UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM 10-Q







x
            Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





For
the quarterly period ended: December 31, 2010





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





For
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


(Address
of principal executive offices) (Zip code)





(727)
539- 0071


(Registrant’s
Telephone Number, Including Area Code)








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. Yesþ      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 (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes ̈
     No ̈





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





Large
Accelerated Filer  ̈
Accelerated Filer  ̈


Non-Accelerated
Filer  ̈ Smaller
Reporting Company þ





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ̈    
Noþ





As of
February 11, 2011, there were 26,393,592 shares of the Company’s 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 subsidiaries.
The term “Registrant” means Avantair, Inc.





INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS





This
Quarterly Report on Form 10-Q 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. Our actual results could differ
materially from the information contained in these forward-looking statements as
a result of various factors, including, but not limited to, the factors outlined
in our Annual Report on Form 10-K, particularly under the heading “Risk
Factors,” and the factors outlined below:





(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.





The
risks described above and in our Annual Report on Form 10-K are not the only
risks facing our Company. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition or operating results. We do not
undertake, and expressly disclaim, any obligation to update this forward-looking
information, except as required by applicable law.





Table
of Contents





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


i


PART I





Item
1. Financial Statements.





AVANTAIR,
INC. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets





ASSETS





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





See
Notes to Condensed Consolidated Financial Statements.


1





AVANTAIR,
INC. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets





LIABILITIES AND
STOCKHOLDERS' DEFICIT





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





See
Notes to Condensed Consolidated Financial Statements.


2





AVANTAIR,
INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Operations


(Unaudited)





Three Months Ended
                  December 31, 2010
                
                
                Six Months Ended
                  December 31, 20102010
                
                
                2009
                
                
                2010
                
                
                2009RevenueFractional
      aircraft sold
                
                $
                8,778,578
                
                
                $
                11,227,309
                
                
                $
                17,976,401
                
                
                $
                23,206,145Management
      and maintenance fees
                
                
                18,813,477
                
                
                
                18,290,025
                
                
                
                37,232,183
                
                
                
                36,264,594Flight
      hour card and Axis Club membership revenue
                
                
                7,257,098
                
                
                
                4,976,763
                
                
                
                13,414,493
                
                
                
                8,835,234Other
      revenue
                
                
                1,735,386
                
                
                
                1,270,860
                
                
                
                3,743,578
                
                
                
                2,663,868Total
      revenue
                
                
                36,584,539
                
                
                
                35,764,957
                
                
                
                72,366,655
                
                
                
                70,969,841Operating
      expensesCost
      of fractional aircraft shares sold
                
                
                7,526,245
                
                
                
                9,476,794
                
                
                
                15,637,690
                
                
                
                19,677,397Cost
      of flight operations
                
                
                17,689,159
                
                
                
                13,304,306
                
                
                
                35,342,272
                
                
                
                25,724,544Cost
      of fuel
                
                
                4,597,316
                
                
                
                3,413,770
                
                
                
                8,535,888
                
                
                
                7,052,671Gain
      on sale of assets
                
                
                -
                
                
                
                (849,584
                )
                
                
                -
                
                
                
                (897,594
                )General
      and administrative expenses
                
                
                6,674,368
                
                
                
                6,234,754
                
                
                
                13,554,219
                
                
                
                12,535,145Selling
      expenses
                
                
                1,707,771
                
                
                
                1,381,180
                
                
                
                3,226,525
                
                
                
                2,366,945Depreciation
      and amortization
                
                
                1,261,559
                
                
                
                1,408,874
                
                
                
                2,518,356
                
                
                
                2,866,791Total
      operating expenses
                
                
                39,456,418
                
                
                
                34,370,094
                
                
                
                78,814,950
                
                
                
                69,325,899Income
      (loss) from operations
                
                
                (2,871,879
                )
                
                
                1,394,863
                
                
                
                (6,448,295
                )
                
                
                1,643,942Other
      income (expenses)Interest
      and other income
                
                
                23,031
                
                
                
                10,372
                
                
                
                34,153
                
                
                
                17,784Interest
      expense
                
                
                (1,217,517
                )
                
                
                (1,587,319
                )
                
                
                (2,466,531
                )
                
                
                (3,210,773
                )Total
      other expenses
                
                
                (1,194,486
                )
                
                
                (1,576,947
                )
                
                
                (2,432,378
                )
                
                
                (3,192,989
                )Net
      loss
                
                
                (4,066,365
                )
                
                
                (182,084
                )
                
                
                (8,880,673
                )
                
                
                (1,549,047
                )Preferred
      stock dividend and accretion of expenses
                
                
                (372,383
                )
                
                
                (372,243
                )
                
                
                (744,729
                )
                
                
                (774,358
                )Net
      loss attributable to common stockholders
                
                $
                (4,438,748
                )
                
                $
                (554,327
                )
                
                $
                (9,625,402
                )
                
                $
                (2,323,405
                )Loss
      per common share:Basic
      and diluted
                
                $
                (0.17
                )
                
                $
                (0.02
                )
                
                $
                (0.37
                )
                
                $
                (0.11
                )Weighted-average
      common shares outstanding:Basic
      and diluted
                
                
                26,381,664
                
                
                
                24,583,880
                
                
                
                26,368,084
                
                
                
                20,528,498





See
Notes to Condensed Consolidated Financial Statements.


3





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





See
Notes to Condensed Consolidated Financial Statements.




4





AVANTAIR,
INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Cash Flows


Six
Months Ended December 31, 2010 and 2009


(Unaudited)





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


5





AVANTAIR,
INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Cash Flows


Six
Months Ended December 31, 2010 and 2009


(Unaudited)





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





See
Notes to Condensed Consolidated Financial Statements.


6


Avantair,
Inc. and Subsidiaries


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





NOTE
1 – OPERATIONS AND MANAGEMENT’S PLANS





Avantair,
Inc. (“Avantair” or the “Company”) is engaged in the sale of fractional
ownership interests in, and flight hour card usage of, professionally piloted
aircraft for personal and business use, and the management of its aircraft
fleet. According to AvData, Avantair is the fifth largest company in the North
American fractional aircraft industry. As of December 31, 2010, Avantair
operated 55 aircraft within its fleet, which is comprised of 46 aircraft for
fractional ownership, 5 company owned core aircraft and 4 leased and company
managed aircraft. Avantair also operates FBOs in Camarillo, California and in
Caldwell, New Jersey. Through these FBOs and its headquarters in Clearwater,
Florida, Avantair provides aircraft maintenance, concierge and other services to
its customers as well as to the Avantair fleet.





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Interim
Reporting





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





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





Basis
of Presentation





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





The
accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. This basis of
accounting contemplates the successful recovery of the Company’s assets and the
satisfaction of its liabilities in the normal course of business. As of December
31, 2010, the Company’s recurring losses resulted in a working capital deficit
of approximately $51.5 million and a stockholders’ deficit of approximately
$41.6 million. The Company’s primary sources of operating funds are the
collection of management and maintenance fees from fractional share owners as
well as the sale of fractional ownership shares, flight hour cards and,
effective January 2009, Axis Club Memberships. Revenue for the sales by product
category can be found in the accompanying Condensed Consolidated Statements of
Operations for the three and six months ended December 31, 2010. Sales by
product category follow:





Unit
      Sales for the Three Months EndedDecember
      31,
                    2010
                  
                  
                  December
      31,
                    2009
                  
                  
                  September
      30,
                    2010
                  
                  
                  September
      30,
                    2009New
      Fractional shares
                  
                  
                  6
                  
                  
                  
                  5
                  
                  
                  
                  3
                  
                  
                  
                  2Flight
      hour cards
                  
                  
                  162
                  
                  
                  
                  100
                  
                  
                  
                  104
                  
                  
                  
                  86Axis
      Club Memberships
                  
                  
                  14
                  
                  
                  
                  21
                  
                  
                  
                  11
                  
                  
                  
                  3





Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. At December 31, 2010, the
Company had 19.5 fractional aircraft shares available for sale. In addition to
the cost of acquiring aircraft, Avantair’s primary expenses are related to fuel,
aircraft repositioning (i.e., moving an aircraft to another location to
accommodate a customer’s need and for demonstration flights for sales purposes),
maintenance, charters and insurance. To finance its growth strategy, the Company
will continue to actively pursue additional funds through equity financing,
including the sale of additional shares of common and preferred stock, asset
sales, promotional sales incentives, accelerated payments of management and
maintenance fees, debt financing, or a combination thereof. At December 31, 2010
and June 30, 2010, Avantair had assets of approximately $114.8 million and
$131.6 million, respectively. For the three and six months ended December 31,
2010, the Company had revenue of approximately $36.6 million and $72.4 million,
respectively, and net losses of approximately $4.1 million and $8.9 million,
respectively. Avantair has incurred losses since inception and may not be able
to generate sufficient net revenue from its business in the future to achieve or
sustain profitability. At December 31, 2010, the Company had approximately $3.9
million of unrestricted cash on hand and assuming there is no change in recent
sales and expense trends, the Company believes that its cash position will be
sufficient to continue operations for the foreseeable future.


7


Use
of Estimates





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





Revenue
Recognition





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





Fractional
Aircraft Shares





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




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





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


8


Management
and Maintenance Agreement





Revenue
earned in connection with the management and maintenance agreements with
fractional share owners is recognized ratably over the term of the agreement,
usually five years. If a customer prepays its management and maintenance fee for
a period of one year or longer, the prepayment is recorded as unearned revenue
and amortized into revenue on a monthly basis in accordance with the schedule
provided for within each agreement.





Flight
hour card and Axis Club Membership Revenue





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





Axis Club Membership revenue.
In January 2009, the Company initiated the Axis Club Membership program that
offers customers access to blocks of flight time at a discount from standard
flight hour card rates for a set, three year membership fee. The program
requires that Axis Club members purchase a minimum of three 25 hour blocks of
flight hour cards over the three year membership term. Axis Club Membership fees
are paid in advance, deferred and recognized over the three year membership
term. Similar to standard flight hour card sales, payment for flight hour cards
sold through the Axis Club Membership program are collected in advance of access
to the aircraft fleet, deferred and recognized as revenue on an incremental
basis over the three year membership term.





Other
Revenues





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





Aircraft
Costs Related To Fractional Sales





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





Maintenance
Expense Policy





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





Prepaid
Pilot Training





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


9


Income
Taxes





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





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





Stock-Based
Compensation





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





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





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





Accounting
for Derivative Instruments





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





Goodwill
and Long-lived Assets





The Company accounts for
goodwill and other intangible assets under ASC 350"Intangibles
— Goodwill and Other." ASC 350eliminates 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.


10


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





Fair
Value Measurements





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





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


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





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


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


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


•
              Disclosures
      about instruments measured at fair
value.




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





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


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


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





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





Loss
Per Share





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


11


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





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





Recently
Issued Pronouncements





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





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





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





NOTE
3 – COMMITMENTS AND CONTINGENCIES





Operating
Lease Commitments





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





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





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


12


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





Purchase
Commitments





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





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





Financing
Commitments- Short-term





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





Midsouth
      Services, Inc.
                      
                      
                      $
                      5,200,000





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


13


Financing Commitments-
Long-term





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





Wells
      Fargo Equipment Finance, Inc.
                  
                  $
                  2,463,994Jet
      Support Services, Inc.
                  
                  
                  725,337Iberia
      Bank
                  
                  
                  1,662,811Wachovia
      Bank
                  
                  
                  1,802,339Other
      long-term debt
                  
                  
                  14,442Midsouth
      Services, Inc.
                  
                  
                  11,130,86617,799,789Less
      current portion
                  
                  
                  (6,022,436
                  )Long-term
      debt
                  
                  $
                  11,777,353





Wells
Fargo Equipment Finance, Inc.





In
February 2005, the Company entered into financing arrangements for the purchase
of core aircraft under various notes payable with Wells Fargo Equipment Finance,
Inc. The notes outstanding at December 31, 2010 totaled approximately $2.5
million and are payable in monthly installments ranging from $10,644 to $38,480
with interest ranging from 5.96% to 6.12% per annum through 2012. The notes are
collateralized by the aircraft.





Jet
Support Services, Inc.





On April
24, 2006, Avantair financed an aircraft maintenance program contract with Jet
Support Services, Inc. (“JSSI”) in the amount of $3.4 million. The promissory
note provided for seven monthly installments of $145,867 and 53 monthly
installments of $45,867, respectively, including interest at 7.0% per year. On
April 15, 2008, the Company entered into a financing arrangement with JSSI by
means of a $5.5 million promissory note. The new note matures on April 1, 2011
and bears interest at 10.0% per annum, with 35 monthly payments of principal and
interest in an amount of $185,127 beginning on June 2, 2008. The new note
covered the remaining balance of $0.4 million of the aforementioned promissory
note, other costs and fees to be paid by the Company under service agreements
with JSSI and related deferred financing costs of approximately $1.0 million
which will be amortized over the life of the note using the effective interest
method. Upon entering into this payment arrangement and the $5.5 million
promissory note, the parties terminated the airframe maintenance contract and
agreed to apply the unamortized prepayment under the airframe maintenance
contract to the engine maintenance program and to amortize this amount over the
remaining 35 month term of that program.  Borrowings outstanding under this
arrangement at December 31, 2010 totaled approximately $0.7 million and have
been included in the current portion of long-term debt on the accompanying
condensed consolidated balance sheets.





Iberia
Bank





In August
2007, the Company and Iberia Bank (formerly Century Bank F.S.B.) executed a $2.2
million note agreement for the purchase of one aircraft. The note outstanding at
December 31, 2010 totaled approximately $1.7 million and is payable in monthly
installments of $27,175 with interest of 8.25% per annum through August 3, 2012.
The note is collateralized by the aircraft.





Wachovia
Bank





On
October 31, 2007, the Company entered into a financing arrangement for the
purchase of one used aircraft at a total purchase price of approximately $4.5
million (inclusive of the value of a flight hour card of 100 hours). Financing
was obtained from Wachovia through a note payable of $3.9 million. This debt
will be repaid monthly over 7 years at an interest rate of the LIBOR rate plus
4.0%. Borrowings outstanding under this arrangement at December 31, 2010 totaled
approximately $1.8 million. In September 2009 and September 2010, the Company
received waivers of compliance for financial covenants in connection with the
note.





Other
long-term debt





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


14


Capital
Lease Transactions





Midsouth Services, Inc. (“Midsouth”)





The
Company has three separate lease agreements with Midsouth.





On
October 10, 2007, Avantair acquired a core aircraft under a capital lease
obligation with Midsouth.  Under the lease agreement, Midsouth provided
funding for the $4.7 million purchase of a pre-owned Piaggio P-180 aircraft and
holds title to the aircraft.  Midsouth leases the aircraft exclusively to
Avantair on a five year lease at 15.0% interest per annum.  The monthly
lease payments for the term of the lease are $89,000.  At the end of the
five year lease, Avantair shall purchase the aircraft from Midsouth at the
guaranteed residual value in the amount of approximately $2.3 million. 
Avantair also has the option to purchase the aircraft anytime during the lease
term at the then current guaranteed residual value as set forth on the
amortization schedule without penalty.  The obligation outstanding at
December 31, 2010 totaled approximately $3.5 million.





In April
2009, the Company amended a lease agreement previously accounted for as an
operating lease under ASC Topic 840“Leases,” dated as of July
31, 2006 between the Company and Midsouth. Pursuant to the amendment, the
Company is required to pay $74,900 monthly, at 11.0% interest per annum until
August 2011, the expiration of the Lease Agreement. In addition, the Company has
agreed to purchase the leased aircraft for approximately $3.0 million from
Midsouth within sixty days following the expiration of the term of the Lease
Agreement. The lease, as amended, has been classified as a capital lease in the
accompanying condensed consolidated balance sheets. The obligation outstanding
at December 31, 2010 totaled approximately $3.0 million, net of deferred
interest of $0.3 million.





In April
2009, the Company entered into a lease agreement, effective April 6, 2009,
pursuant to which Midsouth leases a Piaggio P-180 aircraft to the Company for a
ten year lease term at $75,000 per month, at 15.0% interest per annum, plus
taxes if applicable. The Company is required to provide Midsouth with 100 hours
of flight time per year during the lease term. Hours have been accounted for at
their fair value and are liquidated as hours are flown.  Midsouth has the
sole option to terminate the lease at the end of the fifth year of the term and
to require the Company to purchase the leased aircraft for approximately $3.8
million within ninety days of that date.  If this option is not exercised
by Midsouth, the lease will continue for the remaining five years of the term
and, at the end of the ten year lease, the Company will be required to purchase
the aircraft from Midsouth for $0.3 million. The obligation outstanding at
December 31, 2010 totaled approximately $4.6 million.





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





NOTE
4 – EQUITY TRANSACTIONS





As of
December 31, 2010, the Company had 26,388,619 shares of its common stock
outstanding and 139,066 shares of common stock available for future issuance
under the Company’s 2006 Long-Term Stock Incentive Plan. As of December 31,
2010, the Company has 152,000 shares of Series A Preferred Shares
outstanding. The Company has 4,251,857 shares of common stock reserved
on its books and records for issuance upon the conversion of the outstanding
Series A Preferred Shares. As a result of the sales of shares consummated on
June 30, September 25, and October 16, 2009, the conversion price of the Series
A Preferred Shares was reduced from $5.15 to $3.57.





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





NOTE
5 – SUBSEQUENT EVENTS





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





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


15


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





Overview





Avantair
is engaged in the sale of fractional ownership interests in, and flight hour
card usage of, professionally piloted aircraft for personal and business use,
and the management of its aircraft fleet. According to AvData, Avantair is the
fifth largest company in the North American fractional aircraft industry. As of
December 31, 2010, Avantair operated 55 aircraft within its fleet, which is
comprised of 46 aircraft for fractional ownership, 5 company owned core aircraft
and 4 leased and company managed aircraft.





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





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





In
January 2009, Avantair initiated the Axis Club Membership program. This product
offers access to blocks of flight hours for a three year membership fee of
$75,000. The program requires Axis Club members to purchase a minimum of three
25 hour flight hour cards for $80,000 or less, dependent upon the type of
membership purchased, over a three year period. The program also allows for the
conversion of club membership into fractional ownership. Members are not charged
a management fee until they are fractional owners.





Avantair
presently sources all of its aircraft from a single manufacturer, Piaggio
America, Inc. (“Piaggio”). As of December 31, 2010, Avantair had contractual
commitments to purchase 52 additional Piaggio Avanti II aircraft through 2013
with a mutual understanding that the aircraft delivery dates can be extended.
The total commitment, including a proposed price escalation, is valued at
approximately $330 million. The Company’s agreement with Piaggio permits it some
flexibility to defer a portion of the aircraft deliveries and the Company has
exercised this flexibility at certain times in order to take deliveries in line
with the Company’s sales expectations. Avantair believes that the pricing
structure afforded by utilizing the Piaggio Avanti allows Avantair to attract a
customer desiring quality at a lower price point. Offering the cabin cross
section of a mid-size aircraft and fuel efficiency of a turboprop, along with no
hourly fees, allows Avantair to lower the cost of private air travel for a
broader range of consumers.





The
Company’s primary sources of operating funds are the collection of management
and maintenance fees from fractional share owners as well as the sale of
fractional ownership shares, flight hour cards and, effective January 2009, Axis
Club Memberships. Revenue for the sales by product category can be found in the
accompanying Condensed Consolidated Statements of Operations for the three and
six months ended December 31, 2010. Sales by product category
follow:





Unit Sales for the Three Months
      EndedDecember 31,
                    2010
                  
                  
                  December 31,
                    2009
                  
                  
                  September 30,
                    2010
                  
                  
                  September 30,
                    2009New
      Fractional shares
                  
                  
                  6
                  
                  
                  
                  5
                  
                  
                  
                  3
                  
                  
                  
                  2Flight
      hour cards
                  
                  
                  162
                  
                  
                  
                  100
                  
                  
                  
                  104
                  
                  
                  
                  86Axis
      Club Memberships
                  
                  
                  14
                  
                  
                  
                  21
                  
                  
                  
                  11
                  
                  
                  
                  3





Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. At December 31, 2010, the
Company had 19.5 fractional aircraft shares available for sale. In addition to
the cost of acquiring aircraft, Avantair’s primary expenses are related to fuel,
aircraft repositioning (i.e., moving an aircraft to another location to
accommodate a customer’s need and for demonstration flights for sales purposes),
maintenance, charters and insurance. To finance its growth strategy, the Company
will continue to actively pursue additional funds through equity financing,
including the sale of additional shares of common and preferred stock, asset
sales, promotional sales incentives, accelerated payments of management and
maintenance fees, debt financing, or a combination thereof.


16


At
December 31, 2010 and June 30, 2010, Avantair had assets of approximately $114.8
million and $131.6 million, respectively. For the three and six months
ended December 31, 2010, the Company had revenue of approximately $36.6 million
and $72.4 million, respectively, and net losses of approximately $4.1 million
and $8.9 million, respectively. Avantair has incurred losses since inception and
may not be able to generate sufficient net revenue from its business in the
future to achieve or sustain profitability. At December 31, 2010, the Company
had approximately $3.9 million of unrestricted cash on hand and assuming there
is no change in recent sales and expense trends, the Company believes that its
cash position will be sufficient to continue operations for the foreseeable
future.





Critical
Accounting Policies and Estimates





As
discussed in our Form 10-K for the fiscal year ended June 30, 2010, the
discussion and analysis of our financial condition and results of operations are
based upon our condensed consolidated financial statements, which have been
prepared in conformity with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgments can be subjective and complex, and consequently, actual results could
differ from those estimates. The Company believes that of its significant
accounting policies, the following may involve a higher degree of judgment and
estimation. The judgments, or the methodology on which the judgments are made,
are reviewed with the Audit Committee.





Revenue
Recognition





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





Fractional
Aircraft Shares





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




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





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


17


Other
Revenues





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





Aircraft
Costs Related To Fractional Sales





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





Maintenance
Expense Policy





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





Stock-Based
Compensation





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





Income
Taxes





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





Goodwill
and Long-lived Assets





The Company accounts for
goodwill and other intangible assets under ASC 350"Intangibles
— Goodwill and Other." ASC 350eliminates 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.


18


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





Results
of Operations





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





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





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





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





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





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





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





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





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


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


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


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





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


19


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





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





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





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





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





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





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





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





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





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





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





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





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


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


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





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


20


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





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





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





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





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





Net loss
increased to $8.9 million for the six months ended December 31, 2010 compared to
$1.5 million for the six months ended December 31, 2009 due to the decrease in
income from operations partially offset by the decrease in total other expenses
discussed above.





Liquidity
and Capital Resources





Avantair’s
primary sources of liquidity have been cash provided by operations, cash raised
from its equity offering as Ardent Acquisition Corp., cash provided from its
debt facilities, cash raised in the preferred and common stock offerings, and
other asset-based borrowing. The Company uses its cash primarily to fund losses
from operations, deposits made on aircraft, leasehold improvements, and to fund
the purchase of core aircraft and aircraft which are to be fractionalized. Cash
generated from operations has not been sufficient to provide for all the working
capital needed to meet Avantair’s requirements. At December 31, 2010 and June
30, 2010, Avantair had a working capital deficit of approximately $51.5 million
and $43.9 million, respectively, and a stockholders’ deficit of approximately
$41.6 million and $32.2 million, respectively. As of December 31, 2010, cash and
cash equivalents amounted to approximately $3.9 million and total assets to
$114.8 million. The cash and cash equivalent balance decreased $5.5 million from
June 30, 2010 and total assets decreased $16.8 million. The decrease in cash and
cash equivalents occurred primarily as a result of the repayment of $2.2 million
of long-term debt and $5.8 million of short-term debt, including amounts that
had financed the remaining 3.5 fractional aircraft shares available for sale
under this Floor Plan Agreement, and expenditures related to the movement of the
Company’s routine maintenance schedule to accelerate the required fleet
maintenance to occur during the first and second quarters of fiscal year 2011 so
as to prepare for peak travel season and due to expenditures for the cost of
operations, including amounts accrued for at June 30, 2010, partially offset by
cash generated from operations and general timing differences in cash receipts
during the period. In addition, accounts receivable increased $4.4 million
primarily as a result of use of payment plans by purchasers of flight hour time
cards.





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





Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. At December 31, 2010, the
Company had 19.5 fractional aircraft shares available for sale. In addition to
the cost of acquiring aircraft, Avantair’s primary expenses are related to fuel,
aircraft repositioning (i.e., moving an aircraft to another location to
accommodate a customer’s need and for demonstration flights for sales purposes),
maintenance, charters and insurance. To finance its growth strategy, the Company
will continue to actively pursue additional funds through equity financing,
including the sale of additional shares of common and preferred stock, asset
sales, promotional sales incentives, accelerated payments of management and
maintenance fees, debt financing, or a combination thereof.





At
December 31, 2010 and June 30, 2010, Avantair had assets of approximately $114.8
million and $131.6 million, respectively. For the three and six months ended
December 31, 2010, the Company had revenue of approximately $36.6 million and
$72.4 million, respectively, and net losses of approximately $4.1 million and
$8.9 million, respectively. Avantair has incurred losses since inception and may
not be able to generate sufficient net revenue from its business in the future
to achieve or sustain profitability. At December 31, 2010, the Company had
approximately $3.9 million of unrestricted cash on hand and assuming there is no
change in sales and expense trends experienced since the fourth quarter of
fiscal 2010, the Company believes that its cash position will be sufficient to
continue operations for the foreseeable future.


21


Financing
Arrangements





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





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





Wells Fargo Equipment Finance,
Inc.:In February
2005, the Company entered into financing arrangements for the purchase of core
aircraft under various notes payable with Wells Fargo Equipment Finance, Inc.
The notes outstanding at December 31, 2010 totaled approximately $2.5 million
and are payable in monthly installments ranging from $10,644 to $38,480 with
interest ranging from 5.96% to 6.12% per annum through 2012. The notes are
collateralized by the aircraft.





Jet
Support Services, Inc.:On April 24, 2006,
Avantair financed an aircraft maintenance program contract with Jet Support
Services, Inc. (“JSSI”) in the amount of $3.4 million. The promissory note
provided for seven monthly installments of $145,867 and 53 monthly installments
of $45,867, respectively, including interest at 7.0% per year. On April 15,
2008, the Company entered into a financing arrangement with JSSI by means of a
$5.5 million promissory note. The new note matures on April 1, 2011 and bears
interest at 10.0% per annum, with 35 monthly payments of principal and interest
in an amount of $185,127 beginning on June 2, 2008. The new note covered the
remaining balance of $0.4 million of the aforementioned promissory note, other
costs and fees to be paid by the Company under service agreements with JSSI and
related deferred financing costs of approximately $1.0 million which will be
amortized over the life of the note using the effective interest method. Upon
entering into this payment arrangement and the $5.5 million promissory note, the
parties terminated the airframe maintenance contract and agreed to apply the
unamortized prepayment under the airframe maintenance contract to the engine
maintenance program and will amortize this amount over the remaining 35 month
term of that program.  Borrowings outstanding under this arrangement at
December 31, 2010 totaled approximately $0.7 million and have been included in
the current portion of long-term debt on the accompanying condensed consolidated
balance sheets.





Iberia
Bank:In August
2007, the Company and Iberia Bank (formerly Century Bank F.S.B.) executed a $2.2
million note agreement for the purchase of one aircraft. The note outstanding at
December 31, 2010 totaled approximately $1.7 million and is payable in monthly
installments of $27,175 with interest of 8.25% per annum through August 3, 2012.
The note is collateralized by the aircraft.





Wachovia
Bank:On October
31, 2007, the Company entered into a financing arrangement for the purchase of
one used aircraft at a total purchase price of approximately $4.5 million
(inclusive of the value of a flight hour card of 100 hours). Financing was
obtained from Wachovia through a note payable of $3.9 million. This debt will be
repaid monthly over 7 years at an interest rate of the LIBOR rate plus 4.0%.
Borrowings outstanding under this arrangement at December 31, 2010 totaled
approximately $1.8 million. In September 2009 and September 2010, the Company
received waivers of compliance for financial covenants in connection with the
note.





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





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





On
October 10, 2007, Avantair acquired a core aircraft under a capital lease
obligation with Midsouth.  Under the lease agreement, Midsouth provided
funding for the $4.7 million purchase of a pre-owned Piaggio P-180 aircraft and
holds title to the aircraft.  Midsouth leases the aircraft exclusively to
Avantair on a five year lease at 15.0% interest per annum.  The monthly
lease payments for the term of the lease are $89,000.  At the end of the
five year lease, Avantair shall purchase the aircraft from Midsouth at the
guaranteed residual value in the amount of approximately $2.3 million. 
Avantair also has the option to purchase the aircraft anytime during the lease
term at the then current guaranteed residual value as set forth on the
amortization schedule without penalty.  The obligation outstanding at
December 31, 2010 totaled approximately $3.5 million.





In April
2009, the Company amended a lease agreement previously accounted for as an
operating lease under ASC Topic 840“Leases,” dated as of July
31, 2006 between the Company and Midsouth. Pursuant to the amendment, the
Company is required to pay $74,900 monthly, at 11.0% interest per annum until
August 2011, the expiration of the Lease Agreement. In addition, the Company has
agreed to purchase the leased aircraft for approximately $3.0 million from
Midsouth within sixty days following the expiration of the term of the Lease
Agreement. The lease, as amended, has been classified as a capital lease in the
accompanying condensed consolidated balance sheets. The obligation outstanding
at December 31, 2010 totaled approximately $3.0 million, net of deferred
interest of $0.3 million.


22


In April
2009, the Company entered into a lease agreement, effective April 6, 2009,
pursuant to which Midsouth leases a Piaggio P-180 aircraft to the Company for a
ten year lease term at $75,000 per month, at 15.0% interest per annum, plus
taxes if applicable. The Company is required to provide Midsouth with 100 hours
of flight time per year during the lease term. Hours have been accounted for at
their fair value and are liquidated as hours are flown.  Midsouth has the
sole option to terminate the lease at the end of the fifth year of the term and
to require the Company to purchase the leased aircraft for approximately $3.8
million within ninety days of that date.  If this option is not exercised
by Midsouth, the lease will continue for the remaining five years of the term
and, at the end of the ten year lease, the Company will be required to purchase
the aircraft from Midsouth for $0.3 million. The obligation outstanding at
December 31, 2010 totaled approximately $4.6 million.





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





Off-Balance
Sheet Arrangements


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


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





Item
3. Quantitative and Qualitative Disclosures about Market Risk.





Quantitative
and Qualitative Disclosures about Market Risk





Avantair’s
primary exposure to market risk results from changes in interest rates. Avantair
does not enter into derivatives or other financial instruments for trading or
speculative purposes. Avantair has also not entered into financial instruments
to manage and reduce the impact of changes in interest rates and foreign
currency exchange rates, although Avantair may enter into such transactions in
the future.





Interest
Rate Risk


Avantair
is subject to market risk from exposure to changes in interest rates associated
with its debt facility with Wachovia Bank. The current liability, pursuant to
which Avantair is obligated to pay Wachovia Bank, has an interest rate that is
equal to the LIBOR rate plus 4.0%. At December 31, 2010, the liabilities of
Avantair with exposure to interest rate risk were approximately $1.9 million.
The Company has not
historically used derivative instruments to manage exposure to changes in
interest rates.





Item
4. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





As of
December 31, 2010, under the direction of the Chief Executive Officer and Chief
Financial Officer, the Company evaluated the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rule 13a —
15(e) under the Securities Exchange Act of 1934, as amended. Based on the
evaluation, it was concluded that, as of December 31, 2010, the Company’s
disclosure controls and procedures are effective at a reasonable assurance level
and are designed to ensure that the information required to be disclosed in SEC
reports is recorded, processed, summarized and reported within the time period
specified by the SEC’s rules and forms, and is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure.


23


Limitations
on the Effectiveness of Controls and Other Matters





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





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





Changes
to Internal Control over Financial Reporting





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





There has
been no change, other than those noted above, in the internal controls over
financial reporting during the three months ended December 31, 2010, that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.





CEO
and CFO Certifications





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


24


PART
II - OTHER INFORMATION





Item 1. Legal
Proceedings.





From time
to time, the Company is party to various legal proceedings in the normal course
of business. It is expected that these claims would be covered by insurance
subject to customary deductibles. Those claims, even if lacking merit, could
result in the expenditure of significant financial and managerial resources. As
of December 31, 2010, there were no legal proceedings which the Company would
anticipate having a material adverse effect on its financial position, results
of operations or cash flows.





Item 1A. Risk Factors.





There
have been no material changes from the risk factors as previously disclosed in
the Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2010.





Item 6. Exhibits.





See
exhibit index.


25


SIGNATURES





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





February
11, 2011





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


26


EXHIBIT
INDEX





Exhibit
                Number
              
              Description31.1
              
              Chief
      Executive Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a) of
      the Securities Exchange Act of 193431.2
              
              Chief
      Financial Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a) of
      the Securities Exchange Act of 193432.1
              
              Chief
      Executive Officer Certification pursuant to 18 U.S.C. Section
      135032.2
              
              Chief
      Financial Officer Certification pursuant to 18 U.S.C. Section
      1350


27