UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-K







 ̈
            Annual
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934For the fiscal year ended:
      June 30, 2009




 ̈
              Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
      of 1934For the transition period
      fromto





Commission
File Number 000-51115







Avantair,
Inc.


(Exact
name of registrant as specified in its charter)







Delaware
            
            20-1635240(State
      of incorporation)
            
            (I.R.S.
      Employer I.D. Number)4311
      General Howard Drive
              Clearwater,
      Florida
            
            33762
              (zip
      code)(Address
      of principal executive offices)





727
539 0071


(Registrant’s
telephone number, including area code)







Securities
registered pursuant to Section 12(b) of the Act:


None





Securities
registered pursuant to Section 12(g) of the Act:


Units
consisting of one share of Common Stock, par value $.0001 per share, and two
Warrants


Common
Stock, $.0001 par value per share


Warrants
to purchase shares of Common Stock







Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes   ̈
    No   ̈





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes   ̈
    No   ̈





Note — Checking the box
above will not relieve any registrant required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act from their obligations under those
Sections.





Indicate
by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days.    Yes   ̈
    No   ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes  ̈ No
 ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
Accelerated Filer  ̈    Accelerated
Filer   ̈    Non-Accelerated
Filer   ̈
Smaller reporting company ̈





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange
Act).    Yes   ̈
    No   ̈












As of the
end of the Registrant’s second fiscal quarter, the aggregate market value of the
common stock held by non-affiliates of the Registrant was $11,468,276. For
purposes of this computation, all officers, directors, and 10% beneficial owners
of the registrant are deemed to be affiliates. Such determination should not be
deemed to be an admission that such officers, directors, or 10% beneficial
owners are, in fact, affiliates of the registrant.





As of
September 25, 2009 there were 17,052,166 shares of Common Stock, $.0001 par
value per share, outstanding.





CERTAIN
DEFINITIONS





Unless
the context indicates otherwise, the terms “Avantair”, “the Company”, “we”,
“our” and “us” refer to Avantair, Inc. and, where appropriate, its subsidiary.
The term “Registrant” means Avantair, Inc.





INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS




This Form
10K contains forward-looking statements relating to future events and the future
performance of the Company, including, without limitation, statements regarding
the Company’s expectations, beliefs, intentions or future strategies that are
signified by the words “expects,” “anticipates,” “intends,” “believes,” or
similar language. You should read statements that contain these words carefully
because they:




·
            discuss
      future expectations;


·
            contain
      information which could impact future results of operations or financial
      condition; or


·
            state
      other “forward-looking”
information.




We
believe it is important to communicate our expectations to the Avantair
stockholders. However, there may be events in the future that we are not able to
accurately predict or over which we have no control and which could cause our
actual results to differ materially from the information contained in the
forward-looking statements contained in this document. The risk factors and
cautionary language discussed in this document provide examples of risks,
uncertainties and events that may cause actual results to differ materially from
the expectations described by Avantair in its forward-looking statements,
including among other things:




(1)
            our
      inability to generate sufficient net revenue in the
  future;


(2)
            our
      inability to fund our operations and capital
  expenditures;


(3)
            our
      inability to acquire additional inventory of aircraft from our single
      manufacturer;


(4)
            the
      loss of key personnel;


(5)
            our
      inability to effectively manage our
growth;


(6)
            our
      inability to generate sufficient cash flows to meet our debt service
      obligations;


(7)
            competitive
      conditions in the fractional aircraft
industry;


(8)
            extensive
      government regulation;


(9)
            the
      failure or disruption of our computer, communications or other technology
      systems;


(10)
            increases
      in fuel costs;


(11)
            changing
      economic conditions; and


(12)
            our
      failure to attract and retain qualified pilots and other operations
      personnel.




You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this document.




All
forward-looking statements included herein attributable to Avantair or any
person acting on Avantair’s behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this section. Except to
the extent required by applicable laws and regulations, Avantair undertakes no
obligations to update these forward-looking statements to reflect events or
circumstances after the date of this document or to reflect the occurrence of
unanticipated events.




You
should be aware that the occurrence of the events described in the “Risk
Factors” section and elsewhere in this document could have a material adverse
effect on Avantair.







Table of
Contents




PART
      IItem
      1. Business
              1Item
      1A. Risk Factors
              8Item
      1B. Unresolved Staff Comments
              13Item
      2. Facilities
              13Item
      3. Legal Proceedings
              13Item
      4. Submission of Matters to a Vote of Security Holders
              13PART
      IIItem
      5. Market for Registrant's Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities
              14Item
      6. Selected Financial Data
              16Item
      7. Management's Discussion And Analysis Of Financial Condition And Results
      Of Operations
              17Item
      7A. Quantitative and Qualitative Disclosures about Market
    Risk
              27Item
      8. Financial Statements and Supplementary Data
              27Item
      9. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
              28Item
      9A(T). Controls and Procedures
              28Item
      9B. Other Information
              28PART
      IIIItem
      10. Directors, Executive Officers and Corporate Governance
              29Item
      11. Executive Compensation
              33Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
              40Item
      13. Certain Relationships and Related Transactions and Directors
      Independence
              41Item
      14. Principal Accountant Fees and Services
              42PART
      IVItem
      15. Exhibits and Financial Statement Schedules
              43


i


PART
I





Item 1.
BUSINESS





Overview




Avantair
is engaged in the sale of fractional ownership interests and charter 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 June
30, 2009, Avantair operated 52 aircraft within its fleet, which is comprised of
46 aircraft for fractional ownership, 5 company- owned core aircraft and 1
leased and company- managed aircraft.




Avantair
also operates fixed flight based operations (FBO) in Camarillo, California and
effective August 1, 2008, in Caldwell, New Jersey. Through these FBO’s and its
headquarters in Clearwater, Florida, Avantair provides aircraft maintenance,
concierge and other services to its customers as well as to the Avantair
fleet.




Avantair
generates revenues primarily through the sale of fractional ownership shares of
aircraft, by providing maintenance and management services related to these
aircraft, and from the sale of charter 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 1/16th
ownership interest. Under maintenance and management agreements with fractional
owners, Avantair provides pilots, maintenance, fuel and hangar space for the
aircraft.




In
response to the general economic downturn and the resulting growth of charter
card sales over fractional share sales industry-wide, in January 2009, Avantair
initiated the Axis Club Membership program. This program is designed to bridge
the gap between the financial commitment of a fractional share and charter
cards. This new product offers access to blocks of flight hours for a three year
membership fee of $75,000. The program requires Axis Club members to purchase a
minimum of three 25 hour flight time charter 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 June 30, 2009, Avantair had contractual
commitments to purchase 56 additional Piaggio Avanti II aircraft through 2013.
The total commitment, including a recently proposed price escalation, is valued
at approximately $354.0 million. Our agreement with Piaggio permits the Company
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. The Company expects delivery of 5
aircraft during the remainder of calendar 2009, valued at $30.6 million, which
are anticipated to be utilized to satisfy fleet demands of the growing charter
card and Axis Club Membership Program product lines. At June 30, 2009, the
Company had 36 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.




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,
charter cards and, effective January 2009, Axis Club
Memberships.  Sales by product category follow:




Unit Sales for the Three Months Ended
                      
                      
                      FY 2009
                      
                      
                      FY 2008September 30, 2008
                      
                      
                      December 31, 2008
                      
                      
                      March 31, 2009
                      
                      
                      June 30, 2009
                      
                      
                      Total
                      
                      
                      TotalNew
      Fractional shares
                      
                      
                      19.5
                      
                      
                      
                      16.5
                      
                      
                      
                      -
                      
                      
                      
                      2
                      
                      
                      
                      38
                      
                      
                      
                      139Charter
      cards
                      
                      
                      27
                      
                      
                      
                      53
                      
                      
                      
                      29
                      
                      
                      
                      51
                      
                      
                      
                      160
                      
                      
                      
                      83Axis
      Club Memberships
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      2
                      
                      
                      
                      8
                      
                      
                      
                      10
                      
                      
                      
                      N/A





Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
charter cards and Axis Club Memberships sold. To finance this growth strategy,
the Company may obtain additional funds through equity financing, including the
sale of additional shares of common stock, assets sales, accelerated payments of
maintenance and management fees, debt financing, or a combination thereof. On
June 30, 2009, Avantair sold 567,200 units at a price of $2.50 per unit to
investors in a private placement, generating net proceeds of approximately $1.3
million. (See Recent Developments below.)  The Company is in active
discussions regarding options to secure financing for future aircraft
deliveries, including additional aircraft to satisfy the demand of the growing
charter card product line.  The Company believes that its capital on
hand, as may be augmented by these means to fund future growth, is sufficient to
continue operations for the next twelve months and the foreseeable future
thereafter.




Recent
Developments




The
Company entered into a sale and leaseback agreement, dated August 11, 2006,
with JMMS, LLC (“JMMS”). Under the sale and leaseback agreement, the Company
sold 100.0% of its interest in a core aircraft for $4.2 million and leased back
68.8% of the aircraft for a five year term. The proceeds of the sale and
leaseback arrangement were used to pay down the line of credit with CNM, Inc. In
March 2007, the Company amended the lease agreement to include a provision for
the Company to buy back the aircraft at the expiration of the term. As a result
of the amendment, the Company has accounted for the sale and leaseback
transaction as a finance lease. On March 9, 2009, JMMS notified the Company of
its intention to terminate the sale and leaseback agreement between the parties
entered into on August 11, 2006, effective March 1, 2009, at which date,
pursuant to the agreement, the Company was required to purchase the aircraft at
a cost of no more than the $4.2 million. The Company is currently in
negotiations to obtain financing and pursuing alternative options relating to
the JMMS termination. The closing date of the transaction was initially extended
past March 1, 2009, to June 30, 2009. In consideration for extending the period
to close, the Company made monthly payments for three consecutive months
beginning April 1, 2009 in the amount of $0.2 million. On July 1, 2009, both
parties agreed to extend the closing date to on or before October 31, 2009. In
consideration for such extension, the Company will make two consecutive monthly
payments in the amount of $50,000 beginning on July 1, 2009 and two consecutive
monthly payments in the amount of $0.2 million beginning on September 1, 2009 or
until the closing of the acquisition of the aircraft.  The total
amount of the monthly payments made to JMMS by the Company shall be deducted
from the purchase price on the closing date.


1


On June
30, 2009, Avantair sold 567,200 units at a price of $2.50 per unit to investors
in a private placement, generating net proceeds of approximately $1.3 million.
Each unit consisted of two shares of common stock and one warrant to purchase
one common share. The warrants have an exercise price of $4.00 per share and are
exercisable until June 30, 2012. The sale was consummated under the terms of a
Securities Purchase Agreement between Avantair and each of the investors.
Pursuant to a registration rights agreement, Avantair has agreed to use it best
efforts to register the shares issued to the investors and the shares underlying
the warrants issued to the investors for resale under the Securities Act of
1933, as amended. By agreement between Avantair, the investors in the June 30,
2009 private placement and that offering’s placement agent,
the  period for additional sales of units was extended until October
15, 2009. On September 25, 2009, the Company sold an additional 250,000 units at
a price of $2.50 per unit generating net proceeds of approximately $0.6
million.





On July
15, 2009, the Company entered into a Promissory Note with BRMR, LLC (BRMR) and
Dalewood Associates LP (Dalewood) in the total amount of $1.0 million (with each
of BRMR and Dalewood funding $0.5 million) to cover the costs of a portion of
the unsold inventory of fractional ownership interests in one of its aircraft.
The terms of the note were thirty days at an interest rate of one percent and an
interest rate of two percent through September 14, 2009, the date of repayment.
Pursuant to the terms of this transaction, the Company paid BRMR and Dalewood a
total of a one percent origination fee, as well as provided BRMR with a
twenty-five flight hour charter card.




Industry
Overview




Fractional
aircraft ownership provides customers with the convenience and flexibility of
private air service without the more significant costs associated with sole
ownership of an aircraft. Additionally, fractional aircraft companies generally
provide the same conveniences and benefits to individuals and businesses through
their various charter card programs. Commercial flight delays can be costly and
tiresome, commercial hubs are increasingly crowded, major commercial airports
may be far from final destinations and commercial air travel is increasingly
subject to threats and security-related inconveniences. Attempting to divide the
use of a plane among multiple parties to maximize its value can be logistically
challenging. For businesses and high net worth individuals, fractional ownership
and charter card programs often offer a balance between convenience and
cost.




A
fractional aircraft company assembles a fleet of planes with each of these
planes available for a certain number of revenue generating flight hours per
year. Those hours are then divided into partial ownership shares and these
partial ownership shares are sold to individuals and businesses. Avantair’s
customers typically purchase one-sixteenth or one-eighth shares in an aircraft,
although in some cases the purchases are one-quarter shares or more. The
purchase of a one-eighth share means that the owner will pay approximately
one-eighth of the aircraft retail price initially and receive one-eighth of the
total number hours of flying time per year for the initial term of the contract,
which is five years for a new shareowner. An Avantair fractional share owner
agrees to pay Avantair an additional predetermined monthly fee to cover the
various costs of maintaining and operating the aircraft. Avantair is responsible
for all of these services.




According
to AvData, the North American fractionally owned aircraft fleet has grown from 8
aircraft in 1986 to an aggregate of 849 aircraft as of May 2009, and the number
of fractional share owners has grown to 5,669 in that same period. According to
AvData, five companies have 5.0% or more of the total market for fractional
aircraft, based upon the units in operation - NetJets, Flight Options, FlexJet,
CitationShares, and Avantair, with NetJets having a market share of
approximately 50.0% and Flight Options, FlexJet, CitationShares having a
combined market share of approximately 40.0%. According to AvData, as of May
2009, Avantair had an approximate market share of 10%.




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





·
            price;


·
            availability;


·
            operating
      costs;


·
            reliability;


·
            speed;


·
            range;


·
            cabin
      size and features;


·
            safety
      features and record;


·
            environmental
      impact;


·
            efficiency;


·
            maintenance
      cost;


·
            manufacturer;
      and


·
            runway
      requirements.


2


Some of
Avantair’s principal competitors are wholly or partially owned by aircraft
manufacturers and/or their affiliated parent companies, which have resulted in
their fleets being largely comprised of aircraft built by their respective
parent companies. Although Avantair operates exclusively one aircraft type, the
Company is not owned by any manufacturer, giving it a greater level of
flexibility than most of its competitors.




Fractional
operators must have sufficient numbers of aircraft in the fleet to provide the
service required. Since fractional share buyers desire to enter the program as
soon as possible after purchasing shares, operators are obligated to provide
access to aircraft when the shareowner requests it. If the operator does not
have ample capacity available, it must charter that capacity, a practice that
can be very costly.  As a result, fractional operators tend to place
orders for aircraft in advance, and only sell shares within a few weeks prior to
taking delivery of the aircraft.  Fractional operators may also offer
various charter card programs, which provide a certain number of flight hours to
be used during a specific period of time, generally one year.  The
charter card programs subject the fractional operators to similar capacity
requirements as fractional shareowners.




The
capital requirements for ordering aircraft require the operator to place
deposits well in advance of receiving its planes. Progress payments are made as
certain milestones are achieved. The amounts of the deposits and progress
payments are a function of several factors including the price of the underlying
plane, the creditworthiness of the buyer, and the time until delivery. The
majority of the payments are generally made upon
delivery.




How Avantair’s Fractional Ownership
Program Works




Each of
Avantair’s current aircraft is available to fractional owners for a total of 800
flight hours per year. Those hours are then divided into blocks of ownership,
beginning at fifty hours per year (a one-sixteenth share of the aircraft), and
these partial ownership shares are sold to buyers. A share of an aircraft
currently can be purchased from Avantair starting at $425,000 for a
one-sixteenth share. Purchase prices for larger interests are slightly
discounted. Each fractional owner must enter into a Management and Dry Lease
Exchange Agreement with Avantair as part of the purchase of shares in an
Avantair aircraft. A monthly maintenance and management fee, currently $9,650,
is assessed per 1/16th share owned. This fee covers any direct costs in
operating and maintaining the aircraft, other than fuel surcharges which are
based on actual aircraft usage. This is unlike most other fractional programs,
which generally charge fractional owners an occupied hourly rate for use of the
aircraft. All programs have fuel surcharges, but due to the efficiency of the
Avanti and the way Avantair calculates its management fee, Avantair’s surcharges
tend to be less than those charged by its competitors. Any landing fees, excess
catering fees, applicable international fees and taxes are billed to the owner.
Monthly fees are adjusted upwards on each anniversary date by the greater of
either the current Consumer Price Index or 3.75%, but will not exceed the
then-current rate offered to new share owners.




Each
fractional owner is allocated a certain number of flight hours per year based on
the size of their ownership share. The owner may exceed the number of annual
allocated hours by up to 20.0%, to the extent that the owner did not use all of
their allocated hours in the prior year and/or as an advance use of the next
year’s allocated hours.




Each
share owner owns an “undivided interest” that cannot be affected or encumbered
by the financial actions of other owners. In order to avoid scheduling
conflicts, each share owner throughout Avantair’s fleet agrees to exchange use
of such owner’s airplane with the other share owners in the fleet. Avantair must
move planes to the necessary destinations to meet the fractional owners’ needs.
Avantair keeps a certain number of core aircraft in the fleet in order to have
enough planes to meet demand.




Aircraft
Usage and Scheduling





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





For all
flights outside of the Primary Service Area, which varies by program and is
comprised of the continental United States, as well as certain airports in
geographic locations such as the Bahamas, Canada, Mexico and the Carribbean,
fractional owners must request an aircraft at least 7 days prior to the
scheduled date of the first leg of the trip. All such requests are completed,
provided that, for each such request, the fractional owner has provided
sufficient information regarding the trip to enable Avantair to schedule the
trip.




The
Avantair Card Program




In 2006,
Avantair introduced a card program that allows a purchaser to access Avantair’s
aircraft for 15 or 25 hours of flight time without the requirement to purchase
ownership shares in an aircraft. The card holder purchases the entire card
amount in advance and receives the same service as a fractional owner. After the
card holder has exhausted the hours purchased, the holder has no further
obligations to Avantair. The program offers an alternative to fractional
ownership for individuals and businesses seeking to experience private aircraft
travel. Avantair’s management considers its card program to be an effective
means of introducing potential purchasers to its fractional ownership program.
Avantair’s card program currently is priced at $105,000 for a 25 hour card.
Additionally, Avantair created an introductory 25 hour card for a first charter
card purchaser currently at a rate of $95,000.




The
Axis Club Membership Program




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


3


Chartering




Whenever
possible, Avantair will schedule an aircraft from its fleet for each request for
use by a fractional owner. In the event that none of Avantair’s aircraft are
available, Avantair will charter a comparable aircraft for use by the owner,
provided that the fractional owner has complied with all applicable notice
requirements and all other program provisions. Avantair will only charter
aircraft that satisfy the Aviation Research Group US (ARG/US) Gold or Platinum
rating.




Expiration
of the Program




Upon the
expiration of the term of Avantair’s agreement with a fractional owner, the
owner shall have the option to (i) sell the owner’s interest in the aircraft and
cease to participate in the Avantair program, (ii) sell their interest and
purchase an interest in another aircraft that participates or will participate
in the Avantair program or (iii) retain their interest and renew their
participation in the program.




Sales
and Marketing




Avantair
targets customers based on demographic data, including net worth, household
income, job title and age.





Avantair
uses a variety of methods to market and advertise its various programs,
including print advertising, direct mail, trade events, web site and online and
referral incentives. In fiscal 2009, approximately half of Avantair’s marketing
budget was allocated to print advertising. Advertising placement is based on
historical data, demographics and competitive analysis.




Avantair’s
direct mail advertising consists of several mailings and e-mailings per year to
targeted prospective customers. Avantair also participates in live events,
including aircraft display events at fixed base operators attended by owners and
prospective owners. The events are targeted geographically and costs are often
shared with the aircraft manufacturer to reduce the cost to
Avantair.




As part
of its marketing, Avantair maintains a web site at www.avantair.com. All of
Avantair’s collateral and print marketing materials, direct mail, email and
video materials direct prospective buyers to its web site.




Public
relations efforts are driven by editorial opportunities and news pitches to key
editors. Recent editorial placements include magazines such as Robb Report,
Forbes and Business Jet Traveler, as well as travel and aircraft industry
publications. An owner electronic newsletter, Contrails, is published quarterly
with pertinent news, purchase reinforcement and any new programs.




An
important element of Avantair’s marketing strategy is referral incentives.
Approximately 30.0% of new share sales during 2005 and 2006 have been generated
from referrals from existing share owners. Approximately 40.0% of new share
sales during 2007 and 2008 have been generated from referrals from existing
share owners. Approximately 70.0% of new share sales during 2009 have been
generated from referrals from existing share owners. Under Avantair’s referral
incentive program, a fractional owner who refers a customer to Avantair receives
a choice, dependent on the number of referrals, of additional allocated hours of
flight time or items such as a Vespa or motorcycle.





One
internal measurement used to assess future sales is leads generated by both the
sales force and the other marketing methods described above. The number of
Avantair’s sales leads has nearly doubled over the past year. While many leads
do not turn into sales, they provide the basis for future sales. Another
important indicator is demonstration flights. A very high percentage of
potential buyers of shares will request a demonstration flight on one or more
aircraft types and on one or more products from different fractional operators.
Avantair’s demonstration flights cost the potential buyer approximately $4,000
per hour, with the price charged deducted from the purchase only in the event
that a share or shares are ultimately purchased.




Avantair’s
sales department is comprised of a senior executive vice president of sales and
marketing, vice president of sales, regional sales directors and regional sales
managers supported by a sales department and a marketing department. Avantair’s
sales staff is compensated with a base salary plus commissions.




Fleet
and Geographic Scope




As of
June 30, 2009, Avantair operated 52 aircraft within its fleet which is comprised
of: 46 aircraft for fractional ownership; 5 company- owned core aircraft and 1
leased and company- managed aircraft.




At June 30, 2009, Avantair had 56
additional Piaggio aircraft on order. Currently, all of the fractional aircraft
in Avantair’s fleet are Piaggio Avanti P-180 turboprops. In addition, on October
17, 2006, Avantair announced orders for 20 Embraer Phenom 100 aircraft. The
Phenom 100 is in the Very Light Jet category of business jets, with the largest
cabin in the category. On June 20, 2008, Avantair assigned its rights and
obligations to the purchase agreement for the purchase of these 20 Embraer
Phenom 100 aircraft to a wholly owned subsidiary, called Share 100 Holding Co.,
LLC. On the same date, Avantair sold 100 percent of the Class A membership
interest of the LLC, with the rights and obligations to 18 of the 20 aircraft,
to a third party called Executive AirShares Corporation; Avantair retains the
Class B membership interest of the LLC, with the rights and obligations to
purchase aircraft 19 and 20. If Executive AirShares Corporation defaults under
its obligations as a Class A member of the LLC, Avantair will then be
responsible for the rights and obligations of the remaining undelivered aircraft
..




Avantair
has focused its sales efforts to date on a national basis. A fractional owner is
entitled to board a plane at the location of his/her choosing. The costs of
moving a plane, or repositioning it, are borne by Avantair. These costs have
been very significant due to fuel, pilots and crew and maintenance costs arising
from increased overall usage of the aircraft. As the number of planes in
Avantair’s fleet increases, Avantair believes that the relative amount of
repositioning should decline. As the size of Avantair’s fleet reaches a critical
mass, aircraft will be positioned in strategic locations based on travel
patterns. Those locations are frequently determined through the usage of a
software optimization program. In addition, Avantair incurs costs associated
with pilots and crew, such as transportation to flight departure locations, per
diems, meals and hotel expenses. As Avantair’s fleet expands, crews will be
domiciled in cities frequented by fractional owner and charter card holder
flights. This presents an opportunity for Avantair to leverage more favorable
discounts for air and hotel due to volume, as well as making more efficient use
of pilot and crew work hours.


4


Avantair
believes that operating a very limited number of aircraft models provides it
with cost and operating advantages relative to other fractional aircraft
operators that may operate as many as 24 different aircraft models. Among
the advantages of operating a limited number of aircraft models
are:




·
            Maintenance – Reduces
      costs of repair and maintenance by enabling nearly every member of
      Avantair’s maintenance staff to service all of its aircraft, plus reduced
      repositioning of an aircraft results in fewer flight hours and therefore
      less frequent maintenance;


·
            Pilot Training - Pilots
      need to be certified for a given aircraft model, therefore the operation
      of a limited number of models means that nearly all employed pilots are
      available to operate any aircraft in the
fleet.


·
            Inventory— Fewer parts
      need to be inventoried which reduces the overall cost of inventory. Due to
      the uniformity of the fleet, Avantair is exposed to lower capital
      investment and inventory due to interchangeability of parts and the
      greater ease of troubleshooting.




Avantair
is the sole fleet provider of the Piaggio Avanti P-180 aircraft in North
America. The Piaggio Avanti has a unique design that uses forward wing
technology which the Company believes allows it to both provide the fastest
speed of any turboprop and yet have an unusually large cabin relative to
aircraft in its category. The Piaggio Avanti also compares favorably to light
jets as the Piaggio Avanti has the lowest fuel usage in the category. This
aircraft also allows access to a greater number of airports than most of the
jets in its category since it has the capability to land on shorter
runways.




The
Piaggio Avanti has several very attractive features such as:





·
            Stand-up Cabin– A
      stand-up cabin and a private lavatory, which is unique in its
      category.


·
            Flying Capacity–
      Ability to fly 1,300 nautical miles with five passengers, luggage and a
      full fuel load.


·
            Speed– Fastest
      turboprop manufactured, with jet-like speed of 458
  mph.


·
            Runway capability–
      Ability to land on shorter runways allowing access to a greater number of
      airports.


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


·
            Safety– Since its
      introduction in 1989, there has not been a fatal accident involving a
      Piaggio Avanti P-180. In addition, the Avanti’s wing design reduces the
      effects of turbulence and its de-icing system reduces the impact of
      inclement weather on aircraft
operation.




The
pricing structure afforded by utilizing the Piaggio Avanti allows Avantair to
attract a customer desiring quality at a lower price point. Offering the cabin
cross section of a mid-size aircraft and fuel efficiency of a turboprop, along
with no hourly fees, allows Avantair to lower the cost of private air travel for
a broader range of consumers.




Flight
Operations




Avantair’s
Operations Control Center is made up of four departments that all play a role in
an Avantair program participants trip from the first phone call to completion of
the trip at the final destination:




·
            Owner
      Services


·
            Pilot
      Services


·
            Flight
      Specialists


·
            Flight
      Following




After a
purchase with Avantair in one of our various programs, an owner is assigned an
Owner Services team. This team assists the owner in scheduling flights and
making necessary arrangements based on the owner’s flight requirements,
including coordinating with Avantair’s Operations Control Center.




The
flight scheduling process begins when an owner contacts the owner’s Owner
Services team. When an owner contacts Avantair to schedule a flight, an assigned
Owner Services team member handles the request. The team member will ask for all
details of the proposed trip, including airport of departure and arrival as well
as fixed base operation preference. This department also handles any ground
transportation and/or catering orders.




The trip
request is subject to an approval process with the Flight Specialist. After
approval, the trip is entered into Avantair’s FlightOps computer system by Owner
Services. The trip request is then delivered to the owner for approval. This is
used as a quality control so that Avantair is sure it has all the correct
details of the owner’s trip. After a signed confirmation is received from the
owner, Owner Services will confirm this trip reservation in FlightOps. The night
before and the morning of the trip, Owner Services reconfirms all ground and/or
catering requests for quality control.




The day
before the trip, the flights will be assigned to an Avantair aircraft by the
Flight Specialist. The Flight Specialist then confirms the availability and
location of the aircraft for the next day in an effort to ensure that the owner
gets the optimal schedule with the least amount of repositioning time. This
confirmation process also takes into consideration the crew duty, rest and
flight time regulations.


5


The job
of Pilot Services is to schedule pilots for flights and arrange accommodations
for pilots away from their base of operations. Pilot Services is also
responsible for the crew scheduling of all aircraft.




Flight
Following tracks all current flights that are in progress through direct contact
with the crew and through FlightOps. Flight Following monitors weather
conditions and other situations which may lead to delays, and works with the
flight crews and the Operations Control Center to resolve delays as quickly as
possible.




Pilot
Hiring and Training




Avantair
selects and hires pilots based on a detailed screening process, including
interviews, assessments of the candidate’s knowledge of Avantair’s aircraft,
applicable regulations and flight skills, and background checks. All pilots are
initially hired into first officer positions. Minimum requirements for initial
hires include:




·
            2,500
      hours of total flight time;


·
            1,000
      multi-engine flight hours; and


·
            250
      flight hours within the previous 12
months.




All
pilots must complete FAA required and approved ground and flight training prior
to flying any flight leg for any of Avantair’s fractional owners. Further, all
of Avantair’s pilots must fulfill ongoing training requirements. Avantair’s
pilots have an average of over 6,200 hours of total flight time.




Aircraft
Maintenance





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





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





Competition




Avantair
faces competition from other fractional aircraft operations. Avantair’s primary
competitors are NetJets, a subsidiary of Berkshire Hathaway, Flight Options,
FlexJet, a Bombardier subsidiary, and CitationShares, which is 75% owned by
Cessna, a wholly-owned Textron subsidiary. None of these competitors are
stand-alone entities like Avantair and all of these competitors are
significantly larger than Avantair and with more resources. Some of these
companies are subsidiaries of business jet manufacturers, which Avantair’s
management believes may hamper their flexibility in purchasing aircraft.
According to AvData, five companies have 5% or more of the total market for
fractional aircraft, based upon the units in operation – NetJets, Flight
Options, FlexJet, CitationShares, and Avantair, with NetJets having a market
share of approximately 50% and Flight Options, FlexJet, and CitationShares
having a combined market share of approximately 40%. According to AvData, as of
May 2009, Avantair had an approximate market share of 10%.




Avantair
and other fractional airlines also face competition from charter airlines, air
taxis and commercial airlines. Some of these competitors offer greater selection
of aircraft (including jet aircraft), some of which permit owners to fly greater
distances or at greater speeds, travel with a greater number of passengers and
on shorter advance notice before flying.




Avantair’s
management believes that fractional and charter card aircraft operators compete
on the basis of aircraft model and features, price, customer service and
scheduling flexibility. Avantair’s management believes that customers are
generally willing to continue to use the same aircraft operator so long as such
operator provides satisfactory service with competitive pricing. Avantair’s
management believes that the quality of its aircraft and service, and the value
it provides to its customers, enables it to compete effectively against its
larger competitors.




Information
Technology




Avantair’s
core software application, FlightOps, is designed, developed, and licensed by
Bitwise Solutions, Inc. for use in Avantair’s Operations Control Center to plan,
schedule and track fractional owner trips as well as manage its fleet. FlightOps
uses Oracle as its database server.




Avantair
has invested in an efficient high-performance computing environment that
includes Dell PowerEdge servers with the latest commercially available
Windows-based operating system. In addition, Avantair has approximately 100
Fujitsu Tablet PCs that are used as part of its pilots’ Electronic Flight Bag.
These PCs are equipped with core software applications that include navigational
aids, flight charts, and aircraft manuals.


6


Avantair
currently has two agreements with Application Services Providers:




·
            Salesforce
      – Customer Relationship Management Sales Force Automation;
    and


·
            Corridor
      – Enterprise Resource Management Aviation Service Software (Maintenance,
      Inventory and FBOs).




Government
and Other Regulations





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





The FAA
also has authority to issue air carrier operating certificates and aircraft
airworthiness certificates and regulate pilot and other employee training, among
other responsibilities. Avantair’s management of fractional aircraft is
regulated by the FAA under Part 91, subpart K of the Federal Aviation
Regulations (“FARs”), and the FAA has issued Management Specifications
reflecting Avantair’s authority to manage such aircraft. In some cases,
including all current international operations, the FAA deems Avantair to
transport persons or property by air for compensation. Such “charter” operations
are regulated under Part 135 of the FARs, and Avantair’s authority to conduct
those operations is reflected in an Air Carrier Operating Certificate with
operating specifications. Both types of FAA authority potentially are subject to
amendment, suspension or revocation. From time to time, the FAA issues rules
that require aircraft operators to take certain actions, such as the inspection
or modification of aircraft and other equipment.




Avantair’s
charter operations under Part 135 also are subject to economic regulation by the
U.S. Department of Transportation (“DOT”). To retain its DOT registration as an
air taxi, Avantair must remain a U.S. citizen; that is, U.S. citizens must
actually control Avantair, at least 75% of Avantair’s outstanding voting stock
must be owned and controlled by U.S. citizens, and the President and two-thirds
of the directors and other managing officers must be U.S. citizens. Avantair’s
organizational documents provide for the automatic reduction in voting power of
common stock owned or controlled by non-U.S. citizens if necessary to maintain
U.S. citizenship. If Avantair cannot maintain its U.S. citizenship, it would
lose its ability to conduct its charter operations (though not its fractional
program manager operations).




Aircraft
operators also are subject to various other federal, state and local laws and
regulations. The Department of Homeland Security (“DHS”) has jurisdiction over
virtually all aspects of civil aviation security and arrivals into and
departures from the United States. Avantair is also subject to inquiries by DOT,
the FAA, and other U.S. and international regulatory bodies.




Environmental
Regulation




Many
aspects of Avantair’s operations also are subject to increasingly stringent
federal, state, local and foreign laws and regulations protecting the
environment concerning emissions to the air, discharges to surface and
subsurface waters, safe drinking water, and the management of hazardous
substances, oils, and waste materials. Future regulatory developments in the
U.S. and abroad could require aircraft operators to take additional action to
maintain compliance with applicable laws. For example, potential future actions
that may be taken by the U.S. government, foreign governments, or the
International Civil Aviation Organization to limit the emission of greenhouse
gases by the aviation sector are unknown at this time but could require
significant action from aircraft operators in the future.




Avantair
is also subject to other environmental laws and regulations, including those
that require it to remediate soil or groundwater to meet certain objectives.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act (commonly known as “Superfund”) and similar environmental cleanup
laws, generators of waste materials, and owners or operators of facilities, can
be subject to liability for investigation and remediation costs at facilities
that have been identified as requiring response actions. Certain operations of
Avantair are also subject to the oversight of the Occupational Safety and Health
Administration (OSHA) concerning employee safety and health matters. Avantair
also conducts voluntary remediation actions. Environmental cleanup obligations
can arise from, among other circumstances, the operation of fueling facilities,
and primarily involve airport sites. Future costs associated with these
activities are not expected to have a material adverse effect on Avantair’s
business.




Risk
of Loss and Liability Insurance




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




Employees




As of
June 30, 2009, Avantair had approximately 445 full-time employees, 40 of whom
were management and 405 of whom were operational. Avantair believes that it has
good relations with its employees.


7


Item 1A.
RISK FACTORS





You
should carefully consider the risks described below before making a decision to
buy our common stock. If any of the following risks actually occurs, our
business, financial condition and results of operations could be harmed. In that
case, the trading price of our common stock could decline and you might lose all
or part of your investment in our common stock. You should also refer to the
other information set forth in this Annual Report on Form 10-K, including our
financial statements and the related notes.





Risks
Related to Our Business




Avantair
has a history of losses and may not be able to generate sufficient net revenue
from its business in the future to achieve or sustain
profitability.




Avantair
has incurred losses since inception. To date, Avantair’s revenues have largely
come from sales of fractional interests and charter cards in aircraft and
monthly management fees. Avantair’s primary expenses - cost of aircraft, cost of
flight operations and overhead - have increased over the past several years and
significantly exceeded revenues. Avantair’s consolidated financial statements
have been prepared assuming that Avantair will continue as a going concern. This
basis of accounting contemplates the recovery of the Company’s assets and the
satisfaction of its liabilities in the normal course of business. Successful
transition to profitable operations is dependent upon obtaining a level of sales
adequate to support the Company’s cost structure and an uninterrupted delivery
of aircraft. The Company has suffered recurring losses resulting in an
accumulated deficit of approximately $81.4 million and a working capital
deficiency of $49.2 million as of June 30, 2009 and an accumulated deficit of
$77.0 million and a working capital deficiency of $30.2 million as of June 30,
2008. Historically, the Company has been able to finance operations from the
capital obtained through the Reverse Merger which was completed on February 22,
2007 and the capital obtained through the November 2007 private placement of
Series A Convertible Preferred Stock which raised gross proceeds of $15.2 and
the June and September 2009 private placements of Common Stock which raised
gross proceeds of $1.4 and $0.6 million, respectively. Management intends to
continue to finance the operations of the Company through future cash flows from
operations and future financings. However, Avantair’s expenses are expected to
increase as it acquires additional aircraft and expands its operations, and
there is no assurance that Avantair will be able to obtain sufficient financing
(or financing on acceptable terms) or earn sufficient revenues to generate
positive cash flow and attain profitability.




If
Avantair is unable to fund its operations and capital expenditures, Avantair may
not be able to continue to acquire additional inventory of aircraft, which would
have a material adverse effect on its business.




Avantair
has experienced significant negative cash flow since its inception. In order to
fund Avantair’s operations and capital expenditures, Avantair may be required to
incur borrowings or raise capital through the sale of debt or equity securities.
The Company’s ability to borrow or access the capital markets for future
offerings may be limited by its financial condition at the time of any such
offering as well as by adverse market conditions resulting from, among other
things, general economic conditions and contingencies and uncertainties that are
beyond our control. Avantair’s failure to obtain the funds for necessary future
capital expenditures would limit its ability to acquire additional inventory of
aircraft and could have a material adverse effect on our business, results of
operations and financial condition.




Avantair
is dependent upon key personnel whose loss may adversely impact Avantair’s
business.




Avantair
depends on the expertise, experience and continued services of its senior
management employees, especially Steven Santo, its Chief Executive Officer
(CEO), Richard Pytak, its Chief Financial Officer (CFO) and Kevin Beitzel, its
Chief Operating Officer (COO). Mr. Santo has acquired specialized knowledge and
skills with respect to Avantair and its operations and most decisions concerning
the business of Avantair will be made or significantly influenced by him.
Avantair does not maintain life insurance with respect to Messrs. Santo, Pytak
or Beitzel or any other of its executives. The loss of Messrs. Santo, Pytak,
Beitzel or other senior management employees, or an inability to attract or
retain other key individuals, could materially adversely affect the Company. The
Company seeks to compensate and incentivize its key executives, as well as other
employees, through competitive salaries and bonus plans, but there can be no
assurance that these programs will allow Avantair to retain key or hire new
employees. As a result, if Messrs. Santo, Pytak and/or Beitzel were to leave
Avantair, the Company could face substantial difficulty in hiring qualified
successors and could experience a loss in productivity while any such successors
obtain the necessary training and experience. On September 29, 2006, Avantair
entered into a three year employment agreement with Mr. Santo which will expire
in September 2009. On September 24, 2009, Avantair entered into a new three-
year employment agreement effective that same day. However, there can be no
assurance that a successor employment agreement will be entered into with Mr.
Santo or that the terms of this employment agreement will be sufficient to
retain Mr. Santo.




Avantair’s
management systems and personnel may not be sufficient to effectively manage its
growth.





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




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


8


Expansion
of Avantair’s business will also strain its existing management resources and
operational, financial and management information systems to the point that they
may no longer be adequate to support its operations, requiring Avantair to make
significant expenditures in these areas. Avantair will need to develop further
financial, operational and management reporting systems and procedures to
accommodate future growth and reporting requirements (including pursuant to
applicable securities laws). There can be no assurance that Avantair will be
able to develop such additional systems or procedures to accommodate its future
expansion on a timely basis, and the failure to do so could harm its
business.




The
aviation industry has inherent operational risks that may not be adequately
covered by Avantair’s insurance.




Avantair
maintains insurance on its aircraft for risks commonly insured against by
aircraft owners and operators, including hull physical damage liability,
third-party liability, airport premises liability, war risk liability and ground
hangar keepers’ liability coverage. Avantair can give no assurance that Avantair
will be adequately insured against all risks or that its insurers will pay a
particular claim. Even if its insurance coverage is adequate to cover its
losses, Avantair may not be able to timely obtain a replacement aircraft in the
event of a loss. Furthermore, in the future, Avantair may not be able to obtain
adequate insurance coverage at reasonable rates for its fleet. Avantair’s
insurance policies will also contain deductibles, limitations and exclusions
which, although the Company believes that such policies are standard in the
aviation industry, may nevertheless increase its costs. Moreover, certain
accidents or other occurrences may result in intangible damages (such as damages
to reputation) for which insurance may not provide an adequate
remedy.




Avantair
may not be able to generate sufficient cash flows to meet its debt service
obligations or other financial obligations.




Avantair’s
ability to make payments on its indebtedness and acquire additional aircraft
will depend on its ability to generate cash from its future operations. As of
June 30, 2009 and June 30, 2008, Avantair had incurred an aggregate of
approximately $42.6 and $46.3 million, respectively, in short and long term
indebtedness to third party lenders. Much of this indebtedness is secured by
some or all of Avantair’s assets. In addition, as of June 30, 2009, the Company
has commitments valued at $354.0 million to purchase 56 additional aircraft
through 2013. Avantair’s business may not generate sufficient cash flow from
operations or from other sources sufficient to enable it to repay its
indebtedness and to fund its other liquidity needs, including capital
expenditure and aircraft acquisition requirements. Avantair may need to
refinance or restructure all or a portion of its indebtedness or other financial
obligations on or before maturity. Avantair may not be able to refinance any of
its indebtedness on commercially reasonable terms, or at all. If Avantair cannot
service or refinance its indebtedness or restructure its other financial
obligations, it may have to take actions such as selling assets, seeking
additional equity or reducing or delaying capital expenditures, any of which
could have a material adverse effect on our operations. Additionally, Avantair
may not be able to effect such actions, if necessary, on commercially reasonable
terms, or at all.




A
default under Avantair’s indebtedness may have a material adverse effect on
Avantair’s financial condition.




In the
event of a default under certain of Avantair’s indebtedness, the holders of the
indebtedness generally would be able to declare all of such indebtedness,
together with accrued interest, to be due and payable. In addition, borrowings
under certain of Avantair’s indebtedness are secured by a first priority lien on
all of its assets, and, in the event of a default, the lenders generally would
be entitled to seize the collateral. In addition, default under certain debt
instruments could in turn permit lenders under other debt instruments to declare
borrowings outstanding under those other instruments to be due and payable
pursuant to cross default clauses. Accordingly, the occurrence of a default
under any debt instrument, unless cured or waived, would likely have a material
adverse effect on Avantair’s business and Avantair’s results of
operations.




Avantair’s
loan agreements contain restrictive covenants that will limit Avantair’s
liquidity and corporate activities.





Avantair’s
loan agreements impose operating and financial restrictions that will limit
Avantair’s ability to:




·
            create
      additional liens on its assets;


·
            make
      investments;


·
            engage
      in mergers or acquisitions;


·
            pay
      dividends; and


·
            sell
      any of Avantair’s aircraft or any other assets outside the ordinary course
      of business.




Therefore,
Avantair will need to seek permission from its lenders in order for Avantair to
engage in some corporate actions. Avantair’s lenders’ interests may be different
from those of Avantair, and no assurance can be given that Avantair will be able
to obtain its lenders’ permission when needed. This may prevent Avantair from
taking actions that are in its best interest.




Avantair’s
dependence on Piaggio Avanti aircraft manufacturers poses a significant risk to
its business and prospects.




Avantair
has historically sold and flown only Piaggio Avanti aircraft. The type of
aircraft sold and operated by Avantair is the product of a single manufacturer.
If the Piaggio Avanti manufacturers faced production delays due to, for example,
natural disasters or labor strikes, Avantair may experience a significant delay
in the delivery of previously ordered aircraft, which would adversely affect its
revenues and profitability and could jeopardize its ability to meet the demands
of its customers. Avantair has limited alternatives to find alternate sources of
new aircraft.




Avantair’s
dependence on the importation of foreign aircraft poses a significant risk to
its business prospects.




Avantair’s
revenue and profitability are based in part on current laws and regulations
regarding the exportation from the country of manufacture and importation into
the United States of the aircraft. Current laws and regulations do not preclude
the exportation from the subject manufacturers’ countries of operation or
importation of the aircraft into the United States, provided that all applicable
statutory and regulatory requirements are satisfied. Modification of such
statutes and regulations by any foreign government or any agency thereof with
respect to the exportation of the aircraft or modification of such statutes and
regulations by the federal government of the United States or any agency thereof
affecting the importation of the aircraft, could pose a significant risk to
Avantair’s business operations. The risks for Avantair associated with the
modification of the exportation and importation statutes and regulations are
increased due to Avantair’s current dependence on the importation of foreign
aircraft for the operation of its business.


9


Avantair’s
reputation and financial results could be harmed in the event of an accident or
incident involving its aircraft, or aircraft of the same type.




An
accident or incident involving one of Avantair’s aircraft could involve
significant potential claims of injured passengers or others in addition to
repair or replacement of a damaged aircraft and its consequential temporary or
permanent loss from service. Although Avantair believes it currently maintains
liability insurance in amounts and of the type generally consistent with
industry practice, the amount of such coverage may not be adequate and Avantair
may be forced to bear substantial losses from an accident. Substantial claims
resulting from an accident in excess of Avantair’s related insurance coverage
would harm its business and financial results. Moreover, any aircraft accident
or incident, even if fully insured, could cause a public perception that
Avantair or the Piaggio Avanti aircraft is less safe or reliable than other
competitors, which would harm Avantair’s business. In addition, any accident
involving the Piaggio Avanti aircraft type, even if the aircraft involved is not
operated by Avantair, could also cause a public perception that Avantair or the
Piaggio Avanti aircraft is less safe or reliable than other competitors, which
would harm Avantair’s business.




The
fractional aircraft industry is competitive.




Avantair
competes with national airlines, regional airlines, charter carriers, other
fractional aircraft ownership operators, and particularly on shorter routes,
ground transportation. According to AvData, five companies have 5% or more of
the total market for fractional aircraft, based upon the units in operation -
NetJets, Flight Options, FlexJet, CitationShares, and Avantair, with NetJets
having a market share of approximately 50% and Flight Options, FlexJet,
CitationShares having a combined market share of approximately 40%. According to
AvData, as of May 2009, Avantair had an approximate market share of 10%. Many of
Avantair’s competitors have been in business far longer than Avantair and have
significantly greater financial stability, access to capital markets and name
recognition. In addition, some of our competitors offer a greater selection of
aircraft (including jet aircraft), some of which permit owners to fly greater
distances or at greater speeds, travel with a greater number of passengers and
on shorter advance notice before flying. Unanticipated shortfalls in expected
revenues as a result of price competition or in delivery delays by suppliers
would negatively impact our financial results and harm Avantair’s business.
There is no assurance that Avantair will be able to successfully compete in this
industry.




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





In some
cases, including all current international operations, Avantair is deemed to
transport persons or property by air for compensation, and Avantair accordingly
is regulated by the FAA and the U.S. Department of Transportation as an on
demand air carrier. Therefore, to comply with restrictions imposed by U.S.
aviation laws on foreign ownership of air carriers, the Company’s certificate of
incorporation and bylaws have been amended to reflect that at least 75% of its
voting stock is required to be held by U.S. citizens. Although Avantair’s
amended and restated certificate of incorporation contains provisions limiting
non-citizen ownership of its voting stock, Avantair could lose its operating
certificate, which allows it to conduct aircraft operations in the U.S., if such
provisions prove unsuccessful in maintaining the required level of citizen
ownership. Such loss would have a material adverse effect on Avantair. If
Avantair determines that persons who are not citizens of the U.S. own more than
the permitted percentage, currently 25%, of Avantair’s voting stock, Avantair
may redeem such stock or, if redemption is not permitted by applicable law or
Avantair’s Board of Directors, in its discretion, elects not to make such
redemption, the Company may restrict the voting rights of such excess shares.
The required redemption would be at a price equal to the average closing price
during the preceding 10 trading days, which price could be materially different
from the current price of the common stock, or at a price at which the
non-citizen acquired the voting stock, or at a price equal to the fair market
value as determined by Avantair’s Board of Directors, plus the amounts of any
dividends or other distributions which may be owed to the stockholder. If a
non-citizen purchases the voting stock, there can be no assurance that their
stock will not be redeemed, which redemption could result in a material loss, or
that they will be able to exercise full voting rights with respect to such
voting stock. Such restrictions and redemption rights may make Avantair’s equity
securities less attractive to potential investors, which may result in
Avantair’s publicly traded voting stock having a lower market price than it
might have in the absence of such restrictions and redemption
rights.




Future
acquisitions of fixed base operations (“FBO”) businesses or other assets by
Avantair would subject Avantair to additional business, operating and industry
risks, the impact of which cannot presently be evaluated, and could adversely
impact Avantair’s capital structure.




In the
future, Avantair may intend to pursue other acquisition opportunities to the
extent reasonably feasible. While Avantair is not presently committed to any
additional acquisition, it may in the future consider acquisitions of other
types of businesses. Acquisitions may be of fixed base operations businesses,
operations in the aircraft industry or other businesses that may be
complementary to Avantair’s business. In addition, Avantair is not limited to
any particular industry or type of business for potential acquisitions.
Accordingly, there is no current basis to evaluate the possible merits or risks
of the particular business or assets that Avantair may acquire, or of the
industry in which such business operates. If Avantair acquires a business in an
industry characterized by a high level of risk, it may be affected by the
currently unascertainable risks of that industry. Although Avantair’s management
will endeavor to evaluate the risks inherent in a particular industry or target
business, there can be no assurance that Avantair will properly ascertain or
assess all of the significant risk factors.




In
addition, the financing of any acquisition could adversely impact Avantair’s
capital structure as any such financing would likely include the issuance of
additional equity securities and/or the borrowing of funds. The issuance of
additional equity securities may significantly reduce the equity interest of
existing stockholders and/or adversely affect prevailing market prices for
Avantair’s common stock. If Avantair incurs indebtedness, it could increase the
risk of a default that would entitle the holder to declare such indebtedness due
and payable and/or to seize any collateral securing the indebtedness. In
addition, default under one debt instrument could in turn permit lenders under
other debt instruments to declare borrowings outstanding under those other
instruments to be due and payable pursuant to cross default clauses.
Accordingly, the financing of future acquisitions could adversely impact the
capital structure and equity interest in Avantair.


10


Except as
required by law or the rules of any securities exchange on which Avantair’s
securities might be listed at the time Avantair seeks to consummate an
acquisition, shareholders will not be asked to vote on any proposed acquisition
and will not be entitled to exercise conversion rights in connection with any
such acquisition.




Avantair’s
business is subject to extensive government regulation, which can result in
increased costs, delays, limits on its operating flexibility and competitive
disadvantages.




Commercial
aircraft operators are subject to extensive regulatory requirements. Many of
these requirements result in significant costs. For example, the Federal
Aviation Administration (FAA) from time to time issues directives and other
regulations relating to the maintenance and operation of aircraft, and
compliance with those requirements drives significant expenditures.




Moreover,
additional laws, regulations, taxes and airport rates and charges have been
enacted from time to time that have significantly increased the costs of
commercial aircraft operations, reduced the demand for air travel or restricted
the way the Company can conduct its business. For example, the Aviation and
Transportation Security Act, which became law in 2001, mandates the
federalization of certain airport security procedures and imposes additional
security requirements on airlines. Similar laws or regulations or other
governmental actions in the future may adversely affect Avantair’s business and
financial results.




Avantair’s
results of operations may be affected by changes in law and future actions taken
by governmental agencies having jurisdiction over Avantair’s operations,
including:





·
            changes
      in the law which affect the services that can be offered by commercial
      aircraft operators in particular markets and at particular
      airports;


·
            restrictions
      on competitive practices (for example court orders, or agency regulations
      or orders, that would curtail a commercial aircraft operator’s ability to
      respond to a competitor);


·
            the
      adoption of regulations that impact customer service standards (for
      example, new passenger security standards);
or


·
            the
      adoption of more restrictive locally-imposed noise
      restrictions.




Also,
Avantair is subject to various federal and state environmental
statutes.




The FAA
has jurisdiction over many aspects of Avantair’s business, including personnel,
aircraft and ground facilities. Avantair is required to have an FAA Air Carrier
Operating Certificate to transport personnel and property for compensation in
aircraft it operates directly. The FAA certificate contains operating
specifications that allow Avantair to conduct its present operations, but it is
potentially subject to amendment, suspension or revocation in accordance with
procedures set forth in federal aviation laws. The FAA is responsible for
ensuring that Avantair complies with all FAA regulations relating to the
operation of its aviation business, and conducts regular inspections regarding
the safety, training and general regulatory compliance of its aviation
operations. Additionally, the FAA requires Avantair to file reports confirming
our continued compliance.




Avantair
could be adversely affected by a failure or disruption of its computer,
communications or other technology systems.




Avantair
is highly dependent on its computer systems and call center software to operate
its business. The systems and software on which Avantair relies to manage the
scheduling and monitoring of its flights could be disrupted due to events beyond
Avantair’s control, including natural disasters, power failures, terrorist
attacks, equipment failures, software failures and computer viruses and hackers.
Further, the vendor of Avantair’s scheduling software is a small business and
highly dependent on the services of its founder. Any substantial or repeated
failure of Avantair’s systems or software could impact Avantair’s operations and
customer service, result in a disruption in flight scheduling, the loss of
important data, loss of revenues, increased costs and generally harm its
business. Moreover, a catastrophic failure of certain of Avantair’s vital
systems could limit its ability to operate flights for an indefinite period of
time, which would have a material adverse impact on Avantair’s
business.




Avantair
may not be able to obtain acceptable customer contracts covering all of the
fractional interests of its new airplanes, a sufficient number of charter cards
and/or Axis Club Memberships, or a combination thereof, which could adversely
affect our profitability.




Avantair
intends to substantially expand its fleet of airplanes. In order to most
efficiently do so, Avantair will need to sell a sufficient number of fractional
interests, charter cards, Axis Club Memberships or a combination
thereof.  As a result, Avantair’s financial performance could be
adversely affected if Avantair is unable to sell the sufficient number of the
fractional interests, charter cards, and/or Axis Club Memberships in these
aircraft. At June 30, 2009, the Company had 36 fractional aircraft shares
available for sale.




Sales
of fractional interests and charter cards in excess of available fleet capacity
could adversely affect Avantair’s business.




Since
fractional shareowners generally desire to enter a fractional program when they
make their decision to purchase a fractional share, it is difficult for a
fractional operator to pre-sell many shares in advance of receipt of additional
aircraft. Charter card as well as Axis Club Membership program participants
often likewise purchase their charter cards and begin utilizing the services
within a short time thereafter. An aircraft fleet provides a finite level of
capacity, and the addition of significant additional share owners and charter
card users to the usage base may require an increase in charter usage, which may
not be economical. If Avantair does not adequately manage the sales process and
sells shares or timecards in excess of its available capacity, its business
could be adversely affected.




Avantair’s
business could be adversely affected by a failure to attract and retain
qualified pilots and other operations personnel.




Avantair’s
ability to attract and retain qualified pilots, mechanics, and other highly
trained personnel will be an important factor in determining Avantair’s future
success. Many of Avantair’s customers require pilots of aircraft that service
them to have high levels of flight experience. The market for these experienced
and highly trained personnel is extremely competitive. If Avantair is unable to
attract and retain such persons, flight operations may be disrupted, which could
have a negative effect on its results.


11


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





Ownership
of fractional shares and charter cards is likely considered a luxury item to
consumers, especially compared to the costs associated with commercial air
travel. As a result, a general downturn in economic, business and financial
conditions, including the current recession, inflation and higher interest
rates, could have an adverse effect on consumers’ spending habits and could
cause them to travel less frequently and, to the extent they travel, to travel
using commercial air carriers or other means considered to be more economical
than owning a fractional interest, charter card, and/or membership in a
fractional aircraft program.




The
operation of aircraft is dependent on the price and availability of fuel.
Continued periods of historically high fuel costs may materially adversely
affect Avantair’s operating results.




Avantair’s
operating results may be significantly impacted by changes in the availability
or price of fuel for aircraft operated by Avantair. Fuel prices have fluctuated
significantly since 2004. Although Avantair is currently able to obtain adequate
supplies of fuel, it is impossible to predict the price of fuel. Political
disruptions or wars involving oil-producing countries, changes in government
policy, changes in fuel production capacity, environmental concerns and other
unpredictable events may result in fuel supply shortages and additional fuel
price increases in the future. Furthermore, Avantair bears the entire cost of
fuel when repositioning aircraft. There can be no assurance that Avantair will
be able to fully recover its increased fuel costs by passing these costs on to
its customers. In the event that Avantair is unable to do so, Avantair’s
operating results will be adversely affected.




Avantair’s
reliance on current laws and regulations with respect to the opportunity to
conduct sales with foreign customers and flights to currently permitted areas
poses a significant risk to its business prospects.




Avantair’s
revenue and profitability are based in part on current laws and regulations by
the federal government of the United States and the agencies thereof, including
but not limited to the Department of Homeland Security, the Department of State,
the Department of Commerce and the Department of the Treasury, allowing sales to
and provision of services for foreign persons and flights to foreign locations
that are permissible under current laws and regulations. Modification of such
statutes and regulations could pose a significant risk to Avantair’s business
operations by reducing the pool of potential customers through the preclusion of
foreign persons and the locations of permissible flights.




Risks
Related to Our Common Stock




There
will be a substantial number of shares of Avantair’s common stock available for
resale in the future that may be dilutive to its current stockholders and may
cause a decrease in the market price of its common stock.




As of
June 30, 2009, the Company had 16,463,615 shares of the common stock outstanding
and 1,133,166 shares of common stock available for future issuance under its
2006 Long-Term Stock Incentive Plan. In addition, as of June 30, 2009, the
Company has 152,000 shares of Series A Preferred Shares outstanding.TheCompany has 3,088,898
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 sale
of units consummated on June 30, 2009, the conversion price of the Series A
Preferred Shares was reduced from $5.15 to $4.92. As a result of additional
sales of units, on September 25, 2009, the conversion price of the Series A
Preferred Shares was further reduced from $4.92 to $4.83 and the shares of
common stock reserved on its books and records for issuance upon the conversion
of the outstanding Series A Preferred Shares increased to 3,147,042. Options to
purchase a total of 300,000 units at an exercise price of $9.90 per unit (with
each unit consisting of one share of the Company’s common stock and two
warrants, each to purchase one share of its common stock at an exercise price of
$6.25 per share) were issued in connection with the underwriting of its initial
public offering and will expire on February 23, 2010.




Avantair’s
shares of common stock may become subject to the SEC’s penny stock rules and
broker-dealers may experience difficulty in completing customer transactions and
trading activity in its securities may be adversely affected.




If at any
time Avantair has net tangible assets of $5.0 million or less and its ordinary
shares have a market price per share of less than $5.00, transactions in its
ordinary shares may be subject to the “penny stock” rules promulgated under the
Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend
such securities to persons other than institutional accredited investors
must:




·
            make
      a special written suitability determination for the
    purchaser;


·
            receive
      the purchaser’s written agreement to a transaction prior to
      sale;


·
            provide
      the purchaser with risk disclosure documents that identify certain risks
      associated with investing in “penny stocks” and that describe the market
      for these “penny stocks” as well as a purchaser’s legal remedies;
      and


·
            obtain
      a signed and dated acknowledgment from the purchaser demonstrating that
      the purchaser has actually received the required risk disclosure document
      before a transaction in a “penny stock” can be
  completed.




If
Avantair’s shares of common stock become subject to these rules, broker-dealers
may find it difficult to effectuate customer transactions and trading activity
in its securities may be adversely affected. As a result, the market price of
the securities may be depressed, and you may find it more difficult to sell the
securities.


12





Avantair
has been unable to receive a listing of its securities on NASDAQ or another
national securities exchange, and this may make it more difficult for its
stockholders to sell their securities.




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




Item 1B.
Unresolved Staff Comments





None.




Item
2. Facilities




Avantair
leases its corporate headquarters and hangar space, which is approximately
125,000 square feet at 4311 General Howard Drive, Clearwater, Florida under two
leases that each expire on April 30, 2020. In addition, Avantair currently
leases the following principal properties:




·
            approximately
      17,752 square feet of office and hangar space at 125 Passaic Avenue,
      Caldwell, New Jersey under a lease that expires on October 31, 2018;
      and


·
            approximately
      65,258 square feet of office and hangar space at 575 Aviation Drive,
      Camarillo, California under a lease that expires on August 1,
      2021.





Item 3.
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. At
June 30, 2009, 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 4.
Submission of Matters to a Vote of Security Holders





No
matters were submitted to a vote of our security holders through the
solicitation of proxies or otherwise during the fourth quarter of fiscal year
2009.


13


PART
II





Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities





PRICE
RANGE OF SECURITIES AND DIVIDENDS




Avantair’s
common stock is traded on the Over-the-Counter Bulletin Board under the symbol
AAIR. The following table sets forth the range of high and low closing bid
prices for the common stock for the periods indicated since such common stock
commenced public trading on March 8, 2005. The over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily reflect actual transactions.





Common
      StockQuarter
      Ended
                  
                  High
                  
                  
                  Low2008First
      Quarter
                  
                  
                  5.25
                  
                  
                  
                  4.47Second
      Quarter
                  
                  
                  5.30
                  
                  
                  
                  4.23Third
      Quarter
                  
                  
                  5.15
                  
                  
                  
                  2.80Fourth
      Quarter
                  
                  
                  3.00
                  
                  
                  
                  1.942009First
      Quarter
                  
                  
                  2.20
                  
                  
                  
                  1.50Second
      Quarter
                  
                  
                  1.90
                  
                  
                  
                  0.57Third
      Quarter
                  
                  
                  1.75
                  
                  
                  
                  0.80Fourth
      Quarter
                  
                  
                  1.90
                  
                  
                  
                  1.15





DIVIDEND
POLICY




The
Company has never declared or paid cash dividends on our common stock. The
Company currently expects to retain all future earnings for use in the operation
and expansion of our business and does not anticipate paying cash dividends in
the foreseeable future. The declaration and payment of any dividends in the
future will be determined by our Board of Directors, in its discretion, and will
depend on a number of factors, including our earnings, capital requirements and
overall financial condition.





EQUITY
COMPENSATION PLANS





The
following table sets forth information regarding the Company’s Equity
Compensation Plan as of June 30, 2009:




Plan category
                      
                      Number of securities
                        to be issued upon
                        exercise of
                        outstanding options,
                        warrants and rights
                      
                      
                      Weighted average
                        exercise price of
                        outstanding
                        options, warrants
                        and rights
                      
                      
                      Number of securities
                        remaining available for
                        future issuance under
                        equity compensation
                        plans (excluding
                        securities
                        reflected in column (a))(a)
                      
                      
                      (b)
                      
                      
                      (c)Equity
      compensation plans approved by security holders
                      
                      
                      150,000
                      
                      
                      $
                      5.34
                      
                      
                      
                      1,133,166Equity
      compensation plans not approved by security holders
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
                      
                      
                      150,000
                      
                      
                      $
                      5.34
                      
                      
                      
                      1,133,166





The
maximum number of shares of Avantair’s common stock issuable in connection with
the 2006 Long-Term Incentive Plan (sometimes referred to as “the Plan”) may not
exceed 1,500,000 shares. There are 150,000 shares subject to issuance upon
exercise of outstanding stock options; 216,834 shares have been issued with
respect to awards of restricted stock; and 1,133,166 remain available for future
issuance under the Plan.


14




RECENT
SALES OF UNREGISTERED SECURITIES





On June
30, 2009, Avantair sold 567,200 units at a price of $2.50 per unit to investors
in a private placement, generating net proceeds of approximately $1.3 million.
Each unit consisted of two shares of common stock and one warrant to purchase
one common share. The warrants have  an exercise price of $4.00 per
share and are exercisable until June 30, 2012. The sale was consummated under
the terms of a Securities Purchase Agreement between Avantair and each of the
investors. Pursuant to a registration rights agreement, Avantair has agreed to
use it best efforts to register the shares issued to the investors and the
shares underlying the warrants issued to the investors for resale under the
Securities Act of 1933, as amended. By agreement between Avantair, the investors
in the June 30, 2009 private placement and that offering’s placement agent, the
period for additional sales of units was extended until October 15, 2009. On
September 25, 2009, the Company sold an additional 250,000 units at a price of
$2.50 per unit generating net proceeds of approximately $0.6
million.


15


Item 6.
Selected Financial Data





The
following table presents the Company’s summary historical consolidated financial
information. The summary consolidated statements of operations data for each of
the two fiscal years in the period ended June 30, 2009 and the consolidated
balance sheet data as of June 30, 2009 and 2008 have been derived from our
audited consolidated financial statements included elsewhere in this report. The
consolidated statement of operations data for each of the fiscal years ended
June 30, 2007, 2006, and 2005 and the consolidated balance sheet information as
of June 30, 2007, 2006 and 2005 was derived from our audited consolidated
financial statements which are not presented herein. These historical results
are not necessarily indicative of results to be expected in any future
period.





Avantair,
Inc. and Subsidiaries


Consolidated
Statement of Operations





Years Ended June 30,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2007
                                          
                                          
                                          2006
                                          
                                          
                                          2005Consolidated
      Statement of Operations DataRevenueFractional
      aircraft sold
                                          
                                          $
                                          51,864,010
                                          
                                          
                                          $
                                          43,426,696
                                          
                                          
                                          $
                                          29,695,175
                                          
                                          
                                          $
                                          23,756,070
                                          
                                          
                                          $
                                          10,580,859Maintenance
      and management fees
                                          
                                          
                                          70,693,367
                                          
                                          
                                          
                                          58,211,457
                                          
                                          
                                          
                                          38,787,596
                                          
                                          
                                          
                                          22,824,940
                                          
                                          
                                          
                                          11,645,999Charter
      card and Axis membership revenue
                                          
                                          
                                          9,384,110
                                          
                                          
                                          
                                          7,236,151
                                          
                                          
                                          
                                          3,607,831
                                          
                                          
                                          
                                          210,900
                                          
                                          
                                          
                                          -Other
      revenues
                                          
                                          
                                          4,885,563
                                          
                                          
                                          
                                          6,744,679
                                          
                                          
                                          
                                          4,302,630
                                          
                                          
                                          
                                          1,603,470
                                          
                                          
                                          
                                          1,167,520Total
      revenue
                                          
                                          
                                          136,827,050
                                          
                                          
                                          
                                          115,618,983
                                          
                                          
                                          
                                          76,393,232
                                          
                                          
                                          
                                          48,395,380
                                          
                                          
                                          
                                          23,394,378Operating
      expensesCost
      of fractional aircraft shares sold
                                          
                                          
                                          44,118,352
                                          
                                          
                                          
                                          36,637,959
                                          
                                          
                                          
                                          24,370,988
                                          
                                          
                                          
                                          19,166,722
                                          
                                          
                                          
                                          9,318,013Cost
      of flight operations
                                          
                                          
                                          46,723,184
                                          
                                          
                                          
                                          50,058,692
                                          
                                          
                                          
                                          35,665,057
                                          
                                          
                                          
                                          25,362,985
                                          
                                          
                                          
                                          10,157,566Write-off
      of aircraft deposit
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          300,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Cost
      of fuel
                                          
                                          
                                          13,349,084
                                          
                                          
                                          
                                          16,489,422
                                          
                                          
                                          
                                          10,192,406
                                          
                                          
                                          
                                          6,419,835
                                          
                                          
                                          
                                          4,226,802General
      and administrative expenses
                                          
                                          
                                          23,628,541
                                          
                                          
                                          
                                          20,703,120
                                          
                                          
                                          
                                          18,540,610
                                          
                                          
                                          
                                          10,757,280
                                          
                                          
                                          
                                          4,952,472Selling
      expenses
                                          
                                          
                                          3,736,424
                                          
                                          
                                          
                                          4,670,246
                                          
                                          
                                          
                                          4,333,268
                                          
                                          
                                          
                                          3,672,754
                                          
                                          
                                          
                                          976,164Depreciation
      and amortization
                                          
                                          
                                          5,233,250
                                          
                                          
                                          
                                          3,624,710
                                          
                                          
                                          
                                          2,013,530
                                          
                                          
                                          
                                          2,649,096
                                          
                                          
                                          
                                          1,932,757Total
      operating expenses
                                          
                                          
                                          136,788,835
                                          
                                          
                                          
                                          132,184,149
                                          
                                          
                                          
                                          95,415,859
                                          
                                          
                                          
                                          68,028,672
                                          
                                          
                                          
                                          31,563,774Income
      (loss) from operations
                                          
                                          
                                          38,215
                                          
                                          
                                          
                                          (16,565,166
                                          )
                                          
                                          
                                          (19,022,627
                                          )
                                          
                                          
                                          (19,633,292
                                          )
                                          
                                          
                                          (8,169,396
                                          )Other
      income (expenses)Interest
      income
                                          
                                          
                                          46,073
                                          
                                          
                                          
                                          482,666
                                          
                                          
                                          
                                          444,179
                                          
                                          
                                          
                                          557,508
                                          
                                          
                                          
                                          490,591Other
      income
                                          
                                          
                                          1,397,012
                                          
                                          
                                          
                                          861,662
                                          
                                          
                                          
                                          284,723
                                          
                                          
                                          
                                          437,982
                                          
                                          
                                          
                                          167,329Interest
      expense
                                          
                                          
                                          (5,942,221
                                          )
                                          
                                          
                                          (3,661,227
                                          )
                                          
                                          
                                          (3,406,181
                                          )
                                          
                                          
                                          (2,110,119
                                          )
                                          
                                          
                                          (1,194,723
                                          )Total
      other expenses
                                          
                                          
                                          (4,499,136
                                          )
                                          
                                          
                                          (2,316,899
                                          )
                                          
                                          
                                          (2,677,279
                                          )
                                          
                                          
                                          (1,114,629
                                          )
                                          
                                          
                                          (536,803
                                          )Net
      loss
                                          
                                          
                                          (4,460,921
                                          )
                                          
                                          
                                          (18,882,065
                                          )
                                          
                                          
                                          (21,699,906
                                          )
                                          
                                          
                                          (20,747,921
                                          )
                                          
                                          
                                          (8,706,199
                                          )Preferred
      stock dividend and accretion of expenses
                                          
                                          
                                          (1,488,071
                                          )
                                          
                                          
                                          (903,851
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Net
      loss attributable to common stockholders
                                          
                                          $
                                          (5,948,992
                                          )
                                          
                                          $
                                          (19,785,916
                                          )
                                          
                                          $
                                          (21,699,906
                                          )
                                          
                                          $
                                          (20,747,921
                                          )
                                          
                                          $
                                          (8,706,199
                                          )Loss
      per common share:Basic
      and diluted
                                          
                                          $
                                          (0.39
                                          )
                                          
                                          $
                                          (1.30
                                          )
                                          
                                          $
                                          (2.47
                                          )
                                          
                                          $
                                          (6.31
                                          )
                                          
                                          $
                                          (2.65
                                          )Weighted-
      average common shares outstanding:Basic
      and diluted
                                          
                                          
                                          15,306,725
                                          
                                          
                                          
                                          15,230,482
                                          
                                          
                                          
                                          8,780,234
                                          
                                          
                                          
                                          3,288,590
                                          
                                          
                                          
                                          3,288,590





As of June 30,2009
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          2005Consolidated
      Balance Sheet DataTotal
      assets
                          
                          $
                          164,065,403
                          
                          
                          $
                          204,477,455
                          
                          
                          $
                          160,490,260
                          
                          
                          $
                          105,154,683
                          
                          
                          $
                          93,640,621Long-term
      liabilities
                          
                          $
                          88,229,537
                          
                          
                          $
                          123,018,837
                          
                          
                          $
                          112,509,063
                          
                          
                          $
                          72,844,665
                          
                          
                          $
                          57,777,196Stockholders'
      deficit
                          
                          $
                          (36,007,683
                          )
                          
                          $
                          (31,651,546
                          )
                          
                          $
                          (11,959,024
                          )
                          
                          $
                          (35,030,607
                          )
                          
                          $
                          (13,748,700
                          )




16


Item 7.
Management’s Discussion And Analysis Of Financial Condition And Results Of
Operations





The
following discussion should be read in conjunction with the consolidated
financial statements and related notes which appear elsewhere in this Annual
Report on Form 10-K. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors, including those discussed below and elsewhere in this Annual Report on
Form 10-K, particularly under the heading “Risk Factors.”





Overview




Avantair
is engaged in the sale of fractional ownership interests and charter 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 June
30, 2009, Avantair operated 52 aircraft within its fleet, which is comprised of
46 aircraft for fractional ownership, 5 company- owned core aircraft and 1
leased and company- managed aircraft.




Avantair
also operates fixed flight based operations (FBO) in Camarillo, California and
effective August 1, 2008, in Caldwell, New Jersey. Through these FBO’s and its
headquarters in Clearwater, Florida, Avantair provides aircraft maintenance,
concierge and other services to its customers as well as to the Avantair
fleet.




Avantair
generates revenues primarily through the sale of fractional ownership shares of
aircraft, by providing maintenance and management services related to these
aircraft, and from the sale of charter 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 1/16th
ownership interest. Under maintenance and management agreements with fractional
owners, Avantair provides pilots, maintenance, fuel and hangar space for the
aircraft.




In
response to the general economic downturn and the resulting growth of charter
card sales over fractional share sales industry-wide, in January 2009, Avantair
initiated the Axis Club Membership program. This program is designed to bridge
the gap between the financial commitment of a fractional share and charter
cards. This new product offers access to blocks of flight hours for a three year
membership fee of $75,000. The program requires Axis Club members to purchase a
minimum of three 25 hour flight time charter 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 June 30, 2009, Avantair had contractual
commitments to purchase 56 additional Piaggio Avanti II aircraft through 2013.
The total commitment, including a recently proposed price escalation, is valued
at approximately $354.0 million. Our agreement with Piaggio permits the Company
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. The Company expects delivery of 5
aircraft during the remainder of calendar 2009, valued at $30.6 million, which
are anticipated to be utilized to satisfy fleet demands of the growing charter
card and Axis Club Membership Program product lines. At June 30, 2009, the
Company had 36 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.




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,
charter cards and, effective January 2009, Axis Club
Memberships.  Sales by product category follow:




Unit Sales for the Three Months Ended
                      
                      
                      FY 2009
                      
                      
                      FY 2008September 30, 2008
                      
                      
                      December 31, 2008
                      
                      
                      March 31, 2009
                      
                      
                      June 30, 2009
                      
                      
                      Total
                      
                      
                      TotalNew
      Fractional shares
                      
                      
                      19.5
                      
                      
                      
                      16.5
                      
                      
                      
                      -
                      
                      
                      
                      2
                      
                      
                      
                      38
                      
                      
                      
                      139Charter
      cards
                      
                      
                      27
                      
                      
                      
                      53
                      
                      
                      
                      29
                      
                      
                      
                      51
                      
                      
                      
                      160
                      
                      
                      
                      83Axis
      Club Memberships
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      2
                      
                      
                      
                      8
                      
                      
                      
                      10
                      
                      
                      
                      N/A





Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
charter cards and Axis Club Memberships sold. To finance this growth strategy,
the Company may obtain additional funds through equity financing, including the
sale of additional shares of common stock, assets sales, accelerated payments of
maintenance and management fees, debt financing, or a combination thereof. On
June 30, 2009, Avantair sold 567,200 units at a price of $2.50 per unit to
investors in a private placement, generating net proceeds of approximately $1.3
million. The Company is in active discussions regarding options to secure
financing for future aircraft deliveries, including additional aircraft to
satisfy the demand of the growing charter card product line. The Company
believes that its capital on hand, as may be augmented by these means to fund
future growth, is sufficient to continue operations for the next twelve months
and the foreseeable future thereafter.


17


Critical
Accounting Policies





Avantair’s
discussion and analysis of its financial condition and results of operations for
the purposes of this document are based upon its consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”).




Avantair’s
significant accounting policies are presented in Note 2 to its audited
consolidated financial statements, and the following summaries should be read in
conjunction with the financial statements and the related notes included
elsewhere in this Annual Report on Form 10-K. While all accounting policies
affect the financial statements, certain policies may be viewed as critical.
Critical accounting policies are those that are both most important to the
portrayal of the financial statements and results of operations and that require
Avantair’s management’s most subjective or complex judgments and estimates.
Avantair’s management believes the policies that fall within this category are
the policies related to revenue recognition, aircraft costs related to
fractional sales, use of estimates, capital assets, impairment of long-lived
assets, income taxes and loss per share.




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 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
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 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 from)
income taxes and related deferred tax accounts, certain accrued expenses and
contingencies, and the 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 charter cards (either individually or through the
Company’s Axis Club Membership program). In the case of fractional ownership
sales, the aircraft are sold in 1/16th shares or multiples thereof. The purchase
agreement grants the customer the right to the use of the aircraft for a
specified number of hours each year. When a customer purchases a fractional
share, they are also required to enter into a five-year management and
maintenance agreement. Under the terms of the maintenance and management
agreement, the Company agrees to manage, operate and maintain the aircraft on
behalf of the customer in exchange for a fixed monthly fee. Charter cards
provide customers with flight hours for a fixed fee.




Fractional
Aircraft Shares




The
Company does not have objective evidence to determine the fair value and
allocate fractional share revenue from that generated from the management and
maintenance agreement, and, as a result, has adopted the provisions of the
Emerging Issues Task Force (“EITF”) Issue No. 00-21 “Accounting for Revenue Arrangements
with Multiple Deliverables” to account for the sale of fractional shares
of aircraft. Accordingly, as the sales of the fractional shares cannot be
separated from the underlying maintenance and management agreement, fractional
share sale revenue is recognized ratably over the five-year life of the
maintenance and management agreement. The period in which revenue is recognized
will be evaluated on a periodic basis. Factors that impact management’s
assessment of the most appropriate period of revenue recognition will include,
but not be limited to, customer turnover, terms and conditions of the related
fractional share sale, maintenance arrangements as well as any other factor that
could impact revenue.




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.




Charter
Card and Axis Club Membership Revenue




Charter Card revenue. The
Company also sells access to its aircraft fleet through either a 15 or 25 hour
charter 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 February 2009, the Company initiated the Axis Club Membership program that
offers customers access to blocks of flight time at a discount from standard
charter 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
charter 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 charter card sales, payment for charter 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.


18




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.




Prepaid
Pilot Training




Beginning
in 2008, the costs related to the training of pilots as required by Federal
Aeronautic Regulations are capitalized and amortized over the twelve month
certification period. These costs were expensed in prior years. This change did
not have a material impact on the Company’s financial position or results of
operations as of June 30, 2008.




Aircraft
Costs Related To Fractional Sales




The
Company reflects aircraft costs related to the sale of fractional aircraft
shares. As a result of the adoption of EITF 00-21, the Company recognizes
revenue from the sale of fractional shares as income over the five-year period.
The aircraft costs related to sales of fractional shares consist of the cost of
the aircraft and are recorded as an asset and recognized as the cost of aircraft
shares sold over the five-year period.




Maintenance
Expense Policy




The
Company uses the direct 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.
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.




Property
and Equipment




Property
and equipment is recorded at cost and consists principally of aircraft purchased
which are not fractionalized and which provide additional capacity to the
Company to meet customer demand. Depreciation and amortization is computed using
the straight-line method over the following useful lives:




Aircraft
                
                7
      yearsOffice
      equipment and furniture and fixtures
                
                5 -
      7 yearsFlight
      management software/hardware
                
                5
      yearsVehicles
                
                5
      yearsImprovements
                
                Lesser
      of estimated useful life or the term of the
  lease




Expenditures
for maintenance and repairs of property and equipment are expensed as incurred.
Major improvements are capitalized.




The
Company capitalizes interest costs relating to borrowings made for the
acquisition of aircraft. No amounts were capitalized for the years ended June
30, 2009 or 2008. In addition, interest costs totaled $5,942,221 and $3,661,227
for the years ended June 30, 2009 and 2008, respectively.




Long-lived
Assets





In
accordance with SFAS No. 144, “Accounting for Impairment or
Disposal of Long-Lived Assets,” (“SFAS No. 144”) the Company reviews
long-lived assets to be held-and-used for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
recoverable. If the carrying amount of an asset exceeds its estimated future
undiscounted cash flows the asset is considered to be impaired. Impairment
losses are measured as the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell. As a result
of the analyses, no impairment charges were required for long-lived assets
during the year ended June 30, 2009.




Income
Taxes




Income
taxes are accounted for under the asset and liability method in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 109 (“SFAS No.
109”),“Accounting for 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.


19




Effective
July 1, 2007, the Company adopted the provisions of the FASB Interpretation No.
48, “Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”
(“FIN 48”). FIN 48 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 FIN 48. The Company evaluations were performed for the tax years ended 2005
thru 2009 which represent all years subject to audit for all tax jurisdictions.
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 consolidated 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 SFAS 123(R)“Share-Based Payment,” which requires the recognition of compensation
expense for employee stock options and other share-based payments. Under SFAS
123(R), 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 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 for the entire award, 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” costs in the accompanying Consolidated Statements of Operations,
was $361,059 and $484,817 for the years ended June 30, 2009 and 2008,
respectively. There were no related income tax benefits recognized in the
accompanying Consolidated Statements of Operations for the year ended June 30,
2009 or for the comparable 2008 period.




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.




For the
year ended June 30, 2009, a total of 1,409,933 share-equivalents of potentially
dilutive securities were excluded from the calculation of diluted earnings per
share. These securities were comprised of 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 expire 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 SFAS No.
128, Earnings Per Share
(“SFAS 128”). In accordance with SFAS No. 128’s contingently issuable shares
provision, 92,733 shares of performance-based, unvested common stock awards
(“restricted stock”) granted were not included in the calculation because all
the necessary conditions for vesting had not been satisfied. In addition,
567,200 warrants to purchase shares of the Company’s common stock were not
included in the calculation of diluted earnings per share as they were
antidilutive. A total of 14,496,834 of potentially dilutive securities were
excluded from the calculation of diluted loss per share for the year ended June
30, 2008 and were comprised of 14,146,000 warrants to purchase one share of the
Company’s common stock, 200,834 shares of restricted stock and 150,000
outstanding options.




Fair
Value Measurements




Effective
July 1, 2008, the Company adopted the provisions of SFAS No. 157 (“SFAS
157”),“Fair Value
Measurements” and SFAS No. 159 (“SFAS 159”),“The Fair Value Option for
Financial Assets and Financial Liabilities — including an amendment to FASB
Statement No. 115.” SFAS 157, which defines fair value, establishes a
framework for measuring fair value in accordance with U.S. GAAP, and expands
disclosures about fair value measurements. SFAS 157 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. SFAS 159 permits an entity to measure certain financial assets and
financial liabilities at fair value with changes in fair value recognized in
earnings each period. During the year ended June 30, 2009, the Company has
elected not to use the fair value option permitted under SFAS 159 for any of its
financial assets and financial liabilities that are not already recorded at fair
value.




Accounting for Derivative
Instruments




The
Company accounts for derivative instruments in accordance with SFAS No.
133,“Accounting for
Derivative Instruments and Hedging Activities,” (“SFAS 133”) as amended,
which establishes accounting and reporting standards for derivative instruments
and hedging activities, including certain derivative instruments imbedded in
other financial instruments or contracts. The Company also considers EITF 00-19,
“Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a Company’s Own
Stock,” 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 SFAS 133. The Company evaluates the conversion feature embedded
in its Series A Convertible Preferred Stock at each reporting period based on
the criteria of SFAS 133 and EITF 00-19 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 June 30, 2009.


20




Reclassifications




Certain
balances for the years ended June 30, 2008, 2007, 2006 and 2005 were
reclassified to conform to classifications adopted in the current
year.




Recently
Issued Pronouncements




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R requires an acquirer to measure the
identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquiree at their fair values on the acquisition date, with
goodwill being the excess value over the net identifiable assets acquired. SFAS
141 also requires the fair value measurement of certain other assets and
liabilities related to the acquisition such as contingencies. SFAS 141R applies
prospectively to business combinations and is effective for fiscal years
beginning on or after December 15, 2008. The adoption of SFAS 141R did not have
a material impact on the Company’s consolidated financial position, results of
operations or cash flows.




In December 2007, the FASB issued SFAS
No. 160,“Non-controlling
Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160
requires that a non-controlling interest in a subsidiary be reported as equity
in the consolidated financial statements. Consolidated net income should include
the net income for both the parent and the non-controlling interest with
disclosure of both amounts on the consolidated statement of income. The
presentation provisions of SFAS 160 are to be applied retrospectively, and SFAS
160 is effective for fiscal years beginning on or after December 15, 2008. The
adoption of SFAS 160 did not have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.




In March
2008, the FASB issued SFAS No. 161,“Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 changes the
disclosure requirements for derivative instruments and hedging activities. The
Company will be required to provide enhanced disclosures about (a) how and why
derivative instruments are used, (b) how derivative instruments and related
hedged items are accounted for under SFAS 133, and its related interpretations,
and (c) how derivative instruments and related hedged items affect the Company’s
financial position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The adoption of SFAS 161 did not have an
impact on the Company’s financial position, results of operations or cash flows
as the pronouncement addresses disclosure requirements only.




In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3 (“FSP 142-3”),“Determination of the Useful Life
of Intangible Assets.”FSP 142-3 amends the factors an entity should
consider in developing renewal or extension assumptions used in determining the
useful life of recognized intangible assets under FASB Statement No. 142,“Goodwill and Other Intangible
Assets.”  This new guidance applies prospectively to intangible
assets that are acquired individually or with a group of other assets in
business combinations and asset acquisitions. FSP 142-3 is effective for fiscal
years and interim periods beginning after December 15, 2008.  The
adoption of FSP 142-3 did not have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.




In June
2008, the FASB issued FASB Staff Position EITF 03-6-1,“Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
(“FSP EITF 03-6-1”). FSP EITF 03-6-1 states that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
are “participating securities” as defined in EITF 03-6,“Participating Securities and the
Two-Class Method under FASB Statement No. 128,”and therefore should be
included in computing earnings per share using the two-class method. According
to FSP EITF 03-6-1, a share-based payment award is a participating security when
the award includes nonforfeitable rights to dividends or dividend equivalents.
The rights result in a noncontingent transfer of value each time an entity
declares a dividend or dividend equivalent during the award’s vesting period.
However, the award would not be considered a participating security if the
holder forfeits the right to receive dividends or dividend equivalents in the
event that the award does not vest. FSP EITF 03-6-1 is effective for financial
statements issued in fiscal years beginning after December 15, 2008, and interim
periods within those years. When adopted, its requirements are applied by
recasting previously reported EPS. The adoption of EITF 03-6-1 did not have a
material impact on the Company’s consolidated financial position, results of
operations or cash flows.




In
October 2008, the FASB issued FSP No. FAS 157-3 (“FSP 157-3”), “Determining the Fair Value of a
Financial Asset When the Market for that Asset Is Not Active, ” which
clarifies the application of SFAS 157 as it relates to the valuation of
financial assets in a market that is not active for those financial assets. FSP
157-3 is effective immediately and includes those periods for which financial
statements have not been issued. The Company does not have any financial assets
that are valued using inactive markets, and therefore is not impacted by the
issuance of this standard.




In June
2008, the FASB issued EITF No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock,” which
provides guidance for determining whether an equity-linked financial instrument
(or embedded feature) issued by an entity is indexed to the entity’s stock, and
therefore, would qualify for the first part of the scope exception in paragraph
11(a) of SFAS 133, “Accounting
for Derivative Instruments and Hedging Activities.” The EITF proscribes a
two-step approach under which the entity would evaluate the instrument’s
contingent exercise provisions and then the instrument’s settlement provisions,
for purposes of evaluating whether the instrument (or embedded feature) is
indexed to the entity’s stock.  This EITF is effective for financial
statements issued for fiscal years beginning after December 15,
2008.  The Company is currently evaluating the requirements of EITF
07-5 and its impact on the Company’s consolidated financial position, results of
operations or cash flows.




In
November 2008, the FASB issued EITF No. 08-01, “Revenue Arrangements with Multiple
Deliverables.”EITF 08-01 replaces
EITF 00-21, “Revenue
Arrangements with Multiple Deliverables” and enhances the disclosure
requirements for separating disclosing information related to individually
significant arrangements and disclosing the qualitative and quantitative
information on an aggregate basis. This new guidance applies prospectively to
revenue arrangements entered into or materially modified in fiscal years
beginning on or after December 15, 2009. The Company is currently evaluating the
requirements of EITF No. 08-01 and its impact on its financial condition,
results of operations and cash flows.


21




In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). This new
pronouncement establishes principles and standards related to the accounting for
and disclosure of events that occur after the balance sheet date but before the
financial statements are issued. SFAS 165 requires an entity to recognize, in
the financial statements, subsequent events that provide additional information
regarding conditions that existed at the balance sheet date. Subsequent events
that provide information about conditions that did not exist at the balance
sheet date shall not be recognized in the financial statements under SFAS 165.
SFAS 165 is effective for financial statements issued for fiscal years and
interim periods beginning after June 15, 2009. The adoption of SFAS 165 did not
have a material impact on the Company’s consolidated financial statements. Pursuant
to SFAS 165, the Company evaluated subsequent events through September 28,
2009.




In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting
Principles” (“SFAS 168”) as a replacement of FASB Statement No. 162. The
FASB Accounting Standards Codification (“the Codification”) will become the
source of authoritative U.S. GAAP. The Codification, which changes the
referencing of financial standards, is effective for interim or annual financial
periods ending after September 15, 2009. The Codification is not intended to
change or alter existing U.S. GAAP.




No other
pronouncements have been recently issued that Avantair believes will have a
material impact on Avantair’s financial position and results of
operations.





Results
of Operations





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





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





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





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





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





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





Operating
expenses for the fiscal year ended June 30, 2009increased 3.5% to
$136.3 million compared to $132.2 million, for the comparable 2008 period. The
cost of fractional aircraft shares sold increased 20.4% to $44.1 million for the
fiscal year ended June 30, 2009from $36.6 million for
the fiscal year ended June 30, 2008, due to an increase in the average number of
fractional shares sold through June 30, 2009 from fractional shares sold through
June 30, 2008. The cost of flight operations, together with the cost of fuel,
decreased 9.7% to $60.0 million for the fiscal year ended June 30, 2009from $66.5 million for
the fiscal year ended June 30, 2008, primarily due to:





·
              a
      $3.5 million reduction in chartering expenses as a result of the increased
      use of the Company's core aircraft to alleviate scheduling conflicts, use
      of enhanced flight optimization software and flight staff
      training;





·
            a
      $3.1 million decrease in cost of fuel due to a 19.0% decrease in the per
      gallon cost of fuel (as a result of Avantair negotiating lower fuel rates
      in fiscal year 2009 and also due to the global decrease in fuel costs)
      coupled with improved aircraft utility;
  and





·
            a
      $1.3 million decrease in maintenance expense primarily as a result of the
      replacement of the Company’s former engine service vendor with another
      nationally recognized, FAA certified engine maintenance vendor in January
      2009, offset by general increases in operating costs due to an increase in
      fleet size.


22





·
              The
      above were partially offset by a $1.2 million increase in pilot expenses
      related to pilot salaries and training costs as a result to flight crew
      expansion and a $0.6 million increase in insurance coverage and other
      expenses to an increase in fleet
size.





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





Selling
expenses decreased 20.0% to $3.7 million for the fiscal year ended June 30,
2009from $4.7
million for the fiscal year ended June 30, 2008 primarily due to a decrease of
$0.7 million in marketing expenses as a result of a more direct approach to
marketing implemented during fiscal year 2009.




Income
from operations was $0.4 million for the fiscal year ended June 30, 2009, an
increase of 100.2% from the $16.6 million loss from operations for the fiscal
year ended June 30, 2008 for the reasons set forth above.





Interest
expense was $5.9 million for the fiscal year ended June 30, 2009compared to $3.6
million for the fiscal year ended June 30, 2008, primarily due to an increase in
floor plan borrowing agreements incurred to acquire aircraft and $0.4 million of
interest expense relating to the financing arrangements with Jet Support
Services, Inc., partially offset by decrease in interest due to the reduction in
outstanding principal balances. The
increase of $0.1 million in interest and other income is due to the $1.4 million
nonrecurring gain recognized on the sale of one of the Company’s core aircraft
in fiscal year 2009 as compared to $0.8 million nonrecurring gain recognized in
the comparable 2008 period, partially offset by a reduction in notes receivable
outstanding as of June 30, 2009.




Net loss
decreased to $4.5 million for the fiscal year ended June 30, 2009compared to $18.9
million for the fiscal year ended June 30, 2008 due to the decrease in loss from
operations partially offset by the increase in total other expense discussed
above.





Fiscal
year ended June 30, 2008 compared to the fiscal year ended June 30,
2007.





Revenues
for the fiscal year ended June 30, 2008 were $115.6 million, an increase of
51.3% from $76.4 million for the fiscal year ended June 30, 2007. This
increase was the result of a 46.2% increase in the revenue generated from the
sale of fractional aircraft shares to $43.4 million for the fiscal year ended
June 30, 2008 from $29.7 million for the fiscal year ended June 30,
2007, an increase of 50.1% in maintenance and management fees to $58.2 million
for the fiscal year ended June 30, 2008 from $38.8 million for the fiscal
year ended June 30, 2007, an increase of 100.6% in charter card revenue to
$7.2 million for the fiscal year ended June 30, 2008 from $3.6 million for
the fiscal year ended June 30, 2007, and an increase of 56.8% in other
revenue to $6.7 million for the fiscal year ended June 30, 2008 from $4.3
million for the fiscal year ended June 30, 2007.





Revenue
from the sale of fractional aircraft shares increased due to a 32% increase in
the number of fractional shares sold to 659 through the fiscal year ended
June 30, 2008 from 499.5 fractional shares sold through the fiscal year
ended June 30, 2007. The sale of fractional shares during 2008 reflected
the results of enhanced sales initiatives, including an emphasis on a national
market and the marketing of the fuel efficiency of the Piaggio
aircraft.





The
increase in revenue from maintenance and management fees increased primarily due
to:





•
            an
      increase in the annual maintenance and management fee to $9,400 from
      $8,900 for new and renewing fractional share owners;
  and





•
            an
      increase in the number of fractional share
  owners.





Charter
card revenue increased $3.6 million primarily due to a 94.0% increase in
charter card hours flown during the fiscal year ended June 30, 2008 over hours
flown during the fiscal year ended June 30, 2007 due to increased marketing of
charter cards in fiscal 2008.





Other
revenue increased $2.3 million primarily due to (i) an increase in fuel
sales of $1.5 million due to an increase in fuel prices to match increased cost
of fuel sold along with an increase in fuel volume sold; (ii) a $0.5 million
increase in rent revenue and (iii) an increase of $0.3 million in remarketing
and other revenues.





Operating
expenses for the fiscal year ended June 30, 2008 were 38.5% higher than
during the fiscal year ended June 30, 2007, with total expenses of $132.2
million compared to $95.4 million, respectively. The cost of fractional aircraft
shares sold increased to $36.6 million for the fiscal year ended June 30,
2008 from $24.4 million for the fiscal year ended June 30, 2007, due to an
increase of 32%
in the number of fractional shares sold to 659 fractional shares sold through
the fiscal year ended June 30, 2008 from 499.5 fractional shares sold
through the fiscal year ended June 30, 2007. The cost of flight operations,
together with the cost of fuel, increased 45.1% to $66.5 million for the fiscal
year ended June 30, 2008 from $45.9 million for the fiscal year ended
June 30, 2007, primarily due to:





•
            an
      increase of $5.9 million in maintenance expenses, comprised primarily of
      an increase in maintenance salaries, parts expense and maintenance
      insurance coverage due to an increase in fleet
  size;


23





•
              an
      increase of $7.4 million in fuel prices and flight fees (which includes
      landing fees, airport fees and ground transportation fees) borne by
      Avantair for repositioning flights, demonstration flights and pilot
      training flights; and





•
            an
      increase of $7.6 million in pilot expenses due to hiring an additional 80
      pilots, including salaries and related pilot expenses, training, hotel
      expenses, pilot airfare and living
  expenses.





General
and administrative expenses increased 11.7% to $20.7 million for the fiscal year
ended June 30, 2008 from $18.5 million for the fiscal year ended
June 30, 2007, primarily due to:





•
            an
      increase of $2.2 million in expenses related to fixed based
      operations;





•
            an
      increase of $0.6 million in costs associated with being publicly
      traded;





•
            an
      increase of $0.2 million in flight center expenses due to increased in
      salary and purchasing expenses;





•
            an
      increase of $0.4 million in pilot
training;





•
            an
      increase of $1.0 million in salary, payroll tax and employee benefit
      expenses;





•
            an
      increase in computer expense of $0.2 million;
  and





•
            the
      above were partially offset by a decrease in share-based compensation of
      $2.4 million.




Selling
expenses increased to $4.7 million for the fiscal year ended June 30, 2008
from $4.3 million for the fiscal year ended June 30, 2007 due to an
increase of $0.4 million in advertising expenses and aircraft
shows.





Loss from
operations was $16.6 million for the fiscal year ended June 30, 2008, a
decrease of 12.9% from $19.0 million for the fiscal year ended June 30,
2007 for the reasons set forth above.





Total
other expense was $2.3 million for the fiscal year ended June 30, 2008
compared to $2.7 million for the fiscal year ended June 30, 2007, primarily
due to recognition of a $0.3 million gain on the sale of a non-fractionalized
aircraft and a $0.5 million gain through the sale of its rights to purchase 18
Embraer Phenom 100 aircraft during the fiscal year ended June 30, 2008, which
were offset by a 7.5% increase in interest expense to $3.7 million for the
fiscal year ended June 30, 2008 from $3.4 million for the fiscal year ended
June 30, 2007.





Net loss
decreased to $18.9 million for the fiscal year ended June 30, 2008 compared
to $21.7 million for the fiscal year ended June 30, 2007 due to the
decrease in net loss is the decrease in loss from operations and the decrease in
total other expense discussed above.





Liquidity and Capital
Resources





Avantair’s
primary sources of liquidity have been cash provided by operations, cash raised
from its equity offering as Ardent Acquisition Corp., cash provided from its
debt facility with CNM, Inc., cash raised in the preferred stock offering, and
other asset- based borrowing (see Notes 9 and 10 to the Company’s consolidated
financial statements). The Company uses its cash primarily to fund losses from
operations, deposits made on fractional 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 present requirements. As of June 30,
2009, cash and cash equivalents amounted to approximately $3.8 million and total
assets to $164.1 million. The cash and cash equivalent balance decreased $15.4
million from June 30, 2008 and total assets decreased $40.4 million. The
decrease in cash and cash equivalents occurred primarily as a result of $2.4
million in payments for deposits on future aircraft deliveries, $1.4 million
expended to acquire four fractional shares on a floor planned aircraft upon
expiration of the floor plan on June 30, 2009 (of which approximately $1.0
million was collected subsequent to June 30, 2009 from the sale of two of these
fractional shares), and $29.2 million repayment of debt, in addition to
expenditures for the cost of operations, including amounts accrued at June 30,
2008, insurance and capital and leasehold improvements. Partially offsetting
these disbursements is cash received from the sale of fractional shares, charter
cards, Axis Club Memberships, fuel and rent, collection of maintenance and
management fees and other receipts including proceeds from the sale of a core
aircraft and the Company’s common stock. On June 30, 2009, Avantair sold 567,200
units at a price of $2.50 per unit to investors in a private placement,
generating net proceeds of approximately $1.3 million (See Note 11 to the
Company’s consolidated financial statements). By agreement between Avantair, the
investors in the June 30, 2009 private placement and that offering’s placement
agent, the period for additional sales of units was extended until October 15,
2009. On September 25, 2009, the Company sold an additional 250,000 units at a
price of $2.50 per unit generating net proceeds of approximately $0.6
million.




Avantair’s
Axis Club Membership program, designed to bridge the gap between the financial
commitment of a fractional share and charter cards, may require the Company to
acquire aircraft to satisfy the increased flight hour demands on its core
aircraft fleet if its core utility is strained. However, there can be no
assurance that membership program sales will be sufficient to compensate for a
decrease in fractional share sales, or that financing of additional aircraft
acquired to service this program will be available.


24





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, charter cards and, effective January 2009, Axis
Club Memberships.  Sales by product category follow:




Unit Sales for the Three Months Ended
                      
                      
                      FY 2009
                      
                      
                      FY 2008September 30, 2008
                      
                      
                      December 31, 2008
                      
                      
                      March 31, 2009
                      
                      
                      June 30, 2009
                      
                      
                      Total
                      
                      
                      TotalNew
      Fractional shares
                      
                      
                      19.5
                      
                      
                      
                      16.5
                      
                      
                      
                      -
                      
                      
                      
                      2
                      
                      
                      
                      38
                      
                      
                      
                      139Charter
      cards
                      
                      
                      27
                      
                      
                      
                      53
                      
                      
                      
                      29
                      
                      
                      
                      51
                      
                      
                      
                      160
                      
                      
                      
                      83Axis
      Club Memberships
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      2
                      
                      
                      
                      8
                      
                      
                      
                      10
                      
                      
                      
                      N/A





Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
charter cards and Axis Club Memberships sold. To finance this growth strategy,
including the purchase of additional aircraft to satisfy the demand of the
growing charter card product line, the Company is actively pursuing additional
funds through equity financing, including the sale of additional shares of
common stock, assets sales, accelerated payments of maintenance and management
fees, debt financing, or a combination thereof. In addition, the Company
continuously reviews its cost structure for means to optimize cash expenditures,
such as by establishing more favorable fuel arrangements with suppliers. The
Company believes that its capital on hand, as may be augmented by these means to
fund future growth, is sufficient to continue operations for the next twelve
months and the foreseeable future thereafter.




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





Net cash
used in operating activities was $5.8 million for the year ended June 30, 2009
compared to cash used in operating acitivities of $15.5 million for the same
period last year. Net cash used in operating activities during the year ended
June 30, 2009 is primarily attributable to the $4.5 million net loss, combined
with depreciation expense of $5.2 million and stock based compensation expense
of $0.4 million, less the gain on sale of assets of $1.4 million, $12.0 million
of unsold aircraft costs including $1.4 million expended to acquire four
fractional shares on a floor planned aircraft upon expiration of the floor plan
on June 30, 2009 (of which approximately $1.0 million was collected subsequent
to June 30, 2009 from the sale of two of these fractional shares), a decrease of
$1.6 million due to the collection of notes receivable in accordance with normal
payment terms, a $0.9 million decrease in prepaid expenses, a $0.7 net increase
in accounts payable and accrued expenses, a net decrease of approximately $1.6
resulting from decreases in deferred maintenance, other assets and restricted
cash and a $0.4 million decrease in other liabilities.




Net cash
provided by investing activities was $1.0 million for the year ended June 30,
2009 compared to cash used in investing activities of $2.7 million for the same
period last year. Net cash provided by investing activities during the year
ended June 30, 2009 resulted primarily from $1.9 million from the sale of one of
the Company’s core aircraft, net of capital expenditures on leasehold
improvements and computer systems. Cash used in investing activities for the
year ended June 30, 2008 resulted from $2.5 million in proceeds from rights to
purchase 18 Embraer Phenom 100 Positions, net of capital
expenditures.





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





Financing
Arrangements





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





Wells
      Fargo Equipment Finance, Inc.
                  
                  $
                  3,095,512CNM,
      Inc.
                  
                  
                  3,616,652Jet
      Support Services, Inc.
                  
                  
                  3,707,209JMMS,
      Inc.
                  
                  
                  3,640,810Century
      Bank, F.S.B.
                  
                  
                  1,911,203Wachovia
      Bank
                  
                  
                  2,976,685Midsouth
      Services, Inc
                  
                  
                  12,183,530$
                  31,131,601





Wells
Fargo Equipment Finance, Inc.: In February 2005, the Company entered into
financing arrangements for the purchase of three aircraft under various notes
payable with Wells Fargo Equipment Finance, Inc. In January 2008, the Company
sold one of these aircraft and repaid the outstanding balance on the related
note payable. The notes outstanding at June 30, 2009 totaled approximately $3.1
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.


25


CNM,
Inc.: In August 2007, the Company and CNM executed a new note agreement which
converted an outstanding note obligation of approximately $7.0 million into a
term loan payable monthly over three years and bearing interest at
10.0% per annum. CNM also assumed a promissory note due to Wells Fargo Bank
for $2.9 million which was included as part of this new note agreement.
Borrowings outstanding under these arrangements at June 30, 2009 totaled
approximately $3.6 million.





Jet
Support Services, Inc.: On April 24, 2006, Avantair financed an aircraft
maintenance program contract with Jet Support Services, Inc. (“JSSI”) in the
amount of $3.4 million. The promissory note provided for seven monthly
installments of $145,867 and 53 monthly installments of $45,867, respectively,
including interest at 7.0% per year. On April 15, 2008, the Company entered into
a financing arrangement with JSSI by means of a $5.5 million promissory note.
The new note matures on April 1, 2011 and bears interest at the rate of
10.0% per annum, with 35 monthly payments of principal and interest in an
amount of $185,127 beginning on June 2, 2008. The note covers the balance
of the aforementioned $3.4 million 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 have agreed to apply the unamortized
prepayment ($1,538,175 at June 30, 2009) under the airframe maintenance contract
to the engine maintenance program and will amortize this amount over the
remaining 37 month term of that program. Borrowings outstanding under this
arrangement at June 30, 2009 totaled approximately $3.7 million.





In
addition, the Company entered into another payment arrangement with JSSI by
means of a $525,000 promissory note dated July 31, 2008 with five monthly
payments of $105,000 commencing August 1, 2008. The note constituted payment of
the purchase of airframe parts inventory by the Company from JSSI. The Company
repaid the full amount of the term loan in December 2008.




JMMS,
Inc.: On August 11, 2006, the Company entered into a sale and leaseback
agreement with JMMS, LLC (“JMMS”). The lease transaction has been accounted for
as finance lease and provides for monthly payments of $39,500 through
July 11, 2011.  Borrowings outstanding under this arrangement at June
30, 2009 totaled approximately $3.6 million.





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





Wachovia
Bank: On October 31, 2007, the Company entered into a financing arrangement for
the purchase of one used aircraft at a total purchase price of approximately
$4.5 million (inclusive of the value of a charter card of 100 hours). Financing
was obtained from Wachovia through a note payable of $3.9 million. The note is
collateralized by the aircraft and requires the Company to maintain certain
financial covenants. 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 June 30, 2009 totaled approximately $3.0 million.





Midsouth
Services, Inc.: On October 10, 2007, Avantair acquired a core aircraft under a
capital lease obligation with Midsouth Services, Inc.  Under the lease
agreement, Midsouth provided funding for the $4.7 million purchase of a
pre-owned Piaggio 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 under this agreement at June 30, 2009 totaled
approximately $4.2 million.




In April
2009, the Company amended the Lease Agreement previously accounted for as an
operating lease, dated as of July 31, 2006 between the Company and Midsouth.
Pursuant to the amendment, the Company is required to pay $74,900 monthly until
August 2011, the expiration of the Lease Agreement. In addition, the Company has
agreed to purchase the leased aircraft for approximately $3.0 million from
Midsouth within sixty days following the expiration of the term of the Lease
Agreement. The lease, as amended, has been classified as a capital
lease.





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 a rate of $75,000 per month, plus taxes if applicable.
The Company is required to provide Midsouth with 100 hours of flight time per
year during the lease term. 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.





For
additional information regarding these financing arrangements, see Notes 8, 9
and 10 to the Company’s consolidated financial statements.


26


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





Obligations as of June 30, 2009(1)
              
              Long-Term
                Debt
                Obligations
              
              
              Operating
                Leases(2)
              
              
              Aircraft
                Purchase
                Commitments(3)2010
              
              $
              11,020,590
              
              
              $
              2,572,756
              
              
              $
              48,947,3712011
              
              
              3,740,793
              
              
              
              2,578,862
              
              
              
              61,184,2142012
              
              
              6,816,198
              
              
              
              2,614,835
              
              
              
              55,065,7932013
              
              
              4,778,576
              
              
              
              2,686,368
              
              
              
              42,828,9502014
              
              
              4,589,401
              
              
              
              2,779,275
              
              
              
              53,100,000After
      2014
              
              
              186,043
              
              
              
              18,999,302
              
              
              
              92,925,000Total
      minimum payment
              
              $
              31,131,601
              
              
              $
              32,231,398
              
              
              $
              354,051,328Less
      obligation prepayment as of June 30, 2009
              
              
              —
              
              
              
              —
              
              
              
              8,600,000$
              31,131,601
              
              
              $
              32,231,398
              
              
              $
              345,451,328




(1)
              Amounts
      shown in table are not necessarily representative of, and may vary
      substantially from, amounts that will actually be paid in future years as
      Avantair may incur additional or different obligations subsequent to June
      30, 2009.


(2)
              Includes
      hangar, office and auto leases.


(3)
            Includes
      purchase commitments for 56 Piaggio Avanti II aircraft through
      2013.




Item 7A.
Quantitative and Qualitative Disclosures about Market Risk





Quantitative
and Qualitative Disclosures about Market Risk





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




Interest
Rate Risk





Avantair
is subject to market risk from exposure to changes in interest rates associated
with its debt facility with Wachovia Bank. The current liability, pursuant to
which Avantair is obligated to pay Wachovia Bank, has an interest rate that is
equal to the LIBOR rate plus 4.0%. At June 30, 2009, the liabilities of Avantair
with exposure to interest rate risk were approximately $3.0
million.




June 30, 2009Expected Maturity Date2010
                                
                                
                                2011
                                
                                
                                2012
                                
                                
                                2013
                                
                                
                                2014
                                
                                
                                Thereafter
                                
                                
                                TotalLiabilitiesLong
      term debt:Fixed
      Rate
                                
                                $
                                10,462,461
                                
                                
                                $
                                3,182,664
                                
                                
                                $
                                6,528,070
                                
                                
                                $
                                4,220,448
                                
                                
                                $
                                4,031,273
                                
                                
                                $
                                -
                                
                                
                                $
                                28,154,916Average
      interest rate
                                
                                
                                9.6
                                %
                                
                                
                                9.6
                                %
                                
                                
                                9.4
                                %
                                
                                
                                9.4
                                %
                                
                                
                                9.4
                                %
                                
                                
                                7.3
                                %Variable
      Rate
                                
                                $
                                558,129
                                
                                
                                $
                                558,129
                                
                                
                                $
                                558,128
                                
                                
                                $
                                558,128
                                
                                
                                $
                                558,128
                                
                                
                                $
                                186,043
                                
                                
                                $
                                2,976,685Average
      interest rate
                                
                                
                                6.5
                                %
                                
                                
                                6.5
                                %
                                
                                
                                6.5
                                %
                                
                                
                                6.5
                                %
                                
                                
                                6.5
                                %
                                
                                
                                6.5
                                %





Off-Balance
Sheet Arrangements





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





Item 8.
Financial Statements and Supplementary Data





The
financial statements and supplementary data required by this item are included
in this Annual Report on Form 10-K beginning on page F-1.


27


Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure





None.





Item 9A(T).
Controls and Procedures




Evaluation
of Disclosure Controls and Procedures





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





Limitations
on the Effectiveness of Controls and Other Matters





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




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





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





The
Company assessed the effectiveness of the Company’s internal control over
financial reporting as of June 30, 2009. In making this assessment, management
used the criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission.





Based on
the assessment, management believes that, as of June 30, 2009, the Company’s
internal control over financial reporting was effective.




Changes
to Internal Control Over Financial Reporting




There has
been no change, other than those noted above, in the internal controls over
financial reporting during the year ended June 30, 2009, that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.




CEO
and CFO Certifications





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





Item 9B.
Other Information





Not
applicable.


28


PART
III





Item 10.
Directors, Executive Officers and Corporate Governance





Executive
Officers and Directors




The
Company’s current directors and executive officers are as follows:




Barry
      J. Gordon
              64
              Chairman
      of the BoardSteven
      Santo
              42
              Chief
      Executive Officer and DirectorArthur
      H. Goldberg
              67
              DirectorRichard
      B. DeWolfe
              65
              DirectorStephanie
      A. Cuskley
              49
              DirectorA.
      Clinton Allen
              65
              DirectorRobert
      J. Lepofsky
              64
              DirectorRichard
      A. Pytak Jr.
              47
              Chief
      Financial OfficerKevin
      Beitzel
              40
              Chief
      Operating Officer





Barry J. Gordon. Mr. Gordon
has been Avantair’s (formerly known as Ardent Acquisition Corporation) Chairman
of the Board since its inception. Mr. Gordon has nearly 40 years of experience
in evaluating aviation industry securities, including membership for 25 years in
the Society of Airline Analysts (with 5 years as its president), and over 30
years experience in the senior management of a mutual fund specializing in the
airline, aerospace and technology industries. Mr. Gordon served as executive
vice president of American Fund Advisors, Inc. from September 1978 until
December 1980, as its president from December 1980 until May 1987 and has been
its chairman of the board since May 1987. American Fund Advisors is a private
money management firm that manages money for high net worth individuals, pension
and profit sharing plans. Mr. Gordon has been a director of American Fund
Advisors since December 1980. From December 1991 to March 2005, he was
president, and from December 1991 to December 1993, he was director, of the John
Hancock Technology Series, Inc., an investment company. Since September 1999,
Mr. Gordon has been President, Chief Executive Officer and a director of
BlueStone AFA Management, LLC, the general partner of the AFA Private Equity
Fund 1 (formerly BlueStone AFA Fund), a venture capital fund providing equity
capital for public and private companies primarily in the technology sector, and
since January 2000, he has been a director of the AFA Private Equity Fund. Mr.
Gordon has been Chairman of the Board and Chief Executive Officer of North Shore
Acquisition Corp., a blank check company formed in June 2007 for the purpose of
effecting a business combination with an operating business, since its inception
in June 2007. Mr. Gordon has also been chairman of the board and Chief Executive
Officer of the New Jersey Cardinals, a Class A affiliate of the St. Louis
Cardinals, from February 1990 until April 2006 and the Norwich Navigators, a
Class AA affiliate of the San Francisco Giants, from March 1991 until April
2005. He also served as a director of Winfield Capital Corp., an Over The
Counter Bulletin Board listed small business investment company, from October
1995 to October 2005. In 1992, Mr. Gordon was awarded Entrepreneur of the Year
for Long Island in financial services. Mr. Gordon received a B.B.A. from the
University of Miami and an M.B.A. from Hofstra University.




Steven F. Santo. Mr. Santo has
served as Chief Executive Officer, President and a Director of Avantair since
its inception in June 2003 and Skyline Aviation Services, Inc. since June 2002.
Mr. Santo is a licensed, commercially-rated pilot who has been flying for
approximately 21 years. From 1995 through 2001, Mr. Santo practiced law as an
attorney in private practice, concluding his law practice in 2001 as a name
partner at the firm of Fields, Silver & Santo. From 1992 to 1995, Mr. Santo
served as an Assistant District Attorney in New York working in the office’s
major crimes unit. Mr. Santo received a J.D. from St. Johns’ University School
of Law and a bachelor’s degree from Villanova University.




Arthur H. Goldberg. Mr.
Goldberg has been a member of Avantair’s (formerly known as Ardent Acquisition
Corporation) Board of Directors since inception. Mr. Goldberg has served as a
member of Corporate Solutions Group since January 2000. From February 1994 to
December 1999, Mr. Goldberg served president of Manhattan Associates, an
investment and merchant banking firm. Mr. Goldberg has been a trustee of
Ramco-Gershenson Properties Trust (formerly named RPS Realty Trust), a New York
Stock Exchange listed real estate investment trust, since 1998. Mr. Goldberg has
been a director of North Shore Acquisition Corp., a blank check company formed
in June 2007 for the purpose of effecting a business combination with an
operating business, since its inception in June 2007. Mr. Goldberg received a
B.S. (cum laude) from New York University Stern School and a J.D. from the New
York University School of Law.




Richard B. DeWolfe. Mr.
DeWolfe was appointed to the Board effective January 29, 2009. Mr. DeWolfe is
Managing Partner of DeWolfe & Company, LLC, a real estate management and
investment consulting firm.  He serves as a Director and Chairman of
the Audit Committee of Manulife Financial Corporation which is the parent
company of John Hancock Financial Services, Inc. He is also a director of The
Boston Foundation; Trustee of Boston University; Trustee of the Marine
Biological Laboratory; and an honorary director of The Boston Center for
Community and Justice.  He was formerly Chairman and CEO of The
DeWolfe Companies, Inc., the largest homeownership organization in New England,
which was previously listed on the American Stock Exchange and acquired by
Cendant Corporation in 2002.  Mr. DeWolfe was formerly Chairman and
Founder of Reliance Relocations Services, Inc. and was formerly Chairman of the
Board of Trustees, Boston University. Mr. DeWolfe holds a BAS, Marketing and
Finance from Boston University.




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


29




A. Clinton Allen.Mr. Allen
has served as a member of Avantair’s Board of Directors since 2007. Mr. Allen is
the CEO of A. C. Allen & Company, a private investment banking consulting
firm. He is the Lead Director of Steinway Musical Instruments, one of the
world’s largest manufacturers of musical instruments. He is also a member of the
board of directors of Brooks Automation, Inc., which provides integrated tool
and factory automation solutions for the global semiconductor and related
industries, the board of directors and Executive Committee of LKQ Corporation,
the largest nationwide provider of recycled OEM automotive parts and Chairman of
the Board of Collectors Universe, a high end provider of collectible and gem
grading. He served on the board of directors of Blockbuster Entertainment
Corporation from 1986 until its acquisition by Viacom/Paramount in September
1994. Mr. Allen graduated from Harvard University and serves on the Executive
Committee of the Friends of Harvard Football, as well as the Harvard Visiting
Committee on University Resources and the Harvard Major Gifts Committee. He is a
member of the Board of Directors and the President’s Council of the
Massachusetts General Hospital. Mr. Allen has earned an Advanced Professional
Director Certification issued by the Corporate Directors Group, an accredited
educational organization of RiskMetric ISS Governance Services.




Robert J. Lepofsky. Mr.
Lepofsky has served as a member of Avantair’s Board of Directors since 2007. Mr.
Lepofsky has been the President, Chief Executive Officer and Director of Brooks
Automation, Inc., a publicly held producer of automation, vacuum and
instrumentation solutions for the global semiconductor industry since October
2007. Mr. Lepofsky has also been Chairman of Westcliff Capital Group, a private
holding company since November 2006. After serving for ten years on the Board of
Directors of Ensign-Bickford Industries, Inc., a broadly diversified,
privately-held corporation with business interests ranging from food flavorings,
industrial manufacturing, aerospace defense products and real estate
development, Mr. Lepofsky became President and Chief Executive Officer of
Ensign-Bickford in January 2005, a position he held until his retirement in
November, 2006. From January 1989 to December 2004, Mr. Lepofsky was President
and Chief Executive Officer of Helix Technology Corporation, a publicly-held
producer of innovative vacuum systems for the semiconductor industry. Mr.
Lepofsky previously served as its Senior Vice President and Chief Operating
Officer from 1979 through 1988. From January 2005 Mr. Lepofsky was non-executive
Chairman of the Board of Helix, a position he held until October 2005 when Helix
merged with Brooks Automation, Inc. In the not-for-profit sector Mr. Lepofsky is
a member of the Board of Overseers of the Boston Symphony Orchestra and a Life
Trustee at the Beth Israel Deaconess Medical Center - a major Harvard teaching
hospital in Boston. Mr. Lepofsky received his B.S. degree from Drexel Institute
of Technology.




Richard A. Pytak Jr. Mr. Pytak
has been the Chief Financial Officer since April 14, 2008. Prior thereto, Mr.
Pytak was the Company’s Vice President of Finance since joining the Company in
February 2008. Prior to joining Avantair, Mr. Pytak served as Group Controller
of Gibraltar Industries, Inc., from August 2003 to January 2008 and as Treasurer
from June 1998 to July 2003. Gibraltar Industries, Inc. is a leading
manufacturer, processor, and distributor of products for the building,
industrial, and vehicular markets, with annual sales of over $1 billion dollars
in 2007.




Kevin Beitzel. Mr. Beitzel has
been the Chief Operating Officer since February 8, 2008. Mr. Beitzel served as
the Company’s Executive Vice President of Maintenance and Operations from
September 2007 to February 8, 2008. From December 2005 through August 2007, Mr.
Beitzel served as the Company’s Vice President of Maintenance. Prior to joining
Avantair, Mr. Beitzel served as Director of Vendor Maintenance at US Airways
from February 2005 to December 2005. From July 1999 to February 2005 Mr. Beitzel
served as Maintenance Operations Manager at US Airways.




Corporate
Governance and Board of Directors Matters




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




Current
Members of the Board of Directors




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




Director
                
                Audit
                  Committee
                
                Compensation
                  Committee
                
                Nominating and
                  Corporate Governance
                  CommitteeBarry
      J. GordonArthur
      H. Goldberg
                
                ü
                
                ü
                
                üSteven
      SantoStephanie
      A. Cuskley
                
                Chair
                
                
                
                üA.
      Clinton Allen
                
                
                
                ChairRobert
      J. Lepofsky
                
                ü
                
                ü
                
                ChairRichard
      B. DeWolfe
                
                ü
                
                ü




30




Role
of the Board of Directors’ Committees




The Board
of Directors has a standing Audit, Compensation and Nominating and Corporate
Governance Committees.




Audit
Committee . The functions of the Audit Committee are described below
under the heading “Report of the Audit Committee.” The current charter of the
Audit Committee was revised on September 18, 2008, and is available in the
Investors section of Avantair’s website (www.avantair.com). A copy of
this charter may also be obtained upon request from Avantair’s Corporate
Secretary. The audit committee consists of four directors, Ms. Cuskley and
Messrs. Goldberg, Lepofsky, and DeWolfe each of who are considered independent
within the meaning of SEC regulations and the listing standards of the Nasdaq
Global Market. The Company’s audit committee includes at least one member who
has been determined by the board of directors to meet the qualifications of an
“audit committee financial expert” (as that term is defined in the rules
promulgated by the SEC pursuant to the Sarbanes-Oxley Act of 2002). Ms. Cuskley
is the independent director who has been determined to be an audit committee
financial expert. The Audit Committee met seven times during the fiscal year
ended June 30, 2009.




Nominating and
Corporate Governance Committee. The Nominating and Corporate Governance
Committee is responsible for developing and implementing policies and practices
relating to corporate governance, including reviewing and monitoring
implementation of Avantair’s Corporate Governance Charter. In addition, the
Nominating and Corporate Governance Committee develops and reviews background
information on candidates for the Board of Directors and makes recommendations
to the Board of Directors regarding such candidates. The Nominating and
Corporate Governance Committee also evaluates and makes recommendations to the
Board of Directors in connection with its annual review of director
independence. The current charter of the Nominating and Corporate Governance
Committee is available in the Investors section of Avantair’s website (www.avantair.com). A copy of
this charter may also be obtained upon request from Avantair’s Corporate
Secretary. All of the members of the Nominating and Corporate Governance
Committee are independent within the meaning of the listing standards of the
Nasdaq Global Market. The members of the corporate governance and nominating
committee are Ms. Cuskley and Messrs. Goldberg and Lepofsky. Mr. Lepofsky serves
as chairman of the corporate governance and nominating committee. The Nominating
and Corporate Governance Committee met three times the during fiscal year ended
June 30, 2009.




Compensation
Committee. The compensation committee of the board of directors reviews,
makes recommendations to the board and approves the Company’s compensation
policies and all forms of compensation to be provided to the executive officers
and directors, including, among other things, annual salaries, bonuses, stock
options and other incentive compensation arrangements. In addition, the
compensation committee administers the Company’s stock plans, including
reviewing and granting stock options, with respect to its executive officers and
directors, and may from time to time assist the board of directors in
administering its stock plans with respect to all of the other employees. The
compensation committee also reviews and approves other aspects of compensation
policies and matters. The current charter of the Compensation Committee was
revised on September 18, 2008, and is available in the Investors section of
Avantair’s website (www.avantair.com). A copy of
this charter may also be obtained upon request from Avantair’s Corporate
Secretary. All of the members of the Compensation Committee are independent
within the meaning of the listing standards of the Nasdaq Global Market. The
current members of the compensation committee are Messrs. Allen, Goldberg,
Lepofsky, and DeWolfe. Mr. Allen serves as chairman of the Compensation
Committee. The Compensation Committee met two times during the fiscal year ended
June 30, 2009.




Executive
Sessions of the Independent Directors




The
Company’s “non-employee” directors (as determined under the listing standards of
the Nasdaq Global Market) typically meet at each regularly scheduled meeting of
the Board of Directors, in executive session without any management present. No
single director has been chosen to preside at all of such meetings. Instead, a
director is selected at each such meeting to preside over such meeting. See the
section titled “Stockholder Communication with the Board of Directors” for the
method for interested parties to make their concerns known to an independent
director, or the independent directors as a group.




Board
of Directors Meetings during Fiscal 2009




The Board
of Directors held a total of seven meetings during the fiscal year ended June
30, 2009. All directors attended 75% or more of the aggregate number of Board of
Directors meetings and committee meetings. The Chairman of the Board presides
over all meetings of the Board of Directors.




Policy
Regarding Attendance at Annual Meeting of Stockholders




Avantair
encourages all directors to endeavor to attend all annual stockholders meetings,
absent unanticipated personal or professional obligations which preclude them
from doing so. The majority Avantair’s directors attended the 2009 Annual
Meeting.




Stockholder
Communication with the Board of Directors




The board
of directors will give appropriate attention to written communications on issues
that are submitted by stockholders and other interested parties, and will
respond if and as appropriate. The chairman of the nominating and corporate
governance committee will be primarily responsible for monitoring communications
from stockholders and other interested parties and will provide copies or
summaries of such communications to the other directors as he considers
appropriate.




Communications
will be forwarded to all directors if they relate to substantive matters and
include suggestions or comments that the chairman of the nominating and
corporate governance committee considers to be important for the directors to
know.




Stockholders
and other interested parties who wish to send communications on any topic to the
board of directors should address such communications to chairman of the
corporate nominating and corporate governance committee at the address provided
on the first page of this Annual Report on Form 10-K.


31




Code
of Conduct and Professional Ethics




The
Company’s board of directors has adopted a code of conduct and professional
ethics that applies to all of its directors, employees and officers, including
its principal executive officer, principal financial officer, and principal
accounting officer or controller, or persons performing similar functions. The
full text of the Company’s code of conduct and professional ethics is posted on
its website at www.avantair.com under the
Corporate Governance section. The Company intends to disclose future amendments,
if any, to certain provisions of its code of conduct and professional ethics, or
waivers of such provisions, applicable to its directors and executive officers,
including its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, at the same location on its website identified above and also in a
Current Report on Form 8-K within four business days following the date of such
amendment or waiver. The inclusion of the Company’s website address in this
Annual Report on Form 10-K does not include or incorporate by reference the
information on its website into this Annual Report on Form 10-K.




Directors’
Compensation




Upon the
recommendation of the compensation committee, the full board of directors
approved an annual compensation arrangement for the Company’s independent
directors effective February 23, 2007. Such arrangement is comprised as
follows:




Annual Fee. Each director,
other than those directors serving as employees, receives an annual cash
retainer in the amount of $40,000, paid quarterly in arrears. Each director has
the option to receive, in whole or in part, such amount in cash or hours flown
in Company aircraft. The hours flown in Company aircraft will be valued at
estimated fair market value. Mr. Gordon will receive an additional $35,000 in
annual cash compensation for service as the non-Executive Chairman.




Audit Committee Chair. The
chair of the audit committee, Ms. Cuskley, receives an additional annual cash
compensation of $20,000 as the audit committee chair.




In March
2008, Avantair granted 3,000 shares of restricted stock to each of the then five
non-employee directors on the Company’s Board of Directors. In addition, on May
2009, Avantair granted 3,000 shares of restricted stock to each of the six
non-employee directors on the Company’s Board of Directors. The restricted
shares granted to the director’s vest one third upon each of the next three
successive annual meetings, subject to the grantee’s continued service on the
Board of Directors.





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




Director
Compensation Table




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





(1)
            The
      fees earned by the directors may be paid, at the director’s option, in
      cash and/or in hours flown in Company aircraft at estimated fair market
      value per hour. Messrs. Allen, Goldberg, Lepofsky and DeWolfe have chosen
      to be paid in hours flown in company
aircraft.


Mr.
      Gordon and Ms. Cuskley have chosen to be paid in
  cash.


(2)
            The
      amounts shown reflect the dollar amount recognized for financial statement
      reporting purposes for the fiscal year ended June 30, 2009, in accordance
      with Statement of Financial Accounting Standards No. 123(R). The balance
      remaining to be recognized over the remaining vesting period of the award
      is $29,852.


32


Item 11.
Executive Compensation




COMPENSATION
DISCUSSION AND ANALYSIS




The
primary goals of the compensation committee of Avantair’s board of directors
with respect to executive compensation are to attract and retain the most
talented and dedicated executives possible, to tie annual and long-term cash and
stock incentives to achievement of specified performance objectives, and to
align executives’ incentives with stockholder value creation.




To
achieve these goals, the compensation committee recommends executive
compensation packages to the board of directors that are generally based on a
mix of salary, discretionary bonus and equity awards. Although the compensation
committee has not adopted any formal guidelines for allocating total
compensation between equity compensation and cash compensation, the Company
intends to implement and maintain compensation plans that tie a substantial
portion of its executives’ overall compensation to achievement of corporate
goals and value-creating milestones such as the development of the Company’s
products, the establishment and maintenance of key strategic relationships,
reaching sales and marketing targets and the growth of its customer base as well
as its financial and operational performance, as measured by metrics such as
revenues and profitability.




The
compensation committee performs reviews based on surveys of executive
compensation paid by peer companies in the fractional aircraft industry as well
as reviews other industries of similar age and size, as it sees fit, in
connection with the establishment of cash and equity compensation and related
policies.




Elements
of Compensation




The
compensation committee evaluates individual executive performance with a goal of
setting compensation at levels the committee believes are comparable with
executives in other companies of similar size and stage of development operating
in the industry and are competitive and further the Company’s objectives of
motivating achievement of its short- and long-term financial performance goals
and strategic objectives, rewarding superior performance and aligning the
interests of its executives and shareholders. The compensation received by the
Company’s executive officers consists of the following elements:




·
            base
      salary;


·
            discretionary
      annual bonus;


·
            equity-based
      long-term incentives, including stock appreciation rights and
      performance-based restricted stock;
and


·
            401(k),
      profit-sharing, welfare and other personal
  benefits




Base
Salary




General
Considerations




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




The
compensation committee believes that these base salary levels are commensurate
with the general salary levels for similar positions in companies in a similar
stage of development in the industry.




Annual
Incentive Compensation





Discretionary
Annual Bonus





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




Long-Term
Compensation- 2006 Long-Term Incentive Plan




In
February 2007, Avantair’s Board of Directors and stockholders approved
Avantair’s 2006 Long Term Incentive Plan (which we sometimes refer to as “the
Plan”).




The
purpose of the Plan is to further and promote the interests of Avantair, its
subsidiaries and its stockholders by enabling Avantair and its subsidiaries to
attract, retain and motivate employees, non-employee directors and consultants
or those who will become employees, non-employee directors or consultants, and
to align the interests of those individuals and Avantair’s
stockholders.


33




Number
of Shares




The
maximum number of shares of Avantair common stock as to which awards may be
granted under the Plan may not exceed 1,500,000 shares. Shares of Avantair
common stock subject to issuance upon exercise or settlement of awards with
respect to stock options, stock appreciation rights, restricted stock and
restricted stock units shall count against this limit. Awards of performance
units which are paid in cash are not subject to this limit and will not count
against the number of shares of Avantair common stock available under the Plan.
With respect to awards intending to be “qualified performance-based
compensation” under Section 162(m) of the Internal Revenue Code (which is
referred to as “the Code”) the maximum amount that can be awarded in any
calendar year to any participant is (i) in respect of performance units,
performance-based restricted shares and restricted stock units and other awards
(other than options and stock appreciation rights), 150,000 shares of Avantair
common stock (or the then equivalent fair market value of such shares), and (ii)
in the case of stock options and stock appreciation rights, 150,000 underlying
shares of Avantair common stock. Avantair may grant awards that exceed the
150,000 share limit so long as the amount in excess of such limit is not
intended to be “qualified performance-based compensation” under the code. The
limits on the numbers of shares described in this paragraph and the number of
shares subject to any award under the Plan are subject to proportional
adjustment as determined by Avantair’s Board to reflect certain stock changes,
such as stock dividends and stock splits (see “Recapitalization Adjustments”
below).




If any
awards under the Plan expire or terminate unexercised, the shares of common
stock allocable to the unexercised or terminated portion of such award shall
return to Avantair’s treasury and again be available for award under the
Plan.




Administration




The
administration, interpretation and operation of the Plan will be vested in the
Compensation Committee of Avantair’s Board of Directors. The Compensation
Committee may designate persons other than members of the Compensation Committee
to carry out the day-to-day administration of the Plan.




Eligibility




The Plan
permits awards to employees and non-employee directors and consultants of
Avantair and its subsidiaries.




No
determination has been made as to future awards which may be granted under the
Plan, although it is anticipated that recipients of awards will include the
current executive officers of Avantair. It is not determinable what awards under
the Plan would have been received by the executive officers and directors of
Avantair and its subsidiaries.




Awards
under the Plan




Awards
under the Plan may consist of stock options, stock appreciation rights (which
are sometimes referred to as SARs), restricted shares, restricted stock units or
performance unit awards, each of which is described below. All awards will be
evidenced by an award agreement between Avantair and the individual participant
and approved by the Compensation Committee. At the discretion of the
Compensation Committee, an eligible employee may receive awards from one or more
of the categories described below, and more than one award may be granted to an
eligible employee.




Stock
Options and Stock Appreciation Rights




A stock
option is an award that entitles a participant to purchase shares of Avantair
common stock at a price fixed at the time the option is granted. Stock options
granted under the Plan may be in the form of incentive stock options (which
qualify for special tax treatment) or non-qualified stock options, and may be
granted alone or in addition to other awards under the Plan.




An SAR
entitles a participant to receive, upon exercise, an amount equal to the excess
of the fair market value on the exercise date of a share of Avantair common
stock, over the fair market value of a share of Avantair common stock on the
date the SAR was granted, multiplied by the number of shares of Avantair common
stock for which the SAR has been exercised.




The
exercise price and other terms and conditions of stock options and the terms and
conditions of SARs will be determined by the Compensation Committee at the time
of grant, and in the case of stock options, the exercise price per share may not
be less than 100 percent of the fair market value of a share of Avantair common
stock on the date of the grant. In addition, the term of any incentive stock
options granted under the Plan may not exceed ten years. An option or SAR grant
under the Plan does not provide the recipient of the option any rights as a
shareholder and such rights will accrue only as to shares actually purchased
through the exercise of an option or the settlement of an SAR.




If stock
options and SARs are granted together in tandem, the exercise of such stock
option or the related SAR will result in the cancellation of the related stock
option or SAR to the extent of the number of shares in respect of which such
option or SAR has been exercised.




Stock
options and SARs granted under the Plan shall become exercisable at such time as
designated by the Compensation Committee at the time of grant.




Payment
for shares issuable pursuant to the exercise of a stock option may be made
either in cash, by certified check, bank draft or money order payable to the
order of Avantair, or by payment through any other mechanism permitted by the
Compensation Committee, including, if the Compensation Committee so determines,
by delivery of shares of Avantair common stock.




In
addition, the Compensation Committee, in its sole discretion, may provide in any
stock option or SAR award agreement that the recipient of the stock option or
SAR will be entitled to dividend equivalents with respect to such award. In such
instance, in respect of any such award which is outstanding on a dividend record
date for Avantair common stock, the participant would be entitled to an amount
equal to the amount of cash or stock dividends that would have paid on the
shares of Avantair common stock covered by such stock option or SAR award had
such shares of Avantair common stock been outstanding on the dividend record
date.


34




Restricted
Share Awards and Restricted Stock Units




Restricted
share awards are grants of Avantair common stock made to a participant subject
to conditions established by the Compensation Committee in the relevant award
agreement on the date of grant. Restricted stock units are similar to restricted
shares except that no shares of common stock are actually awarded to a
participant on the date of grant and the common stock underlying the award will
generally be provided to the participant after the vesting conditions have been
satisfied.




Restricted
shares and restricted stock units will vest in accordance with the conditions
and vesting schedule, if any, provided in the relevant award agreement. A
participant may not sell or otherwise dispose of restricted shares or restricted
stock units until the conditions imposed by the Compensation Committee with
respect to such shares and/or units have been satisfied. Restricted share awards
and restricted stock units under the Plan may be granted alone or in addition to
any other awards under the Plan. Restricted shares which vest will be reissued
as unrestricted shares of Avantair common stock.




Each
participant who receives a grant of restricted shares will have the right to
receive all dividends and vote or execute proxies for such shares. Any stock
dividends granted with respect to such restricted shares will be treated as
additional restricted shares. Participants receiving grants of restricted stock
units will not be stockholders until the common stock underlying the award is
provided to them and they will not enjoy the rights of stockholders (such as
receiving dividends and voting or executing proxies) until that
time.




Performance
Units




Performance
units (with each unit representing a monetary amount designated in advance by
the Compensation Committee) are awards which may be granted to participants
alone or in addition to any other awards granted under the Plan. Generally,
participants receiving performance unit grants will only earn such units if
certain performance goals are satisfied during a designated performance period.
The Compensation Committee will establish such performance goals and may use
measures such as level of sales, earnings per share, income before income taxes
and cumulative effect of accounting changes, income before cumulative effect of
accounting changes, net income, earnings before interest and taxes, return on
assets, return on equity, return on capital employed, total stockholder return,
market valuation, cash flow, Cash EBITDA, completion of acquisitions and/or
divestitures, comparisons to peer companies, individual or aggregate participant
performance or such other measure or measures of performance as the Compensation
Committee determines. The participant may forfeit such units in the event the
performance goals are not met. If all or a portion of a performance unit is
earned, payment of the designated value thereof will be made in cash,
unrestricted shares of Avantair common stock, in restricted shares or in any
combination thereof, as provided in the relevant award agreement.




Performance
Goals for Qualified Performance-Based Compensation




Section
162(m) of the Code limits Avantair’s ability to deduct compensation paid to its
senior executive officers, unless the compensation qualifies as “qualified
performance-based compensation,” as defined in that section and the regulations
promulgated under that section. In order to qualify as “qualified
performance-based compensation,” the material terms of the performance goals
must be disclosed to Avantair’s stockholders and approved by the stockholders.
Among the material terms of the performance goals are descriptions of the
business criteria on which the performance goals will be based.




To the
extent possible Avantair intends to have the Plan satisfy the requirements of
Section 162(m) so that the Compensation Committee is able to grant awards
satisfying the requirements of “qualified performance-based compensation.”
Consequently, Avantair must disclose the following business criteria in
establishing performance goals under the plan:




·
            level
      of sales,


·
            earnings
      per share,


·
            income
      before income taxes and cumulative effect of accounting
      changes,


·
            income
      before cumulative effect of accounting
changes,


·
            net
      income,


·
            earnings
      before interest and taxes,


·
            return
      on assets,


·
            return
      on equity,


·
            return
      on capital employed,


·
            total
      stockholder return,


·
            market
      valuation,


·
            cash
      flow,


·
            cash
      EBITDA,


·
            comparisons
      to peer companies, and


·
            completion
      of acquisitions and/or
divestitures.




These
performance goals will be based on any of the above business criteria, either
alone or in any combination, on either a consolidated or business unit or
divisional level, as the Compensation Committee may determine. Such business
criteria will have any reasonable definitions that the Compensation Committee
may specify, which may include or exclude any or all of the following items:
extraordinary, unusual or non-recurring items; effects of accounting changes;
effects of currency fluctuations; effects of financing activities (e.g., effect
on earnings per share of issuing convertible debt securities); expenses for
restructuring or productivity initiatives; non-operating items; acquisition
expenses; and effects of divestitures. Any such performance criterion or
combination of such criteria may apply to a participant’s award opportunity in
its entirety or to any designated portion or portions of the award opportunity,
as the Compensation Committee may specify.


35




Recapitalization
Adjustments




Awards
granted under the Plan, any agreements evidencing such awards and the maximum
number of shares of Avantair common stock subject to all awards, as well as the
per participant per calendar year limitations described above, shall be subject
to adjustment or substitution, as determined by Avantair’s Board of Directors,
as to the number, price or kind of a security or other consideration subject to
such awards or as otherwise determined by the Board to be equitable (i) in the
event of changes in the outstanding stock or in the capital structure of
Avantair by reason of stock or extraordinary cash dividends, stock splits,
reverse stock splits, recapitalization, reorganizations, mergers,
consolidations, combinations, exchanges, or other relevant changes in
capitalization occurring after the date of grant of any such award or (ii) in
the event of any change in applicable laws or any change in circumstances which
results in or would result in any substantial dilution or enlargement of the
rights granted to, or available for, participants, or which otherwise warrants
equitable adjustment because it interferes with the intended operation of the
Plan. Avantair shall give each participant notice of an adjustment hereunder
and, upon notice, such adjustment shall be conclusive and binding for all
purposes.




Mergers
and Other Similar Events




In the
event of any of the following:




A.
            Avantair
      is merged into or consolidated with another corporation or
      entity;


B.
            All
      or substantially all of the assets of Avantair are acquired by another
      person; or


C.
            The
      reorganization or liquidation of
Avantair




Avantair’s
Board of Directors may cancel any outstanding awards and cause the holders
thereof to be paid, in cash, securities or other property (including any
securities or other property of a successor or acquirer), or any combination
thereof, the value of such awards as determined by Avantair Board of Directors,
in its sole discretion (e.g., in the case of Stock Options, based upon the
excess of the value of a share of Avantair common stock over the exercise price
per share). Avantair’s Board of Directors may provide that such cash, securities
or other property is subject to vesting and/or exercisability terms similar to
the award being cancelled.




Amendment,
Suspension or Termination of the Plan




Unless
earlier terminated by Avantair’s Board of Directors, the Plan shall terminate on
the date 10 years after the date the first award is granted thereunder. The
Board may amend, suspend or terminate the Plan (or any portion thereof) at any
time. However, no amendment shall (a) materially and adversely affect the rights
of any participant under any outstanding award, without the consent of such
participant (except as described below) or (b) increase the number of shares
available for awards under the Plan without shareholder approval.




Section
409A of the Code provides substantial penalties to persons deferring taxable
income, unless the requirements of Section 409A have been
satisfied.  The Plan provides the ability to issue awards that may be
subject to subject to Section 409. The Plan explicitly provides the ability for
Avantair’s Board of Directors to amend the Plan , without participant consent,
in any way it deems appropriate, even if such amendment would materially and
adversely affect the rights of participants to satisfy Section 409A and the
regulations that will be issued thereunder.




401(k)
and Retirement Programs




The
Company has a tax-qualified employee savings and retirement plan, or 401(k)
plan, which generally covers its employees. The plan is intended to qualify
under Sections 401(a), 401(k) and 401(m) of the Internal Revenue Code of 1986,
as amended, so that contributions, and income earned thereon, are not taxable to
employees until withdrawn from the plan. Under the plan, employees may elect to
reduce their current compensation by up to the statutorily prescribed annual
limit ($16,500 in calendar year 2009) and have the amount of the reduction
contributed to the plan. The plan also permits, but does not require, us to make
matching contributions and profit-sharing contributions to the plan on behalf of
participants. In addition, eligible employees may elect to contribute an
additional amount of their eligible compensation as a catch-up contribution to
the 401(k) plan, provided that such employees are age 50 or older ($5,500 in
calendar year 2009). To date, the Company has not made any discretionary or
profit-sharing contributions to the 401(k) plan. As a tax-qualified plan, the
Company can generally deduct contributions from the participants pre-tax
compensation when made, and such contributions and their earnings are not
taxable to participants until distributed from the plan. Pursuant to the terms
of the plan, participants may direct the trustees to invest their accounts in
selected investment options.




Nonqualified
Deferred Compensation




On
December 18, 2008, the Company adopted the Avantair Leadership Deferred
Compensation Plan (which we sometimes refer to as the “Deferred Compensation
Plan”) approved by the Board of Directors for a select group of management or
highly compensated employees, and non-employee Directors, effective January 1,
2009. The Deferred Compensation Plan is comprised of an Adoption Agreement and a
Basic Plan Document. The Deferred Compensation Plan is a nonqualified, unfunded
deferred compensation plan that provides specified benefits to a select group of
management or highly compensated employees. Specifically, the Deferred
Compensation Plan is intended to:




·
            provide
      participants with supplemental retirement benefits determined by the
      Company in its complete discretion (which amounts may vary by participant
      and which are subject to a vesting requirement);
  and


·
            allow
      participants to defer compensation in excess of the amounts permitted
      under the Avantair Inc. 401(k) Profit Sharing Plan &
      Trust.


36




Investment
returns on amounts credited pursuant to the Plan are based on one or more
investment funds selected by a participant from among those provided under the
Deferred Compensation Plan.




The
Deferred Compensation Plan will provide the payments to a participant who
separated from service in a single lump sum or in annual installments over 5,
10, or 15 years, as elected by the participant.  Payments will be made
in a single lump sum due to the participant’s death, disability, or termination
of the Deferred Compensation Plan (under certain conditions).  In
addition, in the event of an unforeseeable financial emergency, a participant
may make a written request to the Deferred Compensation Plan administrator for a
hardship withdrawal.  No income taxes are payable on amounts credited
pursuant to the Deferred Compensation Plan until paid to the
participant.




The
Company may amend or terminate the Deferred Compensation Plan at any
time.




As of
June 30, 2009, the Company has made no contributions to the Plan.




Welfare
and Other Benefits




The
Company maintains benefit programs for its U.S. based employees, including
medical and prescription coverage, dental and vision programs, short and
long-term disability insurance, group life insurance and supplemental life
insurance as well as customary vacation, leave of absence and other similar
policies. Avantair’s Named Executive Officers are eligible to participate in
these programs on the same basis as the rest of the salaried
employees.




Policies
Relating to Our Common Stock




Insider
Trading Policy and Stock Ownership Guidelines




Avantair’s
insider trading policy prohibits directors, employees and certain of their
family members from purchasing or selling any type of security, whether issued
by the Company or another company, while aware of material non-public
information relating to the issuer of the security or from providing such
material non-public information to any person who may trade while aware of such
information. The Company restricts trading by its officers and directors, as
well as other categories of employees who may be expected in the ordinary course
of performing their duties to have access to material non-public information, to
quarterly trading windows that begin at the close of business on the second
trading day following the date of public disclosure of the financial results for
the prior fiscal quarter or year and end on the tenth calendar day of the third
fiscal month of the fiscal quarter. While the Company does not have a policy
that specifically prohibits its executive officers from hedging the economic
risk of stock ownership in its stock, it discourages its executive officers from
entering into certain types of hedges with respect to its securities. In
addition, federal securities laws prohibit the executive officers from selling
“short” the stock.




Tax
and Accounting Considerations




Tax
Deductibility of Executive Compensation




Section
162(m) of the Internal Revenue Code generally prohibits a public company from
deducting compensation paid in any year to Named Executive Officers in excess of
$1.0 million. Certain compensation is specifically exempt from the deduction
limit to the extent it qualifies as “performance-based” under the qualification
requirements established under Section 162(m). In evaluating whether to
structure executive compensation components as qualified performance-based
compensation and thus, tax deductible, the Compensation Committee considers the
net cost to us, its ability to effectively administer executive compensation in
the long-term interest of stockholders, and the specific corporate goal
underlying the various items of compensation. Stock option grants and
performance share awards made to executive officers under the Company’s 2006
Long- Term Incentive Plan and cash payments under its Discretionary Annual Bonus
are structured generally to be fully deductible under Section 162(m). The
Compensation Committee believes, however, that it is important to preserve the
flexibility in administering compensation programs in a manner designed to
promote corporate goals.




Section
409A of the Internal Revenue Code requires that “nonqualified deferred
compensation” be deferred and paid under plans or arrangements that satisfy the
requirements of the law with respect to the timing of deferral elections, timing
of payments and certain other matters. In general, it is the Company’s intention
to design and administer its compensation and benefits plans and arrangements
for all of its employees so that they are either exempt from, or satisfy the
requirements of, Section 409A. The Company believes it is currently operating
such plans in compliance with Section 409A.




Accounting
for Share-Based Compensation




Before
the Company grants share-based compensation awards, it considers the accounting
impact of the award as structured and other scenarios in order to analyze the
expected impact of the award.


37


Summary
Compensation Table




The
following table summarizes the compensation of Avantair’s Named Executive
Officers for the fiscal year ended June 30, 2009. The Named Executive Officers
are the Company’s Chief Executive Officer and Chief Financial Officer, along
with its next most highly compensated executive officer, based upon total
compensation as reflected in the table below.




All OtherSalary
                              
                              
                              Bonus
                              
                              
                              Stock
                              
                              
                              Compensation
                              
                              
                              TotalName and Principal Position
                              
                              Year
                              
                              ($)
                              
                              
                              ($)(2)
                              
                              
                              Awards ($)(1)
                              
                              
                              ($)
                              
                              
                              ($)Steven
      Santo
                              
                              2009
                              
                              $
                              408,000
                              
                              
                              $
                              452,000
                              
                              
                              $
                              35,229
                              
                              
                              $
                              67,439
                              (3)
                              
                              $
                              962,668Chief
      Executive Officer and
                                Director
                              
                              2008
                              
                              
                              400,000
                              
                              
                              
                              100,000
                              
                              
                              
                              94,173
                              
                              
                              
                              74,450
                              
                              
                              
                              668,623Richard
      A. Pytak Jr.
                              
                              2009
                              
                              
                              189,298
                              
                              
                              
                              75,250
                              
                              
                              
                              -
                              
                              
                              
                              16,314
                              (4)
                              
                              
                              280,862Chief
      Financial Officer
                              
                              2008
                              
                              
                              59,077
                              
                              
                              
                              50,000
                              
                              
                              
                              -
                              
                              
                              
                              37,539
                              
                              
                              
                              146,616(As
      of April 14, 2008)Kevin
      L. Beitzel
                              
                              2009
                              
                              
                              230,526
                              
                              
                              
                              87,500
                              
                              
                              
                              5,256
                              
                              
                              
                              1,502
                              (4)
                              
                              
                              324,784Chief
      Operating Officer
                              
                              2008
                              
                              
                              179,006
                              
                              
                              
                              50,000
                              
                              
                              
                              14,933
                              
                              
                              
                              6,468
                              
                              
                              
                              250,407(As
      of February 8, 2008)





(1)
            The
      amounts shown reflect the dollar amount recognized for financial statement
      reporting purposes, in accordance with Statement of Financial Accounting
      Standards No. 123(R).


(2)
            The
      amounts shown reflect performance bonuses to Messrs. Santo, Pytak and
      Beitzel of $312,000, $75,250, and $87,500, respectively relating to fiscal
      year 2009 and $140,000 awarded to Mr. Santo in fiscal year 2009 as an
      additional performance bonus relating to fiscal year
  2008.


(3)
            The
      amounts shown for 2009 include a housing allowance of $45,936, and a tax
      gross up of $21,503 relating to this
perquisite.


(4)
            The
      amounts shown for 2009 includes tax gross up payments to Mr. Pytak of
      $16,314 for incidental moving expenses and Mr. Beitzel of $1,502 for an
      automobile allowance which did not exceed $25,000 or 10% of the total
      perquisites.




Grants
of Plan – Based Awards for the Fiscal Year Ended June 30, 2009




Awards of
restricted stock are granted under the 2006 Long-Term Incentive Plan. The Plan
was approved on February 22, 2007. The Company has granted shares of restricted
stock or other plan-based awards and plans to continue to grant shares of
restricted stock or other plan-based awards to executive officers, employees and
other service providers. Avantair made no stock grants to its executive officers
and employees during the fiscal year ended June 30, 2009 and granted an
aggregate of 22,500 shares of restricted stock to its executive officers and
employees in the fiscal year ended June 30, 2008. On September 23, 2009, by
recommendation of the Compensation Committee and approval by the Board of
Directors, 25,000 shares of restricted stock were granted to each of the
Company's three named executive officers, effective October 1, 2009. One-third
of the shares will vest one year following the grant date, and one-twelfth of
the shares vest every three months thereafter.




Outstanding
Equity Awards for the Fiscal Year Ended June 30, 2009




The
following table provides information concerning outstanding equity awards as of
June 30, 2009, by each of the Company’s named executive officers:




Name
                      
                      Date Granted
                      
                      Number of Shares or Units of Stock
                        That Have Not Vested(1)
                      
                      
                      Market Value of Shares or Units of Stock
                        That Have Not VestedSteven
      Santo
                      
                      5/18/07
                      
                      
                      22,334
                      
                      
                      $
                      25,684Richard
      A. Pytak Jr.
                      
                      6/30/08
                      
                      
                      5,000
                      
                      
                      $
                      5,750Kevin
      Beitzel
                      
                      6/30/08
                      
                      
                      13,334
                      (2)
                      
                      $
                      15,334





(1)
            Awards
      of restricted stock granted under the 2006 Long-Term Incentive Plan.
      One-third of the share granted to each executive officer vested one year
      following the grant date, and one-twelfth of the shares vest every three
      months thereafter.


(2)
            Mr.
      Beitzel was granted 10,000 shares on May 18, 2007 as well as another
      15,000 shares on June 30, 2008. Each grant award contained vesting terms
      of one-third of the shares granted to vest one year following the grant
      date, and one-twelfth of the shares vest every three months thereafter.
      Therefore, as of June 30, 2009, approximately one-third of the shares
      granted in 2007 and two-thirds of the shares granted in 2008 had not yet
      vested and are included in the calculation
  above.




Option
Exercises and Stock Vested




No named
executive officer was granted any stock options and there were no options
exercised during the fiscal year ended June 30, 2009. In addition, there were
124,101 shares of restricted stock that vested and 5,007 that were exercised
during the fiscal year ended June 30, 2009.


38


Employment
Arrangement with Named Executive Officer




Steven
Santo




On
September 29, 2006, the Company entered into a three year employment agreement
with Mr. Santo, our Chief Executive Officer and a director. Mr. Santo received
an annual base salary of $400,000 after the closing of the sale of the company
to Ardent Acquisition Corporation and received an annual performance bonus. For
2009, Mr. Santo received an annual base salary of $416,000 and an annual
performance bonus. On September 24, 2009, the Company entered into a new three
year employment agreement with Mr. Santo effective that same day and will
receive an annual base salary of $500,000 and is eligible to receive an annual
performance bonus. Future annual base salary will not be less than $500,000 (or
subsequent to any increases, below his then current salary), with increases
approved by the Compensation Committee and/or the Board of Directors. Pursuant
to the employment agreement entered into on September 24, 2009, Mr. Santo is
entitled, among other things, to:




·
            participate
      in all benefit programs, including the registered retirement savings plan,
      established and made available to its
employees;


·
            monthly
      living expenses in the amount of $2,800 through September 30,
      2009;


·
            monthly
      automobile lease reimbursement of $1,500;
and


·
            reimbursement
      for any reasonable out-of-pocket expenses incurred in the course of
      employment.




The
Company does not have employment agreements with the other named executive
officers.




Termination
Benefits




If the
agreement is terminated by Mr. Santo voluntarily without good reason, Avantair
shall have no further obligations following the effective date of termination
other than to pay the employee for any accrued but unpaid salary and
reimbursable expenses.








If the
agreement is terminated by Avantair without cause, then Mr. Santo is
respectively entitled to:




·
            any
      then accrued but unpaid base salary and performance bonus as of the date
      of termination; and


·
            payment
      of the base salary in effect at the time of termination for a period of 12
      months and continuation of health insurance for a period of 18
      months.




In the
agreement, “cause” means:




·
            employee’s
      fraud or breach of fiduciary obligations in connection with performance of
      his duties with Avantair (including but not limited to any acts of
      embezzlement or misappropriation of
funds);


·
            employee’s
      indictment for a felony or plea of guilty or nolo contendere to a felony
      charge or any criminal act involving moral
  turpitude;


·
            employee’s
      being under the influence of any drugs (other than prescription medicine
      or other medically-related drugs to the extent that they are taken in
      accordance with their directions) or repeatedly being under the influence
      of alcohol, during the performance of his duties under his employment
      agreement, or, while under the influence of such drugs or alcohol,
      engaging in grossly inappropriate conduct during the performance of his
      duties under his employment
agreement;


·
            employee’s
      refusal to substantially perform his duties under his employment
      agreement, except in the event that the employee becomes permanently
      disabled;


·
            employee’s
      willful misconduct or gross negligence in connection with his
      employment;


·
            employee’s
      material violation of any Avantair policies or procedures relating to
      harassment, discrimination or insider trading; or employee’s material
      breach of any provision of his employment
  agreement.




In
addition, Mr. Santo’s interest in any stock options or restricted stock will
fully vest on the effective date of a termination without cause.
  If the
agreement is terminated by Avantair without cause during a change in control
period, then Mr. Santo is respectively entitled to:
  ·
              any
      then accrued but unpaid base salary and performance bonus as of the date
      of termination; and
 ·
              payment
      of the base salary in effect at the time of termination for a period
      of 36 months and continuation of health insurance for a period
      of 36 months.




In the
agreement, “change of control” means:




·
              the acquisition, in one or more
      transactions, by any Person of the beneficial ownership (within the
      meaning of Rule 13d-3 promulgated under the Securities Exchange Act of
      1934, as amended) of more than 50% of (A) all shares of capital stock of
      Company tobe outstanding immediately
      following such acquisition, or (B) the combined voting power of all shares
      of capital stock of Company  to be outstanding immediately
      following such acquisition that are entitled to vote generally in the
      election of directors (theshares described in clauses (A)
      and (B), collectively “Company Voting Stock”);
 ·
              the closing of a sale or other
      conveyance of 40% or more of the assets of
  Company;
 ·
              individuals who, as of the date
      hereof, constitute the Board (the “Incumbent Board”) cease for any reason
      to constitute at least a majority of the Board; provided, however, that
      any individual becoming a member of the Board (a “Director”) subsequent to
      the date hereof whose election, or nomination for election by the
      Company’s stockholders, was approved by a vote of at least two-thirds of
      the Directors then comprising the Incumbent Board (either by a specific
      vote or by approval of the proxy statement of the Company in which such
      person is named as a nominee for director, without objection to such
      nomination) shall be deemed to have been a member of the Incumbent Board,
      but excluding, for this purpose, any such individual whose initial
      assumption of office occurs as a result of an actual or threatened
      election contest (within the meaning of Rule 14a-11 of the Exchange Act)
      with respect to the election or removal of Directors or other actual or
      threatened solicitation of proxies or consents by or on behalf of a Person
      other than the Board; or●
              the effective time of any merger,
      share exchange, consolidation, or other business combination involving
      Company if immediately after such transaction, persons who hold a majority
      of the outstanding voting securities entitled to vote generally in the
      election of directors of the surviving
      entity (or the entity owning 100% of such surviving entity) are not
      persons who, immediately prior to such transaction, held Company Voting
      Stock.
 If the
agreement is terminated by the executive for good reason or for disability, then
Mr. Santo is respectively entitled to:
  ·
              any
      then accrued but unpaid base salary and performance bonus as of the date
      of termination; and
 ·
              payment
      of the base salary in effect at the time of termination for a period of 12
      months and continuation of health insurance for a period of 18
      months.
  In the
agreement, “good reason” means:
  ·
              Avantair’s
      willful material breach of any provision of his employment
      agreement;
 ·
              any
      material adverse change in employee’s position, authority, duties or
      responsibilities (other than a change due to employee’s permanent
      disability or as an accommodation under the Americans With Disabilities
      Act) which results in: (A) a diminution in any material respect in
      employee’s position, authority, duties, responsibilities or compensation,
      which diminution continues in time over at least thirty (30) days, such
      that it constitutes an effective demotion; or (B) a material diversion
      from employee’s performance of the functions of employee’s position,
      excluding for this purpose material adverse changes made with employee’s
      written consent or due to employee’s termination for cause or termination
      by employee without good reason; or
 ·
              relocation
      of Avantair’s headquarters and/or employee’s regular work address to a
      location which requires the employee to travel more than forty (40) miles
      from employee’s place of employment on the date of his employment
      agreement.




Under the
employment agreement with Mr. Santo, if the employment agreement had been
terminated by the Company without cause or by Mr. Santo for good reason or for
disability, effective June 30, 2009 (the last business day of the Company’s
fiscal year of 2009), he would have been paid a total of $453,684, including:
(i) $416,000 representing his base salary then in effect, (ii) $12,000
representing the continuation of health insurance for a period of 12 months; and
(iii) $25,684 representing the acceleration of the vesting of 22,334 shares of
restricted stock from the 2006 Long-term Incentive Plan (based on the closing
price of $1.15 per share as of June 30, 2009).  39




Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters





The
following table sets forth the beneficial ownership of common stock of Avantair
as of September 25, 2009 by: (i) each of Avantair’s directors and nominees for
director; (ii) each of the Named Executive Officers listed in the Summary
Compensation Table below; (iii) all current directors and executive officers of
Avantair as a group and (iv) each person known by Avantair to own beneficially
more than five percent of the outstanding shares of its common stock. The number
and percentage of shares beneficially owned is determined under rules of the SEC
and the information is not necessarily indicative of beneficial ownership for
any other purpose. Unless otherwise indicated in the footnotes, each person has
sole voting and investment power (or shares such powers with his or her spouse)
with respect to the shares shown as beneficially owned. A total of 17,052,166
shares of Avantair’s common stock were issued and outstanding as of September
25, 2009.




Amount andNature ofBeneficialName and Address of Beneficial Owner(1)
                
                Ownership
                
                
                Percent of ClassJonathan
      Auerbach(2)
                
                
                2,882,441
                (2)
                
                
                16.7
                %Steven
      Santo(3)
                
                
                1,698,059
                
                
                
                10.3
                %Allison
      Roberto(4)
                
                
                1,646,650
                
                
                
                10.0
                %Paul
      Sonkin(5)
                
                
                2,089,332
                (6)
                
                
                12.6
                %Jeffrey
      Kirby(7)
                
                
                864,900
                
                
                
                5.3
                %Paul
      J Solit(8)
                
                
                1,903,735
                (8)
                
                
                11.3
                %Seth
      Klarman(9)
                
                
                1,156,000
                
                
                
                7.0
                %Fred
      B. Barbara(10)
                
                
                756,426
                
                
                
                4.6
                %Barry
      J. Gordon(11)
                
                
                645,439
                (12)
                
                
                3.9
                %Richard
      A. Pytak Jr.
                
                
                6,684
                (13)
                
                
                *Arthur
      H. Goldberg(14)
                
                
                216,000
                (12)
                
                
                1.3
                %Stephanie
      A. Cuskley(15)
                
                
                6,000
                (12)
                
                
                *A.
      Clinton Allen(16)
                
                
                244,000
                (12)(23)
                
                
                1.5
                %Robert
      J. Lepofsky(17)
                
                
                16,000
                (12)
                
                
                *Kevin
      Beitzel
                
                
                22,520
                (18)
                
                
                *Gilder,
      Gagnon, & Howe & Co. LLC(19)
                
                
                1,663,156
                
                
                
                10.1
                %Richard
      B. DeWolfe(20)
                
                
                158,000
                
                
                
                1.0
                %All
      directors and executive officers as a group (9 individuals)
      (22)
                
                
                3,012,702
                
                
                
                18.3
                %





*
            Less
      than 1%


(1)
            Unless
      otherwise noted, the business address of each of the following is c/o
      Avantair, 4311 General Howard Drive, Clearwater FL
  33762


(2)
            The
      business address of Mr. Auerbach is Hound Partners, LLC 101 Park Avenue,
      48th Floor, New York, NY 10178. The shares are held by Hound Partners, LP,
      and Hound Partners Offshore Fund, LP. Mr. Auerbach is the Managing Member
      of Hound Performance, LLC and Hound Partners, LLC, investment management
      firms that serve as the general partner and investment manager,
      respectively, to Hound Partners, LP and Hound Partners Offshore Fund, LP.
      Includes 2,070,422 shares of common stock that may be acquired upon the
      conversion of Series A Convertible Preferred
  Stock.


(3)
            1,641,650
      of the shares are held by Camelot 27 LLC. Each of Steven Santo and Allison
      Roberto are members of Camelot 27 LLC. Includes 67,000 shares of
      restricted stock which were granted to Steven Santo individually, which
      one third vested on May 18, 2008 and one twelfth of the shares vest every
      3 months thereafter.


(4)
            1,641,650
      of the shares are held by Camelot 27 LLC. Each of Steven Santo and Allison
      Roberto are members of Camelot 27 LLC. Includes 5,000 shares of restricted
      stock which was granted to Allison Roberto individually which one third
      vested on May 18, 2008 and one twelfth of the shares vest every 3 months
      thereafter.


(5)
            The
      business address of Mr. Sonkin is 460 Park Avenue, 12th Floor, New York,
      New York 10022. The shares are held by Hummingbird Value Fund, L.P., The
      Hummingbird Microcap Value Fund, L.P. and The Hummingbird Concentrated
      Fund, L.P. Mr. Sonkin, as managing member and control person of
      Hummingbird Management LLC, the investment manager of such entities, has
      sole voting and dispositive power over such
  shares.


(6)
            Includes
      248,451 shares of common stock that may be acquired upon the conversion of
      12,000 shares of Series A Convertible Preferred
  Stock.


(7)
            The
      business address of Mr. Kirby is P.O. Box 70458, Reno, Nevada 89570. This
      information is based upon Schedule 13D filed with the SEC on March 5, 2007
      by Mr. Kirby.


(8)
            The
      business address of Mr. Solit is Potomac Capital Management, 825 Third
      Avenue, 33 Floor, New York, NY 10022. The shares are held by Potomac
      Capital Management LLC and Potomac Capital Management Inc. Mr. Solit is
      the Managing Member of Potomac Capital Management LLC and the President
      and Sole Owner of Potomac Capital Management Inc. Includes 828,169 shares
      of common stock that may be acquired upon the conversion of Series A
      Convertible Preferred Stock.


(9)
            The
      business address of Mr. Klarman is The Baupost Group, LLC, 10 St. James
      Avenue, Suite 1700, Boston, MA 02116. The shares are held by The Baupost
      Group, LLC. The Baupost Group LLC is a registered investment advisor. SAK
      Corporation is the Manager of The Baupost Group LLC. Seth Klarman is the
      sole Director of SAK Corporation and a controlling person of The Baupost
      Group LLC. This information is based on Form 13G filed with the SEC on
      February 12, 2008 by these
persons.


40





(10)
            The
      business address of Mr. Barbara is BHP Partners LLC, 2300 South Archer
      Avenue, Chicago, IL 60616. This information is based upon Schedule 13D
      filed with the SEC on March 5, 2007 by Mr.
  Barbara.


(11)
            The
      business address of Mr. Gordon is 7808 Talavera Place, DelRay Beach,
      Florida 33446.


(12)
            Includes
      20,000 shares of common stock issuable upon exercise of options which
      vested on February 22, 2008 and February 22, 2009. Excludes 10,000 shares
      of common stock to be issued upon the exercise of options which vest on
      February 22, 2010. Includes 5,000 shares of restricted stock, 2,000 of
      which vest equally upon each of the next 2 successive annual meetings of
      shareholders, and 3,000 of which vest one-third upon each of the next 3
      successive annual meetings of
  stockholders.


(13)
            Represents
      7,500 shares of restricted stock granted to Mr. Pytak which vest one-third
      on June 30, 2009 and one-twelfth of the shares vest every 3 months
      thereafter.


(14)
            The
      business address of Mr. Goldberg is c/o Corporate Solutions Group, 175
      Great Neck Road, Suite 408, Great Neck, NY
  11021.


(15)
            The
      business address of Ms. Cuskley is 145 West 30th Street, New York, NY
      10001.


(16)
            The
      business address of Mr. Allen is 710 South Street, Needham, MA
      02492.


(17)
            The
      business address of Mr. Lepofsky is c/o Westcliff Capital Group, PO Box
      81367, Wellesley Hills, MA 02461.


(18)
            Represents
      10,000 shares of restricted stock granted to Mr. Beitzel which one third
      vested on May 18, 2008 and one-twelfth of the shares vest every three
      months thereafter. In addition, 15,000 shares of restricted stock were
      granted to Mr. Beitzel on June 30, 2008 which one third vested on June 30,
      2009 and one-twelfth of the shares vest every 3 months
      thereafter.


(19)
            This
      information is based on Schedule 13G filed with the SEC on February 6,
      2008 by Walter Weadock, member of Gilder, Gagnon, Howe and Co.
      LLC.


(20)
            The
      business address of Mr. DeWolfe is c/o DeWolfe & Company, PO Box 299,
      Milton, MA 02186.


(21)
            Includes
      118,000 shares of common stock and 40,000
  warrants.


(22)
            Includes
      132,000 shares of restricted stock. Includes 50,000 shares of common stock
      issuable upon exercise of options.(23)
            Includes
      172,000 shares of common stock and 72,000
  warrants.





Section
16(a) Beneficial Ownership Reporting Compliance




Section
16(a) of the Securities Exchange Act of 1934 requires Avantair’s executive
officers and directors, and persons who beneficially own more than ten percent
of its common stock to file initial reports of ownership and reports of changes
in ownership with the SEC. Executive officers, directors and beneficial owners
of more than ten percent of the Company’s common stock are required by the SEC
to furnish the Company with copies of all Section 16(a) forms they
file.




Based
upon a review of the forms furnished to Avantair and written representations
from its executive officers and directors, the Company believes that during
fiscal 2009 all Section 16(a) filing requirements applicable to its executive
officers, directors and beneficial owners of more than ten percent of its common
stock were complied with.




Compensation
Committee Interlocks and Insider Participation




No member
of the Compensation Committee of the Board of Directors was an officer or
employee of Avantair during the fiscal year ended June 30, 2009 or was formerly
an officer or employee. In addition, none of Avantair’s executive officers
served as a member of another entity’s board of directors or as a member of the
compensation committee of another entity (or other board committee performing
equivalent functions) during the fiscal year June 30, 2009. There are no
compensation committee interlocks and no insider participation in compensation
decisions that are required to be reported under the rules and regulations of
the Exchange Act.




Item 13.
Certain Relationships, Related Transactions and Director
Independence




Related Party Transactions
Policy




The
Company has adopted a Code of Conduct and Professional Ethics, applicable to its
directors, officers and employees, including its Chief Executive Officer, Chief
Financial Officer and all of its other executives pursuant to which all
directors, officers and employees must promptly disclose to us, any material
transaction or relationship that reasonably could be expected to give rise to an
actual or apparent conflict of interest with Avantair, Inc. In approving or
rejecting the proposed agreement, the audit committee shall consider the
relevant facts and circumstances available and deemed relevant to the audit
committee, including, but not limited to the risks, costs and benefits to the
Company, the terms of the transaction, the availability of other sources for
comparable services or products, and, if applicable, the impact on a director’s
independence. The audit committee shall approve only those agreements that, in
light of known circumstances, are in, or are not inconsistent with, the
Company’s best interests, as the audit committee determines in the good faith
exercise of its discretion.




Related
Party Transactions




The
following is a summary of transactions entered into since July 1, 2008, to which
the Company has been a party in and in which any of the Company’s executive
officers, directors or beneficial holders of more than 5% of its capital stock
had or will have a direct or indirect material interest.




In May
2009, Avantair granted 3,000 shares of restricted stock to each of its six
non-employee directors of the Company’s Board of Directors. The restricted
shares granted to the director’s vest one third upon each of the next three
successive annual meetings, subject to the grantee’s continued service on the
Board of Directors.


41




In
addition annually Avantair participates as one of the sponsors of the Corporate
Directors Group, an accredited educational organization of RiskMetric ISS
Governance Services, of which one of our directors presides as its chairman. The
sponsorship provides the Corporate Directors Group with 23 hours of aircraft
usage annually in lieu of compensation. In addition, the Company sponsors the
Corporate Directors Group Piaggio Avanti Owners Club which provides the club
with 15 hours of aircraft usage annually in lieu of compensation.





Item 14.
Principal Accountant Fees and Services




The Audit
Committee has selected J.H. Cohn LLP as the principal independent
registered public accounting firm for 2009. J.H. Cohn LLP has served as the
Company’s principal independent registered public accounting firm since
August 1, 2006.





Fees





The
following table sets forth the fees billed or to be billed for professional
services rendered by J.H. Cohn LLP for audit services, audit-related services,
and all other services in fiscal years 2009 and 2008, respectively.




2009
                        
                        
                        2008Audit
      Fees (1)
                        
                        $
                        218,500
                        
                        
                        $
                        211,000Audit-Related
      Fees (2)
                        
                        
                        25,000
                        
                        
                        
                        77,500Total Fees
                        
                        $
                        243,500
                        
                        
                        $
                        288,500




(1)
            For
      professional services rendered in connection with the audit of the
      Company’s annual financial statements and the reviews of the financial
      statements included in each of its quarterly reports on Form
      10-Q.


(2)
            For
      assurance and related services that are reasonably related to the
      performance of the audit or review of the Company’s financial statements
      in connection with regulatory
filings.





Policy
on Pre-Approval by Audit Committee of Services Performed by Principal
Independent Registered Public Accounting Firm





The
policy of the Audit Committee is to pre-approve all audit and permissible
non-audit services to be performed by the Company’s principal independent
registered public accounting firm.


42


PART
IV





Item 15.
Exhibits and Financial Statement Schedules




(a)        The following are filed as a
part of this report.




(1)         Financial
Statements





Reference
is made to the Index to Financial Statements on Page F-1.




(2)         Financial
Statement Schedules





None.




(3)         Exhibits.





See
Exhibit Index.


43


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.





September
28, 2009




Avantair,
      Inc.By:
                /s/
      Steven SantoSteven
      SantoChief
      Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:




Name
                
                Title
                
                Date/s/ Steven Santo
                
                Chief
      Executive Officer and Director (Principal Executive
    Officer)
                
                September
      28, 2009Steven
      Santo/s/ Richard A. Pytak Jr.
                
                Chief
      Financial Officer (Principal Financial and Accounting
    Officer)
                
                September
      28, 2009Richard
      A. Pytak Jr./s/ Barry Gordon
                
                Chairman
                
                September
      28, 2009Barry
      Gordon/s/ A. Clinton Allen
                
                Director
                
                September
      28, 2009A.
      Clinton Allen/s/ Robert Lepofsky
                
                Director
                
                September
      28, 2009Robert
      Lepofsky/s/ Arthur H. Goldberg
                
                Director
                
                September
      28, 2009Arthur
      H. Goldberg/s/ Stephanie Cuskley
                
                Director
                
                September
      28, 2009Stephanie
      Cuskley/s/ Richard B. DeWolfe
                
                Director
                
                September
      28, 2009Richard
      B. DeWolfe


44





AVANTAIR,
INC. AND SUBSIDIARIES





Index




Report
      of Independent Registered Public Accounting Firm
                      
                      F-2Consolidated
      Financial Statements:Consolidated
      Balance Sheets as of June 30, 2009 and 2008
                      
                      F-3Consolidated
      Statements of Operations for the years ended June 30, 2009 and
      2008
                      
                      F-5Consolidated
      Statement of Changes in Stockholders’ Deficit for the years ended
      June 30, 2009 and 2008
                      
                      F-6Consolidated
      Statements of Cash Flows for the years ended June 30, 2009 and
      2008
                      
                      F-8Notes
      to Consolidated Financial Statements
                      
                      F-10


F-1





Report
of Independent Registered Public Accounting Firm





The
Stockholders and Board of Directors


Avantair,
Inc.





We have
audited the accompanying consolidated balance sheets of Avantair, Inc. and
Subsidiaries as of June 30, 2009 and 2008, and the related consolidated
statements of operations, changes in stockholders’ deficit and cash flows for
each of the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Avantair, Inc. and
Subsidiaries as of June 30, 2009 and 2008, and their results of operations
and cash flows for each of the years then ended, in conformity with accounting
principles generally accepted in the United States of America.




/s/
      J.H. Cohn LLPJericho,
      New YorkSeptember
      28, 2009


F-2




AVANTAIR,
INC. AND SUBSIDIARIES


Consolidated
Balance Sheets





ASSETS





June 30,2009
                
                
                2008CURRENT
      ASSETSCash
      and cash equivalents
                
                $
                3,773,789
                
                
                $
                19,149,777Accounts
      receivable, net of allowance for doubtful accounts of $187,842 at June 30,
      2009 and $213,487 at June 30, 2008
                
                
                5,711,055
                
                
                
                5,692,809Inventory
                
                
                140,997
                
                
                
                252,407Current
      portion of aircraft costs related to fractional sales
                
                
                36,910,206
                
                
                
                40,417,203Current
      portion of notes receivable
                
                
                272,731
                
                
                
                832,107Prepaid
      expenses and other current assets
                
                
                1,278,506
                
                
                
                2,173,992Total
      current assets
                
                
                48,087,284
                
                
                
                68,518,295Aircraft
      costs related to fractional share sales, net of current
      portion
                
                
                70,199,786
                
                
                
                92,383,071Property
      and equipment, at cost, net of accumulated depreciation and amortization
      of $11,695,228 at June 30, 2009 and $8,640,096 at June
      30, 2008
                
                
                29,842,365
                
                
                
                25,663,264OTHER
      ASSETSCash-
      restricted
                
                
                2,352,337
                
                
                
                2,826,290Deposits
      on aircraft
                
                
                9,264,890
                
                
                
                8,679,277Deferred
      maintenance on aircraft engines
                
                
                1,538,175
                
                
                
                2,228,509Notes
      receivable-net of current portion
                
                
                -
                
                
                
                1,008,223Goodwill
                
                
                1,141,159
                
                
                
                1,141,159Other
      assets
                
                
                1,639,407
                
                
                
                2,029,367Total
      other assets
                
                
                15,935,968
                
                
                
                17,912,825Total
      assets
                
                $
                164,065,403
                
                
                $
                204,477,455





See
Notes to Consolidated Financial Statements


F-3





AVANTAIR,
INC. AND SUBSIDIARIES


Consolidated
Balance Sheets





LIABILITIES
AND STOCKHOLDERS' DEFICIT





June 30,2009
                
                
                2008CURRENT
      LIABILITIESAccounts
      payable
                
                $
                7,307,320
                
                
                $
                4,718,355Accrued
      liabilities
                
                
                5,010,745
                
                
                
                5,528,472Customer
      deposits
                
                
                1,282,936
                
                
                
                1,905,682Short-term
      debt
                
                
                11,500,000
                
                
                
                15,775,260Current
      portion of long-term debt
                
                
                11,020,590
                
                
                
                6,648,093Current
      portion of deferred revenue related to fractional aircraft share
      sales
                
                
                43,385,779
                
                
                
                47,778,900Unearned
      management fee and charter card revenues
                
                
                17,807,796
                
                
                
                16,316,044Total
      current liabilities
                
                
                97,315,166
                
                
                
                98,670,806Long-term
      debt, net of current portion
                
                
                20,111,011
                
                
                
                23,856,322Deferred
      revenue related to fractional aircraft share sales, net of current
      portion
                
                
                65,071,197
                
                
                
                96,525,785Other
      liabilities
                
                
                3,047,329
                
                
                
                2,636,730Total
      long-term liabilities
                
                
                88,229,537
                
                
                
                123,018,837Total
      liabilities
                
                
                185,544,703
                
                
                
                221,689,643COMMITMENTS
      AND CONTINGENCIESSeries
      A convertible preferred stock, $.0001 par value, authorized 300,000
      shares; 152,000 shares issued and outstanding
                
                
                14,528,383
                
                
                
                14,439,358STOCKHOLDERS'
      DEFICITPreferred
      stock, $.0001 par value, authorized 700,000 shares; none
      issued
                
                
                -
                
                
                
                -Common
      stock, Class A, $.0001 par value, 75,000,000 shares authorized, 16,463,615
      shares issued and outstanding at June 30, 2009 and 15,286,792 shares
      issued and outstanding at June 30, 2008
                
                
                1,646
                
                
                
                1,529Additional
      paid-in capital
                
                
                45,419,060
                
                
                
                45,314,393Accumulated
      deficit
                
                
                (81,428,389
                )
                
                
                (76,967,468
                )Total
      stockholders' deficit
                
                
                (36,007,683
                )
                
                
                (31,651,546
                )Total
      liabilities and stockholders' deficit
                
                $
                164,065,403
                
                
                $
                204,477,455





See
Notes to Consolidated Financial Statements


F-4





AVANTAIR,
INC. AND SUBSIDIARIES


Consolidated
Statements of Operations





Year Ended June 30,2009
                      
                      
                      2008RevenueFractional
      aircraft sold
                      
                      $
                      51,864,010
                      
                      
                      $
                      43,426,696Maintenance
      and management fees
                      
                      
                      70,693,367
                      
                      
                      
                      58,211,457Charter
      card and Axis Club Membership revenue
                      
                      
                      9,384,110
                      
                      
                      
                      7,236,151Other
      revenue
                      
                      
                      4,885,563
                      
                      
                      
                      6,744,679Total
      revenue
                      
                      
                      136,827,050
                      
                      
                      
                      115,618,983Operating
      expensesCost
      of fractional aircraft shares sold
                      
                      
                      44,118,352
                      
                      
                      
                      36,637,959Cost
      of flight operations
                      
                      
                      46,723,184
                      
                      
                      
                      50,058,692Cost
      of fuel
                      
                      
                      13,349,084
                      
                      
                      
                      16,489,422General
      and administrative expenses
                      
                      
                      23,628,541
                      
                      
                      
                      20,703,120Selling
      expenses
                      
                      
                      3,736,424
                      
                      
                      
                      4,670,246Depreciation
      and amortization
                      
                      
                      5,233,250
                      
                      
                      
                      3,624,710Total
      operating expenses
                      
                      
                      136,788,835
                      
                      
                      
                      132,184,149Income
      (loss) from operations
                      
                      
                      38,215
                      
                      
                      
                      (16,565,166
                      )Other
      income (expenses)Interest
      income
                      
                      
                      46,073
                      
                      
                      
                      482,666Other
      income
                      
                      
                      1,397,012
                      
                      
                      
                      861,662Interest
      expense
                      
                      
                      (5,942,221
                      )
                      
                      
                      (3,661,227
                      )Total
      other expenses
                      
                      
                      (4,499,136
                      )
                      
                      
                      (2,316,899
                      )Net
      loss
                      
                      
                      (4,460,921
                      )
                      
                      
                      (18,882,065
                      )Preferred
      stock dividend and accretion of expenses
                      
                      
                      (1,488,071
                      )
                      
                      
                      (903,851
                      )Net
      loss attributable to common stockholders
                      
                      $
                      (5,948,992
                      )
                      
                      $
                      (19,785,916
                      )Loss
      per common share:Basic
      and diluted
                      
                      $
                      (0.39
                      )
                      
                      $
                      (1.30
                      )Weighted-
      average common shares outstanding:Basic
      and diluted
                      
                      
                      15,306,725
                      
                      
                      
                      15,230,482





See
Notes to Consolidated Financial Statements


F-5





AVANTAIR,
INC. AND SUBSIDIARIES


Consolidated
Statement of Changes in Stockholders' Deficit


Years
Ended June 30, 2009 and 2008





Class A
                    
                    
                    Class B
                    
                    
                    Additional
                    
                    
                    
                    
                    
                    TotalCommonStock
                    
                    
                    CommonStock
                    
                    
                    Paid-In
                    
                    
                    Accumulated
                    
                    
                    Stockholders'Shares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Deficit
                    
                    
                    DeficitBalance
      at June 30, 2007
                    
                    
                    15,220,817
                    
                    
                    $
                    1,522
                    
                    
                    
                    -
                    
                    
                    $
                    - $
                    
                    
                    
                    46,124,857
                    
                    
                    $
                    (58,085,403
                    ) $
                    
                    
                    (11,959,024
                    )Expenses
      associated with the issuance of preferred stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (391,423
                    )
                    
                    
                    
                    
                    
                    
                    (391,423
                    )Stock-based
      compensation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    484,817
                    
                    
                    
                    
                    
                    
                    
                    484,817Dividend
      on Series A convertible preferred stock and accretion of issuance
      costs
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (903,851
                    )
                    
                    
                    
                    
                    
                    
                    (903,851
                    )Issuance
      of shares in connection with vested restricted stock
                    
                    
                    65,975
                    
                    
                    
                    7
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (7
                    )Net
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (18,882,065
                    )
                    
                    
                    (18,882,065
                    )Balance
      at June 30, 2008
                    
                    
                    15,286,792
                    
                    
                    $
                    1,529
                    
                    
                    
                    -
                    
                    
                    $
                    - $
                    
                    
                    
                    45,314,393
                    
                    
                    $
                    (76,967,468
                    )
      $
                    
                    
                    (31,651,546
                    )





See
Notes to Consolidated Financial Statements


F-6


AVANTAIR,
INC. AND SUBSIDIARIES


Consolidated
Statement of Changes in Stockholders' Deficit


Years
Ended June 30, 2009 and 2008





Class
      A
                      
                      
                      Class
      B
                      
                      
                      Additional
                      
                      
                      
                      
                      
                      TotalCommon Stock
                      
                      
                      Common Stock
                      
                      
                      Paid-In
                      
                      
                      Accumulated
                      
                      
                      Stockholders'Shares
                      
                      
                      Amount
                      
                      
                      Shares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Deficit
                      
                      
                      DeficitExpenses
      associated with registration of shares
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (43,804
                      )
                      
                      
                      
                      
                      
                      
                      (43,804
                      )Stock-based
      compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      361,059
                      
                      
                      
                      
                      
                      
                      
                      361,059Dividend
      on Series A convertible preferred stock and accretion of issuance
      costs
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,488,071
                      )
                      
                      
                      
                      
                      
                      
                      (1,488,071
                      )Issuance
      of shares in connection with vested restricted stock, net of shares
      surrendered in lieu of payroll taxes
                      
                      
                      42,423
                      
                      
                      
                      4
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (7,732
                      )
                      
                      
                      
                      
                      
                      
                      (7,728
                      )Sale
      of common stock in connection with private sale
                      
                      
                      1,134,400
                      
                      
                      
                      113
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,283,215
                      
                      
                      
                      
                      
                      
                      
                      1,283,328Net
      loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (4,460,921
                      )
                      
                      
                      (4,460,921
                      )Balance
      at June 30, 2009
                      
                      
                      16,463,615
                      
                      
                      $
                      1,646
                      
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      45,419,060
                      
                      
                      $
                      (81,428,389
                      )
                      
                      $
                      (36,007,683
                      )





See
Notes to Consolidated Financial Statements


F-7


AVANTAIR,
INC. AND SUBSIDIARIES


Consolidated
Statements of Cash Flows





Year
      Ended June 30,2009
                
                
                2008OPERATING
      ACTIVITIES:Net
      loss
                
                $
                (4,460,921
                )
                
                $
                (18,882,065
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                5,233,250
                
                
                
                3,624,710Gain
      on sale of assets
                
                
                (1,394,164
                )
                
                
                (861,410
                )Stock-based
      compensation
                
                
                361,059
                
                
                
                484,817Decrease
      in bad debt expense
                
                
                18,638
                
                
                
                21,109Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                (36,884
                )
                
                
                (626,427
                )Inventory
                
                
                111,410
                
                
                
                327,110Deposits
      on aircraft
                
                
                (585,613
                )
                
                
                (1,475,223
                )Deferred
      maintenance agreement on aircraft engines
                
                
                690,334
                
                
                
                463,030Prepaid
      expenses and other current assets
                
                
                895,486
                
                
                
                (1,795,598
                )Notes
      receivable
                
                
                1,567,599
                
                
                
                1,252,385Aircraft
      costs related to fractional shares
                
                
                25,690,282
                
                
                
                (26,034,485
                )Other
      assets
                
                
                389,960
                
                
                
                (334,726
                )Accounts
      payable
                
                
                2,588,965
                
                
                
                1,642,167Accrued
      liabilities
                
                
                (1,924,501
                )
                
                
                2,042,629Unearned
      management fees and charter card revenue
                
                
                620,091
                
                
                
                8,269,808Cash-restricted
                
                
                473,953
                
                
                
                116,693Customer
      deposits
                
                
                (622,746
                )
                
                
                1,293,182Other
      liabilities
                
                
                410,599
                
                
                
                874,571Deferred
      revenue related to fractional aircraft share sales
                
                
                (35,847,709
                )
                
                
                14,059,804Net
      cash used in operating activities
                
                
                (5,820,912
                )
                
                
                (15,537,919
                )INVESTING
      ACTIVITIES:Proceeds
      from sale of assets
                
                
                1,927,000
                
                
                
                -Proceeds
      from sale of deposits
                
                
                -
                
                
                
                2,470,000Capital
      expenditures
                
                
                (975,433
                )
                
                
                (5,195,325
                )Net
      cash provided by (used in) investing activities
                
                
                951,567
                
                
                
                (2,725,325
                )


F-8





AVANTAIR,
INC. AND SUBSIDIARIES


Consolidated
Statements of Cash Flows





Year
      Ended June 30,2009
                  
                  
                  2008FINANCING
      ACTIVITIES:Borrowings
      under long-term notes payable
                  
                  
                  -
                  
                  
                  
                  2,200,000Borrowings
      under short term notes payable
                  
                  
                  17,479,555
                  
                  
                  
                  25,910,842Principal
      payments on long-term notes payable
                  
                  
                  (7,470,907
                  )
                  
                  
                  (6,630,674
                  )Principal
      payments on short-term notes payable
                  
                  
                  (21,754,815
                  )
                  
                  
                  (10,135,582
                  )Proceeds
      from issuance of preferred stock-net
                  
                  
                  -
                  
                  
                  
                  14,384,894Proceeds
      from issuance of stock-net
                  
                  
                  1,283,328
                  
                  
                  
                  -Preferred
      stock dividends paid
                  
                  
                  -
                  
                  
                  
                  (502,504
                  )Cost
      of stock redemption/registration
                  
                  
                  (43,804
                  )
                  
                  
                  (391,423
                  )Net
      cash (used in) provided by financing activities
                  
                  
                  (10,506,643
                  )
                  
                  
                  24,835,553Net
      (decrease) increase in cash and cash equivalents
                  
                  $
                  (15,375,988
                  )
                  
                  $
                  6,572,309Cash
      and cash equivalents, beginning of the year
                  
                  
                  19,149,777
                  
                  
                  
                  12,577,468Cash
      and cash equivalents, end of the year
                  
                  $
                  3,773,789
                  
                  
                  $
                  19,149,777SUPPLEMENTAL DISCLOSURE
      OF CASH FLOW INFORMATION:Interest
      paid
                  
                  $
                  5,942,221
                  
                  
                  $
                  3,661,227SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCING ANDINVESTING
      ACTIVITIESAccretion
      of Series A convertible preferred stock
                  
                  $
                  89,025
                  
                  
                  $
                  54,464Dividends
      payable on Series A convertible preferred stock
                  
                  $
                  1,399,046
                  
                  
                  $
                  346,883Common
      shares surrendered in lieu of payroll taxes
                  
                  $
                  7,728
                  
                  
                  $
                  -Aircraft
      purchased under capital lease obligation
                  
                  $
                  8,098,093
                  
                  
                  $
                  4,828,642Aircraft
      purchased under long-term notes payable
                  
                  $
                  -
                  
                  
                  $
                  3,906,000Charter
      card issued as partial consideration of aircraft purchase
                  
                  $
                  871,661
                  
                  
                  $
                  95,600Aircraft
      sold through settlement of note payable
                  
                  $
                  -
                  
                  
                  $
                  457,600Deferred
      financing costs
                  
                  $
                  -
                  
                  
                  $
                  996,188Short-term
      notes payable- refinancing
                  
                  $
                  -
                  
                  
                  $
                  2,689,001Note
      receivable on sale of deposits
                  
                  $
                  -
                  
                  
                  $
                  750,000





See
Notes to Consolidated Financial Statements


F-9


NOTE
1 – OPERATIONS AND MANAGEMENT’S PLANS





Avantair,
Inc. (formerly known as Ardent Acquisition Corporation) (“Avantair”, “Ardent” or
the “Company”), was organized on September 14, 2004 as a blank check
company whose objective was to acquire an operating business.





On
October 2, 2006, the Company signed a definitive stock purchase agreement
(the “Reverse Merger”) with Avantair Inc. (“Old Avantair”). The agreement, as
amended on December 15, 2006, provided for Avantair to issue 6,684,822
shares of common stock to the stockholders of Old Avantair in exchange for all
of the issued and outstanding shares of Old Avantair (the “Share Exchange” or
“Reverse Merger”). The agreement also provided for the Company to issue to the
stockholders of Old Avantair additional shares as follows:





•
            At
      the end of the fiscal year ending June 30, 2008, the Company would
      calculate (based on its annual audited consolidated financial statements
      for such fiscal year) Cash EBITDA. If Cash EBITDA was greater than
      $20,000,000 for the fiscal year ending June 30, 2008, the Company was
      to have issued an aggregate of 4,774,873 shares of its common stock to Old
      Avantair stockholders. The Company’s results did not meet the requirements
      for the year ended June 30, 2008 and therefore these shares were not
      issued.





•
            If
      at any time prior to February 23, 2009, the closing trading price on
      the Over-the-Counter Bulletin Board (or on a national securities market on
      which the Company’s common stock is then quoted for trading) of the
      Company’s common stock for 20 trading days within any 30 trading day
      period equals or exceeds $8.50 per share, then the Company was to have
      issued an additional aggregate of 4,774,873 shares of its common stock to
      Old Avantair stockholders. The Company’s results did not meet the
      requirements for the year ended June 30, 2009 and therefore these
      shares were not issued.





On
February 22, 2007, the stockholders of Avantair voted in favor of the
Reverse Merger. Subsequent to the Reverse Merger, Old Avantair’s business
activities were the activities of Avantair. The stockholders and management of
Old Avantair own a substantial portion of the equity of the combined company.
The Board of Directors was comprised of three individuals designated by
Avantair’s stockholders and four individuals designated by Old Avantair’s
stockholders, one of which was subject to the approval of Avantair’s
stockholders. In addition, Old Avantair’s management was responsible for
carrying out the Company’s current business plan. As a result, the transaction
was treated as a Reverse Merger, and a capital transaction, equivalent to the
issuance of stock by Old Avantair for Avantair’s net assets and, accordingly,
the historical financial statements prior to February 22, 2007 were those
of Old Avantair. All shares and per share data prior to the Share Exchange have
been restated to reflect the stock issuances and the effect of the closing of
the Share Exchange including the recognition of 8,400,000 shares of Ardent
common stock outstanding as of the closing of the Share Exchange. Upon the
closing of the Share Exchange, 1,601,593 shares of the Company’s common stock
included within the purchase price were transferred to an escrow agent to secure
indemnification obligations of the Company’s stockholders under the stock
purchase agreement. Such shares were released from escrow within 45 days of the
Company filing the Form 10-K for the year ended June 30, 2008.





Avantair
is engaged in the sale of fractional ownership interests and charter 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 June
30, 2009, Avantair operated 52 aircraft within its fleet, which is comprised of
46 aircraft for fractional ownership, 5 company- owned core aircraft and 1
leased and company- managed aircraft. Avantair also operates fixed flight based
operations (FBO) in Camarillo, California and effective August 1, 2008, in
Caldwell, New Jersey. Through these FBO’s and its headquarters in Clearwater,
Florida, Avantair provides aircraft maintenance, concierge and other services to
its customers as well as to the Avantair fleet.




The
accompanying 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 June 30,
2009, the Company’s recurring losses resulting in an accumulated deficit of
approximately $81.4 million and a working capital deficiency of approximately
$49.2 million. 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 charter cards and Axis Club Memberships sold. To finance
this growth strategy, including the purchase of additional aircraft to satisfy
the demand of the growing charter card product line, the Company has obtained
additional funds through equity financing, including the sale of additional
shares of common stock, assets sales, accelerated payments of maintenance and
management fees, debt financing, or a combination thereof. During the fiscal
year ended June 30, 2009, the Company raised net proceeds of approximately $1.3
million through an equity offering detailed in Note 11, $1.9 million from the
sale of one of the Company’s core aircraft, and approximately $10.5 million of
cash through accelerated payments of management fees. Further, by agreement
between Avantair, the investors in the June 30, 2009 private placement and that
offering’s placement agent, the period for additional sales of units was
extended until October 15, 2009. On September 25, 2009, the Company sold an
additional 250,000 units at a price of $2.50 per unit generating net proceeds of
approximately $0.6 million. The Company believes that its capital on hand, as
may be augmented by these means to fund future growth, is sufficient to continue
operations for the next twelve months and the foreseeable future
thereafter.


F-10


NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles
of Consolidation





The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, and have been prepared in conformity with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”). All material intercompany accounts and transactions have been eliminated
in the consolidated financial statements.




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 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
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 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 from)
income taxes and related deferred tax accounts, certain accrued expenses and
contingencies, and the ability to continue as a going concern.




Cash
and Cash Equivalents





Cash and
cash equivalents consist of cash and highly liquid investments held with
financial institutions, with maturities of three months or less from the date of
acquisition.





Cash-
restricted





The
Company agreed to restrict $2,352,337 in cash at June 30, 2009 and $2,826,290 in
cash at June 30, 2008, to secure letters of credit related to deposits for
leases, provide security for credit card charge backs and to secure fuel
purchases. Management believes that these amounts will be restricted for at
least one year and, accordingly, has classified such cash as
non-current.





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 charter cards (either individually or through the
Company’s Axis Club Membership program). In the case of fractional ownership
sales, the aircraft are sold in 1/16th shares or multiples thereof. The purchase
agreement grants the customer the right to the use of the aircraft for a
specified number of hours each year. When a customer purchases a fractional
share, they are also required to enter into a five-year management and
maintenance agreement. Under the terms of the maintenance and management
agreement, the Company agrees to manage, operate and maintain the aircraft on
behalf of the customer in exchange for a fixed monthly fee. Charter cards
provide customers with flight hours for a fixed fee.




Fractional
Aircraft Shares




The
Company does not have objective evidence to determine the fair value and
allocate fractional share revenue from that generated from the management and
maintenance agreement, and, as a result, has adopted the provisions of the
Emerging Issues Task Force (“EITF”) Issue No. 00-21 “Accounting for Revenue Arrangements
with Multiple Deliverables” to account for the sale of fractional shares
of aircraft. Accordingly, as the sales of the fractional shares cannot be
separated from the underlying maintenance and management agreement, fractional
share sale revenue is recognized ratably over the five-year life of the
maintenance and management agreement. The period in which revenue is recognized
will be evaluated on a periodic basis. Factors that impact management’s
assessment of the most appropriate period of revenue recognition will include,
but not be limited to, customer turnover, terms and conditions of the related
fractional share sale, maintenance arrangements as well as any other factor that
could impact revenue.




Referral
Incentive Hours





The
Company accounts for the additional hours granted under the referral incentive
program by expensing costs as they are incurred. Such costs have not been
material to date.





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.


F-11


Charter
Card and Axis Club Membership Revenue





Charter Card revenue. The
Company also sells access to its aircraft fleet through either a 15 or 25 hour
charter 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 February 2009, the Company initiated the Axis Club Membership program that
offers customers access to blocks of flight time at a discount from standard
charter 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
charter 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 charter card sales, payment for charter 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 adoption of EITF 00-21, the Company recognizes
revenue from the sale of fractional shares as income over the five-year period.
The aircraft costs related to sales of fractional shares consist of the cost of
the aircraft and are recorded as an asset and recognized as the cost of aircraft
shares sold over the five-year period.




Maintenance
Expense Policy




The
Company uses the direct 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.
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.




Accounts
Receivable





Accounts
receivable are stated at the amount management expects to collect from
outstanding balances. The Company provides an allowance for doubtful accounts
equal to the estimated uncollectible amounts. The Company’s estimate is based on
historical collection experience and a review of the current status of trade
accounts receivable.




Prepaid
Pilot Training




Beginning
in 2008, the costs related to the training of pilots as required by Federal
Aeronautic Regulations are capitalized and amortized over the twelve month
certification period. These costs were expensed in prior years. This change did
not have a material impact on the Company’s financial position or results of
operations as of June 30, 2008.




Customer
Deposits





Customer
deposits are cash payments received from customers who have purchased a
fractional interest in an aircraft where that specific aircraft is not available
for delivery.





Advertising
Costs





Advertising
costs are expensed as incurred and totaled $1,585,184 and $2,260,782 for the
years ended June 30, 2009 and 2008, respectively.





Inventory





Aircraft
parts inventory is valued at the lower of cost (determined by the first-in,
first-out method) or market.





Deferred
Rent





The
aggregate of minimum annual operating lease payments are expensed on a
straight-line basis over the term of the related leases. The amount by which
straight-line rent differs from actual lease payments is recognized as deferred
rent and totaled $2,312,249 and $2,034,362 at June 30, 2009 and 2008
respectively, and is included in other liabilities.


F-12


Income
Taxes





Income
taxes are accounted for under the asset and liability method in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 109 (“SFAS No.
109”),“Accounting for 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.




Effective
July 1, 2007, the Company adopted the provisions of the FASB Interpretation No.
48, “Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”
(“FIN 48”). FIN 48 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 FIN 48. The Company evaluations were performed for the tax years ended 2005
thru 2009 which represent all years subject to audit for all tax jurisdictions.
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 consolidated 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 SFAS 123(R)“Share-Based Payment,” which requires the recognition of compensation
expense for employee stock options and other share-based payments. Under SFAS
123(R), 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 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 for the entire award,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” costs in the accompanying Consolidated Statements of Operations,
was $361,059 and $484,817 for the years ended June 30, 2009 and 2008,
respectively. There were no related income tax benefits recognized in the
accompanying Consolidated Statements of Operations for the year ended June 30,
2009 or for the comparable 2008 period.




Accounting for Derivative
Instruments




The
Company accounts for derivative instruments in accordance with SFAS No.
133,“Accounting for
Derivative Instruments and Hedging Activities,” (“SFAS 133”) as amended,
which establishes accounting and reporting standards for derivative instruments
and hedging activities, including certain derivative instruments imbedded in
other financial instruments or contracts. The Company also considers EITF 00-19,
“Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a Company’s Own
Stock,” 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 SFAS 133. The Company evaluates the conversion feature embedded
in its Series A Convertible Preferred Stock at each reporting period based on
the criteria of SFAS 133 and EITF 00-19 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 June 30, 2009.




Goodwill
and Long-lived Assets





Goodwill
represents the excess of cost over fair value of net assets acquired through
acquisitions. In accordance with SFAS No. 141, “Business Combinations,” all
business combinations must be accounted for under the purchase method of
accounting. SFAS No. 142, “Goodwill and Other Intangible
Assets,” 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.


F-13





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. The Company performed its annual evaluation
during June 2009 by comparing the product of the trading price as of June 30,
2009 and the Company’s outstanding shares of common stock on that date to the
Company’s book value.





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.





In
accordance with SFAS No. 144, “Accounting for Impairment or
Disposal of Long-Lived Assets,” the Company reviews long-lived assets to
be held-and-used for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. If the
carrying amount of an asset exceeds its estimated future undiscounted cash flows
the asset is considered to be impaired. Impairment losses are measured as the
amount by which the carrying amount of the asset exceeds the fair value of the
asset.





In
preparing its impairment analysis the Company derives fair value based on two
approaches:




Market
prices. At June 30, 2009, the quoted market for Avantair’s common stock was
$1.15 per share with 16,463,615 shares outstanding giving the Company a total
market capitalization of approximately $18.9 million.





Cash flow
projections. Certain key assumptions used in preparing the cash flow
projections, included:





•
            The
      overall basis for management’s cash flow assumptions and conclusions are
      based on the fact that the the majority of the Company’s revenue is
      contractual and therefore management can predict future management fee
      revenues with some certainty. The model is based on the premise that for
      every plane sold the Company will increase management fees by an agreed
      upon amount per plane. When the Company gets to a certain aircraft fleet
      size, the management fee income will then exceed all fixed and variable
      costs.





•
            The
      Company has a commitment from its aircraft manufacturer for the delivery
      of 5 planes in the next 12 months and management believes it will sell
      fractional shares and charter cards per month which would produce a cash
      flow improvement.




As a
result of the analysis, no impairment charges were required for long-lived
assets during the years ended June 30, 2009 and 2008.





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.




For the
year ended June 30, 2009, a total of 1,409,933 share-equivalents of potentially
dilutive securities were excluded from the calculation of diluted earnings per
share. These securities were comprised of 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 expire 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 SFAS No.
128, Earnings Per Share
(“SFAS 128”). In accordance with SFAS No. 128’s contingently issuable shares
provision, 92,733 shares of performance-based, unvested common stock awards
(“restricted stock”) granted were not included in the calculation because all
the necessary conditions for vesting had not been satisfied. In addition,
567,200 warrants to purchase shares of the Company’s common stock were not
included in the calculation of diluted earnings per share as they were
antidilutive. A total of 14,496,834 of potentially dilutive securities were
excluded from the calculation of diluted loss per share for the year ended June
30, 2008 and were comprised of 14,146,000 warrants to purchase one share of the
Company’s common stock, 200,834 shares of restricted stock and 150,000
outstanding options.




Property
and Equipment




Property
and equipment is recorded at cost and consists principally of aircraft purchased
which are not fractionalized and which provide additional capacity to the
Company to meet customer demand. Depreciation and amortization is computed using
the straight-line method over the following useful lives:


F-14




Aircraft
            
            7 yearsOffice equipment and furniture and fixtures
            
            5 - 7 yearsFlight management software/hardware
            
            5 yearsVehicles
            
            5 yearsImprovements
            
            Lesser of estimated useful life or the term of the lease




Expenditures
for maintenance and repairs of property and equipment are expensed as incurred.
Major improvements are capitalized.




The
Company capitalizes interest costs relating to borrowings made for the
acquisition of aircraft. No amounts were capitalized for the years ended June
30, 2009 or 2008. In addition, interest costs totaled $5,942,221 and $3,661,227
for the years ended June 30, 2009 and 2008, respectively.




Reclassifications




Certain
balances for the year ended June 30, 2008 were reclassified to conform to
classifications adopted in the current year.




Recently
Issued Pronouncements





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R requires an acquirer to measure the
identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquiree at their fair values on the acquisition date, with
goodwill being the excess value over the net identifiable assets acquired. SFAS
141 also requires the fair value measurement of certain other assets and
liabilities related to the acquisition such as contingencies. SFAS 141R applies
prospectively to business combinations and is effective for fiscal years
beginning on or after December 15, 2008. The adoption of SFAS 141R did not have
a material impact on the Company’s consolidated financial position, results of
operations or cash flows.




In
December 2007, the FASB issued SFAS No. 160,“Non-controlling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires that a
non-controlling interest in a subsidiary be reported as equity in the
consolidated financial statements. Consolidated net income should include the
net income for both the parent and the non-controlling interest with disclosure
of both amounts on the consolidated statement of income. The presentation
provisions of SFAS 160 are to be applied retrospectively, and SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008. The adoption
of SFAS 160 did not have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.




In March
2008, the FASB issued SFAS No. 161,“Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 changes the
disclosure requirements for derivative instruments and hedging activities. The
Company will be required to provide enhanced disclosures about (a) how and why
derivative instruments are used, (b) how derivative instruments and related
hedged items are accounted for under SFAS 133, and its related interpretations,
and (c) how derivative instruments and related hedged items affect the Company’s
financial position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The adoption of SFAS 161 did not have an
impact on the Company’s financial position, results of operations or cash flows
as the pronouncement addresses disclosure requirements only.




In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3 (“FSP 142-3”),“Determination of the Useful Life
of Intangible Assets.”FSP 142-3 amends the factors an entity should
consider in developing renewal or extension assumptions used in determining the
useful life of recognized intangible assets under FASB Statement No. 142,“Goodwill and Other Intangible
Assets.”  This new guidance applies prospectively to intangible
assets that are acquired individually or with a group of other assets in
business combinations and asset acquisitions. FSP 142-3 is effective for fiscal
years and interim periods beginning after December 15, 2008.  The
adoption of FSP 142-3 did not have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.




In June
2008, the FASB issued FASB Staff Position EITF 03-6-1,“Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
(“FSP EITF 03-6-1”). FSP EITF 03-6-1 states that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
are “participating securities” as defined in EITF 03-6,“Participating Securities and the
Two-Class Method under FASB Statement No. 128,”and therefore should be
included in computing earnings per share using the two-class method. According
to FSP EITF 03-6-1, a share-based payment award is a participating security when
the award includes nonforfeitable rights to dividends or dividend equivalents.
The rights result in a noncontingent transfer of value each time an entity
declares a dividend or dividend equivalent during the award’s vesting period.
However, the award would not be considered a participating security if the
holder forfeits the right to receive dividends or dividend equivalents in the
event that the award does not vest. FSP EITF 03-6-1 is effective for financial
statements issued in fiscal years beginning after December 15, 2008, and interim
periods within those years. When adopted, its requirements are applied by
recasting previously reported EPS. The adoption of EITF 03-6-1 did not have a
material impact on the Company’s consolidated financial position, results of
operations or cash flows.




In
October 2008, the FASB issued FSP No. FAS 157-3 (“FSP 157-3”), “Determining the Fair Value of a
Financial Asset When the Market for that Asset Is Not Active, ” which
clarifies the application of SFAS 157 as it relates to the valuation of
financial assets in a market that is not active for those financial assets. FSP
157-3 is effective immediately and includes those periods for which financial
statements have not been issued. The Company does not have any financial assets
that are valued using inactive markets, and therefore is not impacted by the
issuance of this standard.


F-15




In June
2008, the FASB issued EITF No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock,” which
provides guidance for determining whether an equity-linked financial instrument
(or embedded feature) issued by an entity is indexed to the entity’s stock, and
therefore, would qualify for the first part of the scope exception in paragraph
11(a) of SFAS 133, “Accounting
for Derivative Instruments and Hedging Activities.” The EITF proscribes a
two-step approach under which the entity would evaluate the instrument’s
contingent exercise provisions and then the instrument’s settlement provisions,
for purposes of evaluating whether the instrument (or embedded feature) is
indexed to the entity’s stock.  This EITF is effective for financial
statements issued for fiscal years beginning after December 15,
2008.  The Company is currently evaluating the requirements of EITF
07-5 and its impact on the Company’s consolidated financial position, results of
operations or cash flows.




In
November 2008, the FASB issued EITF No. 08-01, “Revenue Arrangements with Multiple
Deliverables.”EITF 08-01 replaces
EITF 00-21, “Revenue
Arrangements with Multiple Deliverables” and enhances the disclosure
requirements for separating disclosing information related to individually
significant arrangements and disclosing the qualitative and quantitative
information on an aggregate basis. This new guidance applies prospectively to
revenue arrangements entered into or materially modified in fiscal years
beginning on or after December 15, 2009. The Company is currently evaluating the
requirements of EITF No. 08-01 and its impact on its financial condition,
results of operations and cash flows.




In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). This new
pronouncement establishes principles and standards related to the accounting for
and disclosure of events that occur after the balance sheet date but before the
financial statements are issued. SFAS 165 requires an entity to recognize, in
the financial statements, subsequent events that provide additional information
regarding conditions that existed at the balance sheet date. Subsequent events
that provide information about conditions that did not exist at the balance
sheet date shall not be recognized in the financial statements under SFAS 165.
SFAS 165 is effective for financial statements issued for fiscal years and
interim periods beginning after June 15, 2009. The adoption of SFAS 165 did not
have a material impact on the Company’s consolidated financial statements. Pursuant
to SFAS 165, the Company evaluated subsequent events through September 28,
2009.




In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting
Principles” (“SFAS 168”) as a replacement of FASB Statement No. 162. The
FASB Accounting Standards Codification (“the Codification”) will become the
source of authoritative U.S. GAAP. The Codification, which changes the
referencing of financial standards, is effective for interim or annual financial
periods ending after September 15, 2009. The Codification is not intended to
change or alter existing U.S. GAAP.




No other
pronouncements have been recently issued that Avantair believes will have a
material impact on Avantair’s financial position and results of
operations.





NOTE
3 – CONCENTRATIONS OF RISK





The
Company acquires all of its aircraft from one supplier and is dependent on that
supplier for timely delivery of its airplanes. Any disruption in the delivery of
these airplanes would cause the Company to incur significant costs without the
benefit and the cash flow it receives from its customers.





Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents. The Company maintains its
cash and cash equivalents in bank deposits, the balances of which, at times, may
exceed federally insured limits. Exposure to credit risk is reduced by placing
such deposits in high credit quality financial institutions. At June 30,
2009, the Company had cash and cash equivalents in excess of federally insured
limits of approximately $5.2 million.





NOTE
4 – PROPERTY AND EQUIPMENT





Property
and equipment, stated at cost as of June 30, 2009 and 2008 consisted of the
following:




2009
                    
                    
                    2008Aircraft
                    
                    $
                    33,630,426
                    
                    
                    $
                    27,300,707Leasehold
      improvements
                    
                    
                    4,820,095
                    
                    
                    
                    4,235,476Furniture,
      fixtures and equipment
                    
                    
                    1,301,595
                    
                    
                    
                    1,199,528Flight
      management software/hardware
                    
                    
                    1,727,012
                    
                    
                    
                    1,516,826Vehicles
                    
                    
                    58,465
                    
                    
                    
                    50,823Total
                    
                    
                    41,537,593
                    
                    
                    
                    34,303,360Less:
      accumulated depreciation and amortization
                    
                    
                    (11,695,228
                    )
                    
                    
                    (8,640,096
                    )$
                    29,842,365
                    
                    
                    $
                    25,663,264





Depreciation
and amortization expense for the years ended June 30, 2009 and 2008 was
$5,233,250 and $3,624,710, respectively.


F-16


NOTE
5 – RELATED PARTY TRANSACTIONS





The
following is a summary of transactions entered into during the years ended June
30, 2009 and 2008, to which the Company has been a party in and in which any of
the Company’s executive officers, directors or beneficial holders of more than
5% of its capital stock had or will have a direct or indirect material
interest.




On May 4,
2009 Avantair granted 3,000 shares of restricted stock to each of its six
non-employee directors of the Company’s Board of Directors. The restricted
shares granted to the director’s vest one third upon each of the next three
successive annual meetings, subject to the grantee’s continued service on the
Board of Directors.




In
addition, annually, Avantair participates as one of the sponsors of the
Corporate Directors Group, an accredited educational organization of RiskMetric
ISS Governance Services, of which one of our directors presides as its chairman.
The sponsorship provides the Corporate Directors Group with 23 hours of aircraft
usage annually in lieu of compensation. In addition, the Company sponsors the
Corporate Directors Group Piaggio Avanti Owners Club which provides the club
with 15 hours of aircraft usage annually in lieu of compensation.




Effective
April 11, 2008, the Company’s former Chief Financial Officer departed the
Company and resigned his position as a director of the Company. In connection
with the former Chief Financial Officer’s departure, on April 14, 2008, the
Company entered into a separation agreement pursuant to which the former Chief
Financial Officer received (i) a payment equal to eight months salary
($183,333), (ii) reimbursement of premium payments for COBRA benefits for a
period of eight months commencing April 14, 2008 and (iii) pursuant to
an amendment to his previously issued restricted stock award, 33,334 shares of
common stock. In addition, the former Chief Financial Officer agreed not to
transfer any shares of the Company’s common stock for a period of six months
commencing April 14, 2008. At the end of the six month period, the former
Chief Financial Officer’s unrestricted shares became freely tradable in the open
market, subject to the Company’s “Right of First Refusal” and in compliance with
applicable securities law. In addition, the former Chief Financial Officer
agreed to cooperate fully with the Company’s reasonable requests for assistance
in transitioning his previous responsibilities for a period of eight months
commencing April 14, 2008.




In March
2008, Avantair granted 3,000 shares of restricted stock to each of the then five
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
3 successive annual meetings of stockholders, subject to the grantee’s continued
service on the Board of Directors.





NOTE
6 – INCOME TAXES





The
difference between income tax benefit provided at the Company’s effective rate
and the statutory rate at June 30, 2009 and 2008 are as
follows:





2009
                  
                  
                  2008Income
      tax benefit at statutory rate
                  
                  $
                  1,371,282
                  
                  
                  $
                  6,608,723State
      tax benefit, net of Federal benefit
                  
                  
                  117,538
                  
                  
                  
                  562,373Increase
      in valuation allowance
                  
                  
                  (1,488,820
                  )
                  
                  
                  (7,123,389
                  )Other
                  
                  
                  -
                  
                  
                  
                  (47,707
                  )Total
                  
                  $
                  -
                  
                  
                  $
                  -





Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets (liabilities) at June 30, 2009 and 2008 are
as follows:





2009
                  
                  
                  2008Deferred
      tax liabilitiesGoodwill
                  
                  $
                  (173,456
                  )
                  
                  $
                  (144,547
                  )Depreciation
                  
                  
                  (2,659,248
                  )
                  
                  
                  (1,798,582
                  )Other
                  
                  
                  -
                  
                  
                  
                  (75,792
                  )(2,832,704
                  )
                  
                  
                  (2,018,921
                  )Deferred
      tax assetsDeferred
      revenues, net of amortized aircraft costs related to fractional share
      sales
                  
                  
                  707,848
                  
                  
                  
                  4,371,790Other
                  
                  
                  1,240,273
                  
                  
                  
                  1,190,382Net
      operating loss carryforwards
                  
                  
                  31,570,388
                  
                  
                  
                  25,653,73333,518,509
                  
                  
                  
                  31,215,905Less
      valuation allowance
                  
                  
                  (30,685,805
                  )
                  
                  
                  (29,196,984
                  )2,832,704
                  
                  
                  
                  2,018,921Net
      deferred tax assets
                  
                  $
                  -
                  
                  
                  $
                  -


F-17





The
Company considers that the cumulative losses incurred create a rebuttable
presumption that a full valuation allowance continues to be required for its
deferred tax assets. Therefore, the Company has offset the deferred tax assets
attributable to those potential benefits through a valuation allowance in 2009
and 2008 and, accordingly, the Company did not recognize any benefit from income
taxes in the accompanying consolidated statements of operations. At
June 30, 2009, the Company had net operating loss carryforwards of
approximately $73.8 million which begin to expire in 2019.





Upon the
completion of the Reverse Merger, the Company became subject to Section 382
of the IRS Code relating to a change in ownership. In addition, future changes
in ownership could limit the utilization of the net operating loss carryforward
and may be subject to substantial annual limitation due to the ownership change
limitations provided by the IRS Code of 1986, as amended and similar state
provisions. The annual limitation will result in the expiration of the net
operating loss before utilization.





Effective
July 1, 2007, the Company adopted the provisions of the FASB Interpretation No.
48, “Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”
(“FIN 48”). There were no unrecognized tax benefits as of July 1, 2008 or as of
June 30, 2009. FIN 48 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 FIN 48. The Company evaluations were performed for the tax years ended 2005
thru 2009 which represent all years subject to audit for all tax jurisdictions.
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 consolidated financial position. The Company recognizes
accrued interest and penalties related to unrecognized tax benefits as income
tax expense. No interest and penalties were incurred at June 30, 2009 and
2008.





Information
related to the activity of the valuation allowance is as follows:





June 30,2009
                  
                  
                  2008Beginning
      balance
                  
                  $
                  29,196,984
                  
                  
                  $
                  22,073,595Increase
      in valuation allowance
                  
                  
                  1,488,821
                  
                  
                  
                  7,123,389Ending
      balance
                  
                  $
                  30,685,805
                  
                  
                  $
                  29,196,984





NOTE
7 – COMMITMENTS AND CONTINGENCIES





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 based
operation in Camarillo, California expiring in 2021, which is classified as an
operating lease.





Most of
the 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.





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





Total
rent expense for the years ended June 30, 2009 and 2008 was $3,066,479 and
$2,665,797, respectively.





Future
minimum lease payments on these leases are:




Year Ended June 30,2010
                  
                  $
                  2,572,7562011
                  
                  
                  2,578,8622012
                  
                  
                  2,614,8352013
                  
                  
                  2,686,3682014
                  
                  
                  2,779,275Thereafter
                  
                  
                  18,999,302$
                  32,231,398


F-18





Purchase
Commitment





On June
20, 2008, Avantair assigned its rights and obligations to purchase twenty
Embraer Phenom 100 aircraft positions to Share 100 Holding Co., LLC, 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 has
the option to purchase aircraft nineteen and twenty, which must be exercised by
October 1, 2010; if exercised, EAS shall reimburse Avantair for all payments
made relative to these aircraft and provide all remaining funds required. In the
event that EAS does not exercise the option to purchase aircrafts nineteen and
twenty by October 1, 2010, Avantair will have the right and obligation to
purchase the nineteenth and twentieth aircraft.  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
June 30, 2009, Avantair had contractual commitments to purchase 56 additional
Piaggio Avanti II aircraft through 2013. The total commitment, including a
recently proposed price escalation, is valued at approximately $354.0
million.





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. At
June 30, 2009, 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.




NOTE
8 – CAPITAL LEASE TRANSACTIONS





The
Company entered into a sale and leaseback agreement, dated August 11, 2006,
with JMMS, LLC (“JMMS”). Under the sale and leaseback agreement, the Company
sold 100.0% of its interest in a core aircraft for $4.2 million and leased back
68.8% of the aircraft for a five year term. The proceeds of the sale and
leaseback arrangement were used to pay down the line of credit with CNM, Inc. In
March 2007, the Company amended the lease agreement to include a provision for
the Company to buy back the aircraft at the expiration of the term. As a result
of the amendment, the Company has accounted for the sale and leaseback
transaction as a finance lease. On March 9, 2009, JMMS notified the Company of
its intention to terminate the sale and leaseback agreement between the parties
entered into on August 11, 2006, effective March 1, 2009, at which date,
pursuant to the agreement, the Company was required to purchase the aircraft at
a cost of no more than the $4.2 million. The Company is currently in
negotiations to obtain financing and pursuing alternative options relating to
the JMMS termination. The closing date of the transaction was initially extended
past March 1, 2009, to June 30, 2009. In consideration for extending the period
to close, the Company made monthly payments for three consecutive months
beginning April 1, 2009 in the amount of $0.2 million. On July 1, 2009, both
parties agreed to extend the closing date to on or before October 31, 2009. In
consideration for such extension, the Company will make two consecutive monthly
payments in the amount of $50,000 beginning on July 1, 2009 and two consecutive
monthly payments in the amount of $0.2 million beginning on September 1, 2009 or
until the closing of the acquisition of the aircraft.  The total
amount of the monthly payments made to JMMS by the Company shall be deducted
from the purchase price on the closing date.




On
October 10, 2007, Avantair acquired a core aircraft under a capital lease
obligation with Midsouth Services, Inc.  Under the lease agreement,
Midsouth provided funding for the $4.7 million purchase of a pre-owned Piaggio
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.





In April
2009, the Company amended the Lease Agreement previously accounted for as an
operating lease under SFAS 13, dated as of July 31, 2006 between the Company and
Midsouth. Pursuant to the amendment, the Company is required to pay $74,900
monthly until August 2011, the expiration of the Lease Agreement. In addition,
the Company has agreed to purchase the leased aircraft for approximately $3.0
million from Midsouth within sixty days following the expiration of the term of
the Lease Agreement. The lease, as amended, has been classified as a capital
lease in the accompanying consolidated balance sheet.





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 a rate of $75,000 per month, plus taxes if applicable.
The Company is required to provide Midsouth with 100 hours of flight time per
year during the lease term. 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.


F-19


The total
capital lease obligations as of June 30, 2009 are comprised of the
following:




2010
                  
                  $
                  6,566,0002011
                  
                  
                  2,808,0002012
                  
                  
                  5,058,0002013
                  
                  
                  3,636,6932014
                  
                  
                  4,472,000Total
      minimum payments
                  
                  
                  22,540,693Less
      amount representing interest
                  
                  
                  (6,716,353
                  )Present
      value of minimum lease payments
                  
                  $
                  15,824,340





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





NOTE
9 – SHORT-TERM DEBT





Short-term
debt consists of the following as of June 30, 2009 and 2008:




2009
                
                
                2008Midsouth
      Services, Inc
                
                $
                11,500,000
                
                
                $
                10,575,260Century
      Bank, F.S.B.
                
                
                -
                
                
                
                5,200,00011,500,000
                
                
                
                15,775,260





Midsouth
Services, Inc





On
October 3, 2007, the Company entered into a floor plan agreement with Midsouth
Services, Inc. (“Midsouth”) which provided for up to approximately $5.1 million
of financing for aircraft to be acquired from Piaggio America, Inc., extended on
a month-to-month basis from April 2008 and repaid in July 2008. Effective March
3, 2008, the Company entered into a second floor plan agreement with Midsouth
that provided for up to $5.3 million of financing for aircraft to be acquired
from Piaggio America, Inc. for the six month period commencing with the first
delivery of aircraft under the plan. Each agreement required a $75,000 monthly
facility fee with payment of any outstanding borrowings due in full prior to
taking delivery of additional aircraft. Midsouth also agreed, at the option of
the Company, to provide an additional loan in the amount of $5.3 million, with
terms and conditions of the additional loan substantially similar to the terms
of the March 2008 loan, upon expiration of the October 3, 2007 floor plan
agreement.




On July
31, 2008, the Company entered into two new Floor Plan Finance Agreements (each,
an “Agreement” and collectively "the Agreements"), pursuant to which MidSouth
has agreed to extend credit to the Company in an amount not to exceed $5,345,000
under each Agreement ($10,690,000 in total for the Agreements), for an initial
term of three months for each Agreement. Indebtedness under the Agreements was
used by the Company to fund the purchase of new Piaggio P-180 aircraft. The
Company renewed the Agreements for three consecutive additional one month terms
at the expiration of the initial term and on a month-to-month basis thereafter.
The effective dates of the two Agreements are July 31, 2008, and August 1, 2008,
respectively.  The Company has agreed to pay to the Lender a monthly
facility fee of $75,000 under each Agreement. In connection with the entry into
the Agreements, on July 31, 2008, the Company terminated the prior Floor Plan
Finance Agreements dated March 3, 2008 and October 3, 2007 between the Company
and Midsouth.




On
November 18, 2008, the Company entered into an aircraft deposit agreement with
MidSouth, for a term of twelve months, which provides for up to approximately
$0.6 million of financing for the payment to the aircraft manufacturer of
deposits on future deliveries. As consideration for providing the deposit for
the aircraft during the term of this agreement, the Company has agreed to pay
MidSouth a monthly transaction fee of $9,000 commencing December 2008.
Borrowings outstanding under this arrangement at June 30, 2009 totaled $0.5
million.





Further
on April 2, 2009, Avantair entered into two Floor Plan Agreements with Midsouth
Services, Inc. (“Midsouth”) to replace Midsouth’s existing Floor Plan Agreements
dated July 31, 2008.  The new Floor Plan Agreements extend credit to
Avantair in an increased amount of $11.6 million to be used towards the purchase
of a new Piaggio P-180 aircraft.  Each of the new Floor Plan
Agreements is similar to the prior Floor Plan Agreements and covers 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.




Century
Bank, F.S.B.





On May
29, 2008, the Company entered into a Promissory Note (“Note”) with Century Bank,
F.S.B. (“Lender”), pursuant to which Lender agreed to provide financing to the
company in the amount of $5.2 million to be used towards the purchase of a new
Piaggio P-180 aircraft. The Company paid the following fees for the Note: (1)
$37,500 on the effective date of the Note and (2) $75,000 on the 30th day of the
each month thereafter until repayment in full of the principal amount of the
Note (“Term”). In July 2008, the Company repaid the full amount of the Note with
Century Bank, F.S.B. and paid a fee of $26,000, constituting 0.5% of the
principal balance.


F-20





On
January 9, 2009, the Company entered into a new Note with the Lender, pursuant
to which Lender agreed to provide financing to the Company in the amount of $5.2
million to be used towards the purchase of new Piaggio P-180 aircraft. The
Company paid the following fees for the Note:  (1) $75,000 on the
effective date of the Note and (2) $75,000 on the 9th day of each month
thereafter until repayment in full of the principal amount of the
Note.  The principal amount of the Note shall be paid in full within
120 days from the effective date of the Note.  The Company made
partial payments to Lender in $325,000 increments upon the closing of each
fractional interest and Lender provided partial lien releases as to the
respective fractional interests sold. In June 2009, the Company repaid the
full amount of a promissory note issued to Century Bank, F.S.B and paid a fee of
$26,000, constituting 0.5% of the principal balance.




NOTE
10 – LONG- TERM DEBT





Long-term
debt consists of the following as of June 30, 2009 and 2008:




2009
                
                
                2008Wells
      Fargo Equipment Finance, Inc.
                
                $
                3,095,512
                
                
                $
                3,488,042CNM,
      Inc.
                
                
                3,616,652
                
                
                
                6,968,036Jet
      Support Services, Inc.
                
                
                3,707,209
                
                
                
                5,461,540JMMS,
      Inc.
                
                
                3,640,810
                
                
                
                4,347,058Century
      Bank, F.S.B.
                
                
                1,911,203
                
                
                
                2,082,804Wachovia
      Bank
                
                
                2,976,685
                
                
                
                3,534,814Midsouth
      Services, Inc
                
                
                12,183,530
                
                
                
                4,622,12131,131,601
                
                
                
                30,504,415Less
      current portion
                
                
                (11,020,590
                )
                
                
                (6,648,093
                )Long-term
      debt
                
                $
                20,111,011
                
                
                $
                23,856,322





Wells
Fargo Equipment Finance, Inc.





In
February 2005, the Company entered into financing arrangements for the purchase
of three core aircraft under various notes payable with Wells Fargo Equipment
Finance, Inc. In January 2008, the Company sold one of these aircraft and repaid
the outstanding balance on the related note payable. The notes outstanding at
June 30, 2009 totaled approximately $3.1 million and are payable in monthly
installments ranging from $10,644 to $38,480 with interest ranging from 5.96% to
6.12% per annum, through 2012. The notes are collateralized by the
aircraft.




CNM,
Inc.





In August
2007, the Company and CNM executed a new note agreement which converted an
outstanding note obligation of approximately $7.0 million into a term loan
payable monthly over three years and bearing interest at 10.0% per annum.
The Company accounted for this conversion in accordance with EITF Issue
No. 98-14, “Debtor’s
Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements.”
CNM also assumed a promissory note due to Wells Fargo Bank for $2.9 million
which was included as part of this new note agreement. Borrowings outstanding
under these arrangements at June 30, 2009 totaled approximately $3.6
million.





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
balance of the original note by means of a $5.5 million promissory note. The new
note matures on April 1, 2011 and bears interest at the rate of
10.0% per annum, with 35 monthly payments of principal and interest in an
amount of $185,127 beginning on June 2, 2008. The note covers the balance
of the aforementioned $3.4 million 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
arrangement and the $5.5 million promissory note, the parties terminated the
airframe maintenance contract and have agreed to apply the unamortized
prepayment ($1,538,175 at June 30, 2009) under the airframe maintenance contract
to the engine maintenance program and will amortize this amount over the
remaining 37 month term of that program. Borrowings outstanding under this
arrangement at June 30, 2009 totaled approximately $3.7 million.





In
addition, the Company entered into another payment arrangement with JSSI by
means of a $525,000 promissory note dated July 31, 2008 with five monthly
payments of $105,000 commencing August 1, 2008. The note constituted payment of
the purchase of airframe parts inventory by the Company from JSSI. The Company
repaid the full amount of the term loan in December 2008.


F-21


JMMS,
Inc.





On
August 11, 2006, the Company entered into a sale and leaseback agreement
with JMMS, LLC (“JMMS”). The lease transaction has been accounted for as finance
lease and provides for monthly payments of $39,500 through July 11, 2011
(See Note 8). In addition, during the year, the agreement with JMMS matured
and therefore has been included in the current portion of long-term debt on the
accompanying consolidated balance sheet.




Century
Bank, F.S.B.





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





Wachovia
Bank





On
October 31, 2007, the Company entered into a financing arrangement for the
purchase of one used aircraft at a total purchase price of approximately $4.5
million (inclusive of the value of a charter card of 100 hours). Financing was
obtained from Wachovia through a note payable of $3.9 million. The note is
collateralized by the aircraft and requires the Company to maintain certain
financial covenants. 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 June 30, 2009 totaled approximately $3.0 million. During
September 2009, the Company received a waiver of compliance with a financial
convenant in connection with the note.





Midsouth
Services, Inc.





On
October 10, 2007, Avantair acquired a core aircraft under a capital lease
obligation with Midsouth Services, Inc (See Note 8).





On April
2, 2009, the Company entered into two additional lease transactions with
Midsouth. The lease transactions have been accounted for as capital leases (See
Note 8).




Future
minimum payments on long- term debt in years subsequent to June 30, 2009
are as follows:




Year Ended June 30,2010
                  
                  $
                  11,020,5902011
                  
                  
                  3,740,7932012
                  
                  
                  6,816,1982013
                  
                  
                  4,778,5762014
                  
                  
                  4,589,401Thereafter
                  
                  
                  186,043$
                  31,131,601





NOTE 11 – CAPITAL
STOCK





General:The Company’s
authorized capital stock consists of 76 million shares of all classes of capital
stock, of which 75 million are shares of common stock, par value, $0.0001 per
share, and 1 million are shares of preferred stock, par value of $0.0001 per
share.





Common Stock: The holders of
shares of Avantair’s common stock are entitled to one vote for each share on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Subject to the preferences and rights, if any, applicable to the shares
of preferred stock, the holders of the shares of common stock are entitled to
receive dividends if and when declared by the Board of Directors. Subject to the
prior rights of the holders, if any, of the preferred shares, the holders of the
Company’s shares of common stock are entitled to share ratably in any
distribution of its assets upon liquidation, dissolution or winding-up, after
satisfaction of all debts and other liabilities. As of June 30, 2009, the
Company had 16,463,615 shares of its common stock outstanding and 1,133,166
shares of common stock available for future issuance under the Company’s 2006
Long-Term Stock Incentive Plan. As of June 30, 2009, the Company has 152,000
shares of Series A Preferred Shares outstanding.TheCompany has 3,088,898
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 sale of units consummated on June 30, 2009, the conversion price of the
Series A Preferred Shares was reduced from $5.15 to $4.92.  As a
result of additional sales of units, on September 25, 2009, the conversion price
of the Series A Preferred Shares was further reduced from $4.92 to $4.83 and the
shares of common stock reserved on its books and records for issuance upon the
conversion of the outstanding Series A Preferred Shares increased to 3,147,042.
The remaining shares of authorized and unissued common stock will be available
for future issuance without additional stockholder approval (subject to
applicable securities laws and the rules of any securities market or exchange on
which our common stock is quoted at the time). While the additional shares are
not designed to deter or prevent a change of control, under some circumstances
we could use the additional shares to create voting impediments or to frustrate
persons seeking to effect a takeover or otherwise gain control by, for example,
issuing those shares in private placements to purchasers who might side with our
Board of Directors in opposing a hostile takeover bid.


F-22





Series A Convertible Preferred
Stock: Shares of preferred stock may be issued from time to time in one
or more series and the Company’s Board of Directors, without approval of the
stockholders, is authorized to designate series of preferred stock and to fix
the rights, privileges, restrictions and conditions to be attached to each such
series of shares of preferred stock. The issuance of shares of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting power
of holders of the Company’s shares of common stock. As of June 30, 2009, the
Company has 152,000 shares of Series A Convertible Preferred Stock outstanding.
The terms of the Series A Convertible Preferred Stock are set forth in a
Certificate of Designations filed November 14, 2007 with the State of Delaware.
Pursuant to such Certificate of Designations, the shares of Series A Convertible
Preferred Stock (a) will rank senior to all currently outstanding classes of
stock of the Company with respect to liquidation and dividends, (b) will be
entitled to receive a cash dividend at the annual rate of 9.0%, payable
quarterly (with such rate being subject to increase up to a maximum of 12% if
such dividends are not timely paid), (c) will be convertible into shares of the
Company’s common stock at any time at the option of the Investors based on an
adjusted conversion price of $4.83 per share (subject to adjustment), (d) may be
redeemed by the Company following the seventh anniversary of the issuance of the
shares of Series A Convertible Preferred Stock, (e) may be redeemed by the
Company in connection with certain change of control or acquisition
transactions, (f) will be redeemed by the Company following the ninth
anniversary of the issuance of the shares of Series A Convertible Preferred
Stock, upon receipt of the written consent of the holders of a majority of the
then outstanding shares of Series A Convertible Preferred Stock (g) will vote on
an as-converted basis with the Company’s Common Stock and (h) will have a
separate vote over certain material transactions or changes which the Company
may wish to effect. The Company paid its investment adviser 5.0% of the gross
proceeds of this preferred financing.




Registration of shares: On
June 30, 2009, Avantair sold 567,200 units at a price of $2.50 per unit to
investors in a private placement, generating net proceeds of approximately $1.3
million. Each unit consisted of two shares of common stock and one warrant to
purchase one common share. The warrants have an exercise price of $4.00 per
share and are exercisable until June 30, 2012. The sale was consummated under
the terms of a Securities Purchase Agreement between Avantair and each of the
investors. Pursuant to a registration rights agreement, Avantair has agreed to
use it best efforts to register the shares issued to the investors and the
shares underlying the warrants issued to the investors for resale under the
Securities Act of 1933, as amended. By agreement between Avantair, the investors
in the June 30, 2009 private placement and that offering’s placement agent, the
period for additional sales of units was extended until October 15, 2009. On
September 25, 2009, the Company sold an additional 250,000 units at a price of
$2.50 per unit generating net proceeds of approximately $0.6
million.





NOTE
12 – STOCK-BASED COMPENSATION





Stock
Options





The
Company issues stock-based compensation to its officers, directors, employees
and consultants under its 2006 Long Term Incentive Plan (the “Plan”). There are
1,500,000 shares authorized under the Plan. The term of stock options granted
are determined by the Compensation Committee not to exceed 10 years.
Additionally, the term of the stock grants is limited to five years if the
grantee owns in excess of 10% of the stock of the Company at the time of the
grant. The vesting provisions of individual options may vary but in each case
will generally provide for vesting of at least 33% per year of the total number
of shares subject to the option. The exercise price and other terms and
conditions of stock options will be determined by the Compensation Committee at
the time of grant. The exercise price per share may not be less than 100 percent
of the fair market value of a share of the Company’s common stock on the date of
the grant.




Upon
adoption of the Plan in February 2007, the Company granted 150,000 stock options
to certain non-employee members of the board of directors which resulted in
$145,321 and $151,339 of stock-based compensation expense during the years ended
June 30, 2009 and 2008, respectively, included in general and
administrative expenses on the accompanying consolidated statement of
operations. All options granted under the Plan are accounted for in accordance
with SFAS 123R.




A summary
of options activity for the year ended June 30, 2009 is presented
below:




Shares
                
                
                Weighted Average
                  Exercise Price
                
                
                Weighted Average
                  Fair ValueOptions
      Outstanding as of July 1, 2008
                
                
                150,000
                
                
                $
                5.34
                
                
                $
                1.15Granted
                
                
                —
                
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —
                
                
                
                —Forfeited
      and Expired
                
                
                —
                
                
                
                —
                
                
                
                —Options
      Outstanding, June 30, 2009
                
                
                150,000
                
                
                $
                5.34
                
                
                $
                1.15Vested
      and expected to vest, June 30, 2009
                
                
                135,000
                
                
                $
                5.34
                
                
                $
                1.15Exercisable,
      June 30, 2009
                
                
                100,000
                
                
                $
                5.34
                
                
                $
                1.15


F-23





Stock Options Outstanding
                            
                            
                            Stock Options ExercisableExercise Prices
                            
                            
                            Shares
                            
                            
                            Weighted
                              Average
                              Remaining
                              Contractual
                              Life (Years)
                            
                            
                            Weighted
                              Average
                              Exercise
                              Price
                            
                            
                            Aggregate
                              Intrinsic
                              Value
                            
                            
                            Shares
                            
                            
                            Weighted
                              Average
                              Remaining
                              Contractual
                              Life (Years)
                            
                            
                            Weighted
                              Average
                              Exercise
                              Price
                            
                            
                            Aggregate
                              Intrinsic
                              Value$
                            5.34
                            
                            
                            
                            150,000
                            
                            
                            
                            3.25
                            
                            
                            $
                            5.34
                            
                            
                            $
                            —
                            
                            
                            
                            100,000
                            
                            
                            
                            3.25
                            
                            
                            $
                            5.34
                            
                            
                            $
                            —





The fair
value of each stock option grant to employees is estimated on the date of grant.
A Black-Scholes option-pricing model, applying the following weighted average
assumptions, was used to estimate the fair value for employee stock options
issued:




Year ended June 30,
                                      2007Dividend
      yield
                                    
                                    
                                    0.00
                                    %Expected
      volatility
                                    
                                    
                                    60.68
                                    %Risk-free
      rate
                                    
                                    
                                    4.67
                                    %Expected
      life of options
                                    
                                    6
      years


Due to
its limited history, the Company has estimated expected volatility based on the
historical volatility of certain companies as determined by management. The
risk-free interest rate assumption is based upon observed interest rates
appropriate for the expected term of the Company’s employee stock options. The
dividend yield assumption is based on the Company’s intent not to issue a
dividend under its dividend policy. The expected term is based on the simplified
method in accordance with Staff Accounting Bulletin No. 107 “Share Based
Payment.”




As of
June 30, 2009, there was $94,360 of total deferred compensation cost
related to options issued to non-employee board members that will be recognized
in expense over the remaining vesting period of 0.65 years.




In May
2009, the Company issued 18,000 shares of restricted common stock the certain
non-employee members of its Board of Directors. One-third of the 18,000 shares
awarded in May 2009 will vest upon each of the next three successive annual
meetings, subject to the grantee’s continued service on the Board of Directors.
Compensation expense related to this restricted stock is recognized ratably over
the three years based on the fair value of the shares at date of grant, which
was $1.75 per share. As of June 30, 2009, the Company had 92,733 shares of
restricted stock and 150,000 stock options outstanding. The Company did not
issue stock options during the year ended June 30, 2009.




Restricted
Shares





The
Company expenses restricted shares granted in accordance with the provisions of
SFAS 123(R). The fair value of the restricted shares issued is amortized on a
straight-line basis over the vesting period of three years. The expense
associated with the awarding of restricted shares for the years ended
June 30, 2009 and 2008 is $215,735 and $333,478, respectively, which is
included in general and administrative expense on the accompanying consolidated
statement of operations. As of June 30, 2009, $247,284 of deferred
compensation cost related to restricted stock will be charged to operations over
the next three years.





The
following table summarizes information concerning nonvested restricted
shares:





Shares
                                      
                                      
                                      Weighted Average
                                        Fair ValueRestricted
      Shares Balance at June 30, 2008
                                      
                                      
                                      200,834
                                      
                                      
                                      $
                                      4.90Granted
                                      
                                      
                                      18,000
                                      
                                      
                                      
                                      1.75Forfeited/cancelled
                                      
                                      
                                      (2,000
                                      )
                                      
                                      
                                      4.90Vested
                                      
                                      
                                      (124,101
                                      )
                                      
                                      
                                      4.80Restricted
      Shares Balance at June 30, 2009
                                      
                                      
                                      92,733


F-24


NOTE
13 – WARRANTS





On
November 14, 2008, the Company commenced a warrant retirement program, which
offered the holders of its publicly traded warrants the outstanding the
opportunity to purchase 14,146,000 shares of common stock on an amended term for
a limited time. Pursuant to a tender offer that expired on December 12, 2008,
the Company announced the completion of the warrant retirement program. Under
the tender offer, no warrants were exercised and the Company decided not to
extend the offer. The original terms of the warrants were reinstituted and the
warrants expired on February 23, 2009.





In
addition, options to purchase a total of 300,000 units at an exercise price of
$9.90 per unit (with each unit consisting of one share of common stock and two
warrants, each to purchase one share of Company common stock at an exercise
price of $6.25 per share) were sold in connection with the underwriting of its
initial public offering and will expire on February 23, 2010.





On June
30 and September 25, 2009, Avantair sold 567,200 and 250,000 units,
respectively, at a price of $2.50 per unit to investors in a private placement.
Each unit consisted of two shares of common stock and one warrant to purchase
one common share. The warrants have an exercise price of $4.00 per share and are
exercisable until June 30, 2012. The sale was consummated under the terms of a
Securities Purchase Agreement between Avantair and each of the investors.
Pursuant to a registration rights agreement, Avantair has agreed to use it best
efforts to register the shares issued to the investors and the shares underlying
the warrants issued to the investors for resale under the Securities Act of
1933, as amended. Upon effectiveness of the registration statement, the issuance
of shares of common stock will be available upon exercise of the Company’s
outstanding publically traded warrants. The warrants are issued in registered
form under a warrant agreement between Continental Stock Transfer & Trust
Company, as warrant agent, and Avantair, Inc. The exercise price and number of
shares of common stock issuable on exercise of the warrants may be adjusted in
certain circumstances including in the event of a stock dividend, or Avantair’s
recapitalization, reorganization, merger or consolidation. However, the warrants
will not be adjusted for issuances of common stock at a price below their
respective exercise prices.




The
warrants may be exercised upon surrender of the warrant certificate on or prior
to the expiration date at the offices of the warrant agent, with the exercise
form on the reverse side of the warrant certificate completed and executed as
indicated, accompanied by full payment of the exercise price, by certified check
payable to Avantair, for the number of warrants being exercised. The warrant
holders do not have the rights or privileges of holders of common stock or any
voting rights until they exercise their warrants and receive shares of common
stock. After the issuance of shares of common stock upon exercise of the
warrants, each holder will be entitled to one vote for each share held of record
on all matters to be voted on by stockholders.




No
warrants will be exercisable unless at the time of exercise a prospectus
relating to common stock issuable upon exercise of the warrants is current and
the common stock has been registered or qualified or deemed to be exempt under
the securities laws of the state of residence of the holder of the warrants.
Under the terms of the warrant agreement, we have agreed to meet these
conditions and use our best efforts to maintain a current prospectus relating to
common stock issuable upon exercise of the warrants until the expiration of the
warrants.





NOTE
14 – RETIREMENT PLAN





Defined
Contribution Plan





The
Company has a 401(k) Profit Sharing Plan (the “401(k) Plan”) available for
substantially all employees. Employees may contribute up to the annual Internal
Revenue Service dollar limit. Company contributions to the 401(k) Plan are at
the discretion of the Company. The Company has not made any discretionary profit
sharing employer contributions to the 401(k) Plan to date.





NOTE
15 – VENDOR SERVICE REIMBURSEMENT





In
January 2009, the Company replaced a former engine service vendor with another
nationally recognized, FAA certified engine maintenance vendor. The service
contracts with both the former and successor engine service vendors transferred
risk. Accordingly, the Company’s policy for engine maintenance is to record the
expense as incurred. As a result of the termination of the arrangement with the
former service provider, the Company realized a $2.9 million reduction in
maintenance expense which was credited to cost of flight operations during the
third quarter of fiscal year 2009, of which approximately $2.0 million of the
credit was related to expenses recorded in the first six months of fiscal year
2009.




NOTE
16 – SUBSEQUENT EVENTS





The
Company entered into a sale and leaseback agreement, dated August 11, 2006,
with JMMS, LLC (“JMMS”). Under the sale and leaseback agreement, the Company
sold 100.0% of its interest in a core aircraft for $4.2 million and leased back
68.8% of the aircraft for a five year term. The proceeds of the sale and
leaseback arrangement were used to pay down the line of credit with CNM, Inc. In
March 2007, the Company amended the lease agreement to include a provision for
the Company to buy back the aircraft at the expiration of the term. As a result
of the amendment, the Company has accounted for the sale and leaseback
transaction as a finance lease. On March 9, 2009, JMMS notified the Company of
its intention to terminate the sale and leaseback agreement between the parties
entered into on August 11, 2006, effective March 1, 2009, at which date,
pursuant to the agreement, the Company was required to purchase the aircraft at
a cost of no more than the $4.2 million. The Company is currently in
negotiations to obtain financing and pursuing alternative options relating to
the JMMS termination. The closing date of the transaction was initially extended
past March 1, 2009, to June 30, 2009. In consideration for extending the period
to close, the Company made monthly payments for three consecutive months
beginning April 1, 2009 in the amount of $0.2 million. On July 1, 2009, both
parties agreed to extend the closing date to on or before October 31, 2009. In
consideration for such extension, the Company will make two consecutive monthly
payments in the amount of $50,000 beginning on July 1, 2009 and two consecutive
monthly payments in the amount of $0.2 million beginning on September 1, 2009 or
until the closing of the acquisition of the aircraft.  The total
amount of the monthly payments made to JMMS by the Company shall be deducted
from the purchase price on the closing date.


F-25


In
addition, on June 30, 2009, Avantair sold 567,200 units at a price of $2.50 per
unit to investors in a private placement, generating net proceeds of
approximately $1.3 million. Each unit consisted of two shares of common stock
and one warrant to purchase one common share. The warrants had an exercise price
of $4.00 per share and were exercisable until June 30, 2012. The sale was
consummated under the terms of a Securities Purchase Agreement between Avantair
and each of the investors. Pursuant to a registration rights agreement, Avantair
has agreed to use it best efforts to register the shares issued to the investors
and the shares underlying the warrants issued to the investors for resale under
the Securities Act of 1933, as amended. By agreement between Avantair, the
investors in the June 30, 2009 private placement and that offering’s placement
agent, the stock offering was extended until October 15, 2009. On September 25,
2009, the Company sold an additional 250,000 units at a price of $2.50 per unit
generating net proceeds of approximately $0.6 million.





On July
15, 2009, the Company entered into a Promissory Note with BRMR, LLC (BRMR) and
Dalewood Associates LP (Dalewood) in the amount of $1.0 million (with each of
BRMR and Dalewood funding $0.5 million) to cover the costs of a portion of the
unsold inventory of fractional ownership interests in one of its aircraft. The
terms of the note were thirty days at an interest rate of one percent and two
percent through the September 14, 2009 date of repayment. Pursuant to the terms
of this transaction, the Company paid BRMR and Dalewood a total of a one percent
origination fee, as well as provided BRMR with a twenty-five flight hour charter
card.


F-26


EXHIBIT
INDEX




Exhibit
                        Number
                      
                      Description2.1
                      
                      Stock
      Purchase Agreement, dated as of October 2, 2006 between Ardent Acquisition
      Corporation and the Stockholders of Avantair, Inc. (1)2.2
                      
                      Letter
      Agreement, entered into as of October 2, 2006 between Avantair, Inc.,
      certain equity investors and Ardent Acquisition Corporation.
      (1)2.3
                      
                      Amendment
      to Stock Purchase Agreement, dated as of December 15, 2006 between Ardent
      Acquisition Corporation and the Stockholders of Avantair, Inc.
      (2)2.4
                      
                      Securities
      Purchase Agreement, dated as of June 30, 2009 by and among Avantair, Inc.
      and certain investors. (10)2.5
                      
                      Amendment
      to Securities Purchase Agreement, dated as of July 31, 2009 by and among
      Avantair, Inc. and certain investors. (11)2.6
                      
                      Second
      Amendment to Securities Purchase Agreement, dated as of September 10, 2009
      by and among Avantair, Inc. and certain investors. (12)2.7
                      
                      Third
      Amendment to Securities Purchase Agreement, dated as of September 23, 2009
      by and among Avantair, Inc. and certain investors.3.1
                      
                      Amended
      and Restated Certificate of Incorporation. (3)3.2
                      
                      By-laws.
      (4)3.3
                      
                      Amended
      and Restated By-laws. (8)3.4
                      
                      Certificate
      of Designations, filed with the Secretary of State of the State of
      Delaware on November 14, 2007. (9)4.1
                      
                      Specimen
      Unit Certificate. (4)4.2
                      
                      Specimen
      Common Stock Certificate. (4)4.3
                      
                      Specimen
      Warrant Certificate. (4)4.4
                      
                      Form
      of Unit Purchase Option to be granted to Representative.
    (4)4.5
                      
                      Form
      of Warrant Agreement between Continental Stock Transfer & Trust
      Company and the Registrant. (4)4.6
                      
                      Form
      of Warrant Agreement among the Registrant and certain
      investors.10.1
                      
                      Letter
      Agreement among the Registrant, EarlyBirdCapital, Inc. and Barry J.
      Gordon.
(4)










10.2
                
                Letter
      Agreement among the Registrant, EarlyBirdCapital, Inc. and Marc H. Klee.
      (4)10.3
                
                Letter
      Agreement among the Registrant, EarlyBirdCapital, Inc. and Harvey Granat.
      (4)10.4
                
                Letter
      Agreement among the Registrant, EarlyBirdCapital, Inc. and Robert Brill.
      (4)10.5
                
                Letter
      Agreement among the Registrant, EarlyBirdCapital, Inc. and Arthur G.
      Goldberg. (4)10.6
                
                Letter
      Agreement among the Registrant, EarlyBirdCapital, Inc. and Philip Goodman.
      (4)10.7
                
                Letter
      Agreement among the Registrant, EarlyBirdCapital, Inc. and Alan J.
      Loewenstein. (4)10.8
                
                Letter
      Agreement among the Registrant, EarlyBirdCapital, Inc. and Robert Sroka.
      (4)10.9
                
                Form
      of Investment Management Trust Agreement between Continental Stock
      Transfer & Trust Company and the Registrant. (4)10.10
                
                Form
      of Stock Escrow Agreement between the Registrant, Continental Stock
      Transfer & Trust Company and the Initial Stockholders.
    (4)10.11
                
                Form
      of Letter Agreement between American Fund Advisors, Inc. and Registrant
      regarding administrative support. (4)10.12
                
                Promissory
      Note, dated October 31, 2004, in the principal amount of $70,000 issued to
      Barry J. Gordon. (4)10.13
                
                Registration
      Rights Agreement among the Registrant and the Initial Stockholders.
      (4)10.14
                
                Form
      of Warrant Purchase Agreement among EarlyBirdCapital, Inc. and each of the
      Initial Stockholders. (4)10.15
                
                Investors
      Rights Agreement, entered into as of October 2, 2006, between Avantair,
      Inc. and certain equity investors. (1)10.16
                
                Loan
      Agreement, entered into as of October 2, 2006 by and among Avantair,
      Inc., CNM, Inc. and Ardent Acquisition Corporation. (1)10.17
                
                Amended
      and Restated Promissory Note, dated June 1, 2007, made by Avantair, Inc.
      to CNM, Inc. (8)10.18
                
                Registration
      Rights Agreement among the Registrant and certain investors.
      (10)10.19*
                
                2006
      Long- Term Incentive Plan. (5)10.
      20*
                
                Employment
      Agreement dated September 24, 2009, between the Registrant and Steven F.
      Santo.10.
      21
                
                Floor
      Plan Finance Agreement, dated April 2, 2009, between the Registrant and
      MidSouth Services, Inc. with the term commencing on April 3, 2009.
      (13)










10.
      22
                
                Floor
      Plan Finance Agreement, dated April 2, 2009, between the Registrant and
      MidSouth Services, Inc. with the term commencing on a date that is yet to
      be determined. (13)14.1
                
                Code
      of Conduct and Professional Ethics for directors, officers and employees,
      including our Chief Executive Officer and Chief Financial Officer.
      (6)23.2
                
                Consent
      of AvData. (8)31.1
                
                Chief
      Executive Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a) of
      the Securities Exchange Act of 193431.2
                
                Chief
      Financial Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a) of
      the Securities Exchange Act of 193432.1
                
                Chief
      Executive Officer Certification pursuant to 18 U.S.C. Section
      135032.2
                
                Chief
      Financial Officer Certification pursuant to 18 U.S.C. Section
      135099.1
                
                Charter
      for the Audit Committee of the Board. (8)99.2
                
                Charter
      for the Corporate Governance and Nominating Committee of the Board.
      (9)99.3
                
                Charter
      for the Compensation Committee of the Board.(8)99.4*
                
                Avantair
      Leadership Deferred Compensation Plan Adoption Agreement, dated December
      18, 2008. (14)99.5*
                
                Avantair
      Leadership Deferred Compensation Plan Basic Plan Document, dated December
      18, 2008. (14)




(1)
                  Incorporated
      by reference to the Registrant’s Current Report on Form 8-K, filed with
      the Securities and Exchange Commission on October 4,
      2006.(2)
                  Incorporated
      by reference to the Registrant’s Current Report on Form 8-K, filed with
      the Securities and Exchange Commission on December 20,
      2006.(3)
                  Incorporated
      by reference to Registrant’s current report on Form 8-K, filed with the
      Securities and Exchange commission on March 15,
  2007.(4)
                  Incorporated
      by reference to the Registrant’s Registration Statement on Form S-1 (SEC
      File No. 333-121028).(5)
                  Incorporated
      by reference to the Registrant’s Current Report on Form 8-K, filed with
      the Securities and Exchange Commission on March 23,
    2007.(6)
                  Incorporated
      by reference to the Registrant’s Current Report on Form 8-K, filed with
      the Securities and Exchange Commission on February 28,
    2007.(7)
                  Incorporated
      by reference to the Registrant’s Current Report on Form 8-K, filed with
      the Securities and Exchange Commission on April 6,
2007.(8)
                  Incorporated
      by reference to the Registrant’s Registration Statement on Form S-1 (SEC
      File
No. 333-142312).










(9)
                Incorporated
      by reference to the Registrant’s Current Report on Form 10-KSB, filed with
      the Securities and Exchange Commission on November 20,
    2007.(10)
                Incorporated
      by reference to the Registrant’s Current Report on Form 8-K, filed with
      the Securities and Exchange Commission on July 2, 2009.(11)
                Incorporated
      by reference to the Registrant’s Current Report on Form 8-K, filed with
      the Securities and Exchange Commission on August 4,
  2009.(12)
                Incorporated
      by reference to the Registrant’s Current Report on Form 8-K, filed with
      the Securities and Exchange Commission on September 15,
    2009.(13)
                Incorporated
      by reference to the Registrant’s Current Report on Form 8-K, filed with
      the Securities and Exchange Commission on April 7,
2009.(14)
                Incorporated
      by reference to the Registrant’s Current Report on Form 8-K, filed with
      the Securities and Exchange Commission on December 22,
    2008.*
                Management
      contract or compensatory plan or
arrangement.