same conveniences and benefits to individuals and businesses through their various flight hour card programs. Commercial flight delays can be costly and tiresome, commercial hubs are increasingly crowded, major commercial airports may be far from final destinations and commercial air travel is increasingly subject to threats and security-related inconveniences. Attempting to divide the use of a plane among multiple parties to maximize its value can be logistically challenging. For businesses and high net worth individuals, fractional ownership and flight hour card programs often offer a balance between convenience and cost.
 
A fractional aircraft company assembles a fleet of planes with each of these planes available for a certain number of revenue generating flight hours per year. Those hours are then divided into partial ownership shares and these partial ownership shares are sold to individuals and businesses. Avantair’s customers typically purchase one-sixteenth or one-eighth shares in an aircraft, although in some cases the purchases are one-quarter shares or more. The purchase of a one-eighth share means that the owner will pay approximately one-eighth of the aircraft retail price initially and receive one-eighth of the total number hours of flying time per year for the initial term of the contract, which is five years for a new shareowner. An Avantair fractional share owner agrees to pay Avantair an additional predetermined monthly fee to cover the various costs of maintaining and operating the aircraft. Avantair is responsible for all of these services.
 
According to AvData, the North American fractionally owned aircraft fleet has grown from 8 aircraft in 1986 to an aggregate of 1,054 aircraft as of October 2009. According to AvData, five companies have 10.0% or more of the total market for fractional aircraft, based upon the units in operation - NetJets, Flight Options, FlexJet, CitationShares, and Avantair, with NetJets having a market share of approximately 50.0% and Flight Options, FlexJet, CitationShares having a combined market share of approximately 35.0%. According to AvData, as of October 2009, Avantair had an approximate market share of 10.0%.
 
The general aviation industry builds and sells aircraft ranging from single passenger, single engine propeller planes to multimillion dollar transoceanic jets costing $50.0 million or more. The fractional aircraft industry has primarily concentrated on the middle to upper end of that market. Most fractionally owned aircraft have a capacity of between four and seven passengers and a minimum range of 1,250-1,500 nautical miles. The list prices of these types of aircraft are generally $5.0 million to $50.0 million. Avantair’s Piaggio aircraft have a capacity of eight passengers and a minimum range of 1,200-1,500 nautical miles. The list price of a 1/16th share of an Avantair Piaggio aircraft is $425,000 or $6.8 million for all 16 of the shares in one aircraft. There are numerous manufacturers and models in most categories of aircraft. Both providers of fractional aircraft shares and purchasers of these shares consider the choice of aircraft based upon a variety of factors including:

 
·
price;
 
·
availability;
 
·
operating costs;
 
·
reliability;
 
·
speed;
 
·
range;
 
·
cabin size and features;
 
·
safety features and record;
 
·
environmental impact;
 
·
efficiency;
 
·
maintenance cost;
 
·
manufacturer; and
 
·
runway requirements.
 
Some of Avantair’s principal competitors are wholly or partially owned by aircraft manufacturers and/or their affiliated parent companies, which have resulted in their fleets being largely comprised of aircraft built by their respective parent companies. Although Avantair operates exclusively one aircraft type, the Company is not owned by any manufacturer, giving it a greater level of flexibility than most of its competitors.

 
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Fractional operators must have sufficient numbers of aircraft in the fleet to provide the service required. Since fractional share buyers desire to enter the program as soon as possible after purchasing shares, operators are obligated to provide access to aircraft when the shareowner requests it. If the operator does not have ample capacity available, it must charter that capacity, a practice that can be very costly.  As a result, fractional operators tend to place orders for aircraft in advance, and only sell shares within a few weeks prior to taking delivery of the aircraft. Fractional operators may also offer various flight hour card programs, which provide a certain number of flight hours to be used during a specific period of time, generally one year. The flight hour card programs subject the fractional operators to similar capacity requirements as fractional shareowners.
 
The capital requirements for ordering aircraft require the operator to place deposits well in advance of receiving its planes. Progress payments are made as certain milestones are achieved. The amounts of the deposits and progress payments are a function of several factors including the price of the underlying plane, the creditworthiness of the buyer, and the time until delivery. The majority of the payments are generally made upon delivery. As of January 21, 2010, the Company has paid $7.2 million in deposits for these future aircraft deliveries.
 
How Avantair’s Fractional Ownership Program Works
 
Each of Avantair’s current aircraft is available to fractional owners for a total of 800 flight hours per year. Those hours are then divided into blocks of ownership, beginning at fifty hours per year (a one-sixteenth share of the aircraft), and these partial ownership shares are sold to buyers. A share of an aircraft currently can be purchased from Avantair starting at $425,000 for a one-sixteenth share. Purchase prices for larger interests are slightly discounted. Each fractional owner must enter into a Management and Dry Lease Exchange Agreement with Avantair as part of the purchase of shares in an Avantair aircraft. A monthly maintenance and management fee, currently $9,650, is assessed per 1/16th share owned. This fee covers any direct costs in operating and maintaining the aircraft, other than fuel surcharges which are based on actual aircraft usage. This is unlike most other fractional programs, which generally charge fractional owners an occupied hourly rate for use of the aircraft. All programs have fuel surcharges, but due to the efficiency of the Avanti and the way Avantair calculates its management fee, Avantair believes its surcharges tend to be less than those charged by its competitors. Any landing fees, excess catering fees, applicable international fees and taxes are billed to the owner. Monthly fees are adjusted upwards on each anniversary date by the greater of either the current Consumer Price Index or 3.75%, but will not exceed the then-current rate offered to new share owners.
 
Each fractional owner is allocated a certain number of flight hours per year based on the size of their ownership share. The owner may exceed the number of annual allocated hours by up to 20.0%, to the extent that the owner did not use all of their allocated hours in the prior year and/or as an advance use of the next year’s allocated hours.
 
Each share owner owns an “undivided interest” that cannot be affected or encumbered by the financial actions of other owners. In order to avoid scheduling conflicts, each share owner throughout Avantair’s fleet agrees to exchange use of such owner’s airplane with the other share owners in the fleet. Avantair must move planes to the necessary destinations to meet the fractional owners’ needs. Avantair keeps a certain number of core aircraft in the fleet in order to have enough planes to meet demand. Owners may assign or transfer rights with respect to their undivided interest. Each owner has the right to sell their undivided interest in their aircraft.  Further, each owner is entitled to assign their undivided interest in the aircraft to a wholly owned subsidiary, parent or successor in interest with the Company’s prior written consent, which shall not be unreasonably withheld.

Aircraft Usage and Scheduling

A fractional share owner is required to provide a minimum of 24 hours notice to Avantair prior to the scheduled take-off time when scheduling the first leg of a trip during non-peak travel times. During peak travel times, requests for use by owner of an aircraft must be made at least 72 hours prior to the scheduled departure date of the first leg. No later than January 1st of each year, Avantair will notify all of its fractional owners of a list of the year’s peak travel days, which will not exceed 25 days.

For all flights outside of the Primary Service Area, which varies by program and is comprised of the continental United States, as well as certain airports in geographic locations such as the Bahamas, Canada, Mexico and the Caribbean, fractional owners must request an aircraft at least 7 days prior to the scheduled date of the first leg of the trip. All such requests are completed, provided that, for each such request, the fractional owner has provided sufficient information regarding the trip to enable Avantair to schedule the trip.
 
The Avantair Card Program
 
In 2006, Avantair introduced a card program that allows a purchaser to access Avantair’s aircraft for 15 or 25 hours of flight time without the requirement to purchase ownership shares in an aircraft. The card holder purchases the entire card amount in advance and receives the same service as a fractional owner. After the card holder has exhausted the hours purchased, the holder has no further obligations to Avantair. The program offers an alternative to fractional ownership for individuals and businesses seeking to experience private aircraft travel. Avantair’s management considers its card program to be an effective means of introducing potential purchasers to its fractional ownership program. Avantair’s card program currently is priced at $105,000 for a 25 hour card. Additionally, Avantair created an introductory 25 hour card for a first flight hour card purchaser currently at a rate of $95,000.

 
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The Axis Club Membership Program
 
In 2009, Avantair introduced the Axis Club Membership program. The membership program - ‘The Axis Club’ - allows a customer access flight blocks of 25 hours at a set rate for a three-year term. A one-time membership fee starts as low as $75,000 for the term. Tiered membership options are available to fit the flight needs of the customer. Each membership has a minimum required purchase of three 25 hour blocks of flight hours over the three year term. Each block of 25 flight hours has a price of $80,000 or less, depending on the membership level. The cost of each block of flight hours is also subject to an annual CPI increase. In addition, conversion options into a fractional share are also available, should a customer’s needs change throughout the course of the membership term.

Chartering
 
Whenever possible, Avantair will schedule an aircraft from its fleet for each request for use by a fractional owner. In the event that none of Avantair’s aircraft are available, Avantair will charter a comparable aircraft for use by the owner, provided that the fractional owner has complied with all applicable notice requirements and all other program provisions. Avantair will only charter aircraft that satisfy the Aviation Research Group US (ARG/US) Gold or Platinum rating.
 
Expiration of the Program
 
Upon the expiration of the term of Avantair’s agreement with a fractional owner, the owner shall have the option to (i) sell the owner’s interest in the aircraft and cease to participate in the Avantair program, (ii) sell their interest and purchase an interest in another aircraft that participates or will participate in the Avantair program or (iii) retain their interest and renew their participation in the program.
 
Sales and Marketing
 
Avantair targets customers based on demographic data, including net worth, household income, job title and age.

Avantair uses a variety of methods to market and advertise its various programs, including print advertising, direct mail, trade events, web site and online and referral incentives. In fiscal 2009, approximately half of Avantair’s marketing budget was allocated to print advertising. Advertising placement is based on historical data, demographics and competitive analysis.
 
Avantair’s direct mail advertising consists of several mailings and e-mailings per year to targeted prospective customers. Avantair also participates in live events, including aircraft display events at fixed base operators attended by owners and prospective owners. The events are targeted geographically and costs are often shared with the aircraft manufacturer to reduce the cost to Avantair.
 
As part of its marketing, Avantair maintains a web site at www.avantair.com. All of Avantair’s collateral and print marketing materials, direct mail, email and video materials direct prospective buyers to its web site.
 
Public relations efforts are driven by editorial opportunities and news pitches to key editors. Recent editorial placements include magazines such as Robb Report, Forbes and Business Jet Traveler, as well as travel and aircraft industry publications. An owner electronic newsletter, Contrails, is published quarterly with pertinent news, purchase reinforcement and any new programs.
 
An important element of Avantair’s marketing strategy is referral incentives. Approximately 30.0% of new share sales during 2005 and 2006 have been generated from referrals from existing share owners. Approximately 40.0% of new share sales during 2007 and 2008 have been generated from referrals from existing share owners. Approximately 70.0% of new share sales during 2009 have been generated from referrals from existing share owners. Under Avantair’s referral incentive program, a fractional owner who refers a customer to Avantair receives a choice, dependent on the number of referrals, of additional allocated hours of flight time or items such as a Vespa or motorcycle.

One internal measurement used to assess future sales is leads generated by both the sales force and the other marketing methods described above. The number of Avantair’s sales leads has nearly doubled over the past year. While many leads do not turn into sales, they provide the basis for future sales. Another important indicator is demonstration flights. A very high percentage of potential buyers of shares will request a demonstration flight on one or more aircraft types and on one or more products from different fractional operators. Avantair’s demonstration flights cost the potential buyer approximately $4,000 per hour, with the price charged deducted from the purchase only in the event that a share or shares are ultimately purchased.
 
Avantair’s sales department is comprised of a senior executive vice president of sales and marketing, vice president of sales, regional sales directors and regional sales managers supported by a sales department and a marketing department. Avantair’s sales staff is compensated with a base salary plus commissions.
 
Fleet and Geographic Scope
 
As of January 21, 2010, Avantair operated 55 aircraft within its fleet which is comprised of 46 aircraft for fractional ownership, 5 company- owned core aircraft and 4 leased and company- managed aircraft.

 
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At January 21, 2010, Avantair had 52 additional Piaggio aircraft on order. Currently, all of the fractional aircraft in Avantair’s fleet are Piaggio Avanti turboprops. In addition, on October 17, 2006, Avantair announced orders for 20 Embraer Phenom 100 aircraft. The Phenom 100 is in the Very Light Jet category of business jets, with the largest cabin in the category. On June 20, 2008, Avantair assigned its rights and obligations to the purchase agreement for the purchase of these 20 Embraer Phenom 100 aircraft to a wholly owned subsidiary, called Share 100 Holding Co., LLC. On the same date, Avantair sold 100 percent of the Class A membership interest of the LLC, with the rights and obligations to 18 of the 20 aircraft, to a third party called Executive AirShares Corporation; Avantair retains the Class B membership interest of the LLC, with the rights and obligations to purchase aircraft 19 and 20. If Executive AirShares Corporation defaults under its obligations as a Class A member of the LLC, Avantair will then be responsible for the rights and obligations of the remaining undelivered aircraft.
 
Avantair has focused its sales efforts to date on a national basis. A fractional owner is entitled to board a plane at the location of his/her choosing. The costs of moving a plane, or repositioning it, are borne by Avantair. These costs have been very significant due to fuel, pilots and crew and maintenance costs arising from increased overall usage of the aircraft. As the number of planes in Avantair’s fleet increases, Avantair believes that the relative amount of repositioning should decline. As the size of Avantair’s fleet reaches a critical mass, aircraft will be positioned in strategic locations based on travel patterns. Those locations are frequently determined through the usage of a software optimization program. In addition, Avantair incurs costs associated with pilots and crew, such as transportation to flight departure locations, per diems, meals and hotel expenses. As Avantair’s fleet expands, crews will be domiciled in cities frequented by fractional owner and flight hour card holder flights. This presents an opportunity for Avantair to leverage more favorable discounts for air and hotel due to volume, as well as making more efficient use of pilot and crew work hours.

Avantair believes that operating a very limited number of aircraft models provides it with cost and operating advantages relative to other fractional aircraft operators that may operate as many as 24 different aircraft models. Among the advantages of operating a limited number of aircraft models are:
 
 
·
Maintenance – Reduces costs of repair and maintenance by enabling nearly every member of Avantair’s maintenance staff to service all of its aircraft, plus reduced repositioning of an aircraft results in fewer flight hours and therefore less frequent maintenance;
     
 
·
Pilot Training - Pilots need to be certified for a given aircraft model, therefore the operation of a limited number of models means that nearly all employed pilots are available to operate any aircraft in the fleet.

 
·
Inventory— Fewer parts need to be inventoried which reduces the overall cost of inventory. Due to the uniformity of the fleet, Avantair is exposed to lower capital investment and inventory due to interchangeability of parts and the greater ease of troubleshooting.
 
Avantair is the sole fleet provider of the Piaggio Avanti aircraft in North America. The Piaggio Avanti has a unique design that uses forward wing technology which the Company believes allows it to both provide the fastest speed of any turboprop and yet have an unusually large cabin relative to aircraft in its category. The Piaggio Avanti also compares favorably to light jets as the Piaggio Avanti has the lowest fuel usage in the category. This aircraft also allows access to a greater number of airports than most of the jets in its category since it has the capability to land on shorter runways.
 
The Piaggio Avanti has several features such as:
 
 
·
Stand-up Cabin– A stand-up cabin and a private lavatory, which is unique in its category.
     
 
·
Flying Capacity– Ability to fly 1,300 nautical miles with five passengers, luggage and a full fuel load.

 
·
Speed– Fastest turboprop manufactured, with jet-like speed of 458 mph.
     
 
·
Runway capability– Ability to land on shorter runways allowing access to a greater number of airports.

 
·
Comfortable Ride– Sound dampening interior and rear mounted props, which help deliver a quiet ride.

 
·
Safety– Since its introduction in 1989, there has not been a fatal accident involving a Piaggio Avanti. In addition, the Avanti’s wing design reduces the effects of turbulence and its de-icing system reduces the impact of inclement weather on aircraft operation.
 
Avantair believes that the pricing structure afforded by utilizing the Piaggio Avanti allows Avantair to attract a customer desiring quality at a lower price point. Offering the cabin cross section of a mid-size aircraft and fuel efficiency of a turboprop, along with no hourly fees, allows Avantair to lower the cost of private air travel for a broader range of consumers.
 
Flight Operations
 
Avantair’s Operations Control Center is made up of four departments that all play a role in an Avantair program participants trip from the first phone call to completion of the trip at the final destination:
 
 
·
Owner Services
 
·
Pilot Services

 
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·
Flight Specialists
 
·
Flight Following
 
After a purchase with Avantair in one of our various programs, an owner is assigned an Owner Services team. This team assists the owner in scheduling flights and making necessary arrangements based on the owner’s flight requirements, including coordinating with Avantair’s Operations Control Center.
 
The flight scheduling process begins when an owner contacts the owner’s Owner Services team. When an owner contacts Avantair to schedule a flight, an assigned Owner Services team member handles the request. The team member will ask for all details of the proposed trip, including airport of departure and arrival as well as fixed base operation preference. This department also handles any ground transportation and/or catering orders.
 
The trip request is subject to an approval process with the Flight Specialist. After approval, the trip is entered into Avantair’s FlightOps computer system by Owner Services. The trip request is then delivered to the owner for approval. This is used as a quality control so that Avantair is sure it has all the correct details of the owner’s trip. After a signed confirmation is received from the owner, Owner Services will confirm this trip reservation in FlightOps. The night before and the morning of the trip, Owner Services reconfirms all ground and/or catering requests for quality control.
 
The day before the trip, the flights will be assigned to an Avantair aircraft by the Flight Specialist. The Flight Specialist then confirms the availability and location of the aircraft for the next day in an effort to ensure that the owner gets the optimal schedule with the least amount of repositioning time. This confirmation process also takes into consideration the crew duty, rest and flight time regulations.
 
The job of Pilot Services is to schedule pilots for flights and arrange accommodations for pilots away from their base of operations. Pilot Services is also responsible for the crew scheduling of all aircraft.
 
Flight Following tracks all current flights that are in progress through direct contact with the crew and through FlightOps. Flight Following monitors weather conditions and other situations which may lead to delays, and works with the flight crews and the Operations Control Center to resolve delays as quickly as possible.
 
Pilot Hiring and Training
 
Avantair selects and hires pilots based on a detailed screening process, including interviews, assessments of the candidate’s knowledge of Avantair’s aircraft, applicable regulations and flight skills, and background checks. All pilots are initially hired into first officer positions. Minimum requirements for initial hires include:

 
·
2,500 hours of total flight time;
 
·
1,000 multi-engine flight hours; and
 
·
250 flight hours within the previous 12 months.
 
All pilots must complete FAA required and approved ground and flight training prior to flying any flight leg for any of Avantair’s fractional owners. Further, all of Avantair’s pilots must fulfill ongoing training requirements. Avantair’s pilots have an average of over 6,200 hours of total flight time.
 
Aircraft Maintenance

Avantair aircraft maintenance follows a schedule of inspections based on the numbers of hours flown at the recommendation of the aircraft manufacturer and approval of the FAA. This schedule consists of four levels of inspection - A, B, C and D checks. An A check occurs at every 150 flight hours; a B check at every 600 flight hours; a C check at every 1,500 flight hours; and a D check at every 3,000 flight hours. The scheduled maintenance events, as well as unanticipated events, result in an average downtime of one day for A checks, two days for B checks, five days for C checks and twenty-one days for D checks. As a condition of employment, all of Avantair’s maintenance technicians must have an FAA license and are subject to a background check and drug screening prior to employment. Avantair’s Lead Technicians and Supervisors attend the FAA-approved Piaggio factory training program at Flight Safety. In addition, training is provided at the Rockwell Collins factory school as well as Pratt & Whitney Powerplant (engine) school. Avantair’s main maintenance base and its Maintenance Control Center, which oversees and coordinates all maintenance activity on Avantair’s aircraft, is located in Clearwater, Florida and is staffed 24 hours a day and seven days a week. The average years of experience is over 17 years for Avantair’s maintenance technicians, 20 years for its maintenance controllers and over 25 years for its maintenance quality control staff.

In April 2008, the Company terminated its Airframe Maintenance contract with its third party vendor and began to manage the Airframe Maintenance Program on an internal basis. In January 2009, the Company replaced a former engine service vendor with another nationally recognized, FAA certified engine maintenance vendor.

 
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Competition

Avantair faces competition from other fractional aircraft operations. Avantair’s primary competitors are NetJets, a subsidiary of Berkshire Hathaway, Flight Options, FlexJet, a Bombardier subsidiary, and CitationShares, which is 75.0% owned by Cessna, a wholly-owned Textron subsidiary. None of these competitors are stand-alone entities like Avantair and all of these competitors are significantly larger than Avantair and with more resources. Some of these companies are subsidiaries of business jet manufacturers, which Avantair’s management believes may hamper their flexibility in purchasing aircraft. According to AvData, five companies have 10.0% or more of the total market for fractional aircraft, based upon the units in operation – NetJets, Flight Options, FlexJet, CitationShares, and Avantair, with NetJets having a market share of approximately 50.0% and Flight Options, FlexJet, and CitationShares having a combined market share of approximately 35.0%. According to AvData, as of October 2009, Avantair had an approximate market share of 10.0%.
 
Avantair and other fractional airlines also face competition from charter airlines, air taxis and commercial airlines. Some of these competitors offer greater selection of aircraft (including jet aircraft), some of which permit owners to fly greater distances or at greater speeds, travel with a greater number of passengers and on shorter advance notice before flying.
 
Avantair’s management believes that fractional and flight hour card aircraft operators compete on the basis of aircraft model and features, price, customer service and scheduling flexibility. Avantair’s management believes that customers are generally willing to continue to use the same aircraft operator so long as such operator provides satisfactory service with competitive pricing. Avantair’s management believes that the quality of its aircraft and service, and the value it provides to its customers, enables it to compete effectively against its larger competitors.
 
Information Technology
 
Avantair’s core software application, FlightOps, is designed, developed, and licensed by Bitwise Solutions, Inc. for use in Avantair’s Operations Control Center to plan, schedule and track fractional owner trips as well as manage its fleet. FlightOps uses Oracle as its database server.
 
Avantair has invested in an efficient high-performance computing environment that includes Dell PowerEdge servers with the latest commercially available Windows-based operating system. In addition, Avantair has approximately 100 Fujitsu Tablet PCs that are used as part of its pilots’ Electronic Flight Bag. These PCs are equipped with core software applications that include navigational aids, flight charts, and aircraft manuals. 
  
Avantair currently has two agreements with Application Services Providers:

 
·
Salesforce – Customer Relationship Management Sales Force Automation; and
 
·
Corridor – Enterprise Resource Management Aviation Service Software (Maintenance, Inventory and FBOs).
 
Government and Other Regulations

Avantair, like all air carriers, is subject to extensive regulatory and legal compliance requirements, both domestically and internationally. In addition to state and federal regulation, airports and municipalities enact rules and regulations that affect aircraft operations. The FAA regulates Avantair’s activities, primarily in the areas of flight operations, maintenance, and other safety and technical matters. FAA requirements cover, among other things, security measures, collision avoidance systems, airborne windshear avoidance systems, noise abatement and other environmental concerns, and aircraft safety and maintenance procedures. Specifically, the FAA may issue mandatory orders, relating to, among other things, the grounding of aircraft, inspection of aircraft, installation of new safety-related items and removal and replacement of aircraft parts that have failed or may fail in the future.

The FAA also has authority to issue air carrier operating certificates and aircraft airworthiness certificates and regulate pilot and other employee training, among other responsibilities. Avantair’s management of fractional aircraft is regulated by the FAA under Part 91, subpart K of the Federal Aviation Regulations (“FARs”), and the FAA has issued Management Specifications reflecting Avantair’s authority to manage such aircraft. In some cases, including all current international operations, the FAA deems Avantair to transport persons or property by air for compensation. Such “charter” operations are regulated under Part 135 of the FARs, and Avantair’s authority to conduct those operations is reflected in an Air Carrier Operating Certificate with operating specifications. Both types of FAA authority potentially are subject to amendment, suspension or revocation. From time to time, the FAA issues rules that require aircraft operators to take certain actions, such as the inspection or modification of aircraft and other equipment.
 
Avantair’s charter operations under Part 135 also are subject to economic regulation by the U.S. Department of Transportation (“DOT”). To retain its DOT registration as an air taxi, Avantair must remain a U.S. citizen; that is, U.S. citizens must actually control Avantair, at least 75.0% of Avantair’s outstanding voting stock must be owned and controlled by U.S. citizens, and the President and two-thirds of the directors and other managing officers must be U.S. citizens. Avantair’s organizational documents provide for the automatic reduction in voting power of common stock owned or controlled by non-U.S. citizens if necessary to maintain U.S. citizenship. If Avantair cannot maintain its U.S. citizenship, it would lose its ability to conduct its charter operations (though not its fractional program manager operations).
 
 
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Aircraft operators also are subject to various other federal, state and local laws and regulations. The Department of Homeland Security (“DHS”) has jurisdiction over virtually all aspects of civil aviation security and arrivals into and departures from the United States. Avantair is also subject to inquiries by DOT, the FAA, and other U.S. and international regulatory bodies.

Environmental Regulation
 
Many aspects of Avantair’s operations also are subject to increasingly stringent federal, state, local and foreign laws and regulations protecting the environment concerning emissions to the air, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils, and waste materials. Future regulatory developments in the U.S. and abroad could require aircraft operators to take additional action to maintain compliance with applicable laws. For example, potential future actions that may be taken by the U.S. government, foreign governments, or the International Civil Aviation Organization to limit the emission of greenhouse gases by the aviation sector are unknown at this time but could require significant action from aircraft operators in the future.
 
Avantair is also subject to other environmental laws and regulations, including those that require it to remediate soil or groundwater to meet certain objectives. Under the federal Comprehensive Environmental Response, Compensation and Liability Act (commonly known as “Superfund”) and similar environmental cleanup laws, generators of waste materials, and owners or operators of facilities, can be subject to liability for investigation and remediation costs at facilities that have been identified as requiring response actions. Certain operations of Avantair are also subject to the oversight of the Occupational Safety and Health Administration (OSHA) concerning employee safety and health matters. Avantair also conducts voluntary remediation actions. Environmental cleanup obligations can arise from, among other circumstances, the operation of fueling facilities, and primarily involve airport sites. Future costs associated with these activities are not expected to have a material adverse effect on Avantair’s business.

Risk of Loss and Liability Insurance
 
The operation of any fractional aircraft business includes risks such as mechanical failure, physical damage, collision, property loss or damage due to events beyond the operator’s control. Avantair carries an all-risk aviation insurance policy (subject to standard aviation exclusions and provisions) which offers protection for physical damage to the hull, bodily injury to passengers, as well as third party bodily injury and property damage. While Avantair believes that its present insurance coverage is adequate, not all risks can be insured, and there can be no guarantee that any specific claim will be paid, or that Avantair will always be able to obtain adequate insurance coverage at reasonable rates.

Legal Proceedings
 
From time to time, the Company is party to various legal proceedings in the normal course of business. It is expected that these claims would be covered by insurance subject to customary deductibles. Those claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources. As of January 21, 2010, there were no legal proceedings which the Company would anticipate having a material adverse effect on its financial position, results of operations or cash flows.

Employees
 
As of January 21, 2010, Avantair had approximately 450 full-time employees, 40 of whom were management and 410 of whom were operational. Avantair believes that it has good relations with its employees. 

Facilities
Avantair leases its corporate headquarters and hangar space, which is approximately 125,000 square feet at 4311 General Howard Drive, Clearwater, Florida under two leases that each expire on April 30, 2020. In addition, Avantair currently leases the following principal properties:
 
 
·
approximately 17,752 square feet of office and hangar space at 125 Passaic Avenue, Caldwell, New Jersey under a lease that expires on October 31, 2018; and
 
·
approximately 65,258 square feet of office and hangar space at 575 Aviation Drive, Camarillo, California under a lease that expires on August 1, 2021.

 
33

 

MANAGEMENT
Executive Officers and Directors
 
The Company’s current directors and executive officers are as follows:
 
Barry J. Gordon
 
64
 
Chairman of the Board
Steven Santo
 
42
 
Chief Executive Officer and Director
Arthur H. Goldberg
 
67
 
Director
Richard B. DeWolfe
 
65
 
Director
Stephanie A. Cuskley
 
49
 
Director
A. Clinton Allen
 
65
 
Director
Robert J. Lepofsky
 
65
 
Director
Richard A. Pytak Jr.
 
47
 
Chief Financial Officer
Kevin Beitzel
 
41
 
Chief Operating Officer

Barry J. Gordon. Mr. Gordon has been Avantair’s (formerly known as Ardent Acquisition Corporation) Chairman of the Board since its inception. Mr. Gordon has nearly 40 years of experience in evaluating aviation industry securities, including membership for 25 years in the Society of Airline Analysts (with 5 years as its president), and over 30 years experience in the senior management of a mutual fund specializing in the airline, aerospace and technology industries. Mr. Gordon served as executive vice president of American Fund Advisors, Inc. from September 1978 until December 1980, as its president from December 1980 until May 1987 and has been its chairman of the board since May 1987. American Fund Advisors is a private money management firm that manages money for high net worth individuals, pension and profit sharing plans. Mr. Gordon has been a director of American Fund Advisors since December 1980. From December 1991 to March 2005, he was president, and from December 1991 to December 1993, he was director, of the John Hancock Technology Series, Inc., an investment company. Since September 1999, Mr. Gordon has been President, Chief Executive Officer and a director of BlueStone AFA Management, LLC, the general partner of the AFA Private Equity Fund 1 (formerly BlueStone AFA Fund), a venture capital fund providing equity capital for public and private companies primarily in the technology sector, and since January 2000, he has been a director of the AFA Private Equity Fund. Mr. Gordon had been Chairman of the Board and Chief Executive Officer of North Shore Acquisition Corp., a blank check company formed in June 2007 for the purpose of effecting a business combination with an operating business, since its inception in June 2007 until August 2009. Mr. Gordon has also been chairman of the board and Chief Executive Officer of the New Jersey Cardinals, a Class A affiliate of the St. Louis Cardinals, from February 1990 until April 2006 and the Norwich Navigators, a Class AA affiliate of the San Francisco Giants, from March 1991 until April 2005. He also served as a director of Winfield Capital Corp., an Over The Counter Bulletin Board listed small business investment company, from October 1995 to October 2005. In 1992, Mr. Gordon was awarded Entrepreneur of the Year for Long Island in financial services. Mr. Gordon received a B.B.A. from the University of Miami and an M.B.A. from Hofstra University.
 
Steven F. Santo. Mr. Santo has served as Chief Executive Officer, President and a Director of Avantair since its inception in June 2003 and Skyline Aviation Services, Inc. since June 2002. Mr. Santo is a licensed, commercially-rated pilot who has been flying for approximately 21 years. From 1995 through 2001, Mr. Santo practiced law as an attorney in private practice, concluding his law practice in 2001 as a name partner at the firm of Fields, Silver & Santo. From 1992 to 1995, Mr. Santo served as an Assistant District Attorney in New York working in the office’s major crimes unit. Mr. Santo received a J.D. from St. Johns’ University School of Law and a bachelor’s degree from Villanova University and has earned an Professional Director Certification issued by the Corporate Directors Group, an accredited educational organization of RiskMetric ISS Governance Services. 

Arthur H. Goldberg. Mr. Goldberg has been a member of Avantair’s (formerly known as Ardent Acquisition Corporation) Board of Directors since inception. Mr. Goldberg has served as a member of Corporate Solutions Group since January 2000. From February 1994 to December 1999, Mr. Goldberg served president of Manhattan Associates, an investment and merchant banking firm. Mr. Goldberg has been a trustee of Ramco-Gershenson Properties Trust (formerly named RPS Realty Trust), a New York Stock Exchange listed real estate investment trust, since 1998. Mr. Goldberg has been a director of North Shore Acquisition Corp., a blank check company formed in June 2007 for the purpose of effecting a business combination with an operating business, since its inception in June 2007. Mr. Goldberg received a B.S. (cum laude) from New York University Stern School and a J.D. from the New York University School of Law.
 
Richard B. DeWolfe. Mr. DeWolfe was appointed to the Board effective January 29, 2009. Mr. DeWolfe is Managing Partner of DeWolfe & Company, LLC, a real estate management and investment consulting firm. He serves as a Director and Chairman of the Audit Committee of Manulife Financial Corporation which is the parent company of John Hancock Financial Services, Inc. He is also a director of The Boston Foundation; Trustee of Boston University; Trustee of the Marine Biological Laboratory; and an honorary director of The Boston Center for Community and Justice. He was formerly Chairman and CEO of The DeWolfe Companies, Inc., the largest homeownership organization in New England, which was previously listed on the American Stock Exchange and acquired by Cendant Corporation in 2002. Mr. DeWolfe was formerly Chairman and Founder of Reliance Relocations Services, Inc. and was formerly Chairman of the Board of Trustees, Boston University. Mr. DeWolfe holds a BAS, Marketing and Finance from Boston University and has earned an Professional Director Certification issued by the Corporate Directors Group, an accredited educational organization of RiskMetric ISS Governance Services.

 
34

 
 
Stephanie A. Cuskley. Ms. Cuskley has served as a member of Avantair’s Board of Directors since 2007. In addition, Ms. Cuskley has been on the Board of Directors of Insituform Technologies Inc. (NASDAQ:INSU) since 2005 and is chair of its audit committee. On January 19, 2009, she was appointed to the position of Chief Executive Officer of NPower, a nonprofit information technology services network. She also serves as the Executive Director of NPower NY, an affiliated organization of NPower. From 2003 thru 2005, Ms. Cuskley was a Managing Director with JPMorgan Chase where she headed the Investment Banking Coverage for the firm’s mid-cap clients located in the eastern US. Ms. Cuskley joined JPMorgan Chase in 1994 and spent 7 years in high yield origination. From 2001 to 2003, she led a global culture and leadership development initiative sponsored by the firm’s CEO and Executive Committee. Prior to joining JPMorgan Chase, Ms. Cuskley was an Executive VP with Integrated Resources, a large NY-based financial services company, and advised on their financial restructuring. She started her investment banking career in 1985 at Drexel Burnham Lambert as a corporate finance generalist. She is also a commissioner and co-head of the Economic Development committee of the NYC Mayor’s Commission on Women’s Issues and a member of the Resources Development Committee for United Way of New York City. Ms. Cuskley received her MBA from Cornell and her BA from the University of Toronto.

            A. Clinton Allen. Mr. Allen has served as a member of Avantair’s Board of Directors since 2007. Mr. Allen is the CEO of A. C. Allen & Company, a private investment banking consulting firm. He is the Lead Director of Steinway Musical Instruments, one of the world’s largest manufacturers of musical instruments. He is also a member of the board of directors of Brooks Automation, Inc., which provides integrated tool and factory automation solutions for the global semiconductor and related industries, the board of directors and Executive Committee of LKQ Corporation, the largest nationwide provider of recycled OEM automotive parts and Chairman of the Board of Collectors Universe, a high end provider of collectible grading. He served on the board of directors of Blockbuster Entertainment Corporation from 1986 until its acquisition by Viacom/Paramount in September 1994. Mr. Allen graduated from Harvard University and serves on the Executive Committee of the Friends of Harvard Football, as well as the Harvard Visiting Committee on University Resources and the Harvard Major Gifts Committee. He is a member of the Board of Directors and the President’s Council of the Massachusetts General Hospital. Mr. Allen has earned an Advanced Professional Director Certification issued by the Corporate Directors Group, an accredited educational organization of RiskMetric ISS Governance Services.
 
Robert J. Lepofsky. Mr. Lepofsky has served as a member of Avantair’s Board of Directors since 2007. Mr. Lepofsky has been the President, Chief Executive Officer and Director of Brooks Automation, Inc., a publicly held producer of automation, vacuum and instrumentation solutions for the global semiconductor industry since October 2007. Mr. Lepofsky has also been Chairman of Westcliff Capital Group, a private holding company since November 2006. After serving for ten years on the Board of Directors of Ensign-Bickford Industries, Inc., a broadly diversified, privately-held corporation with business interests ranging from food flavorings, industrial manufacturing, aerospace defense products and real estate development, Mr. Lepofsky became President and Chief Executive Officer of Ensign-Bickford in January 2005, a position he held until his retirement in November, 2006. From January 1989 to December 2004, Mr. Lepofsky was President and Chief Executive Officer of Helix Technology Corporation, a publicly-held producer of innovative vacuum systems for the semiconductor industry. Mr. Lepofsky previously served as its Senior Vice President and Chief Operating Officer from 1979 through 1988. From January 2005 Mr. Lepofsky was non-executive Chairman of the Board of Helix, a position he held until October 2005 when Helix merged with Brooks Automation, Inc. In the not-for-profit sector Mr. Lepofsky is a member of the Board of Overseers of the Boston Symphony Orchestra and a Life Trustee at the Beth Israel Deaconess Medical Center - a major Harvard teaching hospital in Boston. Mr. Lepofsky received his B.S. degree from Drexel Institute of Technology and has earned an Professional Director Certification issued by the Corporate Directors Group, an accredited educational organization of RiskMetric ISS Governance Services.
 
Richard A. Pytak Jr. Mr. Pytak has been the Chief Financial Officer since April 14, 2008. Prior thereto, Mr. Pytak was the Company’s Vice President of Finance since joining the Company in February 2008. Prior to joining Avantair, Mr. Pytak served as Group Controller of Gibraltar Industries, Inc., from August 2003 to January 2008 and as Treasurer from June 1998 to July 2003. Gibraltar Industries, Inc. is a leading manufacturer, processor, and distributor of products for the building, industrial, and vehicular markets, with annual sales of over $1 billion dollars in 2007.
 
Kevin Beitzel. Mr. Beitzel has been the Chief Operating Officer since February 8, 2008. Mr. Beitzel served as the Company’s Executive Vice President of Maintenance and Operations from September 2007 to February 8, 2008. From December 2005 through August 2007, Mr. Beitzel served as the Company’s Vice President of Maintenance. Prior to joining Avantair, Mr. Beitzel served as Director of Vendor Maintenance at US Airways from February 2005 to December 2005. From July 1999 to February 2005 Mr. Beitzel served as Maintenance Operations Manager at US Airways.

Corporate Governance and Board of Directors Matters
 
The affairs of Avantair are managed by the Board of Directors, which is comprised of at least a majority of independent directors. Each member of the Board of Directors is elected at the annual meeting of stockholders each year or appointed by the incumbent Board of Directors and serves until the next annual meeting of stockholders or until a successor has been elected or approved.

Current Members of the Board of Directors

The members of the Board of Directors on the date of this Registration Statement, and the committees of the Board of Directors on which they serve, are identified below:

 
35

 
 
Director
  
Audit
Committee
  
Compensation
Committee
  
Nominating and
Corporate Governance
Committee
Barry J. Gordon
           
Arthur H. Goldberg
 
ü
 
ü
 
ü
Steven Santo
           
Stephanie A. Cuskley
 
Chair
     
ü
A. Clinton Allen
     
Chair
   
Robert J. Lepofsky
 
ü
 
ü
 
Chair
Richard B. DeWolfe
 
ü
 
ü
   
 
 Role of the Board of Directors’ Committees
 
The Board of Directors has standing Audit, Compensation and Nominating and Corporate Governance Committees.
 
Audit Committee . The Audit Committee is responsible for assist Avantair’s Board in fulfilling the oversight responsibilities it has under the law with respect to financial reports and other financial information provided by Avantair to the public, Avantair’s systems of internal controls regarding finance and accounting that management and the Board have established and Avantair’s auditing, accounting and financial reporting processes generally. The current charter of the Audit Committee was revised on September 18, 2008, and is available in the Investors section of Avantair’s website (www.avantair.com). A copy of this charter may also be obtained upon request from Avantair’s Corporate Secretary. The audit committee consists of four directors, Ms. Cuskley and Messrs. Goldberg, Lepofsky, and DeWolfe each of who are considered independent within the meaning of SEC regulations and the listing standards of the Nasdaq Global Market. The Company’s audit committee includes at least one member who has been determined by the board of directors to meet the qualifications of an “audit committee financial expert” (as that term is defined in the rules promulgated by the SEC pursuant to the Sarbanes-Oxley Act of 2002). Ms. Cuskley is the independent director who has been determined to be an audit committee financial expert and serves as the chairperson of the audit committee. The Audit Committee met seven times during the fiscal year ended June 30, 2009.

Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee is responsible for developing and implementing policies and practices relating to corporate governance, including reviewing and monitoring implementation of Avantair’s Corporate Governance Charter. In addition, the Nominating and Corporate Governance Committee develops and reviews background information on candidates for the Board of Directors and makes recommendations to the Board of Directors regarding such candidates. The Nominating and Corporate Governance Committee also evaluates and makes recommendations to the Board of Directors in connection with its annual review of director independence. The current charter of the Nominating and Corporate Governance Committee is available in the Investors section of Avantair’s website (www.avantair.com). A copy of this charter may also be obtained upon request from Avantair’s Corporate Secretary. All of the members of the Nominating and Corporate Governance Committee are independent within the meaning of the listing standards of the Nasdaq Global Market. The members of the corporate governance and nominating committee are Ms. Cuskley and Messrs. Goldberg and Lepofsky. Mr. Lepofsky serves as chairman of the corporate governance and nominating committee. The Nominating and Corporate Governance Committee met three times during the fiscal year ended June 30, 2009.
 
Compensation Committee. The compensation committee of the board of directors reviews, makes recommendations to the board and approves the Company’s compensation policies and all forms of compensation to be provided to the executive officers and directors, including, among other things, annual salaries, bonuses, stock options and other incentive compensation arrangements. In addition, the compensation committee administers the Company’s stock plans, including reviewing and granting stock options, with respect to its executive officers and directors, and may from time to time assist the board of directors in administering its stock plans with respect to all of the other employees. The compensation committee also reviews and approves other aspects of compensation policies and matters. The current charter of the Compensation Committee was revised on September 18, 2008, and is available in the Investors section of Avantair’s website (www.avantair.com). A copy of this charter may also be obtained upon request from Avantair’s Corporate Secretary. All of the members of the Compensation Committee are independent within the meaning of the listing standards of the Nasdaq Global Market. The current members of the compensation committee are Messrs. Allen, Goldberg, Lepofsky, and DeWolfe. Mr. Allen serves as chairman of the Compensation Committee. The Compensation Committee met two times during the fiscal year ended June 30, 2009.
 
Executive Sessions of the Independent Directors
 
The Company’s “non-employee” directors (as determined under the listing standards of the Nasdaq Global Market) typically meet at each regularly scheduled meeting of the Board of Directors, in executive session without any management present. No single director has been chosen to preside at all of such meetings. Instead, a director is selected at each such meeting to preside over such meeting. See the section titled “Stockholder Communication with the Board of Directors” for the method for interested parties to make their concerns known to an independent director, or the independent directors as a group.

 
36

 

Board of Directors Meetings during Fiscal 2009
 
The Board of Directors held a total of seven meetings during the fiscal year ended June 30, 2009. All directors attended 75.0% or more of the aggregate number of Board of Directors meetings and committee meetings. The Chairman of the Board presides over all meetings of the Board of Directors.
 
 Policy Regarding Attendance at Annual Meeting of Stockholders
 
Avantair encourages all directors to endeavor to attend all annual stockholders meetings, absent unanticipated personal or professional obligations which preclude them from doing so. The majority of Avantair’s directors attended the 2009 Annual Meeting.
 
Stockholder Communication with the Board of Directors
 
The board of directors will give appropriate attention to written communications on issues that are submitted by stockholders and other interested parties, and will respond if and as appropriate. The chairman of the nominating and corporate governance committee will be primarily responsible for monitoring communications from stockholders and other interested parties and will provide copies or summaries of such communications to the other directors as he considers appropriate.
 
Communications will be forwarded to all directors if they relate to substantive matters and include suggestions or comments that the chairman of the nominating and corporate governance committee considers to be important for the directors to know.

Stockholders and other interested parties who wish to send communications on any topic to the board of directors should address such communications to chairman of the corporate nominating and corporate governance committee at the address provided on the first page of this registration statement.
 
Code of Conduct and Professional Ethics
 
The Company’s board of directors has adopted a code of conduct and professional ethics that applies to all of its directors, employees and officers, including its principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. The full text of the Company’s code of conduct and professional ethics is posted on its website at www.avantair.com under the Corporate Governance section. The Company intends to disclose future amendments, if any, to certain provisions of its code of conduct and professional ethics, or waivers of such provisions, applicable to its directors and executive officers, including its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, at the same location on its website identified above and also in a Current Report on Form 8-K within four business days following the date of such amendment or waiver. The inclusion of the Company’s website address in this registration statement does not include or incorporate by reference the information on its website into this registration statement.
 
Directors’ Compensation
 
Upon the recommendation of the compensation committee, the full board of directors approved an annual compensation arrangement for the Company’s independent directors effective February 23, 2007. Such arrangement is comprised as follows:
 
Annual Fee. Each director, other than those directors serving as employees, receives an annual cash retainer in the amount of $40,000, paid quarterly in arrears. Each director has the option to receive, in whole or in part, such amount in cash or hours flown in Company aircraft. The hours flown in Company aircraft will be valued at estimated fair market value. Mr. Gordon will receive an additional $35,000 in annual cash compensation for service as the non-Executive Chairman.
 
Audit Committee Chair. The chair of the audit committee, Ms. Cuskley, receives an additional annual cash compensation of $20,000 as the audit committee chair.
 
In March 2008, Avantair granted 3,000 shares of restricted stock to each of the then five non-employee directors on the Company’s Board of Directors. In addition, on May 2009, Avantair granted 3,000 shares of restricted stock to each of the six non-employee directors on the Company’s Board of Directors. The restricted shares granted to the director’s vest one third upon each of the next three successive annual meetings, subject to the grantee’s continued service on the Board of Directors.
 
37

 
The following director compensation table shows the compensation paid in fiscal year ended June 30, 2009 to the Company’s non-employee directors:

Director Compensation Table
 
Name
 
Fees Earned or
Paid in Cash ($)(1)
   
Restricted
Stock Awards
($)(2)
   
Total ($)
 
A. Clinton Allen
    40,000       3,555       43,555  
Barry J. Gordon
    75,000       3,555       78,555  
Arthur H. Goldberg
    40,000       3,555       43,555  
Robert J. Lepofsky
    40,000       3,555       43,555  
Stephanie A. Cuskley
    60,000       3,555       63,555  
Richard B. DeWolfe
    40,000       3,555       43,555  

(1)
The fees earned by the directors may be paid, at the director’s option, in cash and/or in hours flown in Company aircraft at estimated fair market value per hour. Messrs. Allen, Goldberg, Lepofsky and DeWolfe have chosen to be paid in hours flown in company aircraft. Mr. Gordon and Ms. Cuskley have chosen to be paid in cash.
(2)
The amounts shown reflect the dollar amount recognized for financial statement reporting purposes for the fiscal year ended June 30, 2009, in accordance with Statement of Financial Accounting Standards No. 123(R). The balance remaining to be recognized over the remaining vesting period of the award is $29,852.
 
Executive Compensation
 
COMPENSATION DISCUSSION AND ANALYSIS
 
The primary goals of the compensation committee of Avantair’s board of directors with respect to executive compensation are to attract and retain the most talented and dedicated executives possible, to tie annual and long-term cash and stock incentives to achievement of specified performance objectives, and to align executives’ incentives with stockholder value creation.
  
To achieve these goals, the compensation committee recommends executive compensation packages to the board of directors that are generally based on a mix of salary, discretionary bonus and equity awards. Although the compensation committee has not adopted any formal guidelines for allocating total compensation between equity compensation and cash compensation, the Company intends to implement and maintain compensation plans that tie a substantial portion of its executives’ overall compensation to achievement of corporate goals and value-creating milestones such as the development of the Company’s products, the establishment and maintenance of key strategic relationships, reaching sales and marketing targets and the growth of its customer base as well as its financial and operational performance, as measured by metrics such as revenues and profitability.
 
The compensation committee performs reviews based on surveys of executive compensation paid by peer companies in the fractional aircraft industry as well as reviews other industries of similar age and size, as it sees fit, in connection with the establishment of cash and equity compensation and related policies.

In 2008, the compensation committee engaged Pearl Meyer & Partners, a compensation consultant, to conduct a competitive assessment of compensation for the Company’s executives and top management positions. The consultant provided benchmark data for each position. The survey data used for the study included aviation industry specific information, as well as broader survey data that covered a wide range of companies across all industries and revenue sizes. The consultant performed a regression analysis of the survey data to recognize differences in company revenue. With the consultant’s assistance, a comparative peer group of 7 publicly traded aviation-related companies was developed based on similarities in such measures as revenues, gross profit and dividend policies.  Information from the public filings of the peer group companies was used as an additional comparative measure for equivalent positions within the Company.  The peer group consisted of: PHI Inc., Air Methods Corp., Alabama Aircraft Industries Inc., Gulfstream International Group Inc., Clark Holdings Inc., Air T Inc. and Express-1 Expedited Solutions Inc.
 
Elements of Compensation
 
The compensation committee evaluates individual executive performance with a goal of setting compensation at levels the committee believes are comparable with executives in other companies of similar size and stage of development operating in the industry and are competitive and further the Company’s objectives of motivating achievement of its short- and long-term financial performance goals and strategic objectives, rewarding superior performance and aligning the interests of its executives and shareholders. The compensation received by the Company’s executive officers consists of the following elements:

 
·
base salary;
 
·
discretionary annual bonus;
 
·
equity-based long-term incentives, including stock appreciation rights and performance-based restricted stock; and
 
·
401(k), profit-sharing, welfare and other personal benefits
 
 
38

 

Base Salary
 
General Considerations
 
Base salaries for the Company’s executives are established based on the scope of their responsibilities and individual experience, taking into account competitive market compensation paid by other companies for similar positions within the fractional aircraft industry. Base salaries are reviewed annually, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience. Since January 2009, the base salary of the Chief Executive Officer has been $416,000. The annual base salary for the other executive officers range from $215,000 to $250,000. Effective October 1, 2009, the base salary of the Chief Executive Officer will increase to $500,000, and the annual base salary range for the other executive officers will increase to a range of $250,000 to $265,000.
 
The compensation committee believes that these base salary levels are commensurate with the general salary levels for similar positions in companies in a similar stage of development in the industry.
 
Annual Incentive Compensation

Discretionary Annual Bonus

In addition to base salaries, the compensation committee has the authority to award discretionary annual bonuses to the Company’s executive officers. The annual incentive bonuses are intended to compensate officers for achieving corporate goals and for achieving what the committee believes to be value-creating milestones.

For the fiscal year ended June 30, 2009, the compensation committee principally considered the named executive officers’ contributions in achieving the following objectives in their determination of appropriate levels of bonus compensation: (i) the success of the Company’s named executive officers in improving the Company’s balance sheet strength during the 2009 fiscal year, (ii) the success of the Company’s named executive officers in obtaining necessary financing for the Company’s activities during the 2009 fiscal year, (iii) the success of the Company’s named executive officers in implementing the Company’s new business model, including the deployment of the Axis Club membership program, (iv) the success of the Company’s named executive officers in achieving positive EBITDA for the Company during the 2009 fiscal year and (v) the impact of negative macro-economic and industry trends, which heightened the difficulty for the Company’s named executive officers to achieve these successes.
 
Long-Term Compensation- 2006 Long-Term Incentive Plan
 
In February 2007, Avantair’s Board of Directors and stockholders approved Avantair’s 2006 Long Term Incentive Plan ( “the Plan”).
 
The purpose of the Plan is to further and promote the interests of Avantair, its subsidiaries and its stockholders by enabling Avantair and its subsidiaries to attract, retain and motivate employees, non-employee directors and consultants or those who will become employees, non-employee directors or consultants, and to align the interests of those individuals and Avantair’s stockholders.

 Number of Shares
 
The maximum number of shares of Avantair common stock as to which awards may be granted under the Plan may not exceed 1,500,000 shares. Shares of Avantair common stock subject to issuance upon exercise or settlement of awards with respect to stock options, stock appreciation rights, restricted stock and restricted stock units shall count against this limit. Awards of performance units which are paid in cash are not subject to this limit and will not count against the number of shares of Avantair common stock available under the Plan. With respect to awards intending to be “qualified performance-based compensation” under Section 162(m) of the Internal Revenue Code ( “the Code”) the maximum amount that can be awarded in any calendar year to any participant is (i) in respect of performance units, performance-based restricted shares and restricted stock units and other awards (other than options and stock appreciation rights), 150,000 shares of Avantair common stock (or the then equivalent fair market value of such shares), and (ii) in the case of stock options and stock appreciation rights, 150,000 underlying shares of Avantair common stock. Avantair may grant awards that exceed the 150,000 share limit so long as the amount in excess of such limit is not intended to be “qualified performance-based compensation” under the code. The limits on the numbers of shares described in this paragraph and the number of shares subject to any award under the Plan are subject to proportional adjustment as determined by Avantair’s Board to reflect certain stock changes, such as stock dividends and stock splits (see “Recapitalization Adjustments” below).
  
If any awards under the Plan expire or terminate unexercised, the shares of common stock allocable to the unexercised or terminated portion of such award shall return to Avantair’s treasury and again be available for award under the Plan.
 
Administration
 
The administration, interpretation and operation of the Plan will be vested in the Compensation Committee of Avantair’s Board of Directors. The Compensation Committee may designate persons other than members of the Compensation Committee to carry out the day-to-day administration of the Plan.
 
Eligibility
 
The Plan permits awards to employees and non-employee directors and consultants of Avantair and its subsidiaries.

 
39

 

No determination has been made as to future awards which may be granted under the Plan, although it is anticipated that recipients of awards will include the current executive officers of Avantair. It is not determinable what awards under the Plan would have been received by the executive officers and directors of Avantair and its subsidiaries.
 
Awards under the Plan
 
Awards under the Plan may consist of stock options, stock appreciation rights (which are sometimes referred to as SARs), restricted shares, restricted stock units or performance unit awards, each of which is described below. All awards will be evidenced by an award agreement between Avantair and the individual participant and approved by the Compensation Committee. At the discretion of the Compensation Committee, an eligible employee may receive awards from one or more of the categories described below, and more than one award may be granted to an eligible employee.
 
Stock Options and Stock Appreciation Rights
 
A stock option is an award that entitles a participant to purchase shares of Avantair common stock at a price fixed at the time the option is granted. Stock options granted under the Plan may be in the form of incentive stock options (which qualify for special tax treatment) or non-qualified stock options, and may be granted alone or in addition to other awards under the Plan.
 
An SAR entitles a participant to receive, upon exercise, an amount equal to the excess of the fair market value on the exercise date of a share of Avantair common stock, over the fair market value of a share of Avantair common stock on the date the SAR was granted, multiplied by the number of shares of Avantair common stock for which the SAR has been exercised.
 
The exercise price and other terms and conditions of stock options and the terms and conditions of SARs will be determined by the Compensation Committee at the time of grant, and in the case of stock options, the exercise price per share may not be less than 100 percent of the fair market value of a share of Avantair common stock on the date of the grant. In addition, the term of any incentive stock options granted under the Plan may not exceed ten years. An option or SAR grant under the Plan does not provide the recipient of the option any rights as a shareholder and such rights will accrue only as to shares actually purchased through the exercise of an option or the settlement of an SAR.
 
If stock options and SARs are granted together in tandem, the exercise of such stock option or the related SAR will result in the cancellation of the related stock option or SAR to the extent of the number of shares in respect of which such option or SAR has been exercised.
 
Stock options and SARs granted under the Plan shall become exercisable at such time as designated by the Compensation Committee at the time of grant.
 
Payment for shares issuable pursuant to the exercise of a stock option may be made either in cash, by certified check, bank draft or money order payable to the order of Avantair, or by payment through any other mechanism permitted by the Compensation Committee, including, if the Compensation Committee so determines, by delivery of shares of Avantair common stock.
 
In addition, the Compensation Committee, in its sole discretion, may provide in any stock option or SAR award agreement that the recipient of the stock option or SAR will be entitled to dividend equivalents with respect to such award. In such instance, in respect of any such award which is outstanding on a dividend record date for Avantair common stock, the participant would be entitled to an amount equal to the amount of cash or stock dividends that would have paid on the shares of Avantair common stock covered by such stock option or SAR award had such shares of Avantair common stock been outstanding on the dividend record date.

 Restricted Share Awards and Restricted Stock Units
 
Restricted share awards are grants of Avantair common stock made to a participant subject to conditions established by the Compensation Committee in the relevant award agreement on the date of grant. Restricted stock units are similar to restricted shares except that no shares of common stock are actually awarded to a participant on the date of grant and the common stock underlying the award will generally be provided to the participant after the vesting conditions have been satisfied.
  
Restricted shares and restricted stock units will vest in accordance with the conditions and vesting schedule, if any, provided in the relevant award agreement. A participant may not sell or otherwise dispose of restricted shares or restricted stock units until the conditions imposed by the Compensation Committee with respect to such shares and/or units have been satisfied. Restricted share awards and restricted stock units under the Plan may be granted alone or in addition to any other awards under the Plan. Restricted shares which vest will be reissued as unrestricted shares of Avantair common stock.
 
Each participant who receives a grant of restricted shares will have the right to receive all dividends and vote or execute proxies for such shares. Any stock dividends granted with respect to such restricted shares will be treated as additional restricted shares. Participants receiving grants of restricted stock units will not be stockholders until the common stock underlying the award is provided to them and they will not enjoy the rights of stockholders (such as receiving dividends and voting or executing proxies) until that time.

 
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Performance Units
 
Performance units (with each unit representing a monetary amount designated in advance by the Compensation Committee) are awards which may be granted to participants alone or in addition to any other awards granted under the Plan. Generally, participants receiving performance unit grants will only earn such units if certain performance goals are satisfied during a designated performance period. The Compensation Committee will establish such performance goals and may use measures such as level of sales, earnings per share, income before income taxes and cumulative effect of accounting changes, income before cumulative effect of accounting changes, net income, earnings before interest and taxes, return on assets, return on equity, return on capital employed, total stockholder return, market valuation, cash flow, cash EBITDA, completion of acquisitions and/or divestitures, comparisons to peer companies, individual or aggregate participant performance or such other measure or measures of performance as the Compensation Committee determines. The participant may forfeit such units in the event the performance goals are not met. If all or a portion of a performance unit is earned, payment of the designated value thereof will be made in cash, unrestricted shares of Avantair common stock, in restricted shares or in any combination thereof, as provided in the relevant award agreement.
 
Performance Goals for Qualified Performance-Based Compensation
 
Section 162(m) of the Code limits Avantair’s ability to deduct compensation paid to its senior executive officers, unless the compensation qualifies as “qualified performance-based compensation,” as defined in that section and the regulations promulgated under that section. In order to qualify as “qualified performance-based compensation,” the material terms of the performance goals must be disclosed to Avantair’s stockholders and approved by the stockholders. Among the material terms of the performance goals are descriptions of the business criteria on which the performance goals will be based.
 
To the extent possible Avantair intends to have the Plan satisfy the requirements of Section 162(m) so that the Compensation Committee is able to grant awards satisfying the requirements of “qualified performance-based compensation.” Consequently, Avantair must disclose the following business criteria in establishing performance goals under the plan:

 
·
level of sales,
 
·
earnings per share,
 
·
income before income taxes and cumulative effect of accounting changes,