UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549







FORM
10-K










þ
            Annual
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the fiscal year ended: June 30,
2010





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





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


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  þ





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  þ





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  þ      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.  þ




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 companyþ





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





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 $47,730,462. 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 24, 2010 there were 26,353,201 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
10-K 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
                  
                  
                  9Item
      1B. Unresolved Staff Comments
                  
                  
                  15Item
      2. Facilities
                  
                  
                  15Item
      3. Legal Proceedings
                  
                  
                  15PART
      IIItem
      5. Market for Registrant's Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities
                  
                  
                  16Item
      6. Selected Financial Data
                  
                  
                  17Item
      7. Management's Discussion and Analysis of Financial Condition and Results
      of Operations
                  
                  
                  19Item
      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
                  
                  
                  27Item
      9A(T). Controls and Procedures
                  
                  
                  27Item
      9B. Other Information
                  
                  
                  29PART
      IIIItem
      10. Directors, Executive Officers and Corporate Governance
                  
                  
                  30Item
      11. Executive Compensation
                  
                  
                  34Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
                  
                  
                  43Item
      13. Certain Relationships and Related Transactions and Directors
      Independence
                  
                  
                  45Item
      14. Principal Accountant Fees and Services
                  
                  
                  46PART
      IVItem
      15. Exhibits and Financial Statement Schedules
                  
                  
                  48




i


PART
I





Item
1. BUSINESS





Overview





Avantair
is engaged in the sale of fractional ownership interests in, and flight hour
card usage of, professionally piloted aircraft for personal and business use,
and the management of its aircraft fleet. According to AvData, Avantair is the
fifth largest company in the North American fractional aircraft industry. As of
June 30, 2010, Avantair operated 55 aircraft within its fleet, which is
comprised of 46 aircraft for fractional ownership, 5 company owned core aircraft
and 4 leased and company managed aircraft.





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





Avantair
generates revenues primarily through the sale of fractional ownership shares of
aircraft, by providing management and maintenance services related to these
aircraft, and from the sale of flight hour cards providing either 15 or 25 hours
of flight time per year of access to its aircraft fleet (either individually or
through the Company’s Axis Club Membership program). The Company markets and
sells fractional ownership interests to individuals and businesses with a
minimum share size of a one-sixteenth ownership interest. Under management and
maintenance agreements with fractional owners, Avantair provides pilots,
maintenance, fuel and hangar space for the aircraft.





In
response to the general economic downturn and the resulting growth of flight
hour card sales over fractional share sales industry-wide, in January 2009,
Avantair initiated the Axis Club Membership program. This program is designed to
bridge the gap between the financial commitment of a fractional share and flight
hour cards. This product offers access to blocks of flight hours for a three
year membership fee of $75,000. The program requires Axis Club members to
purchase a minimum of three 25 hour flight hour cards for $80,000 or less,
dependent upon the type of membership purchased, over a three year period. The
program also allows for the conversion of club membership into fractional
ownership. Members are not charged a management fee until they are fractional
owners.





Avantair
presently sources all of its aircraft from a single manufacturer, Piaggio
America, Inc. (“Piaggio”). As of June 30, 2010, Avantair had contractual
commitments to purchase 52 additional Piaggio Avanti II aircraft through 2013
with a mutual understanding that the aircraft delivery dates can be extended.
The total commitment, including a recently proposed price escalation, is valued
at approximately $330 million. The Company’s agreement with Piaggio permits it
some flexibility to defer a portion of the aircraft deliveries and the Company
has exercised this flexibility at certain times in order to take deliveries in
line with the Company’s sales expectations. Avantair believes that the pricing
structure afforded by utilizing the Piaggio Avanti allows Avantair to attract a
customer desiring quality at a lower price point. Offering the cabin cross
section of a mid-size aircraft and fuel efficiency of a turboprop, along with no
hourly fees, allows Avantair to lower the cost of private air travel for a
broader range of consumers.





The
Company’s primary sources of operating funds are the collection of management
and maintenance fees from fractional share owners as well as the sale of
fractional ownership shares, flight hour cards and, effective January 2009, Axis
Club Memberships. Revenue for the sales by product category can be found in the
accompanying Consolidated Statement of Operations for the fiscal year ended June
30, 2010. Sales by product category follow:





FY
      2010 Unit Sales for the Three Months Ended
                
                
                FY
      2010
                
                
                FY
      2009September 30, 2009
                
                
                December 31, 2009
                
                
                March 31, 2010
                
                
                June 30, 2010
                
                
                Total
                
                
                TotalNew
      Fractional shares
                
                
                2
                
                
                
                5
                
                
                
                -
                
                
                
                0.5
                
                
                
                7.5
                
                
                
                38Flight
      hour cards
                
                
                86
                
                
                
                100
                
                
                
                82
                
                
                
                120
                
                
                
                388
                
                
                
                160Axis
      Club Memberships
                
                
                3
                
                
                
                21
                
                
                
                9
                
                
                
                18
                
                
                
                51
                
                
                
                10





Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. At June 30, 2010, the Company
had 28.5 fractional aircraft shares available for sale. In addition to the cost
of acquiring aircraft, Avantair’s primary expenses are related to fuel, aircraft
repositioning (i.e., moving an aircraft to another location to accommodate a
customer’s need and for demonstration flights for sales purposes), maintenance,
charters and insurance. To finance its growth strategy, the Company will
continue to actively pursue additional funds through some or a combination of
equity financing, including the sale of additional shares of common and
preferred stock, asset sales, accelerated payments of management and maintenance
fees or debt financing.





In
September and October 2009, the Company consummated private sales of its common
stock to investors generating net proceeds of approximately $8 million. Together
with the proceeds of the private placement consummated in June 2009, the Company
received total net proceeds of approximately $9.2 million.


1





At June
30, 2010 and June 30, 2009, Avantair had assets of approximately $131.6 million
and $164.0 million, respectively. For the fiscal years ended June 30, 2010 and
June 30, 2009, the Company had revenue of approximately $143.0 million and
$136.8 million, respectively, and net losses of approximately $4.0 million and
$4.5 million, respectively. Avantair has incurred losses since inception and may
not be able to generate sufficient net revenue from its business in the future
to achieve or sustain profitability. At August 31, 2010, the Company had
approximately $7.2 million of unrestricted cash on hand and assuming there is no
change in sales and expense trends experienced since the fourth quarter of
fiscal 2010, the Company believes that its cash position will be sufficient to
continue operations for the foreseeable future.





Recent
Developments





During
the second quarter of fiscal 2010, the Company, through an arms-length
transaction, transferred its rights to purchase four Piaggio Avanti II aircraft
to LW Air pursuant to the existing aircraft purchase agreement between the
Company and Piaggio. Upon delivery of the aircraft, Piaggio returned $2.6
million of deposits previously paid on the aircraft by the
Company.  Simultaneous with this transaction, the Company entered into
an eight-year management agreement for those aircraft and the Company issued
2,373,620 warrants to Lorne Weil, the Managing Member of LW
Air.  Pursuant to the agreement between the parties, the Company will
manage each aircraft for a monthly fee which is variable based upon aircraft
flight hours but will not exceed $56,500 per month. The agreement also allows
the Company to enter into short-term leases for the use of the aircraft at a
specified dry lease rate per flight hour.  Effective July 1, 2010, the
terms of the management agreement were amended to reduce the maximum management
fee to be charged for the Company’s management of each of these aircraft to not
exceed $44,000 per month for each aircraft, for the eight months ending February
28, 2011, after which the maximum management fee will continue to not exceed
$56,500 per month for each aircraft. These aircraft are anticipated to be
utilized to satisfy fleet demands of the growing flight hour card and Axis Club
Membership Program product lines. In September 2010, the Company finalized a fee
arrangement with EarlyBirdCapital, Inc (“EBC”) in consideration for services
rendered related to the LW Air lease transaction. The $375,000 fee will be
included as an additional cost of the transaction and amortized over the term of
the arrangement.





Industry
Overview





The
Company believes that fractional aircraft and flight hour card ownership
provides customers with the convenience and flexibility of private air service
without the more significant costs associated with sole ownership of an
aircraft. Additionally, fractional aircraft companies generally provide the same
conveniences and benefits to individuals and businesses through their various
flight hour card programs. Commercial flight delays can be costly and tiresome,
commercial hubs are increasingly crowded, major commercial airports may be far
from final destinations and commercial air travel is increasingly subject to
threats and security-related inconveniences. The Company believes that for
businesses and high net worth individuals, fractional ownership and flight hour
card programs often offer a balance between convenience and cost.





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





As part
of its model a fractional aircraft company may also own core fleet aircraft,
which are owned or leased by the Company for the demand and use of its flight
hour card owners. The Company’s various flight hour card products offers access
to blocks of flight hours which are purchased through a membership or
individually.





According
to AvData, the North American fractionally owned fixed-wing aircraft fleet has
grown from 8 aircraft in 1986 to an aggregate of 830 aircraft as of June 2010.
According to AvData, five companies - NetJets, Flight Options, FlexJet,
CitationAir, and Avantair - account for a majority of the total market for
fractional aircraft, based on unique owners. Among the five major fractional
companies, NetJets has a market share of approximately 51.0% and Flight Options,
FlexJet, CitationAir have a combined market share of approximately 38.0%.
According to AvData, as of June 2010, Avantair had an overall market share of
11.0%. However, in the light-cabin category in which it competes, Avantair has a
market share of approximately 28.0%, the largest among the five major fractional
companies.





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


2





·
            price;


·
            availability;


·
            operating
      costs;


·
            reliability;


·
            speed;


·
            range;


·
            cabin
      size and features;


·
            safety
      features and record;


·
            environmental
      impact;


·
            efficiency;


·
            maintenance
      cost;


·
            manufacturer;
      and


·
            runway
      requirements.





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





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





The
capital requirements for ordering aircraft require the operator to place
deposits well in advance of receiving its planes. Progress payments are made as
certain milestones are achieved. The amounts of the deposits and progress
payments are a function of several factors including the price of the underlying
plane, the creditworthiness of the buyer, and the time until delivery. The
majority of the payments are generally made upon delivery. As of June 30, 2010,
the Company has paid approximately $7.2 million in deposits for these future
aircraft deliveries and will make additional deposits totaling approximately
$13.0 million on these future deliveries at various dates throughout the term of
the contract.





The
Avantair Fractional Ownership Program





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 management and maintenance fee, currently $9,650
for new owners (or $9,150 for renewing owners under a recurring owner loyalty
program and subject to certain conditions), is assessed per 1/16th share owned.
This fee covers any direct costs in operating and maintaining the aircraft,
other than fuel surcharges which are based on actual aircraft usage. This is
unlike most other fractional programs, which generally charge fractional owners
an occupied hourly rate for use of the aircraft. All programs have fuel
surcharges, but due to the efficiency of the Avanti and the way Avantair
calculates its management fee, Avantair believes its surcharges tend to be less
than those charged by its competitors. Any landing fees, excess catering fees,
applicable international fees and taxes are billed to the owner. Monthly fees
are adjusted upwards on each anniversary date by the greater of either the
current Consumer Price Index or 3.75%, but will not exceed the then-current rate
offered to new share owners.





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





Each
share owner owns an “undivided interest” that cannot be affected or encumbered
by the financial actions of other owners. In order to avoid scheduling
conflicts, each share owner throughout Avantair’s fleet agrees to exchange use
of such owner’s airplane with the other share owners in the fleet. Avantair must
move planes to the necessary destinations to meet the fractional owners’ needs.
Avantair keeps a certain number of core aircraft in the fleet in order to have
enough planes to meet demand. Owners may sell, assign or transfer rights with
respect to their undivided interest. Each owner has the right to sell their
undivided interest in their aircraft to a third party with the Company’s prior
written consent, which shall not be unreasonably withheld.  Further,
each owner is entitled to assign or transfer their undivided interest in the
aircraft, but only to a wholly owned subsidiary, parent or successor in interest
with the Company’s prior written consent, which shall not be unreasonably
withheld.


3





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.





The
Avantair Card Program





In 2006,
Avantair introduced the Edge Card Program, which 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 believes its card program to be a means of
introducing potential purchasers to its fractional ownership program. Avantair’s
card program currently is priced at $105,000 for a 25 hour card. Additionally,
Avantair created an introductory 25 hour card for a first flight hour card
purchaser currently at a rate of $95,000.





The Axis Club Membership
Program





In 2009,
Avantair introduced the Axis Club Membership program. The membership program -
‘The Axis Club’ - allows a customer access to 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.





Aircraft
Usage and Scheduling





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





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





Chartering





Whenever
possible, Avantair will schedule an aircraft from its fleet for each request for
use by a fractional or flight hour card 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.





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. Advertising strategy is based on historical performance
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 atwww.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 and media constituents. Recent editorial placements include magazines
such as WSJ.com, Robb Report, Forbes and Business Jet Traveler, as well as
travel and aircraft industry publications. An owner newsletter, Contrails, is
published quarterly with pertinent news, purchase reinforcement and any new
programs.  It is also mailed to competitive
customers.


4





An
important element of Avantair’s marketing strategy is referral incentives. 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 other initiatives. Recognizing that
a significant portion of its success is due to referrals from current owners,
Avantair launched two owner loyalty programs.  Under the new Loyalty
Program, Avantair awards added flight hours or monetary credits to owners who
renew their partnership with Avantair. This in turn assists the Company in
solidifying and stabilizing its customer base. Avantair has also launched the
Ambassador Program under which owners interested in actively recommending
Avantair to prospective customers will receive additional rewards for those that
lead to new sales.





One
internal measurement used to assess future sales is leads generated by both the
sales force and the marketing methods targeting the high net worth demographic,
competitive owners and methods described above. While many leads may 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
flight cost is 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, 2010, Avantair operated 55 aircraft within its fleet which is comprised
of 46 aircraft for fractional ownership, 5 company owned core aircraft and 4
leased and company managed aircraft.





At June
30, 2010, Avantair had 52 additional Piaggio aircraft on order. Currently, all
of the fractional aircraft in Avantair’s fleet are Piaggio Avanti turboprops. In
addition, on October 17, 2006, Avantair announced orders for 20 Embraer Phenom
100 aircraft. The Phenom 100 is in the Very Light Jet category of business jets,
with the largest cabin in the category. On June 20, 2008, Avantair assigned its
rights and obligations to the purchase agreement for the purchase of these 20
Embraer Phenom 100 aircraft to a wholly owned subsidiary, called Share 100
Holding Co., LLC. On the same date, Avantair sold 100 percent of the Class A
membership interest of the LLC, with the rights and obligations to 18 of the 20
aircraft, to a third party called Executive AirShares Corporation; Avantair
retains the Class B membership interest of the LLC, with the rights and
obligations to purchase aircraft 19 and 20. If Executive AirShares Corporation
defaults under its obligations as a Class A member of the LLC, Avantair will
then be responsible for the rights and obligations of the remaining undelivered
aircraft.





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





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





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


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


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





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


5





The
Piaggio Avanti has several features such as:





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


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


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


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


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


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





Flight
Operations





Avantair’s
Operations Control Center is made up of four departments that all play a role in
an Avantair program participant’s 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.





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


·
            Recent
      flight time commensurate with
experience.





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. Actual average
experience of pilot hires far exceeds these minimum
requirements.


6





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 14 years for
Avantair’s maintenance technicians, 15 years for its maintenance controllers and
over 17 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 75.0% owned by
Cessna, a wholly-owned Textron subsidiary). None of these competitors are
publically traded 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, the North American fractionally owned fixed-wing
aircraft fleet has grown from 8 aircraft in 1986 to an aggregate of 830 aircraft
as of June 2010. According to AvData, five companies - NetJets, Flight Options,
FlexJet, CitationAir, and Avantair - account for a majority of the total market
for fractional aircraft, based on unique owners. Among the five major fractional
companies, NetJets has a market share of approximately 51.0% and Flight Options,
FlexJet, CitationAir have a combined market share of approximately 38.0%.
According to AvData, as of June 2010, Avantair had an overall market share of
11.0%. However, in the light-cabin category in which it competes, Avantair has a
market share of approximately 28.0%, the largest among the five major fractional
companies.





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





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





Information
Technology





Avantair
currently uses two core software applications for operations management as it
awaits FAA approval on one of these software applications. FlightOps is
designed, developed, and licensed by Bitwise Solutions, Inc. for use in
Avantair’s Operations Control Center to track owner trips as well as manage its
fleet. In fiscal year 2010, the Company implemented Astro Operations Manager,
which is designed, developed, and licensed by DayJet Technologies for use in
Avantair’s Operations Control Center to plan, schedule, and optimize utilization
of its aircraft fleet. Until all required FAA approvals are received, the
Company will continue to run the Astro software application parallel with the
FlightOps software application. The Company expects to transition to solely
using the state-of-the-art Astro software application during fiscal year
2011.





Avantair
has invested in an efficient high-performance computing environment that
includes Dell PowerEdge servers and Cisco Routers and Switches. In addition,
Avantair has approximately 130 Fujitsu and Samsung Tablet PCs that are used as
part of its pilots’ Electronic Flight Bag. These PCs are equipped with core
software applications that include navigational aids, flight charts, and
aircraft manuals.





Avantair
currently has two agreements with Application Service Providers:





·
            Salesforce
      – Customer Relationship Management Sales Force Automation;
    and




7




·
            Avtrak
      – Enterprise Resource Management Aviation Service Software (Maintenance,
      Inventory).





Government
and Other Regulations





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





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





Avantair’s
charter operations under Part 135 also are subject to economic regulation by the
U.S. Department of Transportation (“DOT”). To retain its DOT registration as an
air taxi, Avantair must remain a U.S. citizen; that is, U.S. citizens must
actually control Avantair, at least 75.0% of Avantair’s outstanding voting stock
must be owned and controlled by U.S. citizens, and the President and two-thirds
of the directors and other managing officers must be U.S. citizens. Avantair’s
organizational documents provide for the automatic reduction in voting power of
common stock owned or controlled by non-U.S. citizens if necessary to maintain
U.S. citizenship. If Avantair cannot maintain its U.S. citizenship, it would
lose its ability to conduct its charter operations (though not its fractional
program manager operations).





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 the
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.




8


Employees





As of
June 30, 2010, Avantair had approximately 450 full-time employees, 40 of whom
were management and 410 of whom were operational. Avantair believes that it has
good relations with its employees.





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’s
revenues are largely derived from the sales of fractional interests and flight
hour cards in aircraft and monthly management fees. The Company has obtained
positive income from operations, however it has not been sufficient to cover
interest expense related to the costs of financing aircraft and therefore, has
incurred losses since inception. Avantair’s consolidated financial statements
have been prepared assuming that Avantair will continue as a going concern. This
basis of accounting contemplates the recovery of the Company’s assets and the
satisfaction of its liabilities in the normal course of business. Successful
transition to profitable operations is dependent upon obtaining a level of sales
adequate to support the Company’s cost structure and an uninterrupted delivery
of aircraft. The Company has suffered recurring losses resulting in a
stockholders’ deficit of approximately $32.2 million and a working capital
deficiency of $43.9 million as of June 30, 2010 and a stockholders’ deficit of
$36.0 million and a working capital deficiency of $49.2 million as of June 30,
2009. Historically, the Company has been able to finance operations from the
capital obtained through the Reverse Merger which was completed on February 22,
2007 and the capital obtained through the November 2007 private placement of
Series A Convertible Preferred Stock which raised gross proceeds of $15.2
million and the June, September and October 2009 private placements of Common
Stock which raised net proceeds of $1.3 million, $0.6 million and $7.3 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
has experienced a decrease in the number of fractional aircraft share sales and
may not be able to obtain acceptable customer contracts covering all of the
fractional interests of its new airplanes, a sufficient number of flight hour
cards and/or Axis Club Memberships, or a combination thereof, which could
adversely affect our profitability and may incur losses by expanding its
business during an economic downturn.





Since the
beginning of the current economic downturn, the Company has experienced a
decrease in the number of fractional aircraft share sales, with fractional
aircraft shares sold decreasing 80.3% to 7.5 during fiscal year 2010 from 38 in
fiscal year 2009.  At June 30, 2010, the Company has 28.5 fractional
aircraft shares available for sale. In fiscal 2010, the Company incurred
approximately $1.9 million in interest expense on floor-plan arrangements
securing two aircraft underlying the 28.5 fractional aircraft shares available
for sale, and will incur approximately $80,000 in interest expense per floor
plan per month until the related aircraft are fully fractionalized. The Company
believes that the decrease in fractional aircraft share sales is due to capital
constraints on, and reluctance to commit tolong-term expenditures
by, individuals and companies who are potential customers.  In
contrast, the Company has experienced an increase in flight hour time card sales
which allow customers to fly privately without the capital commitment or
long-term obligations of fractional ownership. This increase in flight hour time
card sales requires an increase in the Company’s aircraft fleet in order to meet
demand, with the Company bearing all of thefinancing risk in
respect ofthe
additional aircraft. During the current economic downturn, general credit market
conditions have tightened, including credit necessary to acquire additional
aircraft. The Company may not be able to secure sufficient financing for its
fleet expansion due to the current economic downturn and the tightening credit
conditions, or generate sufficientrevenue from short-term
flight hour time card sales to satisfy the cost of financing the acquisition of
additional aircraft. If the Company is unable to secure sufficient financing at
reasonable terms or to continue to generate sufficient revenue from flight hour
time card sales to cover the costs of such additional aircraft, the Company’s
financial performance may be adversely affected.


9





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





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





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





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





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





Expansion
of Avantair’s business may also strain its existing management resources and
operational, financial and management information systems to the point that they
may no longer be adequate to support its operations, requiring Avantair to make
significant expenditures in these areas. Avantair will need to develop further
financial, operational and management reporting systems and procedures to
accommodate future growth and reporting requirements under Section 404 of the
Sarbanes Oxley Act of 2002 (including pursuant to other applicable securities
laws). There can be no assurance that Avantair will be able to develop such
additional systems or procedures to accommodate its future expansion on a timely
basis, and the failure to do so could harm its business.





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





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





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





Avantair’s
ability to make payments on its indebtedness and acquire additional aircraft
will depend on its ability to generate cash from its future operations. As of
June 30, 2010 and 2009, Avantair had incurred an aggregate of approximately
$30.8 million and $42.6 million, respectively, in short and long term
indebtedness to third party lenders. Much of this indebtedness is secured by
some or all of Avantair’s assets. In addition, as of June 30, 2010, the Company
has commitments valued at $330 million to purchase 52 additional aircraft
through 2013. Avantair’s business may not generate sufficient cash flow from
operations or from other sources sufficient to enable it to repay its
indebtedness and to fund its other liquidity needs, including capital
expenditure and aircraft acquisition requirements. Avantair may need to
refinance or restructure all or a portion of its indebtedness or other financial
obligations on or before maturity. Avantair may not be able to refinance any of
its indebtedness on commercially reasonable terms, or at all. If Avantair cannot
service or refinance its indebtedness or restructure its other financial
obligations, it may have to take actions such as selling assets, seeking
additional equity or reducing or delaying capital expenditures, any of which
could have a material adverse effect on our operations. Additionally, Avantair
may not be able to effect such actions, if necessary, on commercially reasonable
terms, or at all.


10





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.





As part
of the Company’s business strategy, Avantair has historically sold and flown
only Piaggio Avanti aircraft. The type of aircraft sold and operated by Avantair
is the product of a single manufacturer. If the Piaggio Avanti manufacturer
faced production delays due to, for example, natural disasters or labor strikes,
Avantair may experience a significant delay in the delivery of previously
ordered aircraft, which would adversely affect its revenues and profitability
and could jeopardize its ability to meet the demands of its customers. Although
Avantair could choose to operate aircraft of other types, such a change would
involve substantial expense to the Company and could disrupt the Company’s
business activities. Avantair has limited alternatives to find alternate sources
of new aircraft.





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





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





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





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


11





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, the North American fractionally
owned fixed-wing aircraft fleet has grown from 8 aircraft in 1986 to an
aggregate of 830 aircraft as of June 2010. According to AvData, five companies -
NetJets, Flight Options, FlexJet, CitationAir, and Avantair - account for a
majority of the total market for fractional aircraft, based on unique owners.
Among the five major fractional companies, NetJets has a market share of
approximately 51.0% and Flight Options, FlexJet, CitationAir have a combined
market share of approximately 38.0%. According to AvData, as of June 2010,
Avantair had an overall market share of 11.0%. However, in the light-cabin
category in which it competes, Avantair has a market share of approximately
28.0%, the largest among the five major fractional companies.





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 75.0% of its
voting stock is required to be held by U.S. citizens. Although Avantair’s
amended and restated certificate of incorporation contains provisions limiting
non-citizen ownership of its voting stock, Avantair could lose its operating
certificate, which allows it to conduct aircraft operations in the U.S., if such
provisions prove unsuccessful in maintaining the required level of citizen
ownership. Such loss would have a material adverse effect on Avantair. If
Avantair determines that persons who are not citizens of the U.S. own more than
the permitted percentage, currently 25.0%, of Avantair’s voting stock, Avantair
may redeem such stock or, if redemption is not permitted by applicable law or
Avantair’s Board of Directors, in its discretion, elects not to make such
redemption, the Company may restrict the voting rights of such excess shares.
The required redemption would be at a price equal to the average closing price
during the preceding 10 trading days, which price could be materially different
from the current price of the common stock, or if the Company’s common stock is
not traded or quoted, at a price equal to the fair market value as determined in
good faith by Avantair’s Board of Directors, in each case, plus the amounts of
any dividends or other distributions which may be owed to the stockholder.
Avantair’s Board of Directors has not adopted a formula for determining fair
market value as the Company’s common stock is currently traded and quoted. If a
non-citizen purchases the voting stock, there can be no assurance that their
stock will not be redeemed, which redemption could result in a material loss, or
that they will be able to exercise full voting rights with respect to such
voting stock. Such restrictions and redemption rights may make Avantair’s equity
securities less attractive to potential investors, which may result in
Avantair’s publicly traded voting stock having a lower market price than it
might have in the absence of such restrictions and redemption
rights.





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





In the
future, Avantair may decide to pursue other acquisition opportunities to the
extent reasonably feasible. 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.


12





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.





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.





Many
aspects of Avantair’s operations are subject to foreign laws and regulations
protecting the environment, in addition to federal, state and local laws. The
Company does not anticipate that the costs of compliance with current
environmental regulations will have a material adverse effect on our business.
However, the cost of compliance with any future environmental regulations is
unknown and may have a material effect. Although the Company believes its
aircraft produce 35.0% less carbon emissions than its competitors’ aircraft,
based upon fuel usage rates of the Piaggio Avanti aircraft as compared to other
aircraft in the light jet category as derived from data compiled by the Halogen
Guide, February 2007 issue, it could be impacted significantly if more stringent
environmental laws and regulations related to aircraft emissions were
imposed.





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





Avantair
is highly dependent on its computer systems and call center software to operate
its business. The systems and software on which Avantair relies to manage the
scheduling and monitoring of its flights could be disrupted due to events beyond
Avantair’s control, including natural disasters, power failures, terrorist
attacks, equipment failures, software failures and computer viruses and hackers.
Further, the vendors of Avantair’s scheduling software are small businesses and
for one of these vendors 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.




13





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





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





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





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





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





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





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





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





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





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





Risks
Related to Our Common Stock





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





As of
June 30, 2010, the Company had 26,353,201 shares of common stock outstanding,
414,066 shares of common stock available for future issuance under its 2006
Long-Term Stock Incentive Plan and warrants to purchase 2,829,507 shares
outstanding. In addition, as of June 30, 2010, the Company has 152,000 shares of
Series A Preferred Shares outstanding.   As of June 30, 2010, the
Company has 4,251,857 shares of common stock reserved on its books and records
for issuance upon the conversion of the outstanding Series A Preferred Shares.
As a result of the sales of shares consummated on June 30, September 25, and
October 16, 2009, the conversion price of the Series A Preferred Shares was
reduced from $5.15 to $3.57.





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


14





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





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





·
            make
      a special written suitability determination for the
    purchaser;


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


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


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





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





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





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





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





Item
1B. Unresolved Staff Comments




There are no unresolved
written comments that were received from the SEC staff 180 days or more before
the fiscal year ended June 30, 2010 relating to our periodic or current reports
filed under the Securities Exchange Act of 1934.





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. As
of June 30, 2010, there were no legal proceedings which the Company would
anticipate having a material adverse effect on its financial position, results
of operations or cash flows.




15


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. The over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily reflect actual transactions. On June 30,
2010, the last reported sale price of our shares was $3.00 per share. As of June
30, 2010, there were approximately 70 shareholders of record of the common
stock.





Common
      StockQuarter
      Ended
                
                High
                
                
                Low2009First
      Quarter
                
                $
                2.20
                
                
                $
                1.50Second
      Quarter
                
                
                1.90
                
                
                
                0.57Third
      Quarter
                
                
                1.75
                
                
                
                0.80Fourth
      Quarter
                
                
                1.90
                
                
                
                1.152010First
      Quarter
                
                
                1.65
                
                
                
                1.20Second
      Quarter
                
                
                2.05
                
                
                
                1.00Third
      Quarter
                
                
                2.35
                
                
                
                2.00Fourth
      Quarter
                
                
                3.20
                
                
                
                2.20





DIVIDEND
POLICY





The
Company has never declared or paid cash dividends on its common stock. The
Company currently expects to retain all future earnings for use in the operation
and expansion of its 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, 2010:





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
                    
                    
                    776,100
                    
                    
                    $
                    3.17
                    
                    
                    
                    414,066Equity
      compensation plans not approved by security holders
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
                    
                    
                    776,100
                    
                    
                    $
                    3.17
                    
                    
                    
                    414,066





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 776,100 shares subject to issuance upon
exercise of outstanding stock options; 309,834 shares have been issued with
respect to awards of restricted stock; and 414,066 remain available for future
issuance under the Plan.




16




RECENT
SALES OF UNREGISTERED SECURITIES





On
October 16, 2009, Avantair, Inc. (the “Company” or “Avantair”) entered into a
Securities Purchase and Exchange Agreement (the “Purchase Agreement”) with the
investors party thereto (the “Investors”) in connection with a PIPE (Private
Investment in a Public Entity) financing. Pursuant to the Purchase Agreement,
certain new investors purchased 8,818,892 shares of common stock in a private
placement for net proceeds of approximately $7.3 million, or $9.2 million when
combined with the proceeds of two prior placements consummated in June and
September 2009. The Company used the net proceeds from this financing
transaction to retire debt, for working capital and general corporate
purposes.





Under the
terms of the Purchase Agreement, Avantair sold 8,818,892 shares of common stock
to the new investors at a price per share of $0.95. In addition, pursuant to the
Purchase Agreement, the Company exchanged the 817,200 outstanding warrants that
had been issued to existing investors in the two prior private placements for an
aggregate of 516,127 shares of common stock. The Purchase Agreement terminated
the purchase agreement and registration rights agreement entered into in
connection with the June and September 2009 private placements. The securities
were issued in a private placement in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
and Section 3(a)(9) under the Securities Act of 1933, as amended. Avantair did
not engage in any general solicitation or advertisement for the issuance of
these securities.




On
October 16, 2009, pursuant to an agreement between EBC and the Company, in
consideration for services rendered as placement agent for the Company’s June,
September and October 2009 private placements, the Company issued to EBC and its
affiliates 455,887 fully vested warrants which expire on June 30, 2012. Each
warrant permits the holder to purchase one share of the Company’s common stock
at an exercise price of $1.05 per share. The shares issuable upon exercise of
the warrants are entitled to registration rights under the October 2009
Registration Rights Agreement. The Company may redeem the warrants at any time
on or after October 16, 2011 at the price of $0.01 per warrant, provided that
the volume weighted average price of the Company’s common stock has been at
least 200.0% of the exercise price of a warrant for any twenty trading days
during any consecutive thirty trading day period ending on the third trading day
preceding the date of the notice of redemption. These warrants were issued
without registration under the Securities Act by reason of the exemption from
registration afforded by the provisions of Section 4(2) thereof, as a
transaction by an issuer not involving any public offering.





During
the second quarter of fiscal 2010, the Company, through an arms-length
transaction transferred its rights to purchase four Piaggio Avanti II aircraft
to LW Air pursuant to the existing aircraft purchase agreement between the
Company and Piaggio America, Inc. Upon delivery of the aircraft, Piaggio America
returned $2.6 million of deposits previously paid on the aircraft by the
Company. Simultaneous with this transaction, the Company entered into an
eight-year management agreement for those aircraft and the Company issued
2,373,260 warrants to Lorne Weil, the Managing Member of LW Air.





The
warrants issued in conjunction with the LW Air transactions to Lorne Weil,
Managing Member of LW Air, provide for the purchase of 2,373,620 shares of the
Company’s common stock at an exercise price of $1.25 per share. The warrants
expire on October 16, 2012, and the warrants and any underlying shares purchased
upon exercise of the warrants may not be sold, transferred, assigned or
hypothecated, in whole or in part, at any time on or prior to October 16, 2011,
other than to an affiliate of the warrant holder. The Company may redeem the
warrants held by Lorne Weil at any time on and after October 16, 2011 at the
price of $0.01 per warrant, provided that the volume weighted average price of
the Company’s common stock has been at least 300.0% of the exercise price of a
warrant for any twenty trading days during any consecutive thirty trading day
period ending on the third trading day preceding the date of the notice of
redemption. These warrants were issued without registration under the Securities
Act by reason of the exemption from registration afforded by the provisions of
Section 4(2) thereof, as a transaction by an issuer not involving any public
offering.




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, 2010 and 2009 and the
consolidated balance sheet data as of June 30, 2010 and 2009 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, 2008, 2007, and 2006 and the consolidated balance sheet
information as of June 30, 2008, 2007 and 2006 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.




17




Avantair,
      Inc. and SubsidiariesYears
      Ended June 30,2010
                            
                            
                            2009
                            
                            
                            2008
                            
                            
                            2007
                            
                            
                            2006Consolidated
      Statement of Operations DataRevenueFractional
      aircraft sold
                            
                            $
                            43,756,222
                            
                            
                            $
                            51,864,010
                            
                            
                            $
                            43,426,696
                            
                            
                            $
                            29,695,175
                            
                            
                            $
                            23,756,070Maintenance
      and management fees
                            
                            
                            72,957,679
                            
                            
                            
                            70,693,367
                            
                            
                            
                            58,211,457
                            
                            
                            
                            38,787,596
                            
                            
                            
                            22,824,940Flight
      hour card and Axis Club membership revenue
                            
                            
                            20,024,602
                            
                            
                            
                            9,384,110
                            
                            
                            
                            7,236,151
                            
                            
                            
                            3,607,831
                            
                            
                            
                            210,900Other
      revenue
                            
                            
                            6,268,071
                            
                            
                            
                            4,885,563
                            
                            
                            
                            6,744,679
                            
                            
                            
                            4,302,630
                            
                            
                            
                            1,603,470Total
      revenue
                            
                            
                            143,006,574
                            
                            
                            
                            136,827,050
                            
                            
                            
                            115,618,983
                            
                            
                            
                            76,393,232
                            
                            
                            
                            48,395,380Operating
      expensesCost
      of fractional aircraft shares sold
                            
                            
                            37,317,493
                            
                            
                            
                            44,118,352
                            
                            
                            
                            36,637,959
                            
                            
                            
                            24,370,988
                            
                            
                            
                            19,166,722Cost
      of flight operations
                            
                            
                            54,151,877
                            
                            
                            
                            46,723,184
                            
                            
                            
                            50,058,692
                            
                            
                            
                            35,665,057
                            
                            
                            
                            25,362,985Cost
      of fuel
                            
                            
                            14,272,477
                            
                            
                            
                            13,349,084
                            
                            
                            
                            16,489,422
                            
                            
                            
                            10,192,406
                            
                            
                            
                            6,419,835Gain
      on sale of assets
                            
                            
                            (897,595
                            )
                            
                            
                            (1,394,164
                            )
                            
                            
                            (861,410
                            )
                            
                            
                            
                            
                            
                            
                            (207,544
                            )Write-off
      of aircraft deposit
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            300,000
                            
                            
                            
                            -General
      and administrative expenses
                            
                            
                            25,861,629
                            
                            
                            
                            23,628,541
                            
                            
                            
                            20,703,120
                            
                            
                            
                            18,540,610
                            
                            
                            
                            10,757,280Selling
      expenses
                            
                            
                            5,116,153
                            
                            
                            
                            3,736,424
                            
                            
                            
                            4,670,246
                            
                            
                            
                            4,333,268
                            
                            
                            
                            3,672,754Depreciation
      and amortization
                            
                            
                            5,471,677
                            
                            
                            
                            5,233,250
                            
                            
                            
                            3,624,710
                            
                            
                            
                            2,013,530
                            
                            
                            
                            2,649,096Total
      operating expenses
                            
                            
                            141,293,711
                            
                            
                            
                            135,394,671
                            
                            
                            
                            131,322,739
                            
                            
                            
                            95,415,859
                            
                            
                            
                            67,821,128Income
      (loss) from operations
                            
                            
                            1,712,863
                            
                            
                            
                            1,432,379
                            
                            
                            
                            (15,703,756
                            )
                            
                            
                            (19,022,627
                            )
                            
                            
                            (19,425,748
                            )Other
      income (expenses)Interest
      income
                            
                            
                            43,959
                            
                            
                            
                            46,073
                            
                            
                            
                            482,666
                            
                            
                            
                            444,179
                            
                            
                            
                            557,508Other
      income
                            
                            
                            31,884
                            
                            
                            
                            2,848
                            
                            
                            
                            252
                            
                            
                            
                            284,723
                            
                            
                            
                            230,438Interest
      expense
                            
                            
                            (5,757,264
                            )
                            
                            
                            (5,942,221
                            )
                            
                            
                            (3,661,227
                            )
                            
                            
                            (3,406,181
                            )
                            
                            
                            (2,110,119
                            )Total
      other expenses
                            
                            
                            (5,681,421
                            )
                            
                            
                            (5,893,300
                            )
                            
                            
                            (3,178,309
                            )
                            
                            
                            (2,677,279
                            )
                            
                            
                            (1,322,173
                            )Net
      loss
                            
                            
                            (3,968,558
                            )
                            
                            
                            (4,460,921
                            )
                            
                            
                            (18,882,065
                            )
                            
                            
                            (21,699,906
                            )
                            
                            
                            (20,747,921
                            )Preferred
      stock dividend and accretion of expenses
                            
                            
                            (1,506,814
                            )
                            
                            
                            (1,488,071
                            )
                            
                            
                            (903,851
                            )
                            
                            
                            -
                            
                            
                            
                            -Net
      loss attributable to common stockholders
                            
                            $
                            (5,475,372
                            )
                            
                            $
                            (5,948,992
                            )
                            
                            $
                            (19,785,916
                            )
                            
                            $
                            (21,699,906
                            )
                            
                            $
                            (20,747,921
                            )Loss
      per common share:Basic
      and diluted
                            
                            $
                            (0.23
                            )
                            
                            $
                            (0.39
                            )
                            
                            $
                            (1.30
                            )
                            
                            $
                            (2.47
                            )
                            
                            $
                            (6.31
                            )Weighted-
      average common shares outstanding:Basic
      and diluted
                            
                            
                            23,419,624
                            
                            
                            
                            15,306,725
                            
                            
                            
                            15,230,482
                            
                            
                            
                            8,780,234
                            
                            
                            
                            3,288,590


Avantair,
      Inc. and SubsidiariesAs
      of June 30,2010
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006Consolidated
      Balance Sheet DataTotal
      assets
                        
                        $
                        131,637,600
                        
                        
                        $
                        164,065,403
                        
                        
                        $
                        204,477,455
                        
                        
                        $
                        160,490,260
                        
                        
                        $
                        105,154,683Long-term
      liabilities
                        
                        $
                        55,000,107
                        
                        
                        $
                        88,229,537
                        
                        
                        $
                        123,018,837
                        
                        
                        $
                        112,509,063
                        
                        
                        $
                        72,844,665Stockholders'
      deficit
                        
                        $
                        (32,163,152
                        )
                        
                        $
                        (36,007,683
                        )
                        
                        $
                        (31,651,546
                        )
                        
                        $
                        (11,959,024
                        )
                        
                        $
                        (35,030,607
                        )




18




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 in, and flight hour
card usage of, professionally piloted aircraft for personal and business use,
and the management of its aircraft fleet. According to AvData, Avantair is the
fifth largest company in the North American fractional aircraft industry. As of
June 30, 2010, Avantair operated 55 aircraft within its fleet, which is
comprised of 46 aircraft for fractional ownership, 5 company owned core aircraft
and 4 leased and company managed aircraft.




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




Avantair
generates revenues primarily through the sale of fractional ownership shares of
aircraft, by providing management and maintenance services related to these
aircraft, and from the sale of flight hour cards providing either 15 or 25 hours
of flight time per year of access to its aircraft fleet (either individually or
through the Company’s Axis Club Membership program). The Company markets and
sells fractional ownership interests to individuals and businesses with a
minimum share size of a one-sixteenth ownership interest. Under management and
maintenance agreements with fractional owners, Avantair provides pilots,
maintenance, fuel and hangar space for the aircraft.




In
response to the general economic downturn and the resulting growth of flight
hour card sales over fractional share sales industry-wide, in January 2009,
Avantair initiated the Axis Club Membership program. This program is designed to
bridge the gap between the financial commitment of a fractional share and flight
hour cards. This product offers access to blocks of flight hours for a three
year membership fee of $75,000. The program requires Axis Club members to
purchase a minimum of three 25 hour flight hour cards for $80,000 or less,
dependent upon the type of membership purchased, over a three year period. The
program also allows for the conversion of club membership into fractional
ownership. Members are not charged a management fee until they are fractional
owners.




Avantair
presently sources all of its aircraft from a single manufacturer, Piaggio
America, Inc. (“Piaggio”). As of June 30, 2010, Avantair had contractual
commitments to purchase 52 additional Piaggio Avanti II aircraft through 2013
with a mutual understanding that the aircraft delivery dates can be extended.
The total commitment, including a recently proposed price escalation, is valued
at approximately $330 million. The Company’s agreement with Piaggio permits it
some flexibility to defer a portion of the aircraft deliveries and the Company
has exercised this flexibility at certain times in order to take deliveries in
line with the Company’s sales expectations. Avantair believes that the pricing
structure afforded by utilizing the Piaggio Avanti allows Avantair to attract a
customer desiring quality at a lower price point. Offering the cabin cross
section of a mid-size aircraft and fuel efficiency of a turboprop, along with no
hourly fees, allows Avantair to lower the cost of private air travel for a
broader range of consumers.





The
Company’s primary sources of operating funds are the collection of management
and maintenance fees from fractional share owners as well as the sale of
fractional ownership shares, flight hour cards and, effective January 2009, Axis
Club Memberships. Revenue for the sales by product category can be found in the
accompanying Consolidated Statement of Operations for the fiscal year ended June
30, 2010. Sales by product category follow:





FY
      2010 Unit Sales for the Three Months Ended
                
                
                FY
      2010
                
                
                FY
      2009September 30, 2009
                
                
                December 31, 2009
                
                
                March 31, 2010
                
                
                June 30, 2010
                
                
                Total
                
                
                TotalNew
      Fractional shares
                
                
                2
                
                
                
                5
                
                
                
                -
                
                
                
                0.5
                
                
                
                7.5
                
                
                
                38Flight
      hour cards
                
                
                86
                
                
                
                100
                
                
                
                82
                
                
                
                120
                
                
                
                388
                
                
                
                160Axis
      Club Memberships
                
                
                3
                
                
                
                21
                
                
                
                9
                
                
                
                18
                
                
                
                51
                
                
                
                10





Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. At June 30, 2010, the Company
had 28.5 fractional aircraft shares available for sale. In addition to the cost
of acquiring aircraft, Avantair’s primary expenses are related to fuel, aircraft
repositioning (i.e., moving an aircraft to another location to accommodate a
customer’s need and for demonstration flights for sales purposes), maintenance,
charters and insurance. To finance its growth strategy, the Company will
continue to actively pursue additional funds through some or a combination of
equity financing, including the sale of additional shares of common and
preferred stock, asset sales, accelerated payments of management and maintenance
fees or debt financing.




19


In
September and October 2009, the Company consummated private sales of its common
stock to investors generating net proceeds of approximately $8.0 million.
Together with the proceeds of the private placement consummated in June 2009,
the Company received total net proceeds of approximately $9.2
million.





At June
30, 2010 and 2009, Avantair had assets of approximately $131.6 million and
$164.0 million, respectively. For the fiscal years ended June 30, 2010 and 2009,
the Company had revenue of approximately $143.0 million and $136.8 million,
respectively, and net losses of approximately $4.0 million and $4.5 million,
respectively. Avantair has incurred losses since inception and may not be able
to generate sufficient net revenue from its business in the future to achieve or
sustain profitability. At August 31, 2010, the Company had approximately $7.2
million of unrestricted cash on hand and assuming there is no change in sales
and expense trends experienced since the fourth quarter of fiscal 2010, the
Company believes that its cash position will be sufficient to continue
operations for the foreseeable future.





Critical
Accounting Policies and Estimates





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. The judgments, or the methodology on
which the judgments are made, are reviewed with the Audit
Committee.





Revenue
Recognition




Avantair
is engaged in the sale and management of fractional ownerships of professionally
piloted aircraft for personal and business use and access to its aircraft fleet
through either 15 or 25 hour flight hour cards (either individually or through
the Company’s Axis Club Membership program). In the case of fractional ownership
sales, the aircraft are sold in one-sixteenth shares or multiples thereof. The
management agreement grants the customer an undivided interest in a specified
aircraft. When a customer purchases a fractional share, they are also required
to enter into a five-year management and maintenance agreement which grants the
customer the right to the use of the aircraft for a specified number of hours
each year. Under the terms of the maintenance and management agreement, the
Company agrees to manage, operate and maintain the aircraft on behalf of the
customer in exchange for a fixed monthly fee which is recognized ratably over
the term of the agreement, usually five years. If a customer prepays its
management and maintenance fee for a period of one year or longer, the
prepayment is recorded as unearned revenue and amortized into revenue on a
monthly basis in accordance with the schedule provided for within each
agreement. Flight hour cards provide customers with a fixed number of flight
hours for a fixed fee. The Company defers the entire amount paid and recognizes
revenue on an incremental basis as aircraft hours are flown. Axis Club
Membership fees are paid in advance, deferred and recognized over the three year
membership term. Similar to standard flight hour card sales, payment for flight
hour cards sold through the Axis Club Membership program are collected in
advance of access to the aircraft fleet, deferred and recognized as revenue on
an incremental basis over the three year membership term.




Fractional
Aircraft Shares Sales




The
Company does not have objective evidence to determine the fair value and
allocate fractional share revenue from that generated from the management and
maintenance agreement, and, as a result, has adopted the provisions of
Accounting Standards Codification (“ASC”) ASC 605-25“Multiple- Element
Arrangements” to account for the sale of fractional shares of aircraft.
Accordingly, as the sales of the fractional shares cannot be separated from the
underlying management and maintenance agreement, fractional share sale revenue
is recognized ratably over the five-year life of the management and maintenance
agreement. The period in which revenue is recognized will be evaluated on a
periodic basis. Factors that impact management’s assessment of the most
appropriate period of revenue recognition will include, but not be limited to,
customer turnover, terms and conditions of the related fractional share sale,
maintenance arrangements as well as any other factor that could impact
revenue.





Aircraft Costs Related To Fractional
Sales




The
Company reflects aircraft costs related to the sale of fractional aircraft
shares. As a result of the adoption of ASC 605-25,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.





20


Maintenance
Expense Policy




The
Company uses the direct expensing method of accounting for non-refurbishment
aircraft maintenance. Engine maintenance is performed by third parties under
contracts which transfer risk, and related costs are expensed as incurred.
Airframe maintenance is performed in-house and related costs are expensed as
incurred. Refurbishments of the interiors of the aircraft, which extend the life
of the aircraft, are capitalized and amortized over the estimated life of three
years.




Stock-Based
Compensation




The
Company accounts for share-based compensation to employees and directors in
accordance with ASC 718“Compensation- Stock Compensation,” which requires the recognition of
compensation expense for employee stock options and other share-based payments.
Under ASC 718, expense related to employee stock options and other share-based
payments is recognized over the relevant service period based on the fair value
of each stock option grant. In addition, the Company recognizes in its
Consolidated Statements of Operations the grant-date fair value of stock options
and other equity-based compensation issued to employees and directors.
Compensation expense for equity-based awards is recognized over the requisite
service period, usually the vesting period on a straight line basis, while
compensation expense for liability-based awards (those usually settled in cash
rather than stock) is measured to fair-value at each balance sheet date until
the award is settled.





Income
Taxes





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





Goodwill
and Long-lived Assets





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





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





Results
of Operations





Fiscal
year ended June 30, 2010 compared to the fiscal year ended June 30,
2009




Revenues
for the fiscal year ended June 30, 2010 were $143.0 million, an increase of 4.5%
from $136.8 million for the fiscal year ended June 30, 2009. This increase was
the result of an increase of 3.2% in management and maintenance fees to $73.0
million for the fiscal year ended June 30, 2010 from $70.7 for the comparable
2009 period, an increase of 113.4% in flight hour card and Axis Club Membership
revenue to $20.0 million for the fiscal year ended June 30, 2010 from $9.4
million for the comparable 2009 period, and an increase of 28.3% in other
revenue to $6.3 million for the fiscal year ended June 30, 2010 from $4.9
million for the comparable 2009 period, offset by a 15.6% decrease in the
revenue generated from the sale of fractional aircraft shares to $43.8 million
for the fiscal year ended June 30, 2010 from $51.9 million for the comparable
2009 period.




Revenue
from the sale of fractional aircraft shares decreased due to the full
amortization of revenue from shares sold in prior periods, partially offset by
amortization of revenue from shares sold in fiscal year 2010.





21


The
increase in revenue from management and maintenance fees is primarily due to a
3.0% increase in the average number of fractional shares through June 30, 2010
from the comparable 2009 period, coupled with an increase in the average monthly
management fee per shareowner.





Flight
hour card revenue and Axis Club Membership revenue increased $10.6 million
primarily due to an increase in flight hour card sales as a result of the
greater acceptance of time card travel in the existing economy compared to
fractional ownership and the resulting increase in flight hour card utilization
by owners during the fiscal year ended June 30, 2010 from the comparable 2009
period. Partially offsetting this increase is a decrease in the per hour revenue
rate recognized in 2010 as a result of a greater number of lower priced Axis
cards, exclusive of membership fees.





Other
revenue increased 28.3% to $6.3 million for the fiscal year ended June 30, 2010
from $4.9 million for the fiscal year ended June 30, 2009, due to increased
fuel, remarketing and engine rental revenue offset by a decrease in
demonstration revenue. Demonstration flights that generate demonstration revenue
are in anticipation of a fractional share sale, but not for flight hour time
card sales. Demonstration revenue therefore decreased because of the decrease in
fractional share sales, despite the increases in flight hour time card
sales.





Operating
expenses for the fiscal year ended June 30, 2010 were 4.4% higher than the
fiscal year ended June 30, 2009, with total operating expenses of $141.3 million
compared to $135.4 million, respectively. The cost of fractional aircraft shares
sold decreased to $37.3 million for the fiscal year ended June 30, 2010 from
$44.1 million for the fiscal year ended June 30, 2009, due to the full
amortization of costs that had been deferred from shares sold in prior periods,
partially offset by amortization of costs from shares sold in fiscal year 2010.
The gain on sale of assets decreased 35.6% to $0.9 million for the fiscal year
ended June 30, 2010 from $1.4 million for the fiscal year ended June 30, 2009,
due to a $0.9 million nonrecurring gain recognized on the sale of one of the
Company’s core aircraft during the fiscal year ended June 30, 2010. The cost of
flight operations, together with the cost of fuel, increased 13.9% to $68.4
million for the fiscal year ended June 30, 2010 from $60.1 million for the
fiscal year ended June 30, 2009, primarily due to:





·
            an
      increase in chartering expense due to aircraft availability and an
      increase in maintenance expense as a result of an increase in fleet size,
      flight hours and aircraft maintenance management, partially offset by
      decreases by use of enhanced flight optimization software and flight staff
      training and a decrease in insurance expense and aircraft lease expense as
      a result of the conversion of a Company leased aircraft to a Company core
      aircraft; and


·
            a
      $1.0 million increase in cost of fuel due to an increase in flight hours
      offset by a decrease in the per gallon cost of
  fuel.





General
and administrative expenses increased 9.5% to $25.9 million for the fiscal year
ended June 30, 2010 from $23.6 million for the fiscal year ended June 30, 2009,
primarily due to a $0.7 million increase in expenses related to fixed based
operations primarily as a result of an increased volume of fuel sales, a $0.4
million increase in payroll and related expenses, and a $0.2 million increase in
shipping expenses.





Selling
expenses increased 36.9% to $5.1 million for the fiscal year ended June 30, 2010
from $3.7 million for the fiscal year ended June 30, 2009 due to an increase in
payroll and commission expenses as a result of increased flight hour card sales
and an increase in marketing expenses due to participation in static displays
and target-focused marketing events.





Income
from operations was $1.7 million for the fiscal year ended June 30, 2010, an
increase from $1.4 million income from operations for the fiscal year ended June
30, 2009 for the reasons set forth above.





Interest
expense decreased 3.1% to $5.8 million for the fiscal year ended June 30, 2010
from $5.9 million for the fiscal year ended June 30, 2009, as a result of
maintaining two aircraft floor plan notes payable throughout fiscal year 2010
compared to an average of two and a half floor plan notes payable during fiscal
year 2009 and from the repayment of two long-term notes payable during the
second quarter of fiscal year 2010, partially offset by interest expense from
two aircraft capital lease obligations in 2010 that were entered into during the
fourth quarter of fiscal year 2009.





Net loss
decreased to $4.0 million for the fiscal year ended June 30, 2010 compared to
$4.5 million for the fiscal year ended June 30, 2009 due to the increase in
income from operations partially offset by the increase in total expenses
discussed above.




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





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





22


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





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





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





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


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





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





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




Income
from operations was $1.4 million for the fiscal year ended June 30, 2009, an
increase of 109.1% from the $15.7 million loss from operations for the fiscal
year ended June 30, 2008 for the reasons set forth above.





Interest
expense was $5.9 million for the fiscal year ended June 30, 2009 compared to
$3.6 million for the fiscal year ended June 30, 2008, primarily due to an
increase in floor plan borrowing agreements incurred to acquire aircraft and
$0.4 million of interest expense relating to the financing arrangements with Jet
Support Services, Inc., partially offset by decrease in interest due to the
reduction in outstanding principal balances.




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





23


Liquidity
and Capital Resources





Avantair’s
primary sources of liquidity have been cash provided by operations, cash raised
from its equity offering as Ardent Acquisition Corp., cash provided from its
debt facilities, cash raised in the preferred and common stock offerings, and
other asset- based borrowing (see Note 12 to the Company’s consolidated
financial statements for the fiscal year ended June 30, 2010). The Company uses
its cash primarily to fund losses from operations, deposits made on aircraft,
leasehold improvements, and to fund the purchase of core aircraft and aircraft
which are to be fractionalized. Cash generated from operations has not been
sufficient to provide for all the working capital needed to meet Avantair’s
requirements. At June 30, 2010 and 2009, Avantair had a working capital deficit
of approximately $43.9 million and $49.2 million, respectively, and a
stockholders’ deficit of approximately $32.2 million and $36.0 million,
respectively. As of June 30, 2010, cash and cash equivalents amounted to
approximately $9.4 million and total assets to $131.6 million. The cash and cash
equivalent balance increased $5.7 million from June 30, 2009 and total assets
decreased $32.4 million. The increase in cash and cash equivalents occurred
primarily as a result of cash received from the sale of fractional shares,
flight hour cards, Axis Club Memberships, fuel and rent, collection of
management and maintenance fees and other receipts including proceeds from the
sale of the Company’s common stock. In October 2009, in its last tranche of its
private placement, Avantair sold 8,818,892 shares at a price of $0.95 per share
generating net proceeds of approximately $7.3 million (See Note 12 to the
Company’s consolidated financial statements for the fiscal year ended June 30,
2010). During the second quarter of fiscal 2010, the Company, through an
arms-length transaction, transferred its rights to purchase four Piaggio Avanti
II aircraft to LW Air pursuant to the existing aircraft purchase agreement
between the Company and Piaggio. Upon delivery of the aircraft, Piaggio returned
to the Company $2.6 million of deposits previously paid on the aircraft by the
Company. In addition, on December 14, 2009, the Company sold one of its aircraft
to a third party for $2.9 million. Partially offsetting these receipts are cash
disbursements of $7.2 million in payments for deposits on future aircraft
deliveries, and $11.8 million repayment of debt, in addition to expenditures for
the cost of operations, including insurance and capital and leasehold
improvements.




In
January 2009, the Company introduced the Axis Club Membership Program designed
to bridge the gap between the financial commitment of a fractional share and
flight hour card. The current rate of flight hour card sales including those
through the Axis Club Membership will require the Company to acquire aircraft to
satisfy the increased flight hour demands on its core aircraft fleet if its core
utility is strained.




Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. At June 30, 2010, the Company
had 28.5 fractional aircraft shares available for sale. In addition to the cost
of acquiring aircraft, Avantair’s primary expenses are related to fuel, aircraft
repositioning (i.e., moving an aircraft to another location to accommodate a
customer’s need and for demonstration flights for sales purposes), maintenance,
charters and insurance. To finance its growth strategy, the Company may continue
to actively pursue additional funds through equity financing, including the sale
of additional shares of common and preferred stock, asset sales, accelerated
payments of management and maintenance fees, debt financing, or a combination
thereof.





At June
30, 2010 and 2009, Avantair had assets of approximately $131.6 million and
$164.0 million, respectively. For the fiscal years ended June 30, 2010 and 2009,
the Company had revenue of approximately $143.0 million and $136.8 million,
respectively, and net losses of approximately $4.0 million and $4.5 million,
respectively. Avantair has incurred losses since inception and may not be able
to generate sufficient net revenue from its business in the future to achieve or
sustain profitability. At August 31, 2010, the Company had approximately $7.2
million of unrestricted cash on hand and assuming there is no change in sales
and expense trends experienced since the fourth quarter of fiscal 2010, the
Company believes that its cash position will be sufficient to continue
operations for the foreseeable future.





Fiscal
year ended June 30, 2010 compared to fiscal year ended June 30, 2009.





Net cash
provided by operating activities was $6.9 million for the year ended June 30,
2010 compared to cash used in operating activities of $5.8 million for the same
period last year. Net cash provided by operating activities during the year
ended June 30, 2010 is primarily attributable to the $4.0 million net loss,
combined with depreciation expense of $5.5 million and stock- based compensation
expense of $0.4 million, less the gain on sale of assets of $0.9 million and
$3.6 million of unsold aircraft costs, a decrease of a $1.7 million in prepaid
expenses, a $4.0 net decrease in accounts payable and accrued expenses, a net
decrease of approximately $0.9 million resulting from decreases other assets and
restricted cash and a $0.2 million decrease in other liabilities.




Net cash
provided by investing activities was $2.6 million for the year ended June 30,
2010 compared to cash used in investing activities of $1.0 million for the same
period last year. Net cash provided by investing activities during the year
ended June 30, 2010 resulted primarily from $2.9 million proceeds from the sale
of one of the Company’s core aircraft, net of $0.3 million of capital
expenditures on leasehold improvements and computer systems.





Net cash
used in financing activities was $3.8 million for the year ended June 30, 2010
compared to cash used in financing activities of $10.5 million for the same
period last year. Net cash used in financing activities for the year ended June
30, 2010 resulted primarily from repayment of approximately $12.0 million of
short and long-term indebtedness, partially offset by net proceeds from the
issuance of stock to investors in a private placement of $7.9
million.




24


Financing
Arrangements





Avantair’s
financing arrangements at June 30, 2010 are described below:





Wells
      Fargo Equipment Finance, Inc.
                
                $
                2,680,816Jet
      Support Services, Inc.
                
                
                1,769,176Century
      Bank, F.S.B.
                
                
                1,753,803Wachovia
      Bank
                
                
                2,081,403Other
      long-term debt
                
                
                31,517Midsouth
      Services, Inc.
                
                
                11,506,490$
                19,823,205





Wells
Fargo Equipment Finance, Inc.:In February 2005, the Company entered into financing arrangements for the
purchase of core aircraft under various notes payable with Wells Fargo Equipment
Finance, Inc. The notes outstanding at June 30, 2010 totaled approximately $2.7
million and are payable in monthly installments ranging from $10,644 to $38,480
with interest ranging from 5.96% to 6.12% per annum through 2012. The notes are
collateralized by the aircraft.




Jet
Support Services, Inc.:On April 24, 2006, Avantair financed an aircraft maintenance program
contract with Jet Support Services, Inc. (“JSSI”) in the amount of $3.4 million.
The promissory note provided for seven monthly installments of $145,867 and 53
monthly installments of $45,867, respectively, including interest at 7.0% per
year. On April 15, 2008, the Company entered into a financing arrangement with
JSSI by means of a $5.5 million promissory note. The new note matures on April
1, 2011 and bears interest at 10.0% per annum with 35 monthly payments of
principal and interest in an amount of $185,127 beginning on June 2, 2008. The
new note covered the remaining balance of $0.4 million of the aforementioned
promissory note, other costs and fees to be paid by the Company under service
agreements with JSSI and related deferred financing costs of approximately $1.0
million which will be amortized over the life of the note using the effective
interest method. Upon entering into this payment arrangement and the $5.5
million promissory note, the parties terminated the airframe maintenance
contract and have agreed to apply the unamortized prepayment under the airframe
maintenance contract to the engine maintenance program and will amortize this
amount over the remaining 35 month term of that program. Borrowings outstanding
under this arrangement at June 30, 2010 totaled approximately $1.8
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, 2010 totaled
approximately $1.8 million and is payable in monthly installments of $27,175
with interest of 8.25% per annum through August 3, 2012. The note is
collateralized by the aircraft.





Wachovia
Bank:On October 31,
2007, the Company entered into a financing arrangement for the purchase of one
used aircraft at a total purchase price of approximately $4.5 million (inclusive
of the value of a flight hour card of 100 hours). Financing was obtained from
Wachovia through a note payable of $3.9 million. This debt will be repaid
monthly over 7 years at an interest rate of the LIBOR rate plus 4.0%. Borrowings
outstanding under this arrangement at June 30, 2010 totaled approximately $2.1
million. During September 2009, the Company received a waiver of compliance with
a financial covenant in connection with the note. During September 2010, the
Company received another waiver of compliance with a financial covenant in
connection with the note.





Other
long-term debt: In October 2009, the Company and Kevco Aviation Inc. executed a
$56,614 note agreement for the purchase of equipment. The note outstanding at
June 30, 2010 totaled $31,517 and is payable in monthly installments of $2,912
with interest of 3.25% per annum through May 2011. The agreement with Kevco has
been included in the current portion of long-term debt on the accompanying
consolidated balance sheet.





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





On
October 10, 2007, Avantair acquired a core aircraft under a capital lease
obligation with Midsouth. Under the lease agreement, Midsouth provided funding
for the $4.7 million purchase of a pre-owned Piaggio P-180 aircraft and holds
title to the aircraft. Midsouth leases the aircraft exclusively to Avantair on a
five year lease at 15.0% interest per annum. The monthly lease payments for the
term of the lease are $89,000. At the end of the five year lease, Avantair shall
purchase the aircraft from Midsouth at the guaranteed residual value in the
amount of approximately $2.3 million. Avantair also has the option to purchase
the aircraft anytime during the lease term at the then current guaranteed
residual value as set forth on the amortization schedule without penalty. The
obligation outstanding at June 30, 2010 totaled approximately $3.8
million.





In April
2009, the Company amended the Lease Agreement previously accounted for as an
operating lease under ASC Topic 840“Leases,” dated as of July
31, 2006 between the Company and Midsouth. Pursuant to the amendment, the
Company is required to pay $74,900 monthly, at 11.0% interest per annum until
August 2011, the expiration of the Lease Agreement. In addition, the Company has
agreed to purchase the leased aircraft for approximately $3.0 million from
Midsouth within sixty days following the expiration of the term of the Lease
Agreement. The lease, as amended, has been classified as a capital lease in the
accompanying consolidated balance sheet. The obligation outstanding at June 30,
2010 totaled approximately $3.0 million, net of deferred interest of $0.5
million.





In April
2009, the Company entered into a Lease Agreement, effective April 6, 2009,
pursuant to which Midsouth leases a Piaggio P-180 aircraft to the Company for a
ten year lease term at $75,000 per month, at 15.0% interest per annum, plus
taxes if applicable. The Company is required to provide Midsouth with 100 hours
of flight time per year during the lease term. Hours have been accounted for at
their fair value and are liquidated as hours are flown. Midsouth has the sole
option to terminate the lease at the end of the fifth year of the term and to
require the Company to purchase the leased aircraft for approximately $3.8
million within ninety days of that date. If this option is not exercised by
Midsouth, the lease will continue for the remaining five years of the term and,
at the end of the ten year lease, the Company will be required to purchase the
aircraft from Midsouth for $0.3 million. The obligation outstanding at June 30,
2010 totaled approximately $4.7 million.





25


For
additional information regarding these financing arrangements, see Note 11 to
the Company’s consolidated financial statements.





Contractual
Obligations





The following table
summarizes the Company’s contractual cash obligations atJune 30,
2010, and the effect
these obligations are expected to have on liquidity and cash flow in future
periods:




Payments
      due by periodLess
      Than
                              
                              
                              
                              
                              
                              
                              
                              
                              More
      thanContractual
      Obligations as of June 30,2010(1)
                              
                              Total
                              
                              
                              1
      Year
                              
                              
                              1-3
      Years
                              
                              
                              3-
      5 Years
                              
                              
                              5
      YearsShort-term
      debt obligations(2)
                              
                              $
                              11,000,000
                              
                              
                              $
                              11,000,000
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -Long-term
      debt obligations(3)
                              
                              
                              8,316,715
                              
                              
                              
                              2,478,420
                              
                              
                              
                              1,400,005
                              
                              
                              
                              4,438,290Operating
      lease obligations(4)
                              
                              
                              60,500,621
                              
                              
                              
                              7,231,474
                              
                              
                              
                              13,083,611
                              
                              
                              
                              13,399,479
                              
                              
                              
                              26,786,057Capital
      lease obligations(5)
                              
                              
                              11,506,490
                              
                              
                              
                              1,215,458
                              
                              
                              
                              10,291,032
                              
                              
                              
                              -Aircraft
      purchase commitments(6)
                              
                              
                              329,577,642
                              
                              
                              
                              36,710,528
                              
                              
                              
                              292,867,114
                              
                              
                              
                              -
                              
                              
                              
                              -Total
      minimum payment
                              
                              
                              420,901,468
                              
                              
                              
                              58,635,880
                              
                              
                              
                              317,641,762
                              
                              
                              
                              17,837,769
                              
                              
                              
                              26,786,057Less
      obligation prepayment as of June 30, 2010
                              
                              
                              (7,269,743
                              )
                              
                              
                              (7,269,743
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Total
      contractual cash obligations
                              
                              $
                              413,631,725
                              
                              
                              $
                              51,366,137
                              
                              
                              $
                              317,641,762
                              
                              
                              $
                              17,837,769
                              
                              
                              $
                              26,786,057




(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,
2010.
 (2) See
Note 10 to the accompanying Consolidated Financial Statements.
 (3)
Long-term debt obligation means a payment obligation under long-term borrowings
referenced in ASC 470 "Disclosure of Long-Term
Obligations."See Note 11 to the accompanying Consolidated Financial
Statements.
 (4)
Operating lease obligation means a payment obligation under a lease classified
as a operating lease pursuant to ASC 840 "Accounting for Leases."The
amounts above include aircraft, hangar, office and auto leases. See Note 8 to
the accompanying Consolidated Financial Statements.
 (5)
Capital lease obligation means a payment obligation under a lease classified as
a capital lease pursuant to ASC 840 "Accounting for Leases."See
Note 9 to the accompanying Consolidated Financial Statements.
 (6)
Purchase obligation means an agreement to purchase goods or services that is
enforceable and legally binding on the Company that specifies all significant
terms, including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the transaction. The
amounts above include purchase committments for 52 Piaggio Avanti II aircraft
through 2013 with a mutual understanding that the aircraft delivery dates can be
extended. See Note 8 to the accompanying Consolidated Financial
Statements.




Off-Balance
Sheet Arrangements


At June 30, 2010, the Company
did not have any material commercial commitments (except for those noted in Note
8 “Purchase Commitments” in the accompanying Consolidated Financial Statements),
including guarantees or standby repurchase obligations, or any relationships
with unconsolidated entities or financial partnerships, including entities often
referred to as structured finance or special purpose entities or variable
interest entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.


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





26


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, 2010, the liabilities of Avantair
with exposure to interest rate risk were approximately $2.1 million. The Company has not
historically used derivative instruments to manage exposure to changes in
interest rates.


June
      30, 2010Expected
      Maturity Date2011
                        
                        
                        2012
                        
                        
                        2013
                        
                        
                        2014
                        
                        
                        2015
                        
                        
                        Thereafter
                        
                        
                        TotalLiabilitiesLong
      term debt:Fixed
      Rate
                        
                        $
                        3,135,749
                        
                        
                        $
                        6,332,745
                        
                        
                        $
                        4,242,036
                        
                        
                        $
                        234,272
                        
                        
                        $
                        3,797,000
                        
                        
                        $
                        -
                        
                        
                        $
                        17,741,802Average
      interest rate
                        
                        
                        8.78
                        %
                        
                        
                        8.78
                        %
                        
                        
                        8.78
                        %
                        
                        
                        8.78
                        %
                        
                        
                        8.78
                        %
                        
                        
                        8.78
                        %Variable
      Rate
                        
                        $
                        558,129
                        
                        
                        $
                        558,129
                        
                        
                        $
                        558,129
                        
                        
                        $
                        407,016
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        2,081,403Average
      interest rate
                        
                        
                        4.29
                        %
                        
                        
                        4.29
                        %
                        
                        
                        4.29
                        %
                        
                        
                        4.29
                        %
                        
                        
                        4.29
                        %
                        
                        
                        4.29
                        %


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.





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, 2010, under the direction of the Chief Executive Officer and Chief
Financial Officer, the Company evaluated the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rule 13a —
15(e) under the Securities Exchange Act of 1934, as amended. Based on the
evaluation, it was concluded that, as of June 30, 2010, the Company’s disclosure
controls and procedures are effective at a reasonable assurance level and are
designed to ensure that the information required to be disclosed in SEC reports
is recorded, processed, summarized and reported within the time period specified
by the SEC’s rules and forms, and is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.




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.





27


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, 2010. 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, 2010, the Company’s
internal control over financial reporting was effective.


The Company’s independent
registered public accounting firm has issued an attestation report on our
internal control over financial reporting as of June 30, 2010. This report
appears on page 29.





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 fiscal year ended June 30, 2010, that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.




CEO
and CFO Certifications





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


28


Report
of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting




To the
Board of Directors and Stockholders


Avantair,
Inc.





We have
audited Avantair, Inc. 's internal control over financial reporting as of June
30, 2010 based on criteria established in “Internal Control —Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Avantair, Inc.'s management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.





We
conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles in the United States of America. A
company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles in the United States of
America, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





In our
opinion, Avantair, Inc. maintained, in all material respects, effective internal
control over financial reporting as of June 30, 2010 based on the criteria
established in “Internal Control —Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of Avantair, Inc. as of June
30, 2010 and 2009, and the related statements of operations, changes in
stockholders’ deficit and cash flows for the years then ended. Our report dated
September 28, 2010 expressed an unqualified opinion.





/s/ J.H.
Cohn LLP


Jericho,
New York


September
28, 2010




Item
9B. Other Information





Not
applicable.




29


PART
III





Item
10. Directors, Executive Officers and Corporate Governance





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




Barry
      J. Gordon
            
            65
            
            Chairman
      of the BoardSteven
      Santo
            
            43
            
            Chief
      Executive Officer and DirectorA.
      Clinton Allen
            
            66
            
            DirectorStephanie
      A. Cuskley
            
            50
            
            DirectorRichard
      B. DeWolfe
            
            66
            
            DirectorArthur
      H. Goldberg
            
            68
            
            DirectorRobert
      J. Lepofsky
            
            65
            
            DirectorKevin
      Beitzel
            
            41
            
            Chief
      Operating OfficerRichard
      A. Pytak Jr.
            
            48
            
            Chief
      Financial 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 over 40 years of experience in
evaluating aviation industry securities, including membership for 25 years in
the Society of Airline Analysts (with 5 years as its president), and over 30
years experience in the senior management of a mutual fund specializing in the
airline, aerospace and technology industries. Mr. Gordon served as executive
vice president of American Fund Advisors, Inc. from September 1978 until
December 1980, as its president from December 1980 until May 1987 and has been
its chairman of the board since May 1987. American Fund Advisors is a private
money management firm that manages money for high net worth individuals, pension
and profit sharing plans. Mr. Gordon has been a director of American Fund
Advisors since December 1980. From December 1991 to March 2005, he was
president, and from December 1991 to December 1993, he was director, of the John
Hancock Technology Series, Inc., an investment company. Since September 1999,
Mr. Gordon has been President, Chief Executive Officer and a director of
BlueStone AFA Management, LLC, the general partner of the AFA Private Equity
Fund 1 (formerly BlueStone AFA Fund), a venture capital fund providing equity
capital for public and private companies primarily in the technology sector, and
since January 2000, he has been a director of the AFA Private Equity Fund. Mr.
Gordon had been Chairman of the Board and Chief Executive Officer of North Shore
Acquisition Corp., a blank check company formed in June 2007 for the purpose of
effecting a business combination with an operating business, since its inception
in June 2007 until August 2009. Mr. Gordon has also been chairman of the board
and Chief Executive Officer of the New Jersey Cardinals, a Class A affiliate of
the St. Louis Cardinals, from February 1990 until April 2006 and the Norwich
Navigators, a Class AA affiliate of the San Francisco Giants, from March 1991
until April 2005. He also served as a director of Winfield Capital Corp., an
Over The Counter Bulletin Board listed small business investment company, from
October 1995 to October 2005. In 1992, Mr. Gordon was awarded Entrepreneur of
the Year for Long Island in financial services. Mr. Gordon received a B.B.A.
from the University of Miami and an M.B.A. from Hofstra University.




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





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





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 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.





30


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 an Overseer of Boston University 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., was
formerly Director of the Boston Foundation, was formerly Trustee of Marine
Biological Laboratory and was formerly Chairman of the Board of Trustees, Boston
University. Mr. DeWolfe holds a BAS, Marketing and Finance from Boston
University and holds a Masters Professional Director Certification from the
American College of Corporate Directors, a national director education
organization.





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
received a B.S. (cum laude) from New York University Stern School and a J.D.
from the New York University School of Law.




Robert J. Lepofsky. Mr.
Lepofsky has served as a member of Avantair’s Board of Directors since 2007. Mr.
Lepofsky has been Chairman of Westcliff Capital Group, a private holding company
since November 2006. Mr. Lepofsky was also the Chief Executive Officer of Brooks
Automation, Inc a publicly held producer of equipment for the global
semiconductor manufacturing industry frm October 2007 through September 2010. In
addition to serving 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 from April 1995, Mr. Lepofsky was President
and Chief Executive Officer of Ensign-Bickford from January 2005 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. From January 2005 Mr. Lepofsky was non-executive Chairman of the Board
of Helix, a position he held until October 2005 when Helix merged with Brooks
Automation, Inc. In the not-for-profit sector Mr. Lepofsky is a member of the
Board of Overseers of the Boston Symphony Orchestra and a Life Trustee at the
Beth Israel Deaconess Medical Center - a major Harvard teaching hospital in
Boston. Mr. Lepofsky received his B.S. degree from Drexel Institute of
Technology and holds a Masters Professional Director Certification from the
American College of Corporate Directors, a national director education
organization.




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 1990 to February 2005, Mr.
Beitzel held various management roles within US Airways.





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.




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.





31


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. GordonSteven
      SantoA.
      Clinton Allen
            
            
            
            ChairStephanie
      A. Cuskley
            
            Chair
            
            
            
            üRichard
      B. DeWolfe
            
            ü
            
            üArthur
      H. Goldberg
            
            ü
            
            ü
            
            üRobert
      J. Lepofsky
            
            ü
            
            ü
            
            Chair




Role
of the Board of Directors’ Committees




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




Audit
Committee . The Audit Committee is responsible for assisting Avantair’s
Board in fulfilling the oversight responsibilities it has under the law with
respect to financial reports and other financial information provided by
Avantair to the public, Avantair’s systems of internal controls regarding
finance and accounting that management and the Board have established and
Avantair’s auditing, accounting and financial reporting processes generally. The
current charter of the Audit Committee was revised on September 18, 2008, and is
available in the Investors section of Avantair’s website (www.avantair.com). A
copy of this charter may also be obtained upon request from Avantair’s Corporate
Secretary. The Audit Committee consists of four directors, Ms. Cuskley and
Messrs. Goldberg, Lepofsky, and DeWolfe each of whom are considered independent
within the meaning of SEC regulations and the listing standards of the Nasdaq
Global Market. The Company’s Audit Committee includes at least one member who
has been determined by the board of directors to meet the qualifications of an
“Audit Committee financial expert” (as that term is defined in the rules
promulgated by the SEC pursuant to the Sarbanes-Oxley Act of 2002). Ms. Cuskley
is the independent director who has been determined to be an Audit Committee
financial expert and serves as the chairperson of the Audit Committee. Mr.
DeWolfe has also been determined to be an Audit Committee financial expert. The
Audit Committee met eight times during the fiscal year ended June 30,
2010.





Nominating and
Corporate Governance Committee. The Nominating and Corporate Governance
Committee is responsible for developing and implementing policies and practices
relating to corporate governance, including reviewing and monitoring
implementation of Avantair’s Corporate Governance Charter. In addition, the
Nominating and Corporate Governance Committee develops and reviews background
information on candidates for the Board of Directors and makes recommendations
to the Board of Directors regarding such candidates. The Nominating and
Corporate Governance Committee also evaluates and makes recommendations to the
Board of Directors in connection with its annual review of director
independence. The current charter of the Nominating and Corporate Governance
Committee is available in the Investors section of Avantair’s website
(www.avantair.com). A copy of this charter may also be obtained upon request
from Avantair’s Corporate Secretary. All of the members of the Nominating and
Corporate Governance Committee are independent within the meaning of the listing
standards of the Nasdaq Global Market. The members of the corporate governance
and nominating committee are Ms. Cuskley and Messrs. Goldberg and Lepofsky. Mr.
Lepofsky serves as chairman of the corporate governance and nominating
committee. The Nominating and Corporate Governance Committee met three times
during the fiscal year ended June 30, 2010.




Compensation
Committee. The Compensation Committee 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 three times during the fiscal year ended June 30,
2010.




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.




32




Board
of Directors Meetings during Fiscal 2010




The Board
of Directors held a total of ten meetings during the fiscal year ended June 30,
2010. All directors attended 75.0% or more of the aggregate number of Board of
Directors meetings and committee meetings. The Chairman of the Board presides
over all meetings of the Board of Directors.




Policy
Regarding Attendance at Annual Meeting of Stockholders




Avantair
encourages all directors to endeavor to attend all annual stockholders meetings,
absent unanticipated personal or professional obligations which preclude them
from doing so. The majority of Avantair’s directors attended the 2010 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.




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.





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 2010 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, 2010 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, 2010. 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 during the fiscal year ended June 30, 2010.





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, which remains in effect. Such arrangement
is comprised of the following:




33




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 receives 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 for service 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, in May
2009 and March 2010, 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 stock granted to the director’s vest one third upon each of the next
three successive annual meetings, subject to the director’s continued service on
the Board of Directors at that time.




The
following director compensation table shows the compensation paid in fiscal year
ended June 30, 2010 to the Company’s non-employee directors:




Director
      Compensation TableFees
      Earned or
                    
                    
                    Stock
                    
                    
                    Option
                    
                    
                    All
      OtherPaid
      in Cash
                    
                    
                    Awards
                    
                    
                    Awards
                    
                    
                    Compensation
                    
                    
                    TotalName
                    
                    (1)
                    
                    
                    (2)Barry
      J. Gordon
                    
                    $
                    75,000
                    
                    
                    $
                    7,050
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    82,050A.
      Clinton Allen
                    
                    
                    40,000
                    
                    
                    
                    7,050
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    47,050Stephanie
      A. Cuskley
                    
                    
                    60,000
                    
                    
                    
                    7,050
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    67,050Richard
      B. DeWolfe
                    
                    
                    40,000
                    
                    
                    
                    7,050
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    47,050Arthur
      H. Goldberg
                    
                    
                    40,000
                    
                    
                    
                    7,050
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    47,050Robert
      J. Lepofsky
                    
                    
                    40,000
                    
                    
                    
                    7,050
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    47,050




(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 reported in this column reflect the grant date fair value of the stock
awards computed in accordance with Financial Accounting Standards Board (FASB)
ASC 718, "Stock Compensation."The assumptions used in the calculation of these amounts are included in
Note 13 to the Company’s consolidated financial statements for the fiscal year
ended June 30, 2010.




Item 11. Executive
Compensation




COMPENSATION
DISCUSSION AND ANALYSIS




This
compensation discussion and analysis describes the Company’s compensation
program for the fiscal year ended June 30, 2010 for our named executive
officers: Steven Santo, Chief Executive Officer; Richard A. Pytak Jr., Chief
Financial Officer; and Kevin Beitzel, Chief Operating Officer. 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 of other industries of similar age and size, as it sees fit, in
connection with the establishment of cash and equity compensation and related
policies.





34


In 2008,
the Compensation Committee engaged Pearl Meyer & Partners, a compensation
consultant, referred to as the consultant, to conduct a competitive assessment
of compensation for the Company’s executives and top management positions. The
consultant reported directly to the Compensation Committee, and not to
management, is independent from the Company, has not provided services to the
Company other than to the Compensation Committee, and received compensation from
the Company only for services provided to the Compensation Committee. The
consultant provided benchmark data for each position. The survey data used for
the study included aviation industry specific information, as well as broader
survey data that covered a wide range of companies across all industries and
revenue sizes. The consultant performed a regression analysis of the survey data
to recognize differences in company revenue. With the consultant’s assistance, a
comparative peer group of 7 publicly traded aviation-related companies was
developed based on similarities in such measures as revenues, gross profit and
dividend policies. Information from the public filings of the peer group
companies was used as an additional comparative measure for equivalent positions
within the Company. The peer group consisted of: PHI Inc., Air Methods Corp.,
Alabama Aircraft Industries Inc., Gulfstream International Group Inc., Clark
Holdings Inc., Air T Inc. and Express-1 Expedited Solutions Inc. Although
the consultant has not been engaged to provide services to the Compensation
Committee since 2008, the Pearl Meyer & Partners 2008 study continues to
influence the Compensation Committee’s compensation decisions by providing a
reference point to similar companies.





Elements
of Compensation




The
Compensation Committee evaluates individual executive performance with a goal of
setting compensation at levels the committee believes are comparable to the
levels of compensation paid to 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; 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
October 2009, the base salary of the Chief Executive Officer has been $500,000.
The annual base salary for the other executive officers range from $250,000 to
$265,000. Effective October 1, 2010, the base salary of the Chief Executive
Officer will increase to $525,000, and the annual base salary for the other
executive officers will increase to $280,000. The Compensation Committee
believes that based on its general understanding of the industry, 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, including the
named 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.





Due to
uncertain economic conditions during fiscal year 2010, the Compensation
Committee did not develop specific targets or goals that needed to be achieved
as a condition to the payment of the discretionary annual bonuses. The
Compensation Committee principally considered the named executive officers’
contributions in achieving the following objectives in determining appropriate
levels of bonus compensation: (i) the Company’s named executive officers timely
responsiveness to the economic conditions affecting the industry, (ii) their
efforts to position the Company in a manner that would enable it to excel and
become a market leader in the industry, (iii) the success of the Company’s named
executive officers in obtaining necessary financing for the Company’s activities
during the 2010 fiscal year, (iv) the strong sales results of the time card
programs during negative macro-economic and industry trends, (v) the success of
the Company’s named executive officers in improving the Company’s balance sheet
strength during the 2010 fiscal year, and (vi) the success of the Company’s
named executive officers in maintaining positive EBITDA for the Company during
the 2010 fiscal year. It was specifically acknowledged that all of the
aforementioned milestones were achieved during a down economic market which
heightened the difficulty encountered by the Company’s named executive officers
in achieving these objectives. In addition to the achievements listed, the
Compensation Committee also considered the overall scope of each named executive
officer’s responsibilities when determining the respective bonus
amounts.




35


Equity
Based Long-Term Incentives




In
February 2007, Avantair’s Board of Directors and stockholders approved
Avantair’s 2006 Long Term Incentive Plan (“the Plan”). The
purpose of the Plan is to further and promote the interests of Avantair, its
subsidiaries and its stockholders by enabling Avantair and its subsidiaries to
attract, retain and motivate employees, non-employee directors and consultants
or those who will become employees, non-employee directors or consultants, and
to align the interests of those individuals and Avantair’s
stockholders.





In
September 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 will vest every three months thereafter. In addition,
in August 2010, by recommendation of the Compensation Committee and approval by
the Board of Directors, 100,000, 50,000 and 25,000 stock options were granted to
Messrs. Santo, Pytak and Beitzel, respectively, effective October 1, 2010.
One-third of the shares will vest one year following the grant date, and
one-twelfth of the shares will vest every three months thereafter. The
Compensation Committee believes that these restricted stock awards provide
incentives to our named executive officers to increase the value of our
stockholders’ investments.





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, or the Code, 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 2010) 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 2010). 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 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 Company’s 401(k) plan.




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.




Participants
who separate from service are paid the balance of their account 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 in the event of 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, 2010, 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.




36


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 Code generally prohibits a public company from deducting
compensation paid in any year to the chief executive officer and the three other
most highly compensated executive officers (other than the chief financial
officer). 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 discretionary annual bonuses are structured
generally to be fully deductible under Section 162(m). While the Company
endeavors to use the performance-based exception to maximize the deductibility
of our compensation, in order to maintain flexibility in compensating executives
and to attract necessary leadership in certain circumstances, it has not adopted
a policy that all compensation must be deductible. The Company does not believe
that such a policy is in the best interest of itself or its
stockholders.




Section 409A





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.





COMPENSATION
AND RISK





The
Compensation Committee believes that the mix and design of the elements of
compensation paid to our employees do not encourage management to assume
excessive or inappropriate risk taking. In addition, Avantair believes that
risks arising from its compensation policies and practices for our employees are
not reasonably likely to have a material adverse effect on the
Company.





The
Compensation Committee extensively reviewed the risks of our compensation
policies and practices, including those relating to our executive compensation
programs, to determine whether any portion of executive compensation
encouraged excessive risk taking and concluded:





·
            The
      Company has strong internal financial
controls;


·
            Base
      salaries are consistent with each executive’s responsibilities so that
      they are not motivated to take excessive risks to achieve a reasonable
      level of financial security;


·
            The
      determination of incentive awards is based on a review of a variety of
      indicators of performance as well as a meaningful subjective assessment of
      personal performance, thus diversifying the risk associated with any
      single indicator of performance;


·
            The
      vesting periods for equity compensation awards encourage executives to
      focus on sustained stock price appreciation;
and


37


·
            The
      Compensation Committee has retained discretionary authority to adjust
      annual awards and payments, which further reduces any business risk
      associated with the Company’s
plans.





Summary
Compensation Table





The
following table summarizes the compensation of Avantair’s named executive
officers for the fiscal year ended June 30, 2010.




All OtherBonus
                                
                                
                                Stock
                                
                                
                                Compensation
                                
                                
                                TotalName and Principal Position
                                
                                Year
                                
                                Salary($)
                                
                                
                                ($)(1)
                                
                                
                                Awards ($)(2)
                                
                                
                                ($)
                                
                                
                                ($)Steven
      Santo
                                
                                2010
                                
                                $
                                474,800
                                
                                
                                $
                                375,000
                                
                                
                                $
                                44,617
                                
                                
                                $
                                22,541
                                (3)
                                
                                $
                                916,958Chief
      Executive Officer and Director
                                
                                2009
                                
                                
                                408,000
                                
                                
                                
                                452,000
                                
                                
                                
                                35,229
                                
                                
                                
                                67,439
                                
                                
                                
                                962,668Richard
      A. Pytak Jr.
                                
                                2010
                                
                                
                                230,154
                                
                                
                                
                                87,500
                                
                                
                                
                                6,344
                                
                                
                                
                                -
                                
                                
                                
                                323,998Chief
      Financial Officer
                                
                                2009
                                
                                
                                189,298
                                
                                
                                
                                75,250
                                
                                
                                
                                -
                                
                                
                                
                                16,314
                                
                                
                                
                                280,862(As
      of April 14, 2008)Kevin
      L. Beitzel
                                
                                2010
                                
                                
                                253,365
                                
                                
                                
                                47,700
                                
                                
                                
                                19,352
                                
                                
                                
                                -
                                
                                
                                
                                320,417Chief
      Operating Officer
                                
                                2009
                                
                                
                                230,526
                                
                                
                                
                                87,500
                                
                                
                                
                                5,256
                                
                                
                                
                                1,502
                                
                                
                                
                                324,784(As
      of February 8, 2008)





(1)
      The amounts shown reflect discretionary bonuses to Messrs. Santo, Pytak
      and Beitzel of $375,000, $87,500, and $47,700, respectively, relating to
      fiscal year 2010.





(2)
      The amounts reported in this column reflect the grant date fair value of
      the stock awards computed in accordance with Financial ASC 718. The
      assumptions used in the calculation of these amounts are included in Note
      13 to the Company’s consolidated financial statements for the fiscal year
      ended June 30, 2010.





(3)
      The amounts shown for 2010 include a housing and automobile allowance and
      a tax gross up relating to these
perquisites.





Grants
of Plan – Based Awards for the Fiscal Year Ended June 30, 2010





The
following table and accompanying footnotes provide information regarding
restricted stock awards granted to the Company’s named executive officers in
fiscal 2010. No stock options were granted to the Company’s named executive
officers in fiscal 2010.


Name
                    
                    GrantDate
                    
                    AllOtherStockAwards:Number
                      ofSharesofStockorUnits(#)
                    
                    
                    GrantDateFair
                      ValueofStock
                      Awards($)(1)Steven
      Santo
                    
                    10/1/2009
                    
                    
                    25,000
                    
                    
                    $
                    32,500Richard
      A. Pytak Jr.
                    
                    10/1/2009
                    
                    
                    25,000
                    
                    
                    
                    32,500Kevin
      Beitzel
                    
                    10/1/2009
                    
                    
                    25,000
                    
                    
                    
                    32,500





(1)
      The amounts reported in this column reflect the grant date fair value of
      the restricted stock awards granted to each of our named executive
      officers computed in accordance with  ASC 718. The assumptions
      used in the calculation of these amounts are included in Note 13 to the
      Company’s consolidated financial statements for the fiscal year ended June
      30, 2010.


38


Outstanding
Equity Awards for the Fiscal Year Ended June 30, 2010





The
following table provides information concerning outstanding equity awards as of
June 30, 2010, held by each of the Company’s named executive
officers:





OptionAwards
                                      
                                      
                                      StockAwardsName
                                      
                                      Numberof
                                        Securities
                                        Underlying
                                        Unexercised
                                        Options(#)
                                        Exercisable
                                      
                                      
                                      Numberof
                                        Securities
                                        Underlying
                                        Unexercised
                                        Options(#)
                                        Unexercisable
                                      
                                      
                                      EquityIncentive
                                        PlanAwards:
                                        NumberofSecurities
                                        Underlying
                                        Unexercised
                                        UnearnedOptions
                                        (#)
                                      
                                      
                                      Option
                                        Exercise
                                        Price($)
                                      
                                      
                                      Option
                                        Expiration
                                        Date
                                      
                                      
                                      Numberof
                                        Sharesor
                                        UnitsofStock
                                        ThatHaveNot
                                        Vested(#)
                                      
                                      
                                      MarketValueof
                                        Sharesor
                                        UnitsofStock
                                        ThatHaveNot
                                        Vested($)
                                      
                                      
                                      EquityIncentive
                                        PlanAwards:
                                        NumberofUnearned
                                        Shares,Units,or
                                        OtherRightsThat
                                        HaveNotVested(#)
                                      
                                      
                                      EquityIncentive
                                        PlanAwards:
                                        MarketorPayout
                                        ValueofUnearned
                                        Shares,Units,or
                                        OtherRightsThat
                                        HaveNotVested($)Steven
      Santo10/1/2009
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      25,000
                                      (1)
                                      
                                      
                                      75,000
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Richard
      A. Pytak Jr.6/30/2008
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2,500
                                      (2)
                                      
                                      
                                      7,500
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -10/1/2009
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      25,000
                                      (2)
                                      
                                      
                                      75,000
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Kevin
      Beitzel6/30/2008
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      5,000
                                      (5)
                                      
                                      
                                      15,000
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -10/1/2009
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      25,000
                                      (5)
                                      
                                      
                                      75,000
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -





(1) Mr.
Santo was granted 25,000 shares of restricted stock on October 1, 2009.
One-third of the shares granted will vest one year following the grant
date, and one-twelfth of the shares will vest every three months
thereafter.





(2) Mr.
Pytak was granted 7,500 shares of restricted stock on June 30, 2008 and 25,000
shares of restricted stock on October 1, 2009. Each grant award provides that
one-third of the shares granted will vest one year following the grant date, and
one-twelfth of the shares will vest every three months
thereafter.





(3) Mr.
Beitzel was granted 15,000 shares of restricted stock on June 30, 2008 and
25,000 shares of restricted stock on October 1, 2009. Each grant
award provides that one-third of the shares granted to vest one year
following the grant date, and one-twelfth of the shares to vest every three
months thereafter.





Option
Exercises and Stock Vested in Fiscal 2010





The
following table provides information regarding the amounts paid or received by
the named executive officers during fiscal year 2010 as a result of the vesting
of restricted stock awards. None of our named executive officers exercised any
stock options during fiscal year 2010.





StockAwardsName
                    
                    NumberofSharesAcquiredon
                      Vesting(#)(1)
                    
                    
                    ValueRealizedonVesting($)(2)Steven
      Santo
                    
                    
                    22,333
                    
                    
                    $
                    44,115Richard
      A. Pytak Jr.
                    
                    
                    2,500
                    
                    
                    
                    5,344Kevin
      Beitzel
                    
                    
                    8,335
                    
                    
                    
                    17,277





(1)
Reflects the shares of common stock acquired by the named executive officers
upon vesting during fiscal year 2010.





(2)
Reflects the market value of the shares on the respective vesting
dates.





Long-Term
Compensation- 2006 Long-Term Incentive Plan





Equity
based long-term incentives are granted under the 2006 Long-Term Incentive Plan.
The Plan was approved in February 2007.





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 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).


39


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 will
again be available for award under the Plan.





Administration





The
administration, interpretation and operation of the Plan is 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.





Awards
under the Plan





Awards
under the Plan may consist of stock options, stock appreciation rights (which
are sometimes referred to as SARs), restricted stock, restricted stock units or
performance unit awards. All awards are 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
participant may receive awards from one or more of the categories described
below, and more than one award may be granted to an eligible
participant.





Stock
Options and Stock Appreciation Rights





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.





The
exercise price and other terms and conditions of stock options and the terms and
conditions of SARs are 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.





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. Although the Plan
does not require it, the typical vesting schedule has been that one-third of the
options will vest one year following the grant date, and one-twelfth of the
options vest every three months thereafter.





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





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





Restricted Stock
Awards and Restricted Stock Units





Restricted
stock 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 stock or restricted
stock units until the conditions imposed by the Compensation Committee with
respect to such stock and/or units have been satisfied. Restricted stock awards
and restricted stock units under the Plan may be granted alone or in addition to
any other awards under the Plan.





Each
participant who receives a grant of restricted stock will have the right to
receive all dividends and vote or execute proxies for such stock. Any stock
dividends granted with respect to such restricted stock will be treated as
additional restricted stock. 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.


40


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. 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.”


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.





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. 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 in
February 2017. 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 Section 409. Avantair’s Board of Directors may 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, in
order to satisfy Section 409A and the regulations issued
thereunder.





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. On
September 24, 2009, the Company entered into a new three year employment
agreement with Mr. Santo effective that same day pursuant to which he receives
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:


41





·
            participate
      in all benefit programs, including the 401(k) 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 in place 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 him for any accrued but unpaid salary and reimbursable
expenses.





If the
agreement is terminated by Avantair for cause, Mr. Santo will not be entitled to
and shall not receive any compensation or benefits of any type following the
effective date of the termination.





If the
agreement is terminated by Avantair without cause, then Mr. Santo will be
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:





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


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


·
            Mr.
      Santo’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;


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


·
            Mr.
      Santo’s willful misconduct or gross negligence in connection with his
      employment;


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





In
addition, Mr. Santo’s interest in any unvested 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 would be 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 50.0% of (A) all
      shares of capital stock of the Company to be 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 (the shares described in clauses (A) and (B),
      collectively “Company Voting
Stock”);


42


·
            the
      closing of a sale or other conveyance of 40.0% or more of the assets of
      Company;


·
            individuals
      who, as of September 24, 2009, 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 September 24, 2009 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 the 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 100.0% 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 would be 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 Mr. Santo’s employment
      agreement;


·
            any
      material adverse change in Mr. Santo’s position, authority, duties or
      responsibilities (other than a change due to his permanent disability or
      as an accommodation under the Americans With Disabilities Act) which
      results in: (A) a diminution in any material respect in his 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 Mr. Santo’s
      performance of the functions of his position, excluding for this purpose
      material adverse changes made with his written consent or due to Mr.
      Santo’s termination for cause or termination by Mr. Santo without good
      reason; or


·
            relocation
      of Avantair’s headquarters and/or Mr. Santo’s regular work address to a
      location which requires him to travel more than forty (40) miles from his
      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, 2010 (the last business day of the Company’s 2010
fiscal year), he would have been paid a total of $587,000, including: (i)
$500,000 representing his base salary then in effect, (ii) $12,000 representing
the value of the continuation of his health insurance for a period of 12 months;
and (iii) $75,000 representing the acceleration of the vesting of 25,000 shares
of restricted stock under the 2006 Long-term Incentive Plan (based on the
closing price of $3.00 per share as of June 30, 2010).





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 24, 2010 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 26,353,201
shares of Avantair’s common stock were issued and outstanding as of September
24, 2010.


43





Name and Address of Beneficial Owner(1)
                                  
                                  Beneficial Ownership
                                  
                                  
                                  Percent of ClassKevin
      Beitzel
                                  
                                  
                                  46,574
                                  (2)(3)
                                  
                                  
                                  *Richard
      A. Pytak Jr.
                                  
                                  
                                  30,946
                                  (3)(4)
                                  
                                  
                                  *Steven
      Santo
                                  
                                  
                                  1,681,808
                                  (3)(5)
                                  
                                  
                                  6.4
                                  %A.
      Clinton Allen(6)
                                  
                                  
                                  250,474
                                  (7)(8)
                                  
                                  
                                  *Stephanie
      A. Cuskley(9)
                                  
                                  
                                  39,000
                                  (8)
                                  
                                  
                                  *Richard
      B. DeWolfe(10)
                                  
                                  
                                  146,263
                                  (11)
                                  
                                  
                                  *Arthur
      H. Goldberg(12)
                                  
                                  
                                  246,000
                                  (8)
                                  
                                  
                                  *Barry
      J. Gordon(13)
                                  
                                  
                                  678,439
                                  (8)
                                  
                                  
                                  2.6
                                  %Robert
      J. Lepofsky(14)
                                  
                                  
                                  49,000
                                  (8)
                                  
                                  
                                  *David
      M. Greenhouse(15)(16)
                                  
                                  
                                  6,740,791
                                  
                                  
                                  
                                  25.6
                                  %Austin
      W. Marxe(15)(16)
                                  
                                  
                                  6,315,791
                                  
                                  
                                  
                                  24.0
                                  %Jonathan
      Auerbach(17)
                                  
                                  
                                  3,977,714
                                  
                                  
                                  
                                  15.1
                                  %Paul
      J Solit(18)
                                  
                                  
                                  2,194,476
                                  
                                  
                                  
                                  8.3
                                  %Lorne
      Weil(19)
                                  
                                  
                                  2,373,620
                                  (20)
                                  
                                  
                                  8.3
                                  %Paul
      Sonkin(21)
                                  
                                  
                                  2,175,554
                                  (22)
                                  
                                  
                                  8.3
                                  %Gilder,
      Gagnon, & Howe & Co. LLC(23)
                                  
                                  
                                  1,663,156
                                  
                                  
                                  
                                  6.3
                                  %Allison
      Roberto
                                  
                                  
                                  1,618,650
                                  (24)
                                  
                                  
                                  6.1
                                  %All
      directors and executive officers as a group (9 individuals)(25)
                                  
                                  
                                  3,168,504
                                  
                                  
                                  
                                  12.0
                                  %





*
            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)
            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.





(3)
            Includes
      25,000 shares of restricted stock granted on October 1, 2009 pursuant to
      the Company's Long-Term Incentive Plan. One- third of the shares vests on
      October 1, 2010 and one-twelfth of the shares vest every three months
      thereafter.





(4)
            Represents
      7,500 shares of restricted stock granted on June 30, 2008 pursuant to the
      Company's Long-Term Incentive Plan. One-third of the shares vested on June
      30, 2009, and one-twelfth of the shares vest every three months
      thereafter.





(5)
            1,606,650
      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.





(6)
            The
      business address of Mr. Allen is 710 South Street, Needham, MA
      02492.





(7)
            Includes
      144,000 shares purchased directly and indirectly pursuant to a Securities
      Purchase Agreement, dated as of June 30, 2009. Includes the exchange of
      72,000 warrants at an exchange ratio of 0.63158 shares of Common Stock per
      warrant, converted pursuant to a Securities Purchase and Exchange
      Agreement, dated as of October 16,
2009.





(8)
            Includes
      30,000 shares of common stock issuable upon exercise of options of which
      vested on February 22, 2008, February 22, 2009 and February 22, 2010.
      Includes 3,000 shares of restricted stock granted on March 5, 2008, 3,000
      shares of restricted stock granted on May 4, 2009, and 3,000 shares
      granted on March 3, 2010, which vest equally upon each of the next 3
      successive annual meetings of stockholders (depending on the grant
      date).





(9)
            The
      business address of Ms. Cuskley is c/o NPower 3 Metrotech Center,
      Brooklyn, NY 11201.





(10)
            The
      business address of Mr. DeWolfe is c/o DeWolfe & Company, PO Box 299,
      Milton, MA 02186.





(11)
            Includes
      3,000 shares of Restricted Stock granted on May 4, 2009 and 3,000 shares
      granted on March 2, 2010, pursuant to the Company's Long-Term Incentive
      Plan. The shares shall vest one-third upon each of the next three
      successive annual meetings of stockholders. Includes 80,000 common stock
      shares purchased indirectly pursuant to a Securities Purchase Agreement
      dated as of June 30, 2009 and the exchange of 40,000 warrants at an
      exchange ratio of 0.63158 shares of Common Stock per warrant, converted
      pursuant to a Securities Purchase and Exchange Agreement, dated as of
      October 16, 2009 owned by Richard B. DeWolfe Revocable Trust. All of the
      aforementioned shares are under the beneficial control of Mr.
      DeWolfe.


44


(12)
            The
      business address of Mr. Goldberg is c/o Corporate Solutions Group, 175
      Great Neck Road, Suite 408, Great Neck, NY
  11021.





(13)
            The
      business address of Mr. Gordon is 7808 Talavera Place, DelRay Beach,
      Florida 33446.





(14)
            The
      business address of Mr. Lepofsky is c/o Westcliff Capital Group, PO Box
      81367, Wellesley Hills, MA 02461.





(15)
            The
      business address of each of Messrs. Marxe and Greenhouse is 527 Madison
      Avenue, Suite 2600, New York, New
York.





(16)
            Includes
      (i) 3,947,369 shares held by Special Situations Fund III QP, L.P., (ii)
      1,315,790 shares held by Special Situations Cayman Fund, L.P. and (iii)
      1,052,632 shares held by Special Situations Private Equity Fund,
      L.P.  MGP Advisors Limited (“MGP”) is the general partner of the
      Special Situations Fund III, QP, L.P.  AWM Investment Company,
      Inc. (“AWM”) is the general partner of MGP, the general partner of and
      investment adviser to the Special Situations Cayman Fund, L.P. and the
      investment adviser to the Special Situations Fund III, QP, L.P. and the
      Special Situations Private Equity Fund, L.P.  Austin W. Marxe
      and David M. Greenhouse are the principal owners of MGP and
      AWM.  Through their control of MGP and AWM, Messrs. Marxe and
      Greenhouse share voting and investment control over the portfolio
      securities of each of the funds listed
above.





(17)
            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 2,797,274 shares of common stock that may be acquired upon the
      conversion of Series A Convertible Preferred
  Stock.





(18)
            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 1,118,910
      shares of common stock that may be acquired upon the conversion of Series
      A Convertible Preferred Stock.





(19)
            The
      business address of Mr. Weil is 750 Lexington Avenue 25th Floor, New York,
      NY 10022.





(20)
            Includes
      2,373,620 warrants, each to purchase one share of the Company’s common
      stock for $1.25 per share.  The warrants expire on October 16,
      2012, and any underlying shares purchased upon exercise of each warrant
      may not be sold, transferred, assigned or hypothecated, in whole or in
      part, at any time on or prior to October 16, 2011, other than to an
      affiliate of Lorne Weil.





(21)
            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.





(22)
            Includes
      335,673 shares of common stock that may be acquired upon the conversion of
      Series A Convertible Preferred
Stock.





(23)
            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.





(24)
            1,606,650
      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. Also includes 7,000 stock options granted to Allison Roberto
      individually, pursuant to the Company's Long-Term Incentive Plan.
      One-third of the shares vest on April 11, 2011, and one-twelfth of the
      shares vest every three months
thereafter.





(25)
            Includes
      189,759 shares of restricted stock. Includes 100,000 shares of common
      stock issuable upon exercise of
options.





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
addition, the Company’s Audit Committee shall conduct an appropriate review of
all related party transactions for potential conflicts of interest and approve
all such related party transactions consistent with the rules applied to
companies listed on NASDAQ. The Committee shall review existing policies
concerning related party transactions and conflicts of interest between Board or
senior members of Management, on the one hand, and the Company, on the other
hand, and recommend any changes to such policies. A “related party transaction”
refers to transactions required to be disclosed pursuant to SEC Regulation S-K,
Item 404 or SEC Regulation S-B, Item 404.


45


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 5.0% 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 Barry Gordon,
Arthur Goldberg, Stephanie Cuskley, Robert Lepofsky, Richard DeWolfe and A.
Clinton Allen. Each of these individuals is a non-employee director of Avantair.
The shares of restricted stock granted to the directors’ vest one third upon
each of the next three successive annual meetings of stockholders, subject to
the grantee’s continued service on the Board of Directors, and the dollar amount
recognized for financial statement reporting purposes in respect of the
restricted stock awards will be determined on each vesting date.





Annually,
Avantair participates as one of the sponsors of the Corporate Directors Group,
an accredited educational organization of RiskMetric ISS Governance Services, of
which A. Clinton Allen 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. Each sponsorship involves amounts less
than $120,000.





During
fiscal year 2010, the Company sold shares of common stock to investors through
the June, September and October 2009 private placements. Investors who
participated in the placements included certain of our non-employee directors
and 5.0% shareholders. (See Note 12 to the Company’s consolidated financial
statements for the fiscal year ended June 30, 2010.)





During
the second quarter of fiscal 2010, the Company, through an arms-length
transaction, transferred its rights to purchase four Piaggio Avanti II aircraft
to LW Air pursuant to the existing aircraft purchase agreement between the
Company and Piaggio America, Inc. Upon delivery of the aircraft, Piaggio America
returned $2.6 million of deposits previously paid on the aircraft by the
Company.  Simultaneous with this transaction, the Company entered into
an eight-year management agreement for those aircraft and the Company issued
2,373,620 warrants to Lorne Weil, the Managing Member of LW Air. By virtue of
his ownership of the warrants, Mr. Weil is now a significant beneficial owner of
the Company. In addition, since the contractual relationships under the
agreements with LW Air were executed following the date that Mr. Weil became a
significant beneficial owner, the Company recognizes the transaction as a
related party transaction. (See Note 8 to the Company’s consolidated financial
statements for the fiscal year ended June 30, 2010.)





In March
2010, 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.





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 the fiscal year ended 2010. 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 2010 and 2009, respectively:





2010
                  
                  
                  2009Audit
      Fees (1)
                  
                  $
                  284,500
                  
                  
                  $
                  218,500Audit-Related
      Fees (2)
                  
                  
                  101,500
                  
                  
                  
                  46,000Total
      Fees
                  
                  $
                  386,000
                  
                  
                  $
                  264,500





(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.


46


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.


47


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.


48


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, 2010





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, 2010Steven
      Santo/s/ Richard A. Pytak Jr.
                
                Chief
      Financial Officer (Principal Financial and Accounting
    Officer)
                
                September
      28, 2010Richard
      A. Pytak Jr./s/ Barry Gordon
                
                Chairman
                
                September
      28, 2010Barry
      Gordon/s/ A. Clinton Allen
                
                Director
                
                September
      28, 2010A.
      Clinton Allen/s/ Robert Lepofsky
                
                Director
                
                September
      28, 2010Robert
      Lepofsky/s/ Arthur H. Goldberg
                
                Director
                
                September
      28, 2010Arthur
      H. Goldberg/s/ Stephanie Cuskley
                
                Director
                
                September
      28, 2010Stephanie
      Cuskley/s/ Richard B. DeWolfe
                
                Director
                
                September
      28, 2010Richard
      B. DeWolfe


49


AVANTAIR,
INC. AND SUBSIDIARIES





Index
to Financial Statements





Report
      of Independent Registered Public Accounting Firm
                  
                  F-2Consolidated
      Financial Statements:Consolidated
      Balance Sheets as of June 30, 2010 and 2009
                  
                  F-3Consolidated
      Statements of Operations for the years ended June 30, 2010 and
      2009
                  
                  F-5Consolidated
      Statements of Changes in Stockholders’ Deficit for the years ended June
      30, 2010 and 2009
                  
                  F-6Consolidated
      Statements of Cash Flows for the years ended June 30, 2010 and
      2009
                  
                  F-8Notes
      to Consolidated Financial Statements
                  
                  F-10


F-1


Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Stockholders,


Avantair,
Inc.





We have
audited the accompanying consolidated balance sheets of Avantair, Inc. and
Subsidiaries as of June 30, 2010 and 2009, and the related consolidated
statements of operations, changes in stockholders’ deficit and cash flows for
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, 2010 and 2009, and their results of operations and
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Avantair, Inc.’s internal control over
financial reporting as of June 30, 2010, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated September
28, 2010 expressed an unqualified opinion.





/s/
      J.H. Cohn LLPJericho,
      New YorkSeptember
      28, 2010


F-2


AVANTAIR,
INC. AND SUBSIDIARIES


Consolidated
Balance Sheets




ASSETS


June 30,
                                  
                                  
                                  June 30,2010
                                  
                                  
                                  2009CURRENT
      ASSETSCash
      and cash equivalents
                                  
                                  $
                                  9,446,619
                                  
                                  
                                  $
                                  3,773,789Accounts
      receivable, net of allowance for doubtful accounts of  $208,065
      at June 30, 2010 and $187,842 at June 30, 2009
                                  
                                  
                                  10,976,129
                                  
                                  
                                  
                                  5,711,055Inventory
                                  
                                  
                                  181,782
                                  
                                  
                                  
                                  140,997Current
      portion of aircraft costs related to fractional share
sales
                                  
                                  
                                  26,680,081
                                  
                                  
                                  
                                  36,910,206Notes
      receivable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  272,731Prepaid
      expenses and other current assets
                                  
                                  
                                  2,979,055
                                  
                                  
                                  
                                  1,278,506Total
      current assets
                                  
                                  
                                  50,263,666
                                  
                                  
                                  
                                  48,087,284Aircraft
      costs related to fractional share sales, net of current
      portion
                                  
                                  
                                  43,461,597
                                  
                                  
                                  
                                  70,199,786Property
      and equipment, at cost, net of accumulated depreciation and amortization
      of $15,821,591 at June 30, 2010 and $11,695,228 at June 30,
      2009
                                  
                                  
                                  22,583,073
                                  
                                  
                                  
                                  29,842,365OTHER
      ASSETSCash
      - restricted
                                  
                                  
                                  2,358,558
                                  
                                  
                                  
                                  2,352,337Deposits
      on aircraft
                                  
                                  
                                  7,883,834
                                  
                                  
                                  
                                  9,264,890Deferred
      maintenance on aircraft engines
                                  
                                  
                                  603,515
                                  
                                  
                                  
                                  1,538,175Goodwill
                                  
                                  
                                  1,141,159
                                  
                                  
                                  
                                  1,141,159Other
      assets
                                  
                                  
                                  3,342,198
                                  
                                  
                                  
                                  1,639,407Total
      other assets
                                  
                                  
                                  15,329,264
                                  
                                  
                                  
                                  15,935,968Total
      assets
                                  
                                  $
                                  131,637,600
                                  
                                  
                                  $
                                  164,065,403





See
Notes to Consolidated Financial Statements.


F-3


AVANTAIR,
INC. AND SUBSIDIARIES


Consolidated
Balance Sheets


LIABILITIES AND STOCKHOLDERS'
DEFICIT


June 30,
                                  
                                  
                                  June 30,2010
                                  
                                  
                                  2009CURRENT
      LIABILITIESAccounts
      payable
                                  
                                  $
                                  4,723,718
                                  
                                  
                                  $
                                  7,307,320Accrued
      liabilities
                                  
                                  
                                  5,000,249
                                  
                                  
                                  
                                  5,010,745Customer
      deposits
                                  
                                  
                                  1,358,988
                                  
                                  
                                  
                                  1,282,936Short-term
      debt
                                  
                                  
                                  11,000,000
                                  
                                  
                                  
                                  11,500,000Current
      portion of long-term debt
                                  
                                  
                                  4,202,726
                                  
                                  
                                  
                                  11,020,590Current
      portion of deferred revenue related to fractional aircraft share
      sales
                                  
                                  
                                  32,770,605
                                  
                                  
                                  
                                  43,385,779Unearned
      management fee, flight hour card and Axis Club Membership
      revenues
                                  
                                  
                                  35,126,401
                                  
                                  
                                  
                                  17,807,796Total
      current liabilities
                                  
                                  
                                  94,182,687
                                  
                                  
                                  
                                  97,315,166Long-term
      debt, net of current portion
                                  
                                  
                                  15,620,479
                                  
                                  
                                  
                                  20,111,011Deferred
      revenue related to fractional aircraft share sales, net of current
      portion
                                  
                                  
                                  35,085,148
                                  
                                  
                                  
                                  65,071,197Deferred
      revenue related to Axis Club Membership sales, net of current
      portion
                                  
                                  
                                  1,773,943
                                  
                                  
                                  
                                  333,271Other
      liabilities
                                  
                                  
                                  2,520,537
                                  
                                  
                                  
                                  2,714,058Total
      long-term liabilities
                                  
                                  
                                  55,000,107
                                  
                                  
                                  
                                  88,229,537Total
      liabilities
                                  
                                  
                                  149,182,794
                                  
                                  
                                  
                                  185,544,703COMMITMENTS
      AND CONTINGENCIESSeries
      A convertible preferred stock, $.0001 par value, authorized 300,000
      shares; 152,000 shares issued and outstanding
                                  
                                  
                                  14,617,958
                                  
                                  
                                  
                                  14,528,383STOCKHOLDERS'
      DEFICITPreferred
      stock, $.0001 par value, authorized 700,000 shares; none
      issued
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Common
      stock, Class A, $.0001 par value, 75,000,000 shares authorized, 26,353,201
      shares issued and outstanding at June 30, 2010 and 16,463,615 shares
      issued and outstanding at June 30, 2009
                                  
                                  
                                  2,635
                                  
                                  
                                  
                                  1,646Additional
      paid-in capital
                                  
                                  
                                  56,896,831
                                  
                                  
                                  
                                  47,667,493Accumulated
      deficit
                                  
                                  
                                  (89,062,618
                                  )
                                  
                                  
                                  (83,676,822
                                  )Total
      stockholders' deficit
                                  
                                  
                                  (32,163,152
                                  )
                                  
                                  
                                  (36,007,683
                                  )Total
      liabilities and stockholders' deficit
                                  
                                  $
                                  131,637,600
                                  
                                  
                                  $
                                  164,065,403





See
Notes to Consolidated Financial Statements.


F-4


AVANTAIR,
INC. AND SUBSIDIARIES


Consolidated
Statements of Operations





Year Ended June 30,2010
                
                
                2009RevenueFractional
      aircraft sold
                
                $
                43,756,222
                
                
                $
                51,864,010Maintenance
      and management fees
                
                
                72,957,679
                
                
                
                70,693,367Flight
      hour card and Axis Club membership revenue
                
                
                20,024,602
                
                
                
                9,384,110Other
      revenue
                
                
                6,268,071
                
                
                
                4,885,563Total
      revenue
                
                
                143,006,574
                
                
                
                136,827,050Operating
      expensesCost
      of fractional aircraft shares sold
                
                
                37,317,493
                
                
                
                44,118,352Cost
      of flight operations
                
                
                54,151,877
                
                
                
                46,723,184Cost
      of fuel
                
                
                14,272,477
                
                
                
                13,349,084Gain
      on sale of assets
                
                
                (897,595
                )
                
                
                (1,394,164
                )General
      and administrative expenses
                
                
                25,861,629
                
                
                
                23,628,541Selling
      expenses
                
                
                5,116,153
                
                
                
                3,736,424Depreciation
      and amortization
                
                
                5,471,677
                
                
                
                5,233,250Total
      operating expenses
                
                
                141,293,711
                
                
                
                135,394,671Income
      from operations
                
                
                1,712,863
                
                
                
                1,432,379Other
      income (expenses)Interest
      and other income
                
                
                75,843
                
                
                
                48,921Interest
      expense
                
                
                (5,757,264
                )
                
                
                (5,942,221
                )Total
      other expenses
                
                
                (5,681,421
                )
                
                
                (5,893,300
                )Net
      loss
                
                
                (3,968,558
                )
                
                
                (4,460,921
                )Preferred
      stock dividend and accretion of expenses
                
                
                (1,506,814
                )
                
                
                (1,488,071
                )Net
      loss attributable to common stockholders
                
                $
                (5,475,372
                )
                
                $
                (5,948,992
                )Loss
      per common share:Basic
      and diluted
                
                $
                (0.23
                )
                
                $
                (0.39
                )Weighted-average
      common shares outstanding:Basic
      and diluted
                
                
                23,419,624
                
                
                
                15,306,725





See
Notes to Consolidated Financial Statements.


F-5


AVANTAIR,
INC. AND SUBSIDIARIES


Consolidated
Statements of Changes in Stockholders' Deficit


Years
Ended June 30, 2010 and 2009





Class A
                  
                  
                  Additional
                  
                  
                  
                  
                  
                  TotalCommon Stock
                  
                  
                  Paid-In
                  
                  
                  Accumulated
                  
                  
                  Stockholders'Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  DeficitBalance
      at June 30, 2008
                  
                  
                  15,286,792
                  
                  
                  $
                  1,529
                  
                  
                  $
                  46,163,780
                  
                  
                  $
                  (77,816,855
                  )
                  
                  $
                  (31,651,546
                  )Stock-based
      compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  361,059
                  
                  
                  
                  
                  
                  
                  
                  361,059Dividend
      on Series A convertible preferred stock
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,399,046
                  )
                  
                  
                  (1,399,046
                  )Accretion
      of preferred stock issuance costs
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (89,025
                  )
                  
                  
                  
                  
                  
                  
                  (89,025
                  )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, net of expenses
      associated with the registration of shares
                  
                  
                  1,134,400
                  
                  
                  
                  113
                  
                  
                  
                  1,239,411
                  
                  
                  
                  
                  
                  
                  
                  1,239,524Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,460,921
                  )
                  
                  
                  (4,460,921
                  )Balance
      at June 30, 2009
                  
                  
                  16,463,615
                  
                  
                  $
                  1,646
                  
                  
                  $
                  47,667,493
                  
                  
                  $
                  (83,676,822
                  )
                  
                  $
                  (36,007,683
                  )





See
Notes to Consolidated Financial Statements.


F-6


AVANTAIR,
INC. AND SUBSIDIARIES


Consolidated
Statements of Changes in Stockholders' Deficit


Years
Ended June 30, 2010 and 2009





Class A
                  
                  
                  Additional
                  
                  
                  
                  
                  
                  TotalCommon Stock
                  
                  
                  Paid-In
                  
                  
                  Accumulated
                  
                  
                  Stockholders'Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  DeficitStock-based
      compensation
                  
                  
                  
                  
                  
                  
                  
                  $
                  387,147
                  
                  
                  
                  
                  
                  $
                  387,147Dividend
      on Series A convertible preferred stock
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (1,417,238
                  )
                  
                  
                  (1,417,238
                  )Accretion
      of preferred stock issuance costs
                  
                  
                  
                  
                  
                  
                  
                  
                  (89,575
                  )
                  
                  
                  
                  
                  
                  
                  (89,575
                  )Issuance
      of shares in connection with vested restricted stock, net of shares
      surrendered in lieu of payroll taxes
                  
                  
                  54,566
                  
                  
                  $
                  5
                  
                  
                  
                  (24,618
                  )
                  
                  
                  
                  
                  
                  
                  (24,613
                  )Issuance
      of warrants in consideration for services rendered in private
      placement
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  209,708
                  
                  
                  
                  
                  
                  
                  
                  209,708Issuance
      of warrants in connection with aircraft management
    agreement
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  807,031
                  
                  
                  
                  
                  
                  
                  
                  807,031Sale
      of common stock in connection with private sale, net of expenses
      associated with registration of shares
                  
                  
                  9,835,020
                  
                  
                  
                  984
                  
                  
                  
                  7,939,645
                  
                  
                  
                  
                  
                  
                  
                  7,940,629Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (3,968,558
                  )
                  
                  
                  (3,968,558
                  )Balance
      at June 30, 2010
                  
                  
                  26,353,201
                  
                  
                  $
                  2,635
                  
                  
                  $
                  56,896,831
                  
                  
                  $
                  (89,062,618
                  )
                  
                  $
                  (32,163,152
                  )





See
Notes to Consolidated Financial Statements.


F-7





AVANTAIR,
      INC. AND SUBSIDIARIESConsolidated
      Statements of Cash FlowsYear
      Ended June 30,2010
                
                
                2009OPERATING
      ACTIVITIES:Net
      loss
                
                $
                (3,968,558
                )
                
                $
                (4,460,921
                )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                
                
                5,471,677
                
                
                
                5,233,250Amortization
      of deferred interest related to capital lease obligation
                
                
                387,185
                
                
                
                -Stock-based
      compensation
                
                
                387,147
                
                
                
                361,059Gain
      on sale of assets
                
                
                (897,595
                )
                
                
                (1,394,164
                )Bad
      debt expense (recoveries)
                
                
                (20,223
                )
                
                
                18,638Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                (5,244,851
                )
                
                
                (36,884
                )Inventory
                
                
                (40,785
                )
                
                
                111,410Deposits
      on aircraft
                
                
                1,381,056
                
                
                
                (585,613
                )Deferred
      maintenance agreement on aircraft engines
                
                
                934,660
                
                
                
                690,334Prepaid
      expenses and other current assets
                
                
                (1,700,549
                )
                
                
                895,486Notes
      receivable
                
                
                272,731
                
                
                
                1,567,599Aircraft
      costs related to fractional shares
                
                
                36,968,314
                
                
                
                25,690,282Other
      assets
                
                
                (895,760
                )
                
                
                389,960Accounts
      payable
                
                
                (2,539,502
                )
                
                
                2,588,965Accrued
      liabilities
                
                
                (1,452,347
                )
                
                
                (1,924,501
                )Unearned
      management fee, flight hour card and Axis Club Membership
      revenue
                
                
                15,587,412
                
                
                
                104,320Cash-restricted
                
                
                (6,221
                )
                
                
                473,953Customer
      deposits
                
                
                76,052
                
                
                
                (622,746
                )Deferred
      revenue related to fractional aircraft share sales
                
                
                (40,601,223
                )
                
                
                (35,847,709
                )Deferred
      revenue related to Axis Club Membership sales
                
                
                3,032,115
                
                
                
                515,771Other
      liabilities
                
                
                (193,521
                )
                
                
                410,599Net
      cash provided by (used in) operating activities
                
                
                6,937,214
                
                
                
                (5,820,912
                )INVESTING
      ACTIVITIES:Proceeds
      from the sale of asset
                
                
                2,900,000
                
                
                
                1,927,000Capital
      expenditures
                
                
                (321,761
                )
                
                
                (975,433
                )Net
      cash provided by investing activities
                
                
                2,578,239
                
                
                
                951,567FINANCING
      ACTIVITIES:Borrowings
      under long-term debt
                
                
                56,614
                
                
                
                -Borrowings
      under short-term debt
                
                
                -
                
                
                
                17,479,555Principal
      payments on long-term debt
                
                
                (11,549,574
                )
                
                
                (7,470,907
                )Principal
      payments on short-term debt
                
                
                (500,000
                )
                
                
                (21,754,815
                )Proceeds
      from issuance of stock, net of cost of stock
      redemption/registration
                
                
                8,150,337
                
                
                
                1,239,524Net
      cash used in financing activities
                
                
                (3,842,623
                )
                
                
                (10,506,643
                )


F-8


AVANTAIR,
INC. AND SUBSIDIARIES


Consolidated
Statements of Cash Flows





Year Ended June 30,2010
                
                
                2009Net
      increase (decrease) in cash and cash equivalents
                
                $
                5,672,830
                
                
                $
                (15,375,988
                )Cash
      and cash equivalents, beginning of the year
                
                
                3,773,789
                
                
                
                19,149,777Cash
      and cash equivalents, end of the year
                
                $
                9,446,619
                
                
                $
                3,773,789SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
                
                $
                5,757,264
                
                
                $
                5,942,221SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIESAccretion
      of Series A convertible preferred stock
                
                $
                89,575
                
                
                $
                89,025Dividends
      payable on Series A convertible preferred stock
                
                $
                1,417,238
                
                
                $
                1,399,046Flight
      hour cards issued in consideration for equipment
                
                $
                139,570
                
                
                $
                -Common
      shares surrendered in lieu of payroll taxes
                
                $
                24,613
                
                
                $
                7,728Issuance
      of warrants to underwriter in connection with private sale of common
      stock
                
                $
                209,708
                
                
                $
                -Issuance
      of warrants to Lorne Weil in connection with aircraft
      agreement
                
                $
                807,031
                
                
                $
                -Reversal
      of accrued expense
                
                $
                44,100
                
                
                $
                -Aircraft
      purchased under capital lease obligation
                
                $
                -
                
                
                $
                8,098,093Flight
      hour cards issued as partial consideration of aircraft
      purchase
                
                $
                -
                
                
                $
                871,661





See
Notes to Consolidated Financial Statements.


F-9




AVANTAIR,
INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 YEARS ENDED JUNE
30, 2010 AND 2009







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 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.





Avantair
is engaged in the sale of fractional ownership interests in, and flight hour
card usage of, professionally piloted aircraft for personal and business use,
and the management of its aircraft fleet. According to AvData, Avantair is the
fifth largest company in the North American fractional aircraft industry. As of
June 30, 2010, Avantair operated 55 aircraft within its fleet, which is
comprised of 46 aircraft for fractional ownership, 5 company owned core aircraft
and 4 leased and company managed aircraft. Avantair also operates FBOs in
Camarillo, California and in Caldwell, New Jersey. Through these FBOs and its
headquarters in Clearwater, Florida, Avantair provides aircraft maintenance,
concierge and other services to its customers as well as to the Avantair fleet.





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,
2010, the Company’s recurring losses resulted in a working capital deficit of
approximately $43.9 million and a stockholders’ deficit of approximately $32.2
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 flight hour cards and Axis Club Memberships sold. To
finance its growth strategy, the Company will continue to actively pursue
additional funds through some or a combination of equity financing, including
the sale of additional shares of common and preferred stock, asset sales,
accelerated payments of management and maintenance fees or debt financing.
During the second quarter of fiscal 2010, the Company, through an arms-length
transaction, transferred its rights to purchase four Piaggio Avanti II aircraft
to LW Air pursuant to the existing aircraft purchase agreement between the
Company and Piaggio. Upon delivery of the aircraft, Piaggio returned $2.6
million of deposits previously paid on the aircraft by the
Company.  In September and October 2009, the Company consummated
private sales of its common stock to investors generating net proceeds of
approximately $8 million. Together with the proceeds of the private placement
consummated in June 2009, the Company received total net proceeds of
approximately $9.2 million (see Note 12). Assuming there is no change in sales
and expense trends experienced since the fourth quarter of fiscal 2010, the
Company believes that its cash position will be sufficient to continue
operations for the foreseeable future.





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, warrant valuations and management’s assessment of its ability to
continue as a going concern.


F-10


Cash
and Cash Equivalents





Cash and
cash equivalents consist of cash and highly liquid short-term investments. Cash
in the amount of approximately $9.4 million and $3.8 million at June 30, 2010
and 2009, respectively, was primarily held in financial institutions, with
maturities of three months or less from the date of acquisition.





Cash-restricted





Restricted
cash includes cash whereby the Company's ability to use the funds at any time is
contractually limited or is generally designated for specific purposes arising
out of certain contractual or other obligations. The Company agreed to restrict
$2,358,558 in cash at June 30, 2010 and $2,352,337 in cash at June 30, 2009, 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 flight hour cards (either individually or through
the Company’s Axis Club Membership program). In the case of fractional ownership
sales, the aircraft are sold in one-sixteenth shares or multiples thereof. The
management agreement grants the customer an undivided interest in a specified
aircraft. When a customer purchases a fractional share, they are also required
to enter into a five-year management and maintenance agreement which grants the
customer the right to the use of the aircraft for a specified number of hours
each year. Under the terms of the maintenance and management agreement, the
Company agrees to manage, operate and maintain the aircraft on behalf of the
customer in exchange for a fixed monthly fee which is recognized ratably over
the term of the agreement, usually five years. If a customer prepays its
management and maintenance fee, the prepayment is recorded as unearned revenue
and amortized into revenue on a monthly basis in accordance with the schedule
provided for within each agreement. Flight hour cards provide customers with a
fixed number of flight hours for a fixed fee. The Company defers the entire
amount paid and recognizes revenue on an incremental basis as aircraft hours are
flown. Axis Club Membership fees are paid in advance, deferred and recognized
over the three year membership term. Similar to standard flight hour card sales,
payment for flight hour cards sold through the Axis Club Membership program are
collected in advance of access to the aircraft fleet, deferred and recognized as
revenue on an incremental basis over the three year membership
term.





Fractional
Aircraft Shares




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 ASC
605-25“Multiple- Element
Arrangements” to account for the sale of fractional shares of aircraft.
Accordingly, as the sales of the fractional shares cannot be separated from the
underlying management and maintenance agreement, fractional share sale revenue
is recognized ratably over the five-year life of the management and maintenance
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.
(See also “Recently Issued Pronouncements.”)




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.





Flight hour card and Axis Club
Membership Revenue





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


F-11


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
flight hour card rates for a set, three year membership fee. The program
requires that Axis Club members purchase a minimum of three 25 hour blocks of
flight hour cards over the three year membership term. Axis Club Membership fees
are paid in advance, deferred and recognized over the three year membership
term. Similar to standard flight hour card sales, payment for flight hour cards
sold through the Axis Club Membership program are collected in advance of access
to the aircraft fleet, deferred and recognized as revenue on an incremental
basis over the three year membership term.




Other
Revenues




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




Aircraft
Costs Related To Fractional Sales




The
Company reflects aircraft costs related to the sale of fractional aircraft
shares. As a result of the adoption of ASC 605-25,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. (See also “Recently Issued
Pronouncements.”)




Maintenance
Expense Policy




The
Company uses the direct expensing method of accounting for non-refurbishment
aircraft maintenance. Engine maintenance is performed by third parties under
contracts which transfer risk, and related costs are expensed as incurred.
Airframe maintenance is performed in-house and related costs are expensed as
incurred. Refurbishments of the interiors of the aircraft, which extend the life
of the aircraft, are capitalized and amortized over the estimated life of three
years.




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 (see below).




Allowance for Doubtful
Accounts





The Company maintains
allowances for doubtful accounts of $0.2 million as of June 30, 2010 and
2009 of accounts receivable for estimated losses arising from the inability of
its customers to make required payments. The Company's estimate is based on
factors surrounding the credit risk of certain clients, historical collection
experience and a review of the current status of accounts receivable. It is
reasonably possible that the Company's estimate of the allowance for doubtful
accounts will change if the financial condition of the Company's customers were
to deteriorate, resulting in a reduced ability to make
payments.





Prepaid
Pilot Training




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




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 $1,792,099 and $1,585,184 for the
years ended June 30, 2010 and 2000, respectively.





Inventory





Fuel and
aircraft stock inventory is valued at the lower of cost (determined by the
first-in, first-out method) or market.


F-12


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 $2,520,537 and $2,312,249 at June 30, 2010 and 2009
respectively, and is included in other liabilities.





Income Taxes





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




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





Stock-Based
Compensation




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




The
Company accounts for share-based compensation to employees and directors in
accordance with ASC 718“Compensation-Stock Compensation,” which requires the recognition of
compensation expense for employee stock options and other share-based payments.
Under ASC 718, expense related to employee stock options and other share-based
payments is recognized over the relevant service period based on the fair value
of each stock option grant. In addition, the Company recognizes in its
Consolidated Statements of Operations the grant-date fair value of stock options
and other equity-based compensation issued to employees and directors.
Compensation expense for equity-based awards is recognized over the requisite
service period, usually the vesting period on a straight-line basis, while
compensation expense for liability-based awards (those usually settled in cash
rather than stock) is measured to fair-value at each balance sheet date until
the award is settled.





Accounting
for Derivative Instruments




The
Company accounts for derivative instruments in accordance with ASC 815“Derivatives and Hedging,”
which establishes accounting and reporting standards for derivative instruments
and hedging activities, including certain derivative instruments embedded in
other financial instruments or contracts. The Company also considers ASC 815,
which provides criteria for determining whether freestanding contracts that are
settled in a company’s own stock, including common stock warrants, should be
designated as either an equity instrument, an asset or as a liability under ASC
815. The Company evaluates the conversion feature embedded in its Series A
Convertible Preferred Stock based on the criteria of ASC 815 to determine
whether the conversion feature would be required to be bifurcated from the
Preferred Stock and accounted for separately as a derivative. Based on
management’s evaluation, the embedded conversion feature did not require
bifurcation and derivative accounting as of June 30, 2010.





Goodwill
and Long-lived Assets





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


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. Application of the goodwill impairment test
requires significant judgments including estimation of future cash flows, which
is dependent on internal forecasts, estimation of the long-term rate of growth
for the Company, estimation of aircraft in use, the useful life over which cash
flows will occur, and determination of cost of capital. Changes in these
estimates and assumptions could materially affect the determination of fair
value and/or conclusions on goodwill impairment.





Fair
Value Measurements




Effective
July 1, 2008, the Company adopted the provisions of ASC 820“Fair Value Measurements and
Disclosures.” ASC 820, defines fair value, establishes a framework for
measuring fair value in accordance with U.S. GAAP, and expands disclosures about
fair value measurements. ASC 820 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. ASC
820 permits an entity to measure certain financial assets and financial
liabilities at fair value with changes in fair value recognized in earnings each
period.




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


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





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


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


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


•
              Disclosures
      about instruments measured at fair
value.




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




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


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


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





During
the fiscal year ended June 30, 2010, the Company has elected not to use the fair
value option permitted under ASC 820 for any of its financial assets and
financial liabilities that are not already recorded at fair value.





Loss
Per Share




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




For the
fiscal year ended June 30, 2010, a total of 3,732,214 share-equivalents of
potentially dilutive securities were excluded from the calculation of diluted
earnings per share. These securities were comprised of 2,373,620 warrants issued
in conjunction with the LW Air transactions to Lorne Weil, 455,887 warrants
issued to EBC in consideration for services rendered as placement agent for the
Company’s June, September and October 2009 private placements and 776,100
options to purchase shares of common stock were outstanding during the periods
but were not included in the computation of diluted earnings per share because
the options’ exercise prices were greater than the average market price of the
common shares, and therefore, their effect would be anti-dilutive as calculated
under the treasury method promulgated by ASC 260“Earnings Per Share.” In
accordance with ASC 260’s contingently issuable shares provision, 126,607 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.


F-14


For the
year ended June 30, 2009, a total of 1,709,933 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, 300,000 unit purchase options (with each unit consisting of one
share and two warrants that expired February 23, 2010), 92,733 shares of
performance-based, unvested common stock awards (“restricted stock”) granted and
567,200 warrants to purchase shares of the Company’s common
stock.





Property
and Equipment




Property
and equipment is recorded at cost and consists principally of aircraft purchased
which are not fractionalized and depreciated using the straight-line method over
the estimated useful lives of the respective assets. Improvements to leased
premises are amortized over the shorter of the related lease term or the
estimated useful lives of the improvements. Cost and related accumulated
depreciation on assets retired or disposed of are removed from the accounts and
any resulting gains or losses are credited or charged to income.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 and interest costs relating to borrowings made for the
acquisition of aircraft are capitalized.




The carrying value of
property and equipment to be held and used is evaluated for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable in accordance with ASC 360 "Property,
Plant and Equipment." For purposes of
recognition and measurement of an impairment loss, assets are grouped at the
lowest levels for which there are identifiable cash flows (the "reporting
unit"). An asset is considered to be impaired when the sum of the undiscounted
future net cash flows expected to result from the use of the asset and its
eventual disposition does not exceed its carrying amount. The amount of the
impairment loss, if any, is measured as the amount by which the carrying value
of the asset exceeds its estimated fair value, which is generally determined
based on appraisals or sales prices of comparable assets. The Company, due to
the age of property and equipment assets, determined that its property and
equipment was not impaired as of June 30, 2010.





Reclassifications




Certain
balances for the year ended June 30, 2009 were reclassified to conform to
classifications adopted in the current year.





Recently
Issued Pronouncements




In June
2009, the FASB issued additional guidance related to financial instrument
transfers Accounting Standards Update (“ASU”) (2009-16, Transfers and Servicing (Topic 860):
Accounting for Transfers of Financial Assets) and evaluation of VIEs for
consolidation (ASU 2009-17, Consolidations (Topic 810):
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities). The guidance is effective for the first quarter of
calendar year 2010:





·
            The
      consolidation guidance relating to VIEs changes the determination of the
      primary beneficiary of a VIE from a quantitative model to a qualitative
      model. Under the new qualitative model, the primary beneficiary must have
      both the ability to direct the activities of the VIE and the obligation to
      absorb either losses or gains that could be significant to the VIE. The
      guidance also changes when reassessment is needed, as well as requires
      enhanced disclosures, including the effects of a company’s involvement
      with the VIEs on its financial statements. The Company is currently
      evaluating the adoption of this guidance and its impact on its
      consolidated financial condition, results of operations and cash flows.
      Subsequently, this guidance was indefinitely deferred for an interest in
      an entity that has the attributes of an investment company or for which it
      is industry practice to apply measurement principles for financial
      reporting purposes that are consistent with those followed by investment
      companies (ASU 2010-10, Consolidation (Topic 810):
      Amendments to Statement 167 for Certain Investment
      Funds).





In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements,”which is effective for fiscal years beginning on or after
June 15, 2010, with early adoption permitted. Under the new guidance, when
vendor specific objective evidence or third party evidence for deliverables in
an arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using
the relative selling price method. The new guidance includes new disclosure
requirements on how the application of the relative selling price method affects
the timing and amount of revenue recognition, and will be adopted by the Company
on a prospective basis in the first quarter of fiscal year 2011. The adoption of
this standard is not expected to have a material impact on cash flows, but will
result in recognition of fractional share sale revenue and related costs at the
time of a fractional share sale, rather than over the life of the management and
maintenance agreement.


F-15


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





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





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,
2010, the Company had cash and cash equivalents in excess of federally insured
limits of approximately $12.0 million.





NOTE 4 – PROPERTY AND
EQUIPMENT





Property
and equipment, stated at cost as of June 30, 2010 and 2009, consisted of
the following:




2010
                    
                    
                    2009Aircraft
                    
                    $
                    29,744,110
                    
                    
                    $
                    33,630,426Leasehold
      improvements
                    
                    
                    5,120,475
                    
                    
                    
                    4,820,095Furniture,
      fixtures and equipment
                    
                    
                    1,441,880
                    
                    
                    
                    1,301,595Flight
      management software/hardware
                    
                    
                    1,895,618
                    
                    
                    
                    1,727,012Vehicles
                    
                    
                    202,581
                    
                    
                    
                    58,465Total
                    
                    
                    38,404,664
                    
                    
                    
                    41,537,593Less:
      accumulated depreciation and amortization
                    
                    
                    (15,821,591
                    )
                    
                    
                    (11,695,228
                    )$
                    22,583,073
                    
                    
                    $
                    29,842,365





Depreciation expense was
$5,471,677 and $5,233,250 as of June 30, 2010 and 2009, respectively. At June
30, 2010 and 2009, Aircraft includes $13,798,296 which are held under capital
lease obligations. Accumulated amortization related to these aircraft totaled
$3,463,847 and $1,502,022 for the years ended June 30, 2010 and 2009,
respectively.





The
Company capitalizes interest costs relating to borrowings or required deposits
made in connection with the acquisition of aircraft. No amounts were capitalized
for the years ended June 30, 2010 or 2009.





NOTE 5 – GOODWILL AND LONG-LIVED
ASSETS





The
Company performed its annual evaluation during August 2010 by comparing the
product of the trading price as of June 30, 2010 and the Company’s outstanding
shares of common stock on that date to the Company’s book value.




In
accordance with ASC 350, 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, 2010, the quoted market for Avantair’s common stock was
$3.00 per share with 26,353,201 shares outstanding giving the Company a total
market capitalization of approximately $79.0 million.





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


F-16





•
            The
      overall basis for management’s cash flow assumptions and conclusions are
      based on the majority of the Company’s revenue being contractual.
      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 attains a certain fractionalized 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 6 planes in the next 12 months and management believes it will sell
      enough fractional shares, flight hour time cards and Axis Club Memberships
      per month to produce sufficient cash flow to cover
  costs.




As a
result of the analysis, no impairment charges were required for long-lived
assets during the years ended June 30, 2010 and 2009.





NOTE
6 – 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 5.0% 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 Barry Gordon,
Arthur Goldberg, Stephanie Cuskley, Robert Lepofsky, Richard DeWolfe and A.
Clinton Allen. Each of these individuals is a non-employee director of Avantair.
The shares of restricted stock granted to the directors’ vest one-third upon
each of the next three successive annual meetings of stockholders, subject to
the grantee’s continued service on the Board of Directors.





Annually,
Avantair participates as one of the sponsors of the Corporate Directors Group,
an accredited educational organization of RiskMetric ISS Governance Services, of
which A. Clinton Allen 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. Each sponsorship involves amounts less
than $120,000.




During
fiscal year 2010, the Company sold shares of common stock to investors through
the June, September and October 2009 private placements. Investors who
participated in the placements included certain of our non-employee directors
and 5.0% shareholders (see Note 12).




During
the second quarter of fiscal 2010, the Company, through an arms-length
transaction, transferred its rights to purchase four Piaggio Avanti II aircraft
to LW Air pursuant to the existing aircraft purchase agreement between the
Company and Piaggio America, Inc. Upon delivery of the aircraft, Piaggio America
returned $2.6 million of deposits previously paid on the aircraft by the
Company.  Simultaneous with this transaction, the Company entered into
an eight-year management agreement for those aircraft and the Company issued
2,373,620 warrants to Lorne Weil, the Managing Member of LW Air. By virtue of
his ownership of the warrants, Mr. Weil is now a significant beneficial owner of
the Company. In addition, since the contractual relationships under the
agreements with LW Air were executed following the date that Mr. Weil became a
significant beneficial owner, the Company recognizes the transaction as a
related party transaction (see Note 8).





In March
2010, 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.





NOTE
7 – INCOME TAXES





The
difference between income tax benefit provided at the Company’s effective rate
and the statutory rate at June 30, 2010 and 2009 are as
follows:





2010
                  
                  
                  2009Income
      tax benefit at statutory rate
                  
                  $
                  1,388,996
                  
                  
                  $
                  1,371,282State
      tax benefit, net of Federal benefit
                  
                  
                  119,057
                  
                  
                  
                  117,538Increase
      in valuation allowance
                  
                  
                  (1,679,353
                  )
                  
                  
                  (1,488,820
                  )Other
                  
                  
                  171,300
                  
                  
                  
                  -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, 2010 and 2009 are
as follows:


F-17





2010
                  
                  
                  2009Deferred
      tax liabilitiesGoodwill
                  
                  $
                  (202,366
                  )
                  
                  $
                  (173,456
                  )Depreciation
                  
                  
                  (3,013,688
                  )
                  
                  
                  (2,659,248
                  )Other
                  
                  
                  (37,342
                  )
                  
                  
                  -(3,253,396
                  )
                  
                  
                  (2,832,704
                  )Deferred
      tax assetsDeferred
      revenues, net of amortized aircraft costs related to fractional share
      sales
                  
                  
                  248,047
                  
                  
                  
                  707,848Other
                  
                  
                  1,566,694
                  
                  
                  
                  1,240,273Net
      operating loss carryforwards
                  
                  
                  33,803,813
                  
                  
                  
                  31,570,38835,618,554
                  
                  
                  
                  33,518,509Less
      valuation allowance
                  
                  
                  (32,365,158
                  )
                  
                  
                  (30,685,805
                  )3,253,396
                  
                  
                  
                  2,832,704Net
      deferred tax assets
                  
                  $
                  -
                  
                  
                  $
                  -





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 2010
and 2009 and, accordingly, the Company did not recognize any benefit from income
taxes in the accompanying consolidated statements of operations. At
June 30, 2010, the Company had net operating loss carryforwards of
approximately $88.9 million which begin to expire in 2023.





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 ASC 740 “Income Taxes.” There were no
unrecognized tax benefits as of July 1, 2008 or as of June 30, 2009. ASC 740
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by taxing authorities.
The Company has identified its federal tax return and State of Florida tax
return as “major” tax jurisdictions, as defined in ASC 740. The Company
evaluations were performed for the tax years ended 2005 thru 2010 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, 2010 and
2009.





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





June 30,2010
                  
                  
                  2009Beginning
      balance
                  
                  $
                  30,685,805
                  
                  
                  $
                  29,196,984Increase
      in valuation allowance
                  
                  
                  1,679,353
                  
                  
                  
                  1,488,821Ending
      balance
                  
                  $
                  32,365,158
                  
                  
                  $
                  30,685,805





NOTE
8 – COMMITMENTS AND CONTINGENCIES





Operating
Lease Commitments





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





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


F-18


During
the second quarter of fiscal 2010, the Company, through an arms-length
transaction, transferred its rights to purchase four Piaggio Avanti II aircraft
to LW Air pursuant to the existing aircraft purchase agreement between the
Company and Piaggio America, Inc. Simultaneous with this transaction, the
Company entered into an eight-year management agreement for those aircraft.
Pursuant to the agreement between the parties, the Company will manage each
aircraft for a monthly fee which is variable based upon aircraft flight hours
but will not exceed $56,500 per month. The agreement also allows the Company to
enter into short-term leases for the use of the aircraft at a specified dry
lease rate per flight hour. Effective July 1, 2010, the terms of the
management agreement were amended to reduce the maximum management fee to be
charged for the Company’s management of each of these aircraft to not exceed
$44,000 per month for each aircraft, for the eight months ending February 28,
2011, after which the maximum management fee will continue to not exceed $56,500
per month for each aircraft. The
Company accrued $375,000 for services rendered by EBC in connection with this
transaction. The fee will be amortized over the term of the arrangement. The
Company accounts for the management agreement as an operating
lease.





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, 2010 and 2009 was $3,151,831 and
$3,066,479, respectively.





Future
minimum lease payments on these operating leases are:





Year Ended June 30,2011
                  
                  $
                  7,231,4742012
                  
                  
                  6,508,5902013
                  
                  
                  6,575,0212014
                  
                  
                  6,656,8412015
                  
                  
                  6,742,638Thereafter
                  
                  
                  26,786,057$
                  60,500,621





Purchase
Commitments





On June
20, 2008, Avantair assigned its rights and obligations to purchase twenty
Embraer Phenom 100 (“Phenom 100”) aircraft positions to Share 100 Holding Co.,
LLC (“Share 100”), a wholly-owned subsidiary of Avantair. On the same date,
Avantair entered into a membership interest purchase agreement with Executive
Air Shares Corporation (“EAS”), in which EAS purchased the Class A membership of
Share 100 and Avantair retained the Class B membership. EAS, as Class A member,
has the rights and obligations to purchase the Phenom 100 aircraft with
positions one through eighteen and to fund payment due in connection with these
aircraft. EAS paid Share 100 approximately $2.47 million in connection with
these transactions and made an additional $750,000 capital contribution to Share
100 in December 2008, all of which was, immediately distributed to Avantair.
Avantair, as Class B member, has the rights and obligations to purchase aircraft
positions nineteen and twenty and to fund payment due in connection with these
aircraft. EAS 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, 2010, Avantair had contractual commitments to purchase 52 additional
Piaggio Avanti II aircraft through 2013. The total commitment, including a
recently proposed price escalation, is valued at approximately $330
million.





Legal
Proceedings





From time
to time, the Company is party to various legal proceedings in the normal course
of business. It is expected that these claims would be covered by insurance
subject to customary deductibles. Those claims, even if lacking merit, could
result in the expenditure of significant financial and managerial resources. As
of June 30, 2010, there were no legal proceedings which the Company would
anticipate having a material adverse effect on its financial position, results
of operations or cash flows.




NOTE
9 – CAPITAL LEASE TRANSACTIONS





JMMS,
Inc.





The
Company entered into a sale and leaseback agreement, dated August 11, 2006, with
JMMS, LLC (“JMMS”). Under the sale and leaseback agreement, the Company sold
100.0% of its interest in a core aircraft for $4.2 million and leased back 68.8%
of the aircraft for a five year term. The proceeds of the sale and leaseback
arrangement were used to pay down a line of credit. In March 2007, the Company
amended the lease agreement to include a provision for the Company to buy back
the aircraft at the expiration of the term. As a result of the amendment, the
Company has accounted for the sale and leaseback transaction as a finance lease.
JMMS notified the Company of its intention to terminate the sale and leaseback
agreement between the parties effective March 1, 2009, at which date, pursuant
to the agreement, the Company was required to purchase the aircraft at a cost of
no more than the $4.2 million. The closing date of the transaction was extended
past March 1, 2009, in consideration for monthly payments to JMMS totaling $1.25
million through December 1, 2009. The total amount of the monthly payments made
to JMMS by the Company since March 1, 2009 were deducted from the aircraft
purchase price. In December 2009, the Company sold the aircraft to a third
party for $2.9 million and paid the remaining outstanding balance of the
purchase price to JMMS, and realized a gain of $0.9 million. In addition, the
remaining balance of approximately $0.2 million deferred gain related to the
sale and leaseback agreement was realized as a result to the
sale.


F-19


Midsouth Services, Inc. (“Midsouth”)





The
Company has three separate lease agreements with Midsouth.





On
October 10, 2007, Avantair acquired a core aircraft under a capital lease
obligation with Midsouth.  Under the lease agreement, Midsouth
provided funding for the $4.7 million purchase of a pre-owned Piaggio P-180
aircraft and holds title to the aircraft.  Midsouth leases the aircraft
exclusively to Avantair on a five year lease at 15.0% interest per annum. 
The monthly lease payments for the term of the lease are $89,000.  At the
end of the five year lease, Avantair shall purchase the aircraft from Midsouth
at the guaranteed residual value in the amount of approximately $2.3
million.  Avantair also has the option to purchase the aircraft anytime
during the lease term at the then current guaranteed residual value as set forth
on the amortization schedule without penalty.  The obligation outstanding
at June 30, 2010 totaled approximately $3.8 million.





In April
2009, the Company amended the Lease Agreement previously accounted for as an
operating lease under ASC Topic 840“Leases,” dated as of July
31, 2006 between the Company and Midsouth. Pursuant to the amendment, the
Company is required to pay $74,900 monthly, at 11.0% interest per annum until
August 2011, the expiration of the Lease Agreement. In addition, the Company has
agreed to purchase the leased aircraft for approximately $3.0 million from
Midsouth within sixty days following the expiration of the term of the Lease
Agreement. The lease, as amended, has been classified as a capital lease in the
accompanying consolidated balance sheet. The obligation outstanding at June 30,
2010 totaled approximately $3.0 million, net of deferred interest of $0.5
million.





In April
2009, the Company entered into a Lease Agreement, effective April 6, 2009,
pursuant to which Midsouth leases a Piaggio P-180 aircraft to the Company for a
ten year lease term at $75,000 per month, at 15.0% interest per annum, plus
taxes if applicable. The Company is required to provide Midsouth with 100 hours
of flight time per year during the lease term. Hours have been accounted for at
their fair value and are liquidated as hours are flown.  Midsouth has
the sole option to terminate the lease at the end of the fifth year of the term
and to require the Company to purchase the leased aircraft for approximately
$3.8 million within ninety days of that date.  If this option is not
exercised by Midsouth, the lease will continue for the remaining five years of
the term and, at the end of the ten year lease, the Company will be required to
purchase the aircraft from Midsouth for $0.3 million. The obligation outstanding
at June 30, 2010 totaled approximately $4.7 million.





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





Future
minimum lease payments on these capital leases are:





Year Ended June 30,2011
                    
                    $
                    2,808,0002012
                    
                    
                    5,058,0002013
                    
                    
                    3,636,6932014
                    
                    
                    4,472,0002015
                    
                    
                    -Total
      minimum payments
                    
                    
                    15,974,693Less:
      amount representing interest
                    
                    
                    (4,468,203
                    )Present
      value of minimum lease payments
                    
                    $
                    11,506,490





NOTE
10 – SHORT-TERM DEBT





Short-term
debt consists of the following as of June 30, 2010 and 2009:





2010
                  
                  
                  2009Midsouth
      Services, Inc
                  
                  $
                  11,000,000
                  
                  
                  $
                  11,500,000





On April
2, 2009, Avantair entered into two Floor Plan Agreements with Midsouth to
replace Midsouth’s existing Floor Plan Agreements dated July 31,
2008.  The new Floor Plan Agreements extended credit to Avantair in an
increased amount of $11.6 million to be used towards the purchase of new Piaggio
P-180 aircraft.  Each of the new Floor Plan Agreements are similar to
the prior Floor Plan Agreements and cover an amount not to exceed $5.8 million
for a term of twelve months.  The Company has the sole option to
terminate one of the Agreements during the term with ninety days written
notice.  The Company has agreed to pay Midsouth a monthly fee of
$82,500 for each Floor Plan Agreement during the term. Borrowings outstanding
under these arrangements at June 30, 2010 and 2009 totaled $11.0 million. In
addition, at June 30, 2009, the Company had borrowings under a short-term note
totaling $500,000 to finance aircraft deposits. This note was repaid during
fiscal year 2010.


F-20


NOTE
11 – LONG- TERM DEBT





Long-term
debt consists of the following as of June 30, 2010 and 2009:




2010
                  
                  
                  2009Wells
      Fargo Equipment Finance, Inc.
                  
                  $
                  2,680,816
                  
                  
                  $
                  3,095,512Jet
      Support Services, Inc.
                  
                  
                  1,769,176
                  
                  
                  
                  3,707,209Century
      Bank, F.S.B.
                  
                  
                  1,753,803
                  
                  
                  
                  1,911,203Wachovia
      Bank
                  
                  
                  2,081,403
                  
                  
                  
                  2,976,685Other
      long-term debt
                  
                  
                  31,517
                  
                  
                  
                  -Midsouth
      Services, Inc.
                  
                  
                  11,506,490
                  
                  
                  
                  12,183,530CNM,
      Inc.
                  
                  
                  -
                  
                  
                  
                  3,616,652JMMS,
      Inc.
                  
                  
                  -
                  
                  
                  
                  3,640,81019,823,205
                  
                  
                  
                  31,131,601Less
      current portion
                  
                  
                  (4,202,726
                  )
                  
                  
                  (11,020,590
                  )Long-term
      debt
                  
                  $
                  15,620,479
                  
                  
                  $
                  20,111,011




Wells
Fargo Equipment Finance, Inc.





In
February 2005, the Company entered into financing arrangements for the purchase
of core aircraft under various notes payable with Wells Fargo Equipment Finance,
Inc. The notes outstanding at June 30, 2010 totaled approximately $2.7 million
and are payable in monthly installments ranging from $10,644 to $38,480 with
interest ranging from 5.96% to 6.12% per annum through 2012. The notes are
collateralized by the aircraft.




Jet
Support Services, Inc.





On April
24, 2006, Avantair financed an aircraft maintenance program contract with Jet
Support Services, Inc. (“JSSI”) in the amount of $3.4 million. The promissory
note provided for seven monthly installments of $145,867 and 53 monthly
installments of $45,867, respectively, including interest at 7.0% per year. On
April 15, 2008, the Company entered into a financing arrangement with JSSI by
means of a $5.5 million promissory note. The new note matures on April 1,
2011 and bears interest at 10.0% per annum, with 35 monthly payments of
principal and interest in an amount of $185,127 beginning on June 2, 2008.
The new note covered the remaining balance of $0.4 million of the aforementioned
promissory note, other costs and fees to be paid by the Company under service
agreements with JSSI and related deferred financing costs of approximately $1.0
million which will be amortized over the life of the note using the effective
interest method. Upon entering into this payment arrangement and the $5.5
million promissory note, the parties terminated the airframe maintenance
contract and agreed to apply the unamortized prepayment under the airframe
maintenance contract to the engine maintenance program and will amortize this
amount over the remaining 35 month term of that program.  Borrowings
outstanding under this arrangement at June 30, 2010 totaled approximately $1.8
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, 2010 totaled
approximately $1.8 million and is payable in monthly installments of $27,175
with interest of 8.25% per annum through August 3, 2012. The note is
collateralized by the aircraft.





Wachovia
Bank





On
October 31, 2007, the Company entered into a financing arrangement for the
purchase of one used aircraft at a total purchase price of approximately $4.5
million (inclusive of the value of a flight hour card of 100 hours). Financing
was obtained from Wachovia through a note payable of $3.9 million. This debt
will be repaid monthly over 7 years at an interest rate of the LIBOR rate plus
4.0%. Borrowings outstanding under this arrangement at June 30, 2010 totaled
approximately $2.1 million. During September 2009, the Company received a waiver
of compliance with a financial covenant in connection with the note. During
September 2010, the Company received another waiver of compliance with a
financial covenant in connection with the note.





Other
long-term debt





Other
long-term debt: In October 2009, the Company and Kevco Aviation Inc. executed a
$56,614 note agreement for the purchase of equipment. The note outstanding at
June 30, 2010 totaled $31,517 and is payable in monthly installments of $2,912
with interest of 3.25% per annum through May 2011. The agreement with Kevco
has been included in the current portion of long-term debt on the accompanying
consolidated balance sheet.


F-21


Midsouth
Services, Inc.





Avantair
leases core aircraft under capital lease obligations with Midsouth (see Note 9).





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 ASC 470-50“Debt Modification &
Extinguishment.”   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. During October 2009, the Company repaid the full amount of the loan
of approximately $2.7 million.





JMMS,
Inc.





On August
11, 2006, the Company entered into a sale and leaseback agreement with JMMS, Inc
(“JMMS”). The lease transaction was accounting for as a finance lease and
provided for monthly payments of $39,500 through July 11, 2011 (see Note 9). On
December 14, 2009, the Company sold the aircraft to a third party for $2.9
million and paid the remaining outstanding balance of its lease obligation to
JMMS, and realized a gain of $0.9 million. In addition, the remaining balance of
approximately $0.2 million deferred gain related to the sale and leaseback
agreement was realized as a result to the sale.




Future
minimum payments on long-term debt in fiscal years subsequent to June 30,
2010 are as follows:




Year Ended June 30,2011
                      
                      $
                      3,693,8782012
                      
                      
                      6,890,8732013
                      
                      
                      4,800,1642014
                      
                      
                      641,2902015
                      
                      
                      3,797,000$
                      19,823,205





NOTE
12 – CAPITAL STOCK





General




The
Company’s authorized capital stock consists of 75 million shares of common
stock, par value, $0.0001 per share, and 1 million 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.




Shares
of Reserved Common Stock




Common
Stock. As of June 30, 2010, the Company had 26,353,201 shares of its
common stock outstanding and 414,066 shares of common stock available for future
issuance under the Company’s 2006 Long-Term Stock Incentive Plan. As of June 30,
2010, the Company has 152,000 shares of Series A Preferred Shares
outstanding.
TheCompany has
4,251,857 shares of common stock reserved on its books and records for issuance
upon the conversion of the outstanding Series A Preferred Shares. As a result of
the sales of shares consummated on June 30, September 25, and October 16, 2009,
the conversion price of the Series A Preferred Shares was reduced from $5.15 to
$3.57. The 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).





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.


F-22


There
are 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 12.0% 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 $3.57 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 cash amount of this preferred
financing.





NOTE
13 – STOCK-BASED COMPENSATION





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




The
Company accounts for share-based compensation to employees and directors in
accordance with ASC 718“Compensation-Stock Compensation,” which requires the recognition of
compensation expense for employee stock options and other share-based payments.
Under ASC 718, expense related to employee stock options and other share-based
payments is recognized over the relevant service period based on the fair value
of each stock option grant. In addition, the Company recognizes in its
Consolidated Statements of Operations the grant-date fair value of stock options
and other equity-based compensation issued to employees and directors.
Compensation expense for equity-based awards is recognized over the requisite
service period, usually the vesting period on a straight line basis, while
compensation expense for liability-based awards (those usually settled in cash
rather than stock) is measured to fair-value at each balance sheet date until
the award is settled.





Stock
Options





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 10.0% 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 33.0% 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
$94,361 and $145,321 of stock-based compensation expense during the years ended
June 30, 2010 and 2009, respectively. In April 2010, Avantair granted a
total of 626,100 stock options to Company employees (other than its three named
executive officers) with each receiving a specified number of stock options
which resulted in $62,164 of stock-based compensation expense during the year
ended June 30, 2010. These amounts have been 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 ASC 718.





The
Company estimated the fair value of each option award on the date of grant using
the Black-Scholes option pricing model (“BSM”). 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 ASC 820.





The fair
value of share-based payment awards was estimated using the BSM option pricing
model with the following assumptions and weighted average fair
values:





Year Ended June 30, 2010Range
                        
                        Weighted AverageVolatility
                        60.68%
      - 61.58%
                        
                        61.41%Risk-free
      interest rate
                        3.29%
      - 4.67%
                        
                        3.56%Expected
      term
                        6.00
      years
                        
                        6.00
      yearsDividend
      rate
                        0.00%
      - 0.00%
                        
                        0.00%Fair
      values
                        $1.51
      - $3.23
                        
                        $1.84


F-23


The
following table summarizes the activity for the Company’s stock options for the
year ended June 30, 2010:





Weighted
                  
                  
                  Weighted
                    AverageAverage
                  
                  
                  Remaining
                  
                  
                  AggregateExercise
                  
                  
                  Contractual
                  
                  
                  IntrinsicShares
                  
                  
                  Price
                  
                  
                  Life (Years)
                  
                  
                  ValueOutstanding,
      beginning of fiscal year
                  
                  
                  150,000
                  
                  
                  $
                  5.34
                  
                  
                  
                  
                  
                  $
                  -Grants
                  
                  
                  626,100
                  
                  
                  
                  2.65
                  
                  
                  
                  
                  
                  
                  -Exercises
                  
                  
                  -
                  
                  
                  
                  -Forfeitures
                  
                  
                  -
                  
                  
                  
                  -Expirations
                  
                  
                  -
                  
                  
                  
                  -Total
      outstanding, end of fiscal year
                  
                  
                  776,100
                  
                  
                  
                  3.17
                  
                  
                  
                  9.19
                  
                  
                  $
                  -Total
      exercisable, end of fiscal year
                  
                  
                  150,000
                  
                  
                  
                  5.34
                  
                  
                  
                  6.66
                  
                  
                  
                  -Total
      unvested, end of fiscal year
                  
                  
                  626,100
                  
                  
                  
                  2.65
                  
                  
                  
                  9.79
                  
                  
                  
                  -Total
      vested or expected to vest as of end of fiscal year
                  
                  
                  713,490
                  
                  
                  
                  2.96
                  
                  
                  
                  9.19
                  
                  
                  
                  -





As of
June 30, 2010, there was no compensation costs that were deferred relating
to the options issued to non-employee board members as the options fully vested
in the current year. As of June 30, 2010, $788,706 of total deferred
compensation cost related to options issued to employees will be recognized in
expense over the remaining vesting period of 3.00 years.




Restricted
Shares





The
Company expenses restricted shares granted in accordance with the provisions of
ASC 718. The fair value of the restricted shares issued is amortized on a
straight-line basis over the vesting period of three years. In September 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. 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 expense associated with the awarding of restricted
shares for the years ended June 30, 2010 and 2009 is $230,622 and $215,738,
respectively, which is included in general and administrative expense on the
accompanying consolidated statement of operations. As of June 30, 2010,
$142,482 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 AverageGrant
      Date
                            Fair ValueRestricted
      Shares Balance at June 30, 2009
                          
                          
                          92,733
                          
                          
                          $
                          4.90Granted
                          
                          
                          93,000
                          
                          
                          
                          1.50Forfeited/cancelled
                          
                          
                          -
                          
                          
                          
                          -Vested
                          
                          
                          (66,145
                          )
                          
                          
                          4.65Restricted
      Shares Balance at June 30, 2010
                          
                          
                          119,588
                          
                          
                          $
                          1.66




NOTE 14 –
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.


F-24


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 expired on February 23, 2010.




On June
30, 2009, Avantair sold 567,200 units at a price of $2.50 per unit to investors
in a private placement, generating net proceeds of approximately $1.3 million.
Each unit consisted of two shares of common stock and one warrant to purchase
one common share. The warrants had an exercise price of $4.00 per share and were
exercisable until June 30, 2012. The sale was consummated under the terms of a
Securities Purchase Agreement between Avantair and each of the private placement
investors. Pursuant to a registration rights agreement, Avantair agreed to use
it best efforts to register the shares issued to the private placement investors
and the shares underlying the warrants issued to the private placement investors
for sale under the Securities Act of 1933, as amended. By agreement between
Avantair, the investors in the June 30, 2009 private placement and that
offering's placement agent, the period for additional sales of units was
extended until October 15, 2009. On September 25, 2009, the Company sold an
additional 250,000 units at a price of $2.50 per unit generating net proceeds of
approximately $0.6 million. On October 19, 2009, the Company sold 8,818,892
shares of common stock to new investors at a price per share of $0.95 for net
proceeds of approximately $7.3 million pursuant to the October 16, 2009
Securities Purchase and Exchange Agreement. In addition, pursuant to the October
16, 2009 Securities Purchase and Exchange Agreement, on October 19, 2009 the
Company exchanged the 817,200 outstanding warrants that had been issued to
existing investors in the June and September private placements for an aggregate
of 516,127 shares of common stock. The October 2009 Securities Purchase and
Exchange Agreement terminated the Securities Purchase and Registration Rights
Agreements entered into in connection with the June and September 2009 private
placements.





In
connection with the transactions contemplated by the Securities Purchase and
Exchange Agreement, Avantair entered into a Registration Rights Agreement with
the parties to the Securities Purchase and Exchange Agreement.   The
Registration Rights Agreement required the Company promptly, but not later than
November 18, 2009, to file a registration statement registering for sale the
shares issued to the investors and to cause the registration statement to be
declared effective prior to the earlier of (i) five business days after the
Securities and Exchange Commission (“SEC”) has informed the Company that no
review of the registration statement will be made or that it has no further
comments on the registration statement or (ii) January 17, 2010 (March 18, 2010,
if the registration statement is reviewed by the SEC). Under the terms of the
Registration Rights Agreement, the Company was obligated to maintain the
effectiveness of the sale registration statement, subject to certain exceptions,
until all securities registered thereunder are sold or otherwise can be sold
pursuant to Rule 144, without restriction and to promptly register the
securities covered thereby on a “short-form” registration statement once the
Company becomes eligible to do so. The Company would have been required to pay
to each investor an amount in cash, as liquidated damages, 1.5% of the aggregate
amount invested by such investor for each 30-day period or pro rata for any
portion thereof, that the Company failed to be in compliance with the
requirements of the Registration Rights Agreement. As the registration statement
was declared effective by the SEC by the stipulated date, the Company incurred
no liquidated damages under these provisions of the Registration Rights
Agreement. The investors in the June, September and October 2009 private
placements included certain of our directors and 5.0% shareholders.




On
October 16, 2009, pursuant to an agreement between EBC and the Company, in
consideration for services rendered as placement agent for the Company’s June,
September and October 2009 private placements, the Company issued to EBC and its
affiliates 455,887 fully vested warrants which expire on June 30, 2012. Each
warrant permits the holder to purchase one share of the Company’s common stock
at an exercise price of $1.05 per share. The shares issuable upon exercise of
the warrants are entitled to registration rights under the October 2009
Registration Rights Agreement. The Company may redeem the warrants at any time
on or after October 16, 2011 at the price of $0.01 per warrant, provided that
the volume weighted average price of the Company’s common stock has been at
least 200.0% of the exercise price of a warrant for any twenty trading days
during any consecutive thirty trading day period ending on the third trading day
preceding the date of the notice of redemption. The fair value of the warrants
calculated in accordance with ASC 820 estimated at $0.46 per warrant was charged
to additional paid-in capital. The fair values of the warrants issued were
estimated on the date of grant. A Lattice option-pricing model, applying the
following assumptions, was used to estimate the fair value for the warrants
issued:


F-25





Stock
      Price (1)
                          
                          $
                          1.15Exercise
      Price (2)
                          
                          $
                          1.05Interest
      Rate (1)
                          
                          
                          1.34
                          %(4)Volatility
                          
                          
                          79.93
                          %Time
      to Maturity (2)
                          
                          
                          2.71 yearsNumber
      of Steps (3)
                          
                          
                          12Exercise
      Factor
                          
                          
                          2.00Minimum
      Market Price
                          
                          $
                          2.10





(1) As of
the Valuation Date


(2) Per
warrant agreement


(3)
Number of quarterly periods in the 2.71 year term.


(4) Based
on vesting period on date of grant.





During
the second quarter of fiscal 2010, the Company, through an arms-length
transaction, transferred its rights to purchase four Piaggio Avanti II aircraft
to LW Air pursuant to the existing aircraft purchase agreement between the
Company and Piaggio America, Inc. Upon delivery of the aircraft, Piaggio America
returned $2.6 million of deposits previously paid on the aircraft by the
Company.  Simultaneous with this transaction, the Company entered into
an eight-year management agreement for those aircraft and the Company issued
2,373,620 warrants to Lorne Weil, the Managing Member of LW Air.  By virtue
of his ownership of the warrants, Mr. Weil is now a significant beneficial owner
of the Company. In addition, since the contractual relationships under the
agreements with LW Air were executed following the date that Mr. Weil became a
significant beneficial owner, the Company recognizes the transaction as a
related party transaction. Pursuant to the agreement between the parties, the
Company will manage each aircraft for a monthly fee which is variable based upon
aircraft flight hours but will not exceed $56,500 per month. The agreement also
allows the Company to enter into short-term leases for the use of the aircraft
at a specified dry lease rate per flight hour. Effective July 1, 2010, the
terms of the management agreement were amended to reduce the maximum management
fee to be charged for the Company’s management of each of these aircraft to not
exceed $44,000 per month for each aircraft, for the eight months ending February
28, 2011, after which the maximum management fee will continue to not exceed
$56,500 per month for each aircraft.




The
warrants issued in conjunction with the LW Air transactions to Lorne Weil,
Managing Member of LW Air, provide for the purchase of 2,373,620 shares of the
Company’s common stock at an exercise price of $1.25 per share. The warrants
expire on October 16, 2012, and the warrants and any underlying shares purchased
upon exercise of the warrants may not be sold, transferred, assigned or
hypothecated, in whole or in part, at any time on or prior to October 16, 2011,
other than to an affiliate of the warrant holder. The Company may redeem the
warrants held by Lorne Weil at any time on and after October 16, 2011 at the
price of $0.01 per warrant, provided that the volume weighted average price of
the Company’s common stock has been at least 300.0% of the exercise price of a
warrant for any twenty trading days during any consecutive thirty trading day
period ending on the third trading day preceding the date of the notice of
redemption. On December 15, 2009, LW Air took delivery of the fourth aircraft
and, as such, has satisfied the conditions for vesting of all the warrants. The
Company accounted for the LW Air transaction and the issuance of the warrants by
recording the charges paid to the owner (including the fair value of the
warrants calculated in accordance with ASC 820 estimated at $0.34 per warrant)
to the Cost of Flight Operations on a straight-line basis ratably over the
initial term of the agreement. The fair values of the warrants issued were
estimated on the date of grant. A Lattice option-pricing model, applying the
following assumptions, was used to estimate the fair value for the warrants
issued:





Stock
      Price (1)
                              
                              $
                              1.15Exercise
      Price (2)
                              
                              $
                              1.25Interest
      Rate (1)
                              
                              
                              0.015% and 0.066
                              %(4)Volatility
                              
                              
                              78.89
                              %Time
      to Maturity (2)
                              
                              3
      yearsNumber
      of Steps (3)
                              
                              
                              156Suboptimal
      Exercise Factor
                              
                              
                              3.00Minimum
      Market Price
                              
                              $
                              3.75





(1) As of
the Valuation Date


(2) Per
warrant agreement


(3)
Number of weeks in a 52 week year over a 3 year period.


(4) Based
on vesting period of one and nine weeks.





The
Company estimated expected volatility for the EBC and Lorne Weil warrant
valuations based on the historical volatility of the Company. The risk-free
interest rate assumptions are based upon observed interest rates appropriate for
the expected term of the warrants.


NOTE
15 – 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.




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 and Exchange Agreement, dated as of October 16, 2009 by and among
      Avantair, Inc. and certain investors. (6)3.1
                                                                                  
                                                                                  Amended
      and Restated Certificate of Incorporation. (3)3.2
                                                                                  
                                                                                  By-laws.
      (4)3.3
                                                                                  
                                                                                  Amended
      and Restated By-laws. (16)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 issued by the Registrant dated as of
      October 16, 2009. (12)10.1*
                                                                                  
                                                                                  Avantair
      Leadership Deferred Compensation Plan Adoption Agreement, dated December
      18, 2008. (11)10.2*
                                                                                  
                                                                                  Avantair
      Leadership Deferred Compensation Plan Basic Plan Document, dated December
      18, 2008. (11)10.3
                                                                                  
                                                                                  Registration
      Rights Agreement among the Registrant and the Initial Stockholders.
      (4)10.4
                                                                                  
                                                                                  Form
      of Warrant Purchase Agreement among EarlyBirdCapital, Inc. and each of the
      Initial Stockholders. (4)10.5
                                                                                  
                                                                                  Investors
      Rights Agreement, entered into as of October 2, 2006, between Avantair,
      Inc. and certain equity investors. (1)10.6
                                                                                  
                                                                                  Loan
      Agreement, entered into as of October 2, 2006 by and among Avantair,
      Inc., CNM, Inc. and Ardent Acquisition Corporation. (1)10.7
                                                                                  
                                                                                  Amended
      and Restated Promissory Note, dated June 1, 2007, made by Avantair, Inc.
      to CNM, Inc. (8)10.8*
                                                                                  
                                                                                  2006
      Long- Term Incentive Plan. (5)10.9*
                                                                                  
                                                                                  Employment
      Agreement dated September 24, 2009, between the Registrant and Steven F.
      Santo. (6)10.10
                                                                                  
                                                                                  Floor
      Plan Finance Agreement, dated April 2, 2009, between the Registrant and
      MidSouth Services, Inc. with the term commencing on April 3, 2009.
      (7)10.11
                                                                                  
                                                                                  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. (7)10.12
                                                                                  
                                                                                  Registration
      Rights Agreement, dated as of October 16, 2009 among the Registrant and
      certain investors. (10)10.13
                                                                                  
                                                                                  Piaggio
      America, INC. P180 Avanti II Aircraft Purchase Agreement, dated November
      10, 2005. (14)(X)10.14
                                                                                  
                                                                                  Piaggio
      America, INC. P180 Avanti II Aircraft Purchase Agreement, dated September
      24, 2007. (14)(X)10.15
                                                                                  
                                                                                  Amendment
      of Aircraft Purchase Agreements dated November 10, 2005 and September 24,
      2007 between Piaggio America, Inc. and Avantair, Inc. (dated September 15,
      2008). (13)(X)10.16
                                                                                  
                                                                                  Aircraft
      Management Agreement between LW Air I LLC and Avantair, Inc. dated October
      19, 2009. (13)(X)10.17
                                                                                  
                                                                                  Aircraft
      Lease Agreement between LW Air I LLC and Avantair, Inc. dated October 19,
      2009. (13)(X)10.18
                                                                                  
                                                                                  Cross
      Lease Exchange Agreement dated October 19, 2009.(13)
(X)10.19
                                                                                  
                                                                                  Addendum
      Number 1 to LW Air I Lease/Management Agreement.(13)
  (X)
  
  14.1
                                      
                                      Code
      of Conduct and Professional Ethics for directors, officers and employees,
      including our Chief Executive Officer and Chief Financial Officer.
      (15)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 1934(†)31.2
                                      
                                      Chief
      Financial Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a) of
      the Securities Exchange Act of 1934(†)32.1
                                      
                                      Chief
      Executive Officer Certification pursuant to 18 U.S.C. Section 1350(†)32.2
                                      
                                      Chief
      Financial Officer Certification pursuant to 18 U.S.C. Section 1350(†)99.1
                                      
                                      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)
  (†)
                                                      Filed
      herewith*
                                                      Management
      contract or compensatory plan or arrangement.(X)
                                                      Portions
      of the exhibit have been omitted pursuant to a request for confidential
      treatment.(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 September 15,
    2009.(7)
                                                      Incorporated
      by reference to the Registrant’s Current Report on Form 8-K, filed with
      the Securities and Exchange Commission on April 7,
2009.(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 October 22,
  2009.(11)
                                                      Incorporated
      by reference to the Registrant’s Current Report on Form 8-K, filed with
      the Securities and Exchange Commission on December 22,
    2008.(12)
                                                      Incorporated
      by reference to the Registrant’s Registration Statement on Form S-1 (SEC
      File No. 333-163152), filed with the Securities and Exchange
      Commission on November 17, 2009.(13)
                                                      Incorporated
      by reference to the Registrant’s Registration Statement on Form S-1/A (SEC
      File No. 333-163152), filed with the Securities and Exchange
      Commission on January 26, 2010.(14)
                                                      Incorporated
      by reference to the Registrant’s Registration Statement on Form S-1/A (SEC
      File No. 333-163152), filed with the Securities and Exchange
      Commission on March 8, 2010.(15)
                                                      Incorporated
      by reference to the Registrant’s Current Report on Form 8-K, filed with
      the Securities and Exchange Commission on February 28,
    2007.(16)
                                                      Incorporated
      by reference to the Registrant’s Current Report on Form 8-K, filed with
      the Securities and Exchange Commission on September 3,
  2010.