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PART I FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets		1
	Condensed Consolidated Statements of Operations		3
	Condensed Consolidated Statement of Changes in Stockholders’ Deficit		4
	Condensed Consolidated Statements of Cash Flows		5
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		23
Item 4.	Controls and Procedures		23
PART II OTHER INFORMATION
Item 1.	Legal Proceedings.		25
Item 1A.	Risk Factors.		25
Item 6.	Exhibits.		25
	Signatures		26

 

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Item 1. Financial Statements.

AVANTAIR, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

ASSETS

		December 31,				June 30,
		2010				2010
		(Unaudited)				(Note 2)
CURRENT ASSETS
Cash and cash equivalents		$	3,940,614			$	9,446,619
Accounts receivable, net of allowance for doubtful accounts of $201,888 at December 31, 2010 and $208,065 at June 30, 2010			15,390,129				10,976,129
Inventory			206,478				181,782
Current portion of aircraft costs related to fractional share sales			25,097,877				26,680,081
Prepaid expenses and other current assets			3,933,731				2,979,055
Total current assets			48,568,829				50,263,666
Aircraft costs related to fractional share sales, net of current portion			29,481,257				43,461,597
Property and equipment, at cost, net of accumulated depreciation and amortization of $18,339,948 at December 31, 2010 and $15,821,591 at June 30, 2010			20,156,336				22,583,073
OTHER ASSETS
Cash - restricted			2,360,251				2,358,558
Deposits on aircraft			7,883,834				7,883,834
Deferred maintenance on aircraft engines			1,722,511				603,515
Goodwill			1,141,159				1,141,159
Other assets			3,500,751				3,342,198
Total other assets			16,608,506				15,329,264
Total assets		$	114,814,928			$	131,637,600

See Notes to Condensed Consolidated Financial Statements.

 

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AVANTAIR, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

LIABILITIES AND STOCKHOLDERS' DEFICIT

		December 31,				June 30,
		2010				2010
		(Unaudited)				(Note 2)
CURRENT LIABILITIES
Accounts payable		$	4,460,739			$	4,723,718
Accrued liabilities			7,082,776				5,000,249
Customer deposits			2,673,675				1,358,988
Short-term debt			5,200,000				11,000,000
Current portion of long-term debt			6,022,436				4,202,726
Current portion of deferred revenue related to fractional aircraft share sales			27,981,223				32,770,605
Unearned management fee, flight hour card and Axis Club Membership revenues			46,612,083				35,126,401
Total current liabilities			100,032,932				94,182,687
Long-term debt, net of current portion			11,777,353				15,620,479
Deferred revenue related to fractional aircraft share sales, net of current portion			25,363,129				35,085,148
Deferred revenue related to Axis Club Membership sales, net of current portion			2,015,459				1,773,943
Other liabilities			2,578,393				2,520,537
Total long-term liabilities			41,734,334				55,000,107
Total liabilities			141,767,266				149,182,794
COMMITMENTS AND CONTINGENCIES
Series A convertible preferred stock, $.0001 par value, authorized 300,000 shares; 152,000 shares issued and outstanding			14,663,320				14,617,958
STOCKHOLDERS' DEFICIT
Preferred stock, $.0001 par value, authorized 700,000 shares; none issued			-				-
Common stock, Class A, $.0001 par value, 75,000,000 shares authorized, 26,388,619 shares issued and outstanding at December 31, 2010 and 26,353,201 shares issued and outstanding at June 30, 2010			2,639				2,635
Additional paid-in capital			57,024,361				56,896,831
Accumulated deficit			(98,642,658	)			(89,062,618	)
Total stockholders' deficit			(41,615,658	)			(32,163,152	)
Total liabilities and stockholders' deficit		$	114,814,928			$	131,637,600

See Notes to Condensed Consolidated Financial Statements.

 

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AVANTAIR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

		Three Months Ended December 31, 2010								Six Months Ended December 31, 2010
		2010				2009				2010				2009
Revenue
Fractional aircraft sold		$	8,778,578			$	11,227,309			$	17,976,401			$	23,206,145
Management and maintenance fees			18,813,477				18,290,025				37,232,183				36,264,594
Flight hour card and Axis Club membership revenue			7,257,098				4,976,763				13,414,493				8,835,234
Other revenue			1,735,386				1,270,860				3,743,578				2,663,868
Total revenue			36,584,539				35,764,957				72,366,655				70,969,841
Operating expenses
Cost of fractional aircraft shares sold			7,526,245				9,476,794				15,637,690				19,677,397
Cost of flight operations			17,689,159				13,304,306				35,342,272				25,724,544
Cost of fuel			4,597,316				3,413,770				8,535,888				7,052,671
Gain on sale of assets			-				(849,584	)			-				(897,594	)
General and administrative expenses			6,674,368				6,234,754				13,554,219				12,535,145
Selling expenses			1,707,771				1,381,180				3,226,525				2,366,945
Depreciation and amortization			1,261,559				1,408,874				2,518,356				2,866,791
Total operating expenses			39,456,418				34,370,094				78,814,950				69,325,899
Income (loss) from operations			(2,871,879	)			1,394,863				(6,448,295	)			1,643,942
Other income (expenses)
Interest and other income			23,031				10,372				34,153				17,784
Interest expense			(1,217,517	)			(1,587,319	)			(2,466,531	)			(3,210,773	)
Total other expenses			(1,194,486	)			(1,576,947	)			(2,432,378	)			(3,192,989	)
Net loss			(4,066,365	)			(182,084	)			(8,880,673	)			(1,549,047	)
Preferred stock dividend and accretion of expenses			(372,383	)			(372,243	)			(744,729	)			(774,358	)
Net loss attributable to common stockholders		$	(4,438,748	)		$	(554,327	)		$	(9,625,402	)		$	(2,323,405	)
Loss per common share:
Basic and diluted		$	(0.17	)		$	(0.02	)		$	(0.37	)		$	(0.11	)
Weighted-average common shares outstanding:
Basic and diluted			26,381,664				24,583,880				26,368,084				20,528,498

See Notes to Condensed Consolidated Financial Statements.

 

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AVANTAIR, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders' Deficit

Six Months Ended December 31, 2010

(Unaudited)

		Class A								Additional								Total
		Common Stock								Paid-In				Accumulated				Stockholders'
		Shares				Amount				Capital				Deficit				Deficit
Balance at June 30, 2010			26,353,201			$	2,635			$	56,896,831			$	(89,062,618	)		$	(32,163,152	)
Stock-based compensation											189,880								189,880
Dividend on Series A convertible preferred stock															(699,367	)			(699,367	)
Accretion of preferred stock issuance costs											(45,362	)							(45,362	)
Issuance of shares in connection with vested restricted stock, net of shares surrendered in lieu of payroll taxes			24,731				3				(16,987	)							(16,984	)
Issuance of shares in connection with exercise of warrants			10,687				1				(1	)							-
Net loss															(8,880,673	)			(8,880,673	)
Balance at December 31, 2010			26,388,619			$	2,639			$	57,024,361			$	(98,642,658	)		$	(41,615,658	)

 

See Notes to Condensed Consolidated Financial Statements.

 

 

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AVANTAIR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

Six Months Ended December 31, 2010 and 2009

(Unaudited)

		2010				2009
OPERATING ACTIVITIES:
Net loss		$	(8,880,673	)		$	(1,549,047	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			2,518,356				2,866,791
Amortization of deferred interest related to capital lease obligation			210,655				188,326
Stock-based compensation			189,880				190,046
Gain on sale of assets			-				(897,594	)
Bad debt (recoveries) expense			(6,177	)			61,359
Changes in operating assets and liabilities:
Accounts receivable			(4,407,823	)			(2,598,965	)
Inventory			(24,696	)			(4,604	)
Deposits on aircraft			-				1,196,274
Deferred maintenance agreement on aircraft engines			(1,118,996	)			218,807
Prepaid expenses and other current assets			(954,676	)			(2,197,842	)
Notes receivable			-				264,398
Aircraft costs related to fractional shares			15,562,544				19,502,809
Other assets			(158,553	)			(142,368	)
Accounts payable			(262,979	)			(2,518,895	)
Accrued liabilities			2,050,176				141,149
Unearned management fee, flight hour card and Axis Club Membership revenue			11,363,298				7,933,599
Cash-restricted			(1,693	)			(4,358	)
Customer deposits			1,314,687				(188,279	)
Deferred revenue related to fractional aircraft share sales			(14,511,401	)			(20,243,645	)
Deferred revenue related to Axis Club Membership sales			363,900				1,223,767
Other liabilities			57,856				31,635
Net cash provided by operating activities			3,303,685				3,473,363
INVESTING ACTIVITIES:
Proceeds from the sale of asset			-				2,900,000
Capital expenditures			(91,619	)			(28,559	)
Net cash (used in) provided by investing activities			(91,619	)			2,871,441
FINANCING ACTIVITIES:
Borrowings under long-term debt			-				56,614
Dividends paid			(684,000	)			(1,773,225	)
Principal payments on long-term debt			(2,234,071	)			(9,425,749	)
Principal payments on short-term debt			(5,800,000	)			(500,000	)
Proceeds from issuance of stock, net of cost of stock redemption/registration			-				8,369,570
Net cash used in financing activities			(8,718,071	)			(3,272,790	)

 

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AVANTAIR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

Six Months Ended December 31, 2010 and 2009

(Unaudited)

		2010				2009
Net (decrease) increase in cash and cash equivalents		$	(5,506,005	)		$	3,072,014
Cash and cash equivalents, beginning of the period			9,446,619				3,773,789
Cash and cash equivalents, end of the period		$	3,940,614			$	6,845,803
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid		$	2,466,531			$	3,210,773
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
Accretion of Series A convertible preferred stock		$	45,362			$	45,083
Dividends payable on Series A convertible preferred stock		$	699,367			$	729,275
Flight hour cards issued in consideration for equipment		$	-			$	139,750
Common shares surrendered in lieu of payroll taxes		$	16,984			$	10,025
Issuance of warrants to underwriter in connection with private sale of common stock		$	-			$	209,708
Issuance of warrants to Lorne Weil in connection with aircraft agreement		$	-			$	807,031
Reversal of accrued expense		$	-			$	44,100

See Notes to Condensed Consolidated Financial Statements.

 

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Avantair, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – OPERATIONS AND MANAGEMENT’S PLANS

Avantair, Inc. (“Avantair” or the “Company”) is engaged in the sale of fractional ownership interests in, 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 December 31, 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 FBOs in Camarillo, California and in Caldwell, New Jersey. Through these FBOs and its headquarters in Clearwater, Florida, Avantair provides aircraft maintenance, concierge and other services to its customers as well as to the Avantair fleet.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Reporting

The accompanying unaudited interim condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the interim condensed financial statement rules and regulations of the Securities and Exchange Commission. In the opinion of management, these statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated financial statements. The interim condensed operating results are not necessarily indicative of the results for a full year or any interim period. The June 30, 2010 condensed consolidated balance sheet has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

Basis of Presentation

All material intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the successful recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. As of December 31, 2010, the Company’s recurring losses resulted in a working capital deficit of approximately $51.5 million and a stockholders’ deficit of approximately $41.6 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. Revenue for the sales by product category can be found in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2010. Sales by product category follow:

		Unit Sales for the Three Months Ended
		December 31, 2010				December 31, 2009				September 30, 2010				September 30, 2009
New Fractional shares			6				5				3				2
Flight hour cards			162				100				104				86
Axis Club Memberships			14				21				11				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 December 31, 2010, the Company had 19.5 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 will continue to actively pursue additional funds through equity financing, including the sale of additional shares of common and preferred stock, asset sales, promotional sales incentives, accelerated payments of management and maintenance fees, debt financing, or a combination thereof. At December 31, 2010 and June 30, 2010, Avantair had assets of approximately $114.8 million and $131.6 million, respectively. For the three and six months ended December 31, 2010, the Company had revenue of approximately $36.6 million and $72.4 million, respectively, and net losses of approximately $4.1 million and $8.9 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, 2010, the Company had approximately $3.9 million of unrestricted cash on hand and assuming there is no change in recent sales and expense trends, the Company believes that its cash position will be sufficient to continue operations for the foreseeable future.

 

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Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying disclosures. These estimates and assumptions are based upon management’s best knowledge of current events and actions that the Company may take in the future. The Company is subject to uncertainties such as the impact of future events, economic, environmental and political factors and changes in the Company’s business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of the Company’s condensed consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the condensed consolidated financial statements. Significant estimates and assumptions by management affect: the proper recording of revenue arrangements with multiple deliverables, the allowance for doubtful accounts, the carrying value of long-lived assets, the amortization period of long-lived assets, the provision for (benefit of) income taxes and related deferred tax accounts, certain accrued expenses and contingencies, warrant valuations and management’s assessment of its ability to continue as a going concern.

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 an undivided interest in a specified aircraft. When a customer purchases a fractional share, they are also required to enter into a five-year management and maintenance agreement which grants the customer the right to the use of the aircraft for a specified number of hours each year. 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, 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 a fixed number of 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

Prior to the first quarter of fiscal year 2011, the Company did not have the objective evidence specified by Accounting Standards Codification (“ASC”) 605-25 “Multiple-Element Arrangements” to determine the fair value of fractional shares sold independent of the fair value of the management and maintenance agreement entered into by the purchaser of the fractional share. Therefore, the Company had adopted the provisions of ASC 605-25 to account for the sale of fractional shares of aircraft under which fractional share sale revenue and related costs of sales were deferred at the time of sale and are being recognized ratably over the five-year life of the management and maintenance agreement.

 

Effective July 1, 2010, the Company adopted the guidance of Accounting Standards Update (“ASU”) 2009-13, which updates ASC 605-25, to value its management and maintenance agreements independent of the sale of a new fractional aircraft share and will recognize fractional aircraft share sale revenue and related costs at the time of the fractional aircraft share sale.  The Company will report adoption of ASU 2009-13 prospectively to sales beginning in fiscal year 2011 without reflecting the impact of the new accounting principles on fractional aircraft share sales made prior to July 1, 2010. There were no fractional aircraft shares sold during the six months ended December 31, 2010 requiring recognition under this new guidance. However, see the discussion in the paragraph immediately following concerning the accounting for the sale of select fractional aircraft shares with a repurchase guarantee.  The adoption of ASU 2009-13 is expected to have a material effect on the financial statements issued in periods after July 1, 2010 at the time that the sale of new fractional aircraft shares without residual guarantees.

In July 2010, the Company initiated a promotion on select fractional aircraft shares that offers customers a discount on the share purchase price and a guarantee to repurchase the fractional aircraft share at the expiration of the term, at the customers’ discretion, for a percent of the original purchase price less the specified remarketing fee.  The program requires that the owners of the select shares enter into a seven year management and maintenance agreement. The sale of the select fractional aircraft shares have been accounted for as operating leases in accordance with ASC 840 “Accounting for Leases” and the revenue earned (less the guaranteed residual value) in connection with the select fractional share owners is recognized ratably over the term of the agreement, usually seven years.  During the three months ended December 31, 2010, the Company sold six select fractional shares under this program.  At December 31, 2010, guarantees under this program totaled approximately $2.4 million and are included in deferred revenue related to fractional aircraft share sales.

 

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Management and Maintenance Agreement

Revenue earned in connection with the management and maintenance agreements with fractional share owners 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 card and Axis Club Membership Revenue

Flight hour card revenue. The Company sells access to its aircraft fleet through either a 15 or 25 hour flight hour card for flight time without the requirement to purchase an ownership share in an aircraft. The card holder pays the Company the entire amount in advance of access to the aircraft fleet. The Company defers the entire amount paid and recognizes revenue on an incremental basis as aircraft hours are flown.

Axis Club Membership revenue. In January 2009, the Company initiated the Axis Club Membership program that offers customers access to blocks of flight time at a discount from standard flight hour card rates for a set, three year membership fee. The program requires that Axis Club members purchase a minimum of three 25 hour blocks of flight hour cards over the three year membership term. 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.

Other Revenues

Other revenues are comprised primarily of revenue from demonstration flights, revenue from the sale of fuel at the Company’s FBO facilities and revenue from the rental of hangar space at the Company’s operating locations. Revenue from fuel sales and hangar rentals are recorded when goods are delivered or services are rendered. Demonstration revenue is earned as the Company charges prospective fractional share owners on an hourly basis for each hour the prospective share owners are flown to demonstrate the quality and capabilities of the aircraft. The Company recognizes revenue related to these demonstration flights when the flight is completed.

Aircraft Costs Related To Fractional Sales

The Company reflects aircraft costs related to the sale of fractional aircraft shares. As a result of the initial adoption of ASC 605-25, the Company recognized 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 were recorded as an asset and recognized as the cost of aircraft shares sold over the five-year period. In connection with its adoption, the Company established the specific objective evidence required by ASC 605-25, as updated by ASU 2009-13, for arrangements with multiple-deliverables. Management adopted ASU 2009-13 on a prospective basis effective July 1, 2010 and will apply the separation accounting to new share sales contracts. Fractional share sale costs will be recognized at the time of a fractional share sale, rather than over the five-year period.

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.

Prepaid Pilot Training

The costs related to the training of pilots as required by Federal Aeronautic Regulations are capitalized and amortized over the twelve month certification period.

 

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Income Taxes

Income taxes are accounted for under the asset and liability method in accordance with ASC 740 “Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets to the amounts expected to be realized. The Company calculated an annual effective tax rate to determine the interim period income tax provisions; however, no tax liability was accrued for the three and six months ended December 31, 2010, as the Company expects to have sufficient operating loss and tax credit carryforwards to cover any taxable income.

Effective July 1, 2007, the Company adopted the provisions of the ASC 740 relating to uncertain tax positions. ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company has identified its federal tax return and State of Florida tax return as “major” tax jurisdictions, as defined in ASC 740. The Company evaluations were performed for the tax years ended 2005 through 2010. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense.

Stock-Based Compensation

The Company has one stock-based compensation plan, the 2006 Long Term Incentive Plan, which the Company’s shareholders approved, for employees, certain non-employees and non-employee directors. Stock-based awards under this plan may consist of common stock, common stock units, stock options, cash-settled or stock-settled stock appreciation rights, restricted stock and other stock-based awards. The Company issues common stock to satisfy stock option exercises or vesting of stock awards.

The Company accounts for share-based compensation to employees and directors in accordance with ASC 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.

Stock-based compensation expense related to these plans, which is included in “General and administrative expenses” in the accompanying Condensed Consolidated Statements of Operations, was $94,116 and $189,880 for the three and six months ended December 31, 2010 and was $98,346 and $190,046 for the three and six months ended December 31, 2009, respectively. There were no related income tax benefits recognized in the accompanying Condensed Consolidated Statements of Operations for the three or six months ended December 31, 2010 or for the comparable 2009 period. As of December 31, 2010, the Company had 188,750 shares of restricted stock and 951,100 stock options outstanding.

Accounting for Derivative Instruments

The Company accounts for derivative instruments in accordance with ASC 815 “Derivatives and Hedging,” which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts. The Company also considers ASC 815, which provides criteria for determining whether freestanding contracts that are settled in a company’s own stock, including common stock warrants, should be designated as either an equity instrument, an asset or as a liability under ASC 815. The Company evaluates the conversion feature embedded in its Series A Convertible Preferred Stock based on the criteria of ASC 815 to determine whether the conversion feature would be required to be bifurcated from the Preferred Stock and accounted for separately as a derivative. Based on management’s evaluation, the embedded conversion feature did not require bifurcation and derivative accounting as of December 31, 2010.

Goodwill and Long-lived Assets

The Company accounts for goodwill and other intangible assets under ASC 350 "Intangibles — Goodwill and Other."  ASC 350 eliminates the amortization of goodwill and certain other intangible assets and requires an evaluation of impairment by applying a fair-value based test. The goodwill impairment test is a two-step process which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of the Company’s reporting units based on discounted cash flow models using revenue and profit forecasts and comparing the estimated fair values with the carrying values of the Company’s reporting units which include the goodwill. If the estimated fair values are less than the carrying values, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of the Company’s “implied fair value” requires the Company to allocate the estimated fair value to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared to the corresponding carrying value.

 

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The Company performs its annual goodwill impairment testing in the fourth quarter of each year, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the Company, estimation of aircraft in use, the useful life over which cash flows will occur, and determination of cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment.

Fair Value Measurements

The Company has adopted the provisions of ASC 820 “Fair Value Measurements and Disclosures” which defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820 permits an entity to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period.

The fair values of the Company’s assets and liabilities that qualify as financial instruments under ASC 820 including cash and cash equivalents, restricted cash, accounts receivable, accounts payable,  accrued expenses, unearned management fees and charter flight hour card revenues and short-term debt are carried at cost, which approximates fair value due to the short-term maturity of these instruments. Long-term obligations approximate fair value, given management’s evaluation of the instruments’ current rates compared to market rates of interest and other factors.

 

The Company measures at fair value basis based on the following key objectives:

•

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date;

•

A three-level hierarchy ("Valuation Hierarchy") for fair value measurements;

•

Consideration of the Company's creditworthiness when valuing liabilities; and

•

Disclosures about instruments measured at fair value.

 

The Valuation Hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument's categorization within the Valuation Hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of the Valuation Hierarchy and the distribution of the Company's financial assets within it are as follows:

•

Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes goodwill and other items.

During the three months ended December 31, 2010, the Company has elected not to use the fair value option permitted under ASC 820 for any of its financial assets and financial liabilities that are not already recorded at fair value.

Loss Per Share

Basic loss per share is computed by dividing loss available to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

 

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For the three and six months ended December 31, 2010, a total of 8,203,214 share-equivalents of potentially dilutive securities were excluded from the calculation of diluted earnings per share. These securities were comprised of 2,373,620 warrants issued to Lorne Weil in conjunction with the LW Air transactions; 437,887 warrants issued to EBC in consideration for services rendered as placement agent for the Company’s June, September and October 2009 private placements; 951,100 options to purchase shares of common stock were outstanding during the periods but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares, and therefore, their effect would be anti-dilutive as calculated under the treasury method promulgated by ASC 260 “Earnings Per Share;” and 4,251,857 shares of common stock reserved for issuance upon the conversion of the outstanding Series A Preferred Shares.  In accordance with ASC 260’s contingently issuable shares provision, 188,750 shares of unvested common stock awards (“restricted stock”) granted were not included in the calculation because all the necessary conditions for vesting had not been satisfied.

For the three and six months ended December 31, 2009, a total of 8,270,749 share-equivalents of potentially dilutive securities were excluded from the calculation of diluted earnings per share. These securities were comprised of 2,373,620 warrants issued to Lorne Weil in conjunction with the LW Air transactions; 455,887 warrants issued to EarlyBirdCapital in consideration for services rendered as placement agent for the Company’s June, September and October 2009 private placements; 150,000 options to purchase shares of common stock and 300,000 unit purchase options (with each unit consisting of one share and two warrants that expired February 23, 2010) which were outstanding during the periods but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares, and therefore, their effect would be anti-dilutive as calculated under the treasury method promulgated by ASC 260  “Earnings Per Share;” and 4,251,857 shares of common stock reserved for issuance upon the conversion of the outstanding Series A Preferred Shares. In accordance with ASC 260’s contingently issuable shares provision, 139,385 shares of unvested common stock awards (“restricted stock”) granted were not included in the calculation because all the necessary conditions for vesting had not been satisfied.

Recently Issued Pronouncements

In June 2009, the FASB issued additional guidance related to financial instrument transfers ASU 2009-16, Transfers and Servicing and evaluation of Variable Interest Entities (“VIEs”) for consolidation ASU 2009-17, Consolidations. The guidance was effective for the first quarter of calendar year 2010. The consolidation guidance relating to VIEs changes the determination of the primary beneficiary of a VIE from a quantitative model to a qualitative model. Under the new qualitative model, the primary beneficiary must have both the ability to direct the activities of the VIE and the obligation to absorb either losses or gains that could be significant to the VIE. The guidance also changes when reassessment is needed, as well as requires enhanced disclosures, including the effects of a company’s involvement with the VIEs on its financial statements. The adoption of this guidance did not have a significant impact on the Company’s condensed consolidated financial condition, results of operations and cash flows.

In January 2010, the FASB issued new guidance that requires new disclosures about significant transfers in and/or out of Levels 1 and 2 of the fair value hierarchy and activity in Level 3 ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements). In addition, this guidance provides clarification of existing disclosure requirements about (a) level of disaggregation and (b) inputs and valuation techniques. The update was effective for the first quarter of calendar year 2010. The adoption of this guidance did not have a significant impact on the Company’s condensed consolidated financial condition, results of operations and cash flows.

The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the Company’s condensed consolidated financial statements.

NOTE 3 – COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

The Company conducts a major part of its operations from leased facilities, which include airplane hangars and administrative offices. The 15 year hangar lease in Clearwater, Florida expiring in 2020 is classified as an operating lease. The lease provides for rent allocation credits for the first three years. These credits have been netted in rental expense on a straight-line basis over the term of the lease. The Company also has a 15 year lease for its fixed flight based operation in Camarillo, California expiring in 2021 and a 10 year lease for its fixed flight based operation in Caldwell, New Jersey expiring in 2018, which are classified as operating leases.

Most of the Company’s facilities operating leases contain an option to renew at the then fair rental value for periods of five to ten years. These options enable the Company to retain use of facilities in desirable operating areas.

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 pursuant to the existing aircraft purchase agreement between the Company and Piaggio America, Inc. Simultaneous with this transaction, the Company entered into an eight-year management agreement for those aircraft. 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. Effective July 1, 2010, the terms of the management agreement were amended to reduce the maximum management fee to be charged for the Company’s management of each of these aircraft to not exceed $44,000 per month for each aircraft, for the eight months ending February 28, 2011, after which the maximum management fee will continue to not exceed $56,500 per month for each aircraft. The Company accounts for the management agreement as an operating lease. The Company accrued $375,000 for services rendered by a third party in connection with this transaction. The fee is being amortized over the term of the arrangement.

 

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In addition, the Company leases transportation equipment and data processing equipment under operating leases expiring during the next three years.

 

Purchase Commitments

On June 20, 2008, Avantair assigned its rights and obligations to purchase twenty Embraer Phenom 100 (“Phenom 100”) aircraft positions to Share 100 Holding Co., LLC (“Share 100”), a wholly-owned subsidiary of Avantair. On the same date, Avantair entered into a membership interest purchase agreement with Executive Air Shares Corporation (“EAS”), in which EAS purchased the Class A membership of Share 100 and Avantair retained the Class B membership. EAS, as Class A member, has the rights and obligations to purchase the Phenom 100 aircraft with positions one through eighteen and to fund payment due in connection with these aircraft. EAS paid Share 100 approximately $2.47 million in connection with these transactions and made an additional $750,000 capital contribution to Share 100 in December 2008, all of which was, immediately distributed to Avantair. Avantair, as Class B member, has the rights and obligations to purchase aircraft positions nineteen and twenty and to fund payment due in connection with these aircraft. EAS had the option to purchase aircraft nineteen and twenty which was to have been exercised by October 1, 2010; if exercised, EAS would reimburse Avantair for all payments made relative to these aircraft and provide all remaining funds required. In the event that EAS did not exercise the option to purchase aircrafts nineteen and twenty by October 1, 2010, Avantair would have the right and obligation to purchase the nineteenth and twentieth aircraft.  During November 2010, the Company and EAS entered into an agreement to extend the exercise requirement date to April 1, 2011. If EAS defaults under its obligations to purchase the aircraft positions, EAS will forfeit all deposits paid for the undelivered aircraft, including the funds distributed to Avantair. Avantair will then be responsible for the rights and obligations of the remaining undelivered aircraft.  If Avantair defaults under its obligations to purchase the last two aircraft positions, any deposits paid by Avantair in connection with the undelivered Class B Aircraft will be forfeited.

As of December 31, 2010, Avantair had contractual commitments to purchase 52 additional Piaggio Avanti II aircraft through 2013. The total commitment, including a proposed price escalation, is valued at approximately $330 million.

Financing Commitments- Short-term

Short-term debt consists of the following as of December 31, 2010:

Midsouth Services, Inc.

$

5,200,000

On April 2, 2009, Avantair entered into two Floor Plan Agreements with Midsouth to replace Midsouth’s existing Floor Plan Agreements dated July 31, 2008.  The new Floor Plan Agreements extended credit to Avantair in an increased amount of $11.6 million to be used towards the purchase of new Piaggio P-180 aircraft.  Each of the new Floor Plan Agreements are similar to the prior Floor Plan Agreements and cover an amount not to exceed $5.8 million for a term of twelve months.  The Company has the sole option to terminate one of the Agreements during the term with ninety days written notice. The Company has agreed to pay Midsouth a monthly fee of $82,500 for each Floor Plan Agreement during the term. During December 2010, the Company repaid one of the new Floor Plan Agreements in the amount of $5.8 million. Borrowings outstanding under the remaining Floor Plan Agreement arrangement at December 31, 2010 totaled $5.2 million.

 

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Financing Commitments- Long-term

Long-term debt consists of the following as of December 31, 2010:

Wells Fargo Equipment Finance, Inc.		$	2,463,994
Jet Support Services, Inc.			725,337
Iberia Bank			1,662,811
Wachovia Bank			1,802,339
Other long-term debt			14,442
Midsouth Services, Inc.			11,130,866
			17,799,789
Less current portion			(6,022,436	)
Long-term debt		$	11,777,353

Wells Fargo Equipment Finance, Inc.

In February 2005, the Company entered into financing arrangements for the purchase of core aircraft under various notes payable with Wells Fargo Equipment Finance, Inc. The notes outstanding at December 31, 2010 totaled approximately $2.5 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.

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 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 $0.4 million of the aforementioned promissory note, 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 agreed to apply the unamortized prepayment under the airframe maintenance contract to the engine maintenance program and to amortize this amount over the remaining 35 month term of that program.  Borrowings outstanding under this arrangement at December 31, 2010 totaled approximately $0.7 million and have been included in the current portion of long-term debt on the accompanying condensed consolidated balance sheets.

Iberia Bank

In August 2007, the Company and Iberia Bank (formerly Century Bank F.S.B.) executed a $2.2 million note agreement for the purchase of one aircraft. The note outstanding at December 31, 2010 totaled approximately $1.7 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 December 31, 2010 totaled approximately $1.8 million. In September 2009 and September 2010, the Company received waivers of compliance for financial covenants in connection with the note.

Other long-term debt

In October 2009, the Company and Kevco Aviation Inc. executed a $56,614 note agreement for the purchase of equipment. The note outstanding at December 31, 2010 totaled $14,442 and is payable in monthly installments of $2,912 with interest of 3.25% per annum through May 2011. The agreement with Kevco has been included in the current portion of long-term debt on the accompanying condensed consolidated balance sheets.

 

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Capital Lease Transactions

Midsouth Services, Inc. (“Midsouth”)

The Company has three separate lease agreements with Midsouth.

On October 10, 2007, Avantair acquired a core aircraft under a capital lease obligation with Midsouth.  Under the lease agreement, Midsouth provided funding for the $4.7 million purchase of a pre-owned Piaggio P-180 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 at December 31, 2010 totaled approximately $3.5 million.

In April 2009, the Company amended a lease agreement previously accounted for as an operating lease under ASC Topic 840 “Leases,” dated as of July 31, 2006 between the Company and Midsouth. Pursuant to the amendment, the Company is required to pay $74,900 monthly, at 11.0% interest per annum 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 in the accompanying condensed consolidated balance sheets. The obligation outstanding at December 31, 2010 totaled approximately $3.0 million, net of deferred interest of $0.3 million.

In April 2009, the Company entered into a lease agreement, effective April 6, 2009, pursuant to which Midsouth leases a Piaggio P-180 aircraft to the Company for a ten year lease term at $75,000 per month, at 15.0% interest per annum, 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 at December 31, 2010 totaled approximately $4.6 million.

The capital lease obligations are included in long-term debt in the accompanying condensed consolidated balance sheets.

NOTE 4 – EQUITY TRANSACTIONS

As of December 31, 2010, the Company had 26,388,619 shares of its common stock outstanding and 139,066 shares of common stock available for future issuance under the Company’s 2006 Long-Term Stock Incentive Plan. As of December 31, 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.

By recommendation of the Compensation Committee and approval by the Board of Directors, 175,000, stock options were granted to the Company’s three named executive officers, effective October 1, 2010, pursuant to the Company's Long-Term Incentive Plan. One-third of the shares will vest one year following the grant date, and one-twelfth of the shares will vest every three months thereafter. All options granted under the Plan are accounted for in accordance with ASC 718 and will be included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

NOTE 5 – SUBSEQUENT EVENTS

In January 2011, Avantair granted 10,000 shares of restricted stock to each of its seven non-employee directors of the Company’s Board of Directors. The shares of restricted stock granted to the directors’ vest one third upon each of the next three successive annual meetings of stockholders, subject to the grantee’s continued service on the Board of Directors, and the dollar amount recognized for financial statement reporting purposes in respect of the restricted stock awards will be determined on each vesting date.

In January 2011, the Company’s 2006 Long-Term Stock Incentive Plan was amended to increase the number of shares available to be awarded thereunder by 2 million shares.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Avantair is engaged in the sale of fractional ownership interests in, 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 December 31, 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 in Caldwell, New Jersey. Through these FBOs 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 management and maintenance 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 management and maintenance agreements with fractional owners, Avantair provides pilots, maintenance, fuel and hangar space for the aircraft.

In January 2009, Avantair initiated the Axis Club Membership program. This 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 December 31, 2010, Avantair had contractual commitments to purchase 52 additional Piaggio Avanti II aircraft through 2013 with a mutual understanding that the aircraft delivery dates can be extended. The total commitment, including a 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. 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.

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. Revenue for the sales by product category can be found in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2010. Sales by product category follow:

		Unit Sales for the Three Months Ended
		December 31, 2010				December 31, 2009				September 30, 2010				September 30, 2009
New Fractional shares			6				5				3				2
Flight hour cards			162				100				104				86
Axis Club Memberships			14				21				11				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 December 31, 2010, the Company had 19.5 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 will continue to actively pursue additional funds through equity financing, including the sale of additional shares of common and preferred stock, asset sales, promotional sales incentives, accelerated payments of management and maintenance fees, debt financing, or a combination thereof.

 

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At December 31, 2010 and June 30, 2010, Avantair had assets of approximately $114.8 million and $131.6 million, respectively. For the three and six months ended December 31, 2010, the Company had revenue of approximately $36.6 million and $72.4 million, respectively, and net losses of approximately $4.1 million and $8.9 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, 2010, the Company had approximately $3.9 million of unrestricted cash on hand and assuming there is no change in recent sales and expense trends, the Company believes that its cash position will be 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, 2010, the discussion and analysis of our financial condition and results of operations are based upon our condensed 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 judgment 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 management agreement grants the customer an undivided interest in a specified aircraft. When a customer purchases a fractional share, they are also required to enter into a five-year management and maintenance agreement which grants the customer the right to the use of the aircraft for a specified number of hours each year. 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, 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 a fixed number of 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

Prior to the first quarter of fiscal year 2011, the Company did not have the objective evidence specified by Accounting Standards Codification (“ASC”) 605-25 “Multiple-Element Arrangements” to determine the fair value of fractional shares sold independent of the fair value of the management and maintenance agreement entered into by the purchaser of the fractional share. Therefore, the Company had adopted the provisions of ASC 605-25 to account for the sale of fractional shares of aircraft under which fractional share sale revenue and related costs of sales were deferred at the time of sale and are being recognized ratably over the five-year life of the management and maintenance agreement.

 

Effective July 1, 2010, the Company adopted the guidance of ASU 2009-13, which updates ASC 605-25, to value its management and maintenance agreements independent of the sale of a new fractional aircraft share and will recognize fractional aircraft share sale revenue and related costs at the time of the fractional aircraft share sale.  The Company will report adoption of ASU 2009-13 prospectively to sales beginning in fiscal year 2011 without reflecting the impact of the new accounting principles on fractional aircraft share sales made prior to July 1, 2010. There were no fractional aircraft shares sold during the six months ended December 31, 2010 requiring recognition under this new guidance. However, see the discussion in the paragraph immediately following concerning the accounting for the sale of select fractional aircraft shares with a repurchase guarantee.  The adoption of ASU 2009-13 is expected to have a material effect on the financial statements issued in periods after July 1, 2010 at the time that the sale of new fractional aircraft shares without residual guarantees.

In July 2010, the Company initiated a promotion on select fractional aircraft shares that offers customers a discount on the share purchase price and a guarantee to repurchase the fractional aircraft share at the expiration of the term, at the customers’ discretion, for a percent of the original purchase price less the specified remarketing fee.  The program requires that the owners of the select shares enter into a seven year management and maintenance agreement. The sale of the select fractional aircraft shares have been accounted for as operating leases in accordance with ASC 840 “Accounting for Leases” and the revenue earned (less the guaranteed residual value) in connection with the select fractional share owners is recognized ratably over the term of the agreement, usually seven years.  During the three months ended December 31, 2010, the Company sold six select fractional shares under this program.  At December 31, 2010, guarantees under this program totaled approximately $2.4 million and are included in deferred revenue related to fractional aircraft share sales.

 

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Other Revenues

Other revenues are comprised primarily of revenue from demonstration flights, revenue from the sale of fuel at the Company’s FBO facilities and revenue from the rental of hangar space at the Company’s operating locations. Revenue from fuel sales and hangar rentals are recorded when goods are delivered or services are rendered. Demonstration revenue is earned as the Company charges prospective fractional share owners on an hourly basis for each hour the prospective share owners are flown to demonstrate the quality and capabilities of the aircraft. The Company recognizes revenue related to these demonstration flights when the flight is completed.

Aircraft Costs Related To Fractional Sales

The Company reflects aircraft costs related to the sale of fractional aircraft shares. As a result of the initial adoption of ASC 605-25, the Company recognized 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 were recorded as an asset and recognized as the cost of aircraft shares sold over the five-year period. In connection with its adoption, the Company established the specific objective evidence required by ASC 605-25, as updated by ASU 2009-13, for arrangements with multiple-deliverables. Management adopted ASU 2009-13 on a prospective basis effective July 1, 2010 and will apply the separation accounting to new share sales contracts. Fractional share sale costs will be recognized at the time of a fractional share sale, rather than over the five-year period.

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 ASC 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.

Income Taxes

Income taxes are accounted for under the asset and liability method in accordance with ASC 740 “Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets to the amounts expected to be realized.

Goodwill and Long-lived Assets

The Company accounts for goodwill and other intangible assets under ASC 350 "Intangibles — Goodwill and Other."  ASC 350 eliminates the amortization of goodwill and certain other intangible assets and requires an evaluation of impairment by applying a fair-value based test. The goodwill impairment test is a two-step process which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of the Company’s reporting units based on discounted cash flow models using revenue and profit forecasts and comparing the estimated fair values with the carrying values of the Company’s reporting units which include the goodwill. If the estimated fair values are less than the carrying values, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of the Company’s “implied fair value” requires the Company to allocate the estimated fair value to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared to the corresponding carrying value.

 

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The Company performs its annual goodwill impairment testing in the fourth quarter of each year, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the Company, estimation of aircraft in use, the useful life over which cash flows will occur, and determination of cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment.

Results of Operations

Three Months Ended December 31, 2010 Compared With Three Months Ended December 31, 2009

Revenues for the three months ended December 31, 2010 were $36.6 million, an increase of 2.3% from $35.8 million for the three months ended December 31, 2009. This increase was the result of an increase of 2.9% in management and maintenance fees to $18.8 million for the three months ended December 31, 2010 from $18.3 million for the comparable 2009 period, an increase of 45.8% in flight hour card and Axis Club Membership revenue to $7.3 million for the three months ended December 31, 2010 from $5.0 million for the comparable 2009 period, and an increase of 36.6% in other revenue to $1.7 million for the three months ended December 31, 2010 from $1.3 million for the comparable 2009 period.  These increases were partially offset by a 21.8% decrease in the revenue generated from the sale of fractional aircraft shares to $8.8 million for the three months ended December 31, 2010 from $11.2 million for the comparable 2009 period.

Revenue from the sale of fractional aircraft shares decreased $2.4 million primarily due to the full amortization of revenue from shares sold in prior periods, partially offset by amortization of revenue from shares sold from January 1, 2010 through December 31, 2010.

Revenue from management and maintenance fees increased $0.5 million primarily due to the higher average number of fractional shares through December 31, 2010 from the comparable 2009 period, coupled with an increase in the average monthly management fee per shareowner.

Flight hour card revenue and Axis Club Membership revenue increased $2.3 million primarily due to an increase in flight hour card sales and the resulting increase in flight hour card utilization by owners during the three months ended December 31, 2010 from the comparable 2009 period. Partially offsetting this increase is a decrease in the per hour revenue rate recognized as a result of a greater number of lower priced Axis cards.

Other revenue increased 36.6% to $1.7 million for the three months ended December 31, 2010 from $1.3 million for the three months ended December 31, 2009, due to increased demonstration flights, fuel, remarketing and engine rental revenue.

Operating expenses for the three months ended December 31, 2010 were 14.8% higher than the three months ended December 31, 2009, with total operating expenses of $39.5 million compared to $34.4 million, respectively. The cost of fractional aircraft shares sold decreased to $7.5 million for the three months ended December 31, 2010 from $9.5 million for the three months ended December 31, 2009, due to the full amortization of costs that had been deferred from shares sold in prior periods, partially offset by amortization of costs from shares sold from January 1, 2010 through December 31, 2010.  In fiscal year 2010, the Company recognized a nonrecurring gain on the sale of one of the Company’s core aircraft; no such gain was recorded in fiscal year 2011.

The cost of flight operations, together with the cost of fuel, increased 33.3% to $22.3 million for the three months ended December 31, 2010 from $16.7 million for the three months ended December 31, 2009, primarily due to:

¨

a $2.8 million increase in maintenance expense as a result of an increase in fleet size, flight hours and completion of the aircraft maintenance management acceleration of required fleet maintenance during the second quarter of fiscal year 2011 so as to prepare for peak travel season;

¨

a $1.3 million increase in aircraft lease expense as a result of the addition of four leased aircraft to the fleet in the second quarter of fiscal year 2010;

¨

a $1.2 million increase in cost of fuel due to an increase in flight hours and an increase in the per gallon cost of fuel; and

¨

a $0.2 million increase in pilot expense due primarily to the increase in fleet size.

General and administrative expenses increased 7.1% to $6.7 million for the three months ended December 31, 2010 from $6.2 million for the three months ended December 31, 2009, primarily due to increases in expenses related to flight scheduling and maintenance related administrative costs relating to shipment of parts.

 

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Selling expenses increased 23.6% to $1.7 million for the three months ended December 31, 2010 from $1.4 million for the three months ended December 31, 2009 due to an increase in commission expenses as a result of increased flight hour card sales and an increase in marketing expenses due to increased advertising and target-focused marketing events.

           Loss from operations was $2.9 million for the three months ended December 31, 2010 compared to income from operations of $1.4 million for the three months ended December 31, 2009, for the reasons set forth above.

Interest expense decreased 23.3% to $1.2 million for the three months ended December 31, 2010 from $1.6 million for the three months ended December 31, 2009 due to decreases in the short-term and long-term debt obligations between the two periods as a result of maturity and repayment of loan amounts.

Net loss increased to $4.1 million for the three months ended December 31, 2010 compared to $0.2 million for the three months ended December 31, 2009 due to the decrease in income from operations partially offset by the decrease in total other expenses discussed above.

Six Months Ended December 31, 2010 Compared With Six Months Ended December 31, 2009

Revenues for the six months ended December 31, 2010 were $72.4 million, an increase of 2.0% from $71.0 million for the six months ended December 31, 2009. This increase was the result of an increase of 2.7% in management and maintenance fees to $37.2 million for the six months ended December 31, 2010 from $36.3 million for the comparable 2009 period, an increase of 51.8% in flight hour card and Axis Club Membership revenue to $13.4 million for the six months ended December 31, 2010 from $8.8 million for the comparable 2009 period, and an increase of 40.5% in other revenue to $3.7 million for the six months ended December 31, 2010 from $2.7 million for the comparable 2009 period.  These increases were partially offset by a 22.5% decrease in the revenue generated from the sale of fractional aircraft shares to $18.0 million for the six months ended December 31, 2010 from $23.2 million for the comparable 2009 period.

Revenue from the sale of fractional aircraft shares decreased $5.2 million due to the full amortization of revenue from shares sold in prior periods, partially offset by amortization of revenue from new shares sold from January 1, 2010 through December 31, 2010.

Revenue from management and maintenance fees increased $1.0 million primarily due to the higher average number of fractional shares through December 31, 2010 from the comparable 2009 period, coupled with an increase in the average monthly management fee per shareowner.

Flight hour card revenue and Axis Club Membership revenue increased $4.6 million primarily due to an increase in flight hour card sales and the resulting increase in flight hour card utilization by owners during the six months ended December 31, 2010 from the comparable 2009 period. Partially offsetting this increase is a decrease in the per hour revenue rate recognized as a result of a greater number of lower priced Axis cards.

Other revenue increased 40.5% to $3.7 million for the six months ended December 31, 2010 from $2.7 million for the six months ended December 31, 2009, due to increased demonstration flights, fuel, remarketing and engine rental revenue and revenue from acquired existing fractional aircraft shares that were subsequently sold.

Operating expenses for the six months ended December 31, 2010 were 13.7% higher than the six months ended December 31, 2009, with total operating expenses of $78.8 million compared to $69.3 million, respectively. The cost of fractional aircraft shares sold decreased to $15.6 million for the six months ended December 31, 2010 from $19.7 million for the six months ended December 31, 2009, due to the full amortization of costs that had been deferred from shares sold in prior periods, partially offset by amortization of costs from shares sold from January 1, 2010 through December 31, 2010.  The Company did not recognize a gain on the sale of assets during the six months ended December 31, 2010, and the comparable 2009 gain related to a nonrecurring gain recognized on the sale of one of the Company’s core aircraft.

The cost of flight operations, together with the cost of fuel, increased 33.9% to $43.9 million for the six months ended December 31, 2010 from $32.8 million for the six months ended December 31, 2009, primarily due to:

¨

a $5.4 million increase in maintenance expense as a result of an increase in fleet size, flight hours and completion of the aircraft maintenance management acceleration of required fleet maintenance during the first and second quarters of fiscal year 2011 so as to prepare for peak travel season;

¨

a $2.5 million increase in aircraft lease expense as a result of the addition of four leased aircraft to the fleet in the second quarter of fiscal year 2010;

¨

a $1.5 million increase in cost of fuel due to an increase in flight hours and an increase in the per gallon cost of fuel;

¨

a $0.7 million increase in pilot expense, including training costs, due primarily to the increase in fleet size; and

 

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¨

a $0.6 million increase in chartering expense due to aircraft availability, partially offset by decreases by use of enhanced flight optimization software and flight staff training and a decrease in insurance expense.

General and administrative expenses increased 8.1% to $13.6 million for the six months ended December 31, 2010 from $12.5 million for the six months ended December 31, 2009, primarily due to increases in the costs related to reacquired fractional aircraft shares subsequently sold, expenses related to flight scheduling and maintenance related administrative costs relating to shipment of parts.

Selling expenses increased 36.3% to $3.2 million for the six months ended December 31, 2010 from $2.4 million for the six months ended December 31, 2009 due to an increase in commission expenses as a result of increased flight hour card sales and an increase in marketing expenses due to increased advertising and target-focused marketing events.

Loss from operations was $6.5 million for the six months ended December 31, 2010 compared to income from operations of $1.6 million for the six months ended December 31, 2009, for the reasons set forth above.

Interest expense decreased 23.2% to $2.5 million for the six months ended December 31, 2010 from $3.2 million for the six months ended December 31, 2009 due to decreases in the short-term and long-term debt obligations between the two periods as a result of maturity and repayment of loan amounts.

Net loss increased to $8.9 million for the six months ended December 31, 2010 compared to $1.5 million for the six months ended December 31, 2009 due to the decrease in income from operations partially offset by the decrease in total other expenses 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. 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 December 31, 2010 and June 30, 2010, Avantair had a working capital deficit of approximately $51.5 million and $43.9 million, respectively, and a stockholders’ deficit of approximately $41.6 million and $32.2 million, respectively. As of December 31, 2010, cash and cash equivalents amounted to approximately $3.9 million and total assets to $114.8 million. The cash and cash equivalent balance decreased $5.5 million from June 30, 2010 and total assets decreased $16.8 million. The decrease in cash and cash equivalents occurred primarily as a result of the repayment of $2.2 million of long-term debt and $5.8 million of short-term debt, including amounts that had financed the remaining 3.5 fractional aircraft shares available for sale under this Floor Plan Agreement, and expenditures related to the movement of the Company’s routine maintenance schedule to accelerate the required fleet maintenance to occur during the first and second quarters of fiscal year 2011 so as to prepare for peak travel season and due to expenditures for the cost of operations, including amounts accrued for at June 30, 2010, partially offset by cash generated from operations and general timing differences in cash receipts during the period. In addition, accounts receivable increased $4.4 million primarily as a result of use of payment plans by purchasers of flight hour time cards.

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.

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 December 31, 2010, the Company had 19.5 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 will continue to actively pursue additional funds through equity financing, including the sale of additional shares of common and preferred stock, asset sales, promotional sales incentives, accelerated payments of management and maintenance fees, debt financing, or a combination thereof.

At December 31, 2010 and June 30, 2010, Avantair had assets of approximately $114.8 million and $131.6 million, respectively. For the three and six months ended December 31, 2010, the Company had revenue of approximately $36.6 million and $72.4 million, respectively, and net losses of approximately $4.1 million and $8.9 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, 2010, the Company had approximately $3.9 million of unrestricted cash on hand and assuming there is no change in sales and expense trends experienced since the fourth quarter of fiscal 2010, the Company believes that its cash position will be sufficient to continue operations for the foreseeable future.

 

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Financing Arrangements

Avantair’s financing arrangements at December 31, 2010 are described below:

Wells Fargo Equipment Finance, Inc.		$	2,463,994
Jet Support Services, Inc.			725,337
Iberia Bank			1,662,811
Wachovia Bank			1,802,339
Other long-term debt			14,442
Midsouth Services, Inc.			11,130,866
		$	17,799,789

Wells Fargo Equipment Finance, Inc.: In February 2005, the Company entered into financing arrangements for the purchase of core aircraft under various notes payable with Wells Fargo Equipment Finance, Inc. The notes outstanding at December 31, 2010 totaled approximately $2.5 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.

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 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 $0.4 million of the aforementioned promissory note, 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 agreed to apply the unamortized prepayment under the airframe maintenance contract to the engine maintenance program and will amortize this amount over the remaining 35 month term of that program.  Borrowings outstanding under this arrangement at December 31, 2010 totaled approximately $0.7 million and have been included in the current portion of long-term debt on the accompanying condensed consolidated balance sheets.

Iberia Bank: In August 2007, the Company and Iberia Bank (formerly Century Bank F.S.B.) executed a $2.2 million note agreement for the purchase of one aircraft. The note outstanding at December 31, 2010 totaled approximately $1.7 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 December 31, 2010 totaled approximately $1.8 million. In September 2009 and September 2010, the Company received waivers of compliance for financial covenants in connection with the note.

Other long-term debt: In October 2009, the Company and Kevco Aviation Inc. executed a $56,614 note agreement for the purchase of equipment. The note outstanding at December 31, 2010 totaled $14,442 and is payable in monthly installments of $2,912 with interest of 3.25% per annum through May 2011. The agreement with Kevco has been included in the current portion of long-term debt on the accompanying condensed consolidated balance sheets.

Midsouth Services, Inc.: The Company has three separate lease agreements with Midsouth.

On October 10, 2007, Avantair acquired a core aircraft under a capital lease obligation with Midsouth.  Under the lease agreement, Midsouth provided funding for the $4.7 million purchase of a pre-owned Piaggio P-180 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 at December 31, 2010 totaled approximately $3.5 million.

In April 2009, the Company amended a lease agreement previously accounted for as an operating lease under ASC Topic 840 “Leases,” dated as of July 31, 2006 between the Company and Midsouth. Pursuant to the amendment, the Company is required to pay $74,900 monthly, at 11.0% interest per annum 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 in the accompanying condensed consolidated balance sheets. The obligation outstanding at December 31, 2010 totaled approximately $3.0 million, net of deferred interest of $0.3 million.

 

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In April 2009, the Company entered into a lease agreement, effective April 6, 2009, pursuant to which Midsouth leases a Piaggio P-180 aircraft to the Company for a ten year lease term at $75,000 per month, at 15.0% interest per annum, 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 at December 31, 2010 totaled approximately $4.6 million.

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

Off-Balance Sheet Arrangements

 

At December 31, 2010, the Company did not have any material commercial commitments (except for those noted in Note 3 “Purchase Commitments” in the accompanying Condensed Consolidated Financial Statements), including guarantees or standby repurchase obligations, or any relationships with unconsolidated entities or financial partnerships, including entities often referred to as structured finance or special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

From time to time, during the normal course of business, the Company may make certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include, but are not limited to: (i) indemnities to clients, vendors and service providers pertaining to claims based on negligence or willful misconduct and (ii) indemnities involving breach of contract, the accuracy of representations and warranties, or other liabilities assumed by us in certain contracts. In addition, the Company has agreements whereby we will indemnify certain officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, the Company has director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. The Company believes the applicable insurance coverage is generally adequate to cover any estimated potential liability under these indemnification agreements. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments the Company could be obligated to make.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Quantitative and Qualitative Disclosures about Market Risk

Avantair’s primary exposure to market risk results from changes in interest 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 December 31, 2010, the liabilities of Avantair with exposure to interest rate risk were approximately $1.9 million. The Company has not historically used derivative instruments to manage exposure to changes in interest rates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of December 31, 2010, 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, as of December 31, 2010, 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.

 

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Limitations on the Effectiveness of Controls and Other Matters

Management is also 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, disclosure controls and procedures and 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.

Changes to Internal Control over Financial Reporting

In July 2010, the Company began its utilization of Astro Operations Manager application in certain processes which impact financial reporting. Until all required FAA approvals are received, the Company will continue to run the Astro software application parallel with the FlightOps software application. The Company is currently integrating policies, processes and people, for the combined applications. Management will continue to evaluate its internal controls over financial reporting as integration activities are executed.

There has been no change, other than those noted above, in the internal controls over financial reporting during the three months ended December 31, 2010, 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.

 

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Item 1. 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 December 31, 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.

Item 1A. Risk Factors.