UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549









FORM
10-Q







(Mark
one)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the quarterly period ended December 31, 2008




or




 ̈
            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
      or other jurisdiction of
                  incorporation
      or organization)
                
                (I.R.S.
      Employer
                  Identification
      No.)




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.    Yes   x
    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
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
                    x




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




As of
February 13, 2009, there were 15,306,666 shares of the Registrant’s Common Stock
outstanding.












CERTAIN
DEFINITIONS





Unless
the context indicates otherwise, the terms “Avantair”, “the Company”, “Ardent”,
“we”, “our”, and “us” refer to Avantair, Inc. and, where appropriate, its
subsidiary, or its predecessor, Ardent Acquisition Corporation.





SPECIAL
NOTE 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;





(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
                                  2Condensed
      Consolidated Statements of Operations
                                  4Condensed
      Consolidated Statement of Changes in Stockholders’ Deficit
                                  5Condensed
      Consolidated Statements of Cash Flows
                                  6Notes
      to Condensed Consolidated Financial Statements
                                  8Item 2.
                                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                  18Item 3
                                  Quantitative
      and Qualitative Disclosures about Market Risk
                                  24Item 4T.
                                  Controls
      and Procedures
                                  24PART II OTHER
      INFORMATIONItem 1.
                                  Legal
      Proceedings.
                                  26Item 1A.
                                  Risk
      Factors.
                                  26Item 2.
                                  Unregistered
      Sales of Equity Securities and Use of Proceeds.
                                  26Item 4.
                                  Submission
      of Matters to a Vote of Security Holders.
                                  26Item 6.
                                  Exhibits
                                  26Signatures







PART
I - FINANCIAL INFORMATION
 
 Item
1. Financial Statements.
 
 AVANTAIR,
INC. AND SUBSIDIARIES
 Condensed
Consolidated Balance Sheets
 
 ASSETS
 
 December 31,
                            
                            
                            June 30,2008
                            
                            
                            2008(Unaudited)
                            
                            
                            (Note
      2)CURRENT
      ASSETSCash
      and cash equivalents
                            
                            $
                            7,813,042
                            
                            
                            $
                            19,149,777Accounts
      receivable, net of allowance for doubtful accounts of $137,435 atDecember 31, 2008 and $213,487 at June 30,
      2008
                            
                            
                            6,195,397
                            
                            
                            
                            5,692,809Inventory
                            
                            
                            248,757
                            
                            
                            
                            252,407Current
      portion of aircraft costs related to fractional sales
                            
                            
                            40,631,563
                            
                            
                            
                            40,417,203Current
      portion of notes receivable
                            
                            
                            596,074
                            
                            
                            
                            832,107Prepaid
      expenses and other current assets
                            
                            
                            1,424,054
                            
                            
                            
                            2,173,992Total
      current assets
                            
                            
                            56,908,887
                            
                            
                            
                            68,518,295Aircraft
      costs related to fractional share sales, net of current
      portion
                            
                            
                            80,774,234
                            
                            
                            
                            92,383,071Property
      and equipment, at cost, net of accumulated depreciation and amortization
      of $11,777,169 at December 31, 2008 and $8,989,277 at June 30,
      2008
                            
                            
                            23,764,125
                            
                            
                            
                            25,663,264OTHER
      ASSETSCash-
      restricted
                            
                            
                            2,842,550
                            
                            
                            
                            2,826,290Deposits
      on aircraft
                            
                            
                            10,307,813
                            
                            
                            
                            8,679,277Deferred
      maintenance on aircraft engines
                            
                            
                            1,595,620
                            
                            
                            
                            2,228,509Notes
      receivable-net of current portion
                            
                            
                            29,250
                            
                            
                            
                            1,008,223Goodwill
                            
                            
                            1,141,159
                            
                            
                            
                            1,141,159Other
      assets
                            
                            
                            1,801,850
                            
                            
                            
                            2,029,367Total
      other assets
                            
                            
                            17,718,242
                            
                            
                            
                            17,912,825Total
      assets
                            
                            $
                            179,165,488
                            
                            
                            $
                            204,477,455
 
 2
  
  AVANTAIR,
INC. AND SUBSIDIARIES
 Condensed
Consolidated Balance Sheets
 
 LIABILITIES AND
STOCKHOLDERS' DEFICIT
 
 December 31,
                          
                          
                          June 30,2008
                          
                          
                          2008(Unaudited)
                          
                          
                          (Note
      2)CURRENT
      LIABILITIESAccounts
      payable
                          
                          $
                          6,141,865
                          
                          
                          $
                          4,718,355Accrued
      liabilities
                          
                          
                          3,121,184
                          
                          
                          
                          5,528,472Customer
      deposits
                          
                          
                          1,319,951
                          
                          
                          
                          1,905,682Short-term
      notes payable
                          
                          
                          11,159,110
                          
                          
                          
                          15,775,260Current
      portion of long-term notes payable
                          
                          
                          11,049,155
                          
                          
                          
                          6,648,093Current
      portion of deferred revenue related to fractional aircraft share
      sales
                          
                          
                          48,018,165
                          
                          
                          
                          47,778,900Unearned
      management fee and charter card revenues
                          
                          
                          17,783,486
                          
                          
                          
                          16,316,044Total
      current liabilities
                          
                          
                          98,592,916
                          
                          
                          
                          98,670,806Long-term
      notes payable, net of current portion
                          
                          
                          16,231,379
                          
                          
                          
                          23,856,322Deferred
      revenue related to fractional aircraft share sales, net of current
      portion
                          
                          
                          84,606,358
                          
                          
                          
                          96,525,785Other
      liabilities
                          
                          
                          2,696,107
                          
                          
                          
                          2,636,730Total
      long-term liabilities
                          
                          
                          103,533,844
                          
                          
                          
                          123,018,837Total
      liabilities
                          
                          
                          202,126,760
                          
                          
                          
                          221,689,643COMMITMENTS
      AND CONTINGENCIESSeries
      A convertible preferred stock, $.0001 par value, authorized 300,000
      shares; 152,000 shares issuedand outstanding
                          
                          
                          14,484,164
                          
                          
                          
                          14,439,358STOCKHOLDERS'
      DEFICITPreferred
      stock, $.0001 par value, authorized 700,000 shares; none
      issued
                          
                          
                          -
                          
                          
                          
                          -Common
      stock, Class A, $.0001 par value, 75,000,000 shares authorized, 15,306,666
      shares issued and outstanding at December 31, 2008 and 15,286,792 shares
      issued and outstanding at June 30, 2008
                          
                          
                          1,531
                          
                          
                          
                          1,529Additional
      paid-in capital
                          
                          
                          44,740,325
                          
                          
                          
                          45,314,393Accumulated
      Deficit
                          
                          
                          (82,187,292
                          )
                          
                          
                          (76,967,468
                          )Total
      stockholders' deficit
                          
                          
                          (37,445,436
                          )
                          
                          
                          (31,651,546
                          )Total
      liabilities and stockholders' deficit
                          
                          $
                          179,165,488
                          
                          
                          $
                          204,477,455
 
 See
Notes to Condensed Consolidated Financial Statements.
 
 3
  
 
 AVANTAIR,
INC. AND SUBSIDIARIES
 Condensed
Consolidated Statements of Operations
 (Unaudited)
  Three Months Ended December 31,
                                                        
                                                        
                                                        Six Months Ended December 31,2008
                                                        
                                                        
                                                        2007
                                                        
                                                        
                                                        2008
                                                        
                                                        
                                                        2007RevenuesFractional
      aircraft sold
                                                        
                                                        $
                                                        14,372,747
                                                        
                                                        
                                                        $
                                                        10,646,457
                                                        
                                                        
                                                        $
                                                        26,866,462
                                                        
                                                        
                                                        $
                                                        20,450,250Maintenance
      and management fees
                                                        
                                                        
                                                        17,702,350
                                                        
                                                        
                                                        
                                                        14,148,217
                                                        
                                                        
                                                        
                                                        34,779,489
                                                        
                                                        
                                                        
                                                        27,122,813Charter
      card and demonstration revenue
                                                        
                                                        
                                                        2,125,787
                                                        
                                                        
                                                        
                                                        2,838,803
                                                        
                                                        
                                                        
                                                        4,492,012
                                                        
                                                        
                                                        
                                                        4,942,186FBO
      and other revenues
                                                        
                                                        
                                                        1,213,496
                                                        
                                                        
                                                        
                                                        996,788
                                                        
                                                        
                                                        
                                                        1,952,878
                                                        
                                                        
                                                        
                                                        1,769,516Total
      revenue
                                                        
                                                        
                                                        35,414,380
                                                        
                                                        
                                                        
                                                        28,630,265
                                                        
                                                        
                                                        
                                                        68,090,841
                                                        
                                                        
                                                        
                                                        54,284,765Operating
      expensesCost
      of fractional aircraft shares sold
                                                        
                                                        
                                                        12,323,154
                                                        
                                                        
                                                        
                                                        8,921,684
                                                        
                                                        
                                                        
                                                        22,928,177
                                                        
                                                        
                                                        
                                                        16,969,110Cost
      of flight operations
                                                        
                                                        
                                                        12,402,387
                                                        
                                                        
                                                        
                                                        13,389,081
                                                        
                                                        
                                                        
                                                        24,212,790
                                                        
                                                        
                                                        
                                                        25,486,596Cost
      of fuel
                                                        
                                                        
                                                        3,061,019
                                                        
                                                        
                                                        
                                                        3,915,240
                                                        
                                                        
                                                        
                                                        7,573,425
                                                        
                                                        
                                                        
                                                        7,606,661General
      and administrative expenses
                                                        
                                                        
                                                        5,828,778
                                                        
                                                        
                                                        
                                                        4,819,886
                                                        
                                                        
                                                        
                                                        11,489,545
                                                        
                                                        
                                                        
                                                        9,352,942Selling
      expenses
                                                        
                                                        
                                                        1,108,682
                                                        
                                                        
                                                        
                                                        1,389,470
                                                        
                                                        
                                                        
                                                        2,016,434
                                                        
                                                        
                                                        
                                                        2,413,326Depreciation
      and amortization
                                                        
                                                        
                                                        1,318,256
                                                        
                                                        
                                                        
                                                        984,673
                                                        
                                                        
                                                        
                                                        2,400,521
                                                        
                                                        
                                                        
                                                        1,746,113Total
      operating expenses
                                                        
                                                        
                                                        36,042,276
                                                        
                                                        
                                                        
                                                        33,420,034
                                                        
                                                        
                                                        
                                                        70,620,892
                                                        
                                                        
                                                        
                                                        63,574,748Loss
      from operations
                                                        
                                                        
                                                        (627,896
                                                        )
                                                        
                                                        
                                                        (4,789,769
                                                        )
                                                        
                                                        
                                                        (2,530,051
                                                        )
                                                        
                                                        
                                                        (9,289,983
                                                        )Other
      income (expenses)Interest
      income
                                                        
                                                        
                                                        38,404
                                                        
                                                        
                                                        
                                                        142,131
                                                        
                                                        
                                                        
                                                        25,909
                                                        
                                                        
                                                        
                                                        334,853Other
      income
                                                        
                                                        
                                                        300
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,500
                                                        
                                                        
                                                        
                                                        -Interest
      expense
                                                        
                                                        
                                                        (1,294,899
                                                        )
                                                        
                                                        
                                                        (664,625
                                                        )
                                                        
                                                        
                                                        (2,717,182
                                                        )
                                                        
                                                        
                                                        (1,149,831
                                                        )Total
      other expenses
                                                        
                                                        
                                                        (1,256,195
                                                        )
                                                        
                                                        
                                                        (522,494
                                                        )
                                                        
                                                        
                                                        (2,689,773
                                                        )
                                                        
                                                        
                                                        (814,978
                                                        )Net
      loss
                                                        
                                                        
                                                        (1,884,091
                                                        )
                                                        
                                                        
                                                        (5,312,263
                                                        )
                                                        
                                                        
                                                        (5,219,824
                                                        )
                                                        
                                                        
                                                        (10,104,961
                                                        )Preferred
      stock dividend and accretion of expenses
                                                        
                                                        
                                                        (372,104
                                                        )
                                                        
                                                        
                                                        (167,876
                                                        )
                                                        
                                                        
                                                        (763,617
                                                        )
                                                        
                                                        
                                                        (167,876
                                                        )Net
      loss attributable to common stockholders
                                                        
                                                        $
                                                        (2,256,195
                                                        )
                                                        
                                                        $
                                                        (5,480,139
                                                        )
                                                        
                                                        $
                                                        (5,983,441
                                                        )
                                                        
                                                        $
                                                        (10,272,837
                                                        )Loss
      per common share:Basic
      and diluted
                                                        
                                                        $
                                                        (0.15
                                                        )
                                                        
                                                        $
                                                        (0.36
                                                        )
                                                        
                                                        $
                                                        (0.39
                                                        )
                                                        
                                                        $
                                                        (0.67
                                                        )Weighted-
      average common shares outstanding:Basic
      and diluted
                                                        
                                                        
                                                        15,288,523
                                                        
                                                        
                                                        
                                                        15,220,817
                                                        
                                                        
                                                        
                                                        15,291,035
                                                        
                                                        
                                                        
                                                        15,220,817
 
 See
Notes to Condensed Consolidated Financial Statements.
 
 4
  
 
 AVANTAIR,
INC. AND SUBSIDIARIES
 Condensed
Consolidated Statement of Changes in Stockholders' Deficit
 Six
Months Ended December 31, 2008
 (Unaudited)
 
 Class A
                          
                          
                          Class B
                          
                          
                          Additional
                          
                          
                          
                          
                          
                          TotalCommon Stock
                          
                          
                          Common Stock
                          
                          
                          Paid-In
                          
                          
                          Accumulated
                          
                          
                          StockholdersShares
                          
                          
                          Amount
                          
                          
                          Shares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Deficit
                          
                          
                          DeficitBalance
      at June 30, 2008
                          
                          
                          15,286,792
                          
                          
                          $
                          1,529
                          
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          45,314,393
                          
                          
                          $
                          (76,967,468
                          )
                          
                          $
                          (31,651,546
                          )Expenses
      associated with registration of shares
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (1,865
                          )
                          
                          
                          
                          
                          
                          
                          (1,865
                          )Stock-based
      compensation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          191,416
                          
                          
                          
                          
                          
                          
                          
                          191,416Dividend
      on Series A convertible preferred stock and accretion of issuance
      costs
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (763,617
                          )
                          
                          
                          
                          
                          
                          
                          (763,617
                          )Issuance
      of shares in connection with vested restricted stock
                          
                          
                          19,874
                          
                          
                          
                          2
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (2
                          )
                          
                          
                          
                          
                          
                          
                          -Net
      loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (5,219,824
                          )
                          
                          
                          (5,219,824
                          )Balance
      at December 31, 2008
                          
                          
                          15,306,666
                          
                          
                          $
                          1,531
                          
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          44,740,325
                          
                          
                          $
                          (82,187,292
                          )
                          
                          $
                          (37,445,436
                          )
 
 See
Notes to Condensed Consolidated Financial Statements.
 
 5
  
  AVANTAIR,
INC. AND SUBSIDIARIES
 Condensed
Consolidated Statements of Cash Flows
 Six
Months Ended December 31, 2008 and 2007
 (Unaudited)
 2008
                                        
                                        
                                        2007OPERATING
      ACTIVITIES:Net
      loss
                                        
                                        $
                                        (5,219,824
                                        )
                                        
                                        $
                                        (10,104,961
                                        )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                        
                                        
                                        2,400,521
                                        
                                        
                                        
                                        1,746,113Stock-based
      compensation
                                        
                                        
                                        191,416
                                        
                                        
                                        
                                        231,275Bad
      debt recoveries
                                        
                                        
                                        (76,052
                                        )
                                        
                                        
                                        (119,478
                                        )Changes
      in operating assets and liabilities:Accounts
      receivable
                                        
                                        
                                        (426,536
                                        )
                                        
                                        
                                        (2,546,072
                                        )Inventory
                                        
                                        
                                        3,650
                                        
                                        
                                        
                                        88,560Deposits
      on aircraft
                                        
                                        
                                        (1,628,536
                                        )
                                        
                                        
                                        (2,063,434
                                        )Deferred
      maintenance agreement on aircraft engines
                                        
                                        
                                        632,889
                                        
                                        
                                        
                                        260,965Prepaid
      expenses and other current assets
                                        
                                        
                                        749,938
                                        
                                        
                                        
                                        15,091Notes
      receivable
                                        
                                        
                                        1,215,006
                                        
                                        
                                        
                                        362,018Aircraft
      costs related to fractional shares
                                        
                                        
                                        11,394,477
                                        
                                        
                                        
                                        (28,262,777
                                        )Other
      assets
                                        
                                        
                                        227,517
                                        
                                        
                                        
                                        (278,492
                                        )Accounts
      payable
                                        
                                        
                                        1,423,510
                                        
                                        
                                        
                                        2,741,818Accrued
      liabilities
                                        
                                        
                                        (3,126,099
                                        )
                                        
                                        
                                        (903,015
                                        )Unearned
      management fees and charter card revenue
                                        
                                        
                                        1,467,442
                                        
                                        
                                        
                                        3,665,812Cash-restricted
                                        
                                        
                                        (16,260
                                        )
                                        
                                        
                                        413,431Customer
      deposits
                                        
                                        
                                        (585,731
                                        )
                                        
                                        
                                        (105,079
                                        )Other
      liabilities
                                        
                                        
                                        59,377
                                        
                                        
                                        
                                        692,622Deferred
      revenue related to fractional aircraft share sales
                                        
                                        
                                        (11,680,162
                                        )
                                        
                                        
                                        10,389,751Net
      cash used in operating activities
                                        
                                        
                                        (2,993,457
                                        )
                                        
                                        
                                        (23,775,852
                                        )INVESTING
      ACTIVITIES:Capital
      expenditures
                                        
                                        
                                        (501,382
                                        )
                                        
                                        
                                        (2,693,322
                                        )Net
      cash used in investing activities
                                        
                                        
                                        (501,382
                                        )
                                        
                                        
                                        (2,693,322
                                        )FINANCING
      ACTIVITIES:Borrowings
      under long-term notes payable
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,200,000Borrowings
      under short term notes payable
                                        
                                        
                                        1,125,000
                                        
                                        
                                        
                                        5,067,791Principal
      payments on long-term notes payable
                                        
                                        
                                        (3,223,881
                                        )
                                        
                                        
                                        (4,318,838
                                        )Principal
      payments on short-term notes payable
                                        
                                        
                                        (5,741,150
                                        )
                                        
                                        
                                        -Proceeds
      from issuance of preferred stock-net
                                        
                                        
                                        -
                                        
                                        
                                        
                                        14,227,294Cost
      of stock redemption/registration
                                        
                                        
                                        (1,865
                                        )
                                        
                                        
                                        (341,321
                                        )Net
      cash (used in) provided by financing activities
                                        
                                        
                                        (7,841,896
                                        )
                                        
                                        
                                        16,834,926
 
 6
  
 AVANTAIR,
INC. AND SUBSIDIARIES
 Condensed
Consolidated Statements of Cash Flows
 Six
Months Ended December 31, 2008 and 2007
 (Unaudited)
 
 2008
                      
                      
                      2007Net
      decrease in cash and cash equivalents
                      
                      $
                      (11,336,735
                      )
                      
                      $
                      (9,634,248
                      )Cash
      and cash equivalents, beginning of the period
                      
                      
                      19,149,757
                      
                      
                      
                      12,577,468Cash
      and cash equivalents, end of the period
                      
                      $
                      7,813,042
                      
                      
                      $
                      2,943,220SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid (net of amounts capitalized)
                      
                      $
                      2,717,182
                      
                      
                      $
                      1,023,588SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCING AND INVESTING
    ACTIVITIESAccretion
      of Series A convertible preferred stock
                      
                      $
                      44,806
                      
                      
                      $
                      10,276Dividends
      payable on Series A convertible preferred stock
                      
                      $
                      718,811
                      
                      
                      $
                      157,600Aircraft
      purchased under capital lease obligation
                      
                      $
                      -
                      
                      
                      $
                      4,828,642Aircraft
      purchased under long-term notes payable
                      
                      $
                      -
                      
                      
                      $
                      3,906,900Charter
      card issued as partial consideration of aircraft purchase
                      
                      $
                      -
                      
                      
                      $
                      95,600
 
 See
Notes to Condensed Consolidated Financial Statements.
 
 7







AVANTAIR,
INC. AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





NOTE
1 - BUSINESS OPERATIONS




General




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





On
October 2, 2006, the Company signed a definitive stock purchase agreement
with Avantair, Inc. (“Old Avantair”). The agreement, as amended on
December 15, 2006, provided for Avantair to issue 6,684,822 shares of
common stock to the stockholders of Old Avantair in exchange for all of the
issued and outstanding shares of Old Avantair (the “Reverse Merger”). On
February 22, 2007, the stockholders of Avantair voted in favor of the
Reverse Merger. On February 22, 2007, upon the closing of the reverse
acquisition of Ardent Acquisition Corp., the Company received approximately
$36.3 million. For further details on this reverse acquisition, refer to the
audited consolidated financial statements and the notes thereto included in the
Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2008.




Avantair
is engaged in the sale and management of fractional ownerships of professionally
piloted aircraft for personal and business use. As of December 31, 2008,
Avantair operated 51 aircraft (which includes 5 core aircraft), with 58
additional Piaggio aircraft on order. Avantair operates fixed flight based
operations (FBO) in Camarillo, California and effective August 1, 2008, in
Caldwell, New Jersey. The Company also provides aircraft maintenance, concierge
and other services to customers and services to the Avantair fleet from hangars
and office locations in Clearwater, Florida, Camarillo, California and Caldwell,
New Jersey.




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 (“GAAP”) in
the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and
Exchange Commission. Accordingly, 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.  In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the information set forth therein have been included. Certain amounts in
the prior periods’ financial statements have been reclassified to conform to
current period presentation. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes included in the Annual Report on Form 10-K of
Avantair, Inc. (the “Company”) for the fiscal year ended June 30, 2008. The
interim condensed operating results are not necessarily indicative of the
results for a ful1 year or any interim period. The June 30, 2008 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, 2008.


8







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, 2008, the Company’s recurring losses resulted in an accumulated deficit of
approximately $82.2 million and a working capital deficiency of approximately
$41.7 million. Management currently estimates that income from operations before
depreciation and amortization sufficient to cover interest charges can be
achieved on a sustainable basis through either fully fractionalizing 48
aircraft, increasing the sale of charter cards to 150 on an annual basis (either
individually or through the Company’s Axis Membership Program), or a combination
thereof.  At December 31, 2008, the Company had 43.4 fractionalized
aircraft. For the six months ended December 31, 2008, the Company sold 80
charter cards, including 53 in the quarter ended December 31, 2008. Therefore,
Avantair’s primary growth strategy is to continue to increase the number of
fractional share owners and aircraft under management as well as increase the
number of charter cards sold. The Company believes income from operations before
depreciation and amortization is useful to investors as it excludes non-cash
expenses that do not directly relate to the operation of fractionalized
aircraft. This measure is a supplement to GAAP used to prepare the Company’s
condensed consolidated financial statements and should not be viewed as a
substitute for GAAP measures. In addition, the Company’s non-GAAP measure may
not be comparable to non-GAAP measures of other companies. Income from
operations according to GAAP would include depreciation and amortization
expense, estimated to be approximately $430,000 per month. In connection with
future financing of growth, the Company may obtain additional funds through
equity financing, including the sale of additional shares of common stock,
assets sales, accelerated payments of maintenance and management fees, debt
financing, or a combination thereof. The Company believes that its capital on
hand, as may be augmented by these means to fund future growth, is sufficient to
continue operations for the foreseeable future.




Use of Estimates




The
preparation of financial statements in conformity with GAAP requires management
to make certain estimates and assumptions that affect the amounts reported in
the 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 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 financial statements. Significant estimates and
assumptions by management affect: the proper recording of revenue arrangements
with multiple deliverables, the allowance for doubtful accounts, the carrying
value of long-lived assets, the amortization period of long-lived assets, the
provision for (benefit from) income taxes and related deferred tax accounts,
certain accrued expenses and contingencies, and ability to continue as a going
concern.





Revenue
Recognition




The
Company’s primary business is to sell fractional shares of aircraft and the
related maintenance and management services that accompany aircraft ownership.
The aircrafts are sold in 1/16th shares or multiples thereof. The purchase
agreement grants the customer the right to the use of the aircraft for a
specified number of hours each year the aircraft is in service. When a customer
purchases a fractional share, they are also required to enter into a five-year
management and maintenance agreement. Under the terms of the maintenance and
management agreement, the Company agrees to manage, operate and maintain the
aircraft on behalf of the customer in exchange for a fixed monthly
fee.




Fractional
Aircraft Shares




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


9









Management
and Maintenance Agreement




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





Charter
Card and Demonstration Revenue





Charter Card revenue. The
Company also sells access to its aircraft fleet through either a 15 or 25 hour
time 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.





Demonstration revenue. The
Company charges prospective new aircraft share owners on an hourly basis for
each hour the prospective share owners are flown to demonstrate the quality and
capabilities of the aircraft. The Company recognizes revenue related to these
demonstration flights when the flight is completed.




Prepaid
Pilot Training





The costs
related to the training of pilots as required by Federal Aeronautic Regulations
are capitalized and amortized over the twelve month certification period. These
costs were expensed in the year ended June 30, 2007 and prior years. This change
did not have a material impact on the Company’s financial position or results of
operation.




FBO
and Other Revenue





FBO and
other revenue are comprised primarily of revenue from the sale of fuel at the
Company’s FBO facilities and rental of hangar space at the Company’s operating
locations. This revenue is recorded when goods are delivered or services have
been rendered.





Aircraft
Costs Related To Fractional Sales




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





Maintenance
Policy




The
Company uses the direct method of accounting for scheduled non-refurbishment
maintenance checks. The refurbishment portion of the maintenance check is
capitalized since the interior of the aircraft is substantially refurbished and
the life of the aircraft is extended. The cost of refurbishment is amortized
over a three-year period. The direct method of accounting for overhaul costs is
also used and these costs are expensed as incurred.




Income
Taxes




Income
taxes are accounted for under the asset and liability method in accordance with
Statement of Financial Accounting Standards No. 109 (“SFAS No. 109”),“Accounting for Income
Taxes.”  Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is established to reduce
deferred tax assets to the amounts expected to be realized.


10




Effective
July 1, 2007, the Company adopted the provisions of the Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - An Interpretation of SFAS Statement No. 109” (“FIN 48”). FIN 48
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by taxing authorities.
The Company has identified its Federal tax return and State of Florida tax
return as “major” tax jurisdictions, as defined in FIN 48. The Company
evaluations were performed for tax years ended 2004, 2005, 2006, 2007 and 2008.
The Company believes that its income tax positions and deductions would be
sustained on audit and does not anticipate any adjustments that would result in
a material change to its consolidated financial position. The Company recognizes
accrued interest and penalties related to unrecognized tax benefits as income
tax expense.





Stock-Based
Compensation





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




The
Company accounts for share-based compensation to employees and directors in
accordance with SFAS 123(R)“Share-Based Payment,” which requires the recognition of compensation
expense for employee stock options and other share-based payments. Under SFAS
123(R), expense related to employee stock options and other share-based payments
is recognized over the relevant service period based on the fair value of each
stock option grant. In addition, the Company recognizes in its income statement
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,
while compensation expense for liability-based awards (those usually settled in
cash rather than stock) is measured to fair-value at each balance sheet date
until the award is settled.




Stock-based
compensation expense related to these plans, which is included in “General and
administrative” costs in the accompanying Condensed Consolidated Statements of
Operations, was $95,708 and $191,416 for the three and six months ended
December 31, 2008 and was $115,920 and $231,275 for the three and six months
ended December 31, 2007, 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, 2008 or for the comparable 2007
period. The Company made no stock option or restricted stock grants during the
three months ended December 31, 2008. As of December 31, 2008, the Company had
200,834 shares of restricted stock and 150,000 stock options outstanding. The
Company did not issue warrants during the three months ended December 31,
2008.





Loss
Per Share





Basic
loss per share is computed by dividing loss available to common stockholders by
the weighted average common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Since the effect of outstanding options and warrants is
antidilutive due to the losses incurred by the Company, they have been excluded
from the Company’s computation of net loss per share for all years presented. A
total of 14,415,167 share- equivalents of potentially dilutive securities were
excluded from the calculation of diluted loss per share for the three and six
months ended December 31, 2008 and were comprised of 14,146,000 warrants to
purchase one share of the Company’s common stock, 119,167 shares of restricted
stock and 150,000 outstanding options. The total number of share- equivalents of
potentially dilutive securities excluded from the calculation of diluted loss
per share for the three months ended December 31, 2007 was 14,510,000 which were
comprised of 14,146,000 warrants to purchase one share of the Company’s common
stock, 214,000 shares of restricted stock and 150,000 outstanding
options.





Fair
Value Measurements




Effective
July 1, 2008, the Company adopted the provisions of SFAS No. 157 (SFAS
157),“Fair Value
Measurements” and SFAS No. 159 (“SFAS 159”),“The Fair Value Option for
Financial Assets and Financial Liabilities — including an amendment to FASB
Statement No. 115.” SFAS 157, which defines fair value, establishes
a framework for measuring fair value in accordance with GAAP, and expands
disclosures about fair value measurements. SFAS 157 clarifies that fair value is
an exit price, representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants. SFAS 159 permits an entity to measure certain financial
assets and financial liabilities at fair value with changes in fair value
recognized in earnings each period. During the six months ended December 31,
2008, the Company has elected not to use the fair value option permitted under
SFAS 159 for any of its financial assets and financial liabilities that are not
already recorded at fair value.


11









Accounting for Derivative
Instruments





The
Company accounts for derivative instruments in accordance with SFAS
No. 133,“Accounting for
Derivative Instruments and Hedging Activities,”  (“SFAS 133”)
as amended, which establishes accounting and reporting standards for derivative
instruments and hedging activities, including certain derivative instruments
imbedded in other financial instruments or contracts. The Company also considers
the EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in, a Company’s Own Stock,” which provides criteria for
determining whether freestanding contracts that are settled in a company’s own
stock, including common stock warrants, should be designated as either an equity
instrument, an asset or as a liability under SFAS 133. The Company evaluates the
conversion feature embedded in its Series A Convertible Preferred Stock at each
reporting period based on the criteria of SFAS 133 and EITF 00-19 to determine
whether the conversion feature would be required to be bifurcated from the
Preferred Stock and accounted for separately as a derivative.  Based on
management’s evaluation, the embedded conversion feature did not require
bifurcation and derivative accounting as of December 31, 2008.





Reclassifications





Certain
balances for the three and six months ended December 31, 2007 were reclassified
to conform to classifications adopted in the current year.


12









Recently
Issued Pronouncements




In
December 2007, Financial Accounting Standards Board (the “FASB”) issued SFAS No.
141 (revised 2007),“Business
Combinations” (“SFAS 141”). SFAS 141 requires an acquirer to measure the
identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquiree at their fair values on the acquisition date, with
goodwill being the excess value over the net identifiable assets acquired. SFAS
141 also requires the fair value measurement of certain other assets and
liabilities related to the acquisition such as contingencies. SFAS 141 applies
prospectively to business combinations and is effective for fiscal years
beginning on or after December 15, 2008. The Company is currently evaluating the
impact of adopting the presentation and disclosure provisions of SFAS 141 on its
financial condition, results of operations and cash flows.





In
December 2007, the FASB issued SFAS No. 160,"Non-controlling Interests in
Consolidated Financial Statements" (“SFAS 160”). SFAS 160 requires that a
non-controlling interest in a subsidiary be reported as equity in the
consolidated financial statements. Consolidated net income should include the
net income for both the parent and the non-controlling interest with disclosure
of both amounts on the consolidated statement of income. The presentation
provisions of SFAS 160 are to be applied retrospectively, and SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008. The Company
is currently evaluating the impact of adopting the presentation and disclosure
provisions of SFAS 160 on its financial condition, results of operations and
cash flows.





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





In
April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3
(“FSP 142-3”),“Determination
of the Useful Life of Intangible Assets.”  FSP 142-3 amends
the factors an entity should consider in developing renewal or extension
assumptions used in determining the useful life of recognized intangible assets
under FASB Statement No. 142,“Goodwill and Other Intangible
Assets.”  This new guidance applies prospectively to intangible
assets that are acquired individually or with a group of other assets in
business combinations and asset acquisitions. FSP 142-3 is effective for fiscal
years and interim periods beginning after December 15, 2008.  The
Company is currently evaluating the impact that FSP 142-3 will have on its
financial condition, results of operations and cash flows.




In
May 2008, the FASB issued SFAS No. 162 (SFAS 162), “TheHierarchy of Generally Accepted
Accounting Principles”, which reorganizes the GAAP hierarchy. SFAS 162 is
intended to improve financial reporting by providing a consistent framework for
determining what accounting principles should be used in preparing U.S. GAAP
financial statements. With the issuance of SFAS 162, the FASB concluded that the
GAAP hierarchy should be directed toward the entity and not its auditor, and
reside in the accounting literature established by the FASB as opposed to the
American Institute of Certified Public Accountants (AICPA) Statement on
Auditing Standards No. 69, “TheMeaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles”. SFAS 162 will
become effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “TheMeaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles” and is not
expected to have any impact on the Company’s financial condition, results of
operations and cash flows.





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





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


13




NOTE 3 - COMMITMENTS AND
CONTINGENCIES
  Lease
Commitments
 
 The
Company conducts a major part of its operations from leased facilities, which
include aircraft hangars and administrative offices. The 15 year hangar lease in
Clearwater, Florida expiring in 2020 is classified as an operating lease. The
lease provided for rent allocation credits for the first three years. These
credits have been netted in rental expense on a straight line basis over the
term of the lease. The Company also has a 15 year lease for its fixed based
operation in Camarillo, California, expiring in 2021, which is classified as an
operating lease.
 
 Most of
the operating leases contain an option to renew at the then fair rental value
for periods of five to ten years. These options enable the Company to retain use
of facilities in desirable operating areas.
 
 Effective
August 1, 2008, Avantair, Inc. entered into a Lease Agreement (“Lease”) and
Operating Agreement for Fueling Service (“Fueling Agreement”) between Essex
County Improvement Authority (“ECIA”) and the Company. The Lease provides the
Company with a hangar located at the Essex County Airport in Caldwell, New
Jersey that is approximately 17,752 square feet, which includes hanger space,
shop space and office space. The Lease was month to month until it was approved
by the Essex County Board of Chosen Freeholders, and once the Lease was approved
in October 2008, the ECIA and the Company entered into a ten year lease term.
The annual rent for the Lease is $230,776, payable in monthly installments of
$19,231. The annual rent shall be adjusted on the first day of each new year of
the ten year lease term by adding the product of the current annual rent
multiplied by the percentage change of the CPI index not to exceed 4% for the
preceding 12 months. The Fueling Agreement shall be in force and effect while
the Company is in lawful possession of the property pursuant to the Lease, but
it shall not extend beyond the term of the Lease. The Lease and the Fueling
Agreement will allow the Company to operate a full service FBO at Essex County
Airport.
 
 Effective
August 4, 2008, the Company terminated the month- to- month lease agreement for
the principal property located at 155 Passaic Avenue, Fourth Floor, Fairfield,
New Jersey, which offered 100 square feet of office space.
 
 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 aircraft positions to Share 100 Holding Co., LLC, a
wholly-owned subsidiary of Avantair. On the same date, Avantair entered into a
membership interest purchase agreement with Executive Air Shares Corporation
(“EAS”), in which EAS purchased the Class A membership of Share 100 and Avantair
retained the Class B membership. EAS, as Class A member, has the rights and
obligations to purchase the Phenom 100 aircraft with positions one through
eighteen and to fund payment due in connection with these aircraft. EAS paid
Share 100 approximately $2.47 million in connection with these transactions and
made an additional $750,000 capital contribution to Share 100 on December 1,
2008, all of which was immediately distributed to Avantair. Avantair, as Class B
member, has the rights and obligations to purchase aircraft positions nineteen
and twenty and to fund payment due in connection with these aircraft. EAS has
the option to purchase aircraft nineteen and twenty, which must be exercised by
October 1, 2010; if exercised, EAS shall reimburse Avantair for all payments
made relative to these aircraft and provide all remaining funds required. In the
event that EAS does not exercise the option to purchase aircrafts nineteen and
twenty by October 1, 2010, Avantair will have the right and obligation to
purchase the nineteenth and twentieth aircraft.  If EAS defaults under its
obligations to purchase the aircraft positions, EAS will forfeit all deposits
paid for the undelivered aircraft, including the funds distributed to Avantair.
Avantair will then be responsible for the rights and obligations of the
remaining undelivered aircraft.  If Avantair defaults under its obligations
to purchase the last two aircraft positions, any deposits paid by Avantair in
connection with the undelivered Class B Aircraft will be forfeited.
 
 As of
December 31, 2008, the Company has agreed to purchase 58 additional Avanti II
P-180 aircraft from Piaggio America. The total commitment is approximately $338
million to be delivered through fiscal 2013.
 
 From time
to time, the Company may lease aircraft that require purchase commitments. See
also “Financing
Commitments.”
  14
 
 Financing Commitments- Short-term notes
payable
  CNM,
Inc.
 
 On
October 2, 2006, the Company and CNM, Inc. (“CNM”) and its principal
stockholders entered into a revolving credit agreement (the “Agreement”) that
provides for the Company to borrow $7,600,000 from CNM. This borrowing was
conditional on the execution of a definitive stock purchase agreement with a
public company, which occurred on October 2, 2006. The parties also agreed
that upon the completion of the stock purchase agreement and approval of the
proposed acquisition by the public company stockholders, the Company would repay
a minimum of $19,000,000 of the borrowings under the revolving credit agreement.
Per the terms of the Agreement, upon the completion of the Reverse Merger, the
Company repaid approximately $19,000,000 of the borrowings under the revolving
credit agreement with CNM.
 
 In
addition, upon the execution of the stock purchase agreement, the outstanding
balance after repayment of the $19,000,000, which may be no more than
$10,000,000, was to be converted into a term loan payable quarterly over three
years and bear interest at 10% per annum. The borrowings under the
arrangement were to be collateralized by a first priority lien and security
interest in all of the Company’s assets.
 
 Under the
agreement, the Company also has agreed to provide the principal stockholder of
CNM 100 hours of use of its aircraft over the three-year period. The fair value
of aircraft usage of approximately $200,000 was accrued and will be amortized to
interest expense over the term of the remaining debt under a method that will
produce a constant periodic rate of return. In the fiscal quarter ended December
31, 2008, CNM used approximately 17.4 hours at an internal cost of
$18,270.
 
 In August
2007, the Company and CNM executed a new note agreement which converted an
outstanding note obligation of approximately $7,000,000 into a term loan payable
monthly over three years and bearing interest at 10% per annum. CNM also
assumed a promissory note due to Wells Fargo Bank for $2,900,000 which was
included as part of this new note agreement. The Company accounted for this
conversion in accordance with EITF Issue No. 98-14, “Debtor’s Accounting
for Changes in Line-of-Credit or Revolving-Debt Arrangements.”
 
 Midsouth
Services, Inc.
 
 On
October 3, 2007, the Company entered into a floor plan agreement with Midsouth
Services, Inc. (“Midsouth”) which provides for up to approximately $5.1 million
of financing for aircraft to be acquired from Piaggio America, Inc., extended on
a month-to-month basis from April 2008 and repaid in July 2008. Effective March
3, 2008, the Company entered into a second floor plan agreement with Midsouth
that provides for up to $5.3 million of financing for aircraft to be acquired
from Piaggio America, Inc. for the six month period commencing with the first
delivery of aircraft under the plan. Each agreement requires a $75,000 monthly
facility fee with payment of any outstanding borrowings due in full prior to
taking delivery of additional aircraft. Midsouth also agreed, at the option of
the Company, to provide an additional loan in the amount of $5.3 million, with
terms and conditions of the additional loan substantially similar to the terms
of the March 2008 loan, upon expiration of the October 3, 2007 floor plan
agreement.
 
 In
addition, on July 31, 2008, Avantair, Inc. (the "Company") entered into two new
Floor Plan Finance Agreements (each, an “Agreement” and collectively "the
Agreements"), pursuant to which MidSouth has agreed to extend credit to the
Company in an amount not to exceed $5,345,000 under each Agreement ($10,690,000
in total for the Agreements), for an initial term of three months for each
Agreement. Indebtedness under the Agreements will be used by the Company to fund
the purchase of new Piaggio P-180 aircraft. The Company shall have the sole
option to renew the Agreements for three consecutive additional one month terms
at the expiration of the initial term. The effective dates of the two Agreements
are July 31, 2008, and August 1, 2008, respectively.  The Company has
agreed to pay to the Lender a monthly facility fee of $75,000 under each
Agreement. Borrowings outstanding under these arrangements at December 31, 2008
totaled approximately $10.5 million.
 
 In
connection with the entry into the Agreements, on July 31, 2008, the Company
terminated the prior Floor Plan Finance Agreements dated March 3, 2008 and
October 3, 2007 between the Company and Midsouth.
 
 On
November 18, 2008, the Company entered into an aircraft deposit agreement with
MidSouth, for a term of twelve months, which provides for up to approximately
$600,000 of financing for the payment to the aircraft manufacturer of deposits
on future deliveries. As consideration for providing the deposit for the
aircraft during the term of this agreement, the Company has agreed to pay
MidSouth a monthly transaction fee of $9,000 commencing December
2008.
  15
  Century Bank, F.S.B.
 
 On May
29, 2008 the Company entered into a Promissory Note (“Note”) with Century Bank,
F.S.B. (“Lender”), pursuant to which Lender agreed to provide financing to the
company in the amount of $5,200,000 to be used towards the purchase of a new
Piaggio P-180 aircraft. The Company paid the following fees for the Note: (1)
$37,500 on the effective date of the Note and (2) $75,000 on the 30th day of the
each month thereafter until repayment in full of the principal amount of the
Note (“Term”). The Principal amount of the Note was to be paid in
full within 120 days from the effective date of the Note. The Company was
to make partial payments to Lender in $325,000 increments upon the closing of
each fractional interest and Lender was to provide partial lien releases as to
the respective fractional interests sold. In July 2008, the Company repaid the
full amount of the Note with Century Bank, F.S.B. and paid a fee of $26,000,
constituting 0.5% of the principal balance.
  Financing
Commitments- Long-term notes payable
 
 Wells
Fargo Equipment Finance, Inc.
  In
February 2005, the Company entered into financing arrangements for the purchase
of three aircraft under various notes payable with Wells Fargo Equipment
Finance, Inc. In January 2008, the Company sold one of these aircraft and repaid
the outstanding balance on the related note payable. The notes outstanding at
December 31, 2008 in the amount of $3,293,756 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 provides for seven monthly installments of $145,867 and 53 monthly
installments of $45,867, including interest at 7% per year. On April 15, 2008,
the Company entered into a payment arrangement with JSSI by means of a $5.5
million promissory note. The note matures on April 1, 2011 and bears
interest at the rate of 10% per annum, with 35 monthly payments of
principal and interest in an amount of $185,127 beginning on June 2, 2008.
The note covers the balance of the aforementioned $3.4 million promissory note,
other costs and fees to be paid by the Company under service agreements with
JSSI and related deferred financing costs of approximately $1.0 million which
will be amortized over the life of the note using the effective interest method.
In connection with the parties entering into this payment arrangement and the
$5.5 million promissory note, the parties terminated the airframe maintenance
contract and have agreed to apply the unamortized prepayment under the airframe
maintenance contract to the engine maintenance program and will amortize this
amount over the remaining 37 month term of that program.
 
 In
addition, the Company entered into another payment arrangement with JSSI by
means of a $525,000 promissory note dated July 31, 2008 with five monthly
payments of $105,000 commencing August 1, 2008. The note constitutes payment of
the purchase of airframe parts inventory by the Company from JSSI. The Company
repaid the full amount of the term loan in December 2008.
  Bank
of America
 
 In
January 2007, the Company assumed a term loan totaling $2,290,640 from Bank of
America in connection with the acquisition of the outstanding interest in
Aircraft Support. The term loan provided for monthly installments of $9,550 plus
interest at LIBOR plus 2% through July 1, 2011. The Company repaid the full
amount of the term loan with the execution of a new note agreement with Century
Bank on August 2, 2007 detailed below.
 
 JMMS,
Inc.
 
 On
August 11, 2006, the Company entered into a sale and leaseback agreement
with JMMS, LLC. The lease transaction has been accounted for as a finance lease
under FASB Statement No. 13 “Accounting for Leases,” (SFAS
13) and provides for monthly payments of $39,500 through July 11, 2011. See
also Note 4 “Subsequent Events.”
 
 Century
Bank, F.S.B.
 
 In August
2007, the Company and Century Bank F.S.B executed a $2.2 million note agreement
for the purchase of one aircraft. The note outstanding at December 31, 2008 in
the amount of $2,018,302 is payable in monthly installments of $27,175 with
interest of 8.25% per annum, through July 1, 2011. The note is
collateralized by the aircraft.
  16
 
 Wachovia Bank
 
 On
October 31, 2007, the Company entered into a financing arrangement for the
purchase of one used aircraft at a total purchase price of approximately $4.5
million (inclusive of the value of a charter card of 100 hours). Financing was
obtained from Wachovia through a note payable of $3.9 million. This debt will be
repaid monthly over 7 years at an interest rate of the LIBOR rate plus
4.0%.
 
 Midsouth
Services, Inc.
 
 On
October 10, 2007, the Company entered into a sale and leaseback agreement with
Midsouth Services, Inc. The lease transaction has been accounted for as finance
lease under SFAS 13 and provides for monthly payments of $39,500 through October
1, 2021.
 
 NOTE
4 – SUBSEQUENT EVENTS
  Effective
January 1, 2009, the Company adopted the Avantair Leadership Deferred
Compensation Plan (“Deferred Compensation Plan”) approved by the Board of
Directors that provides specified benefits for a select group of management,
highly compensated employees, and non-employee Directors. The Deferred
Compensation Plan is a nonqualified, unfunded deferred compensation plan that is
intended to provide participants with supplemental retirement benefits
determined by the Company at its complete discretion (which amounts may vary by
participant and which are subject to a vesting requirement) and allow
participants to defer compensation in excess of the amounts permitted under the
Avantair Inc. 401(k) Profit Sharing Plan & Trust.
 
 On
January 9, 2009, the Company entered into a Promissory Note (“Note”) with
Century Bank, F.S.B. (“Lender”), pursuant to which Lender agreed to provide
financing to the company in the amount of $5,200,000 to be used towards the
purchase of a new Piaggio P-180 aircraft. The Company paid $37,500 on the
effective date of the Note and will pay $75,000 on the 30th day of the each
month thereafter until repayment in full of the principal amount of the Note
(“Term”). The Principal amount of the Note is to be paid in full within 120
days from the effective date of the Note. The Company was to make partial
payments to Lender in $325,000 increments upon the closing of each fractional
interest and Lender was to provide partial lien releases as to the respective
fractional interests sold.
 
 As a
component of the Company’s overall cost curtailment initiatives, in January
2009, a nationally recognized, accredited engine maintenance vendor replaced
another vendor (the former engine service vendor) in providing engine
maintenance service for certain Piaggio aircraft engines.  As a
result, the former engine service provider will reimburse the Company
approximately $1.1 million, which represents amounts paid by the Company where
the related services were not performed. In addition, the accompanying condensed
balance sheet includes a liability in the amount of $1.8 million to the former
engine service provider, which is no longer due as a result of this
termination.   The Company will record the transaction as a
reduction of cost of flight operations in the three and nine months ended March
31, 2009. Engine maintenance expense for service to be provided by the new
engine service vendor will be recognized as incurred.
 
 JMMS, LLC
notified the Company that it is terminating the sale and leaseback agreement
between the parties effective March 1, 2009, at which date, pursuant to the
agreement, the Company is required to purchase the aircraft at a cost of no more
than the $4.2 million. The Company is currently in negotiations to obtain
financing and pursuing alternative options relating to the JMMS termination.
However, there can be no assurance that such financing or alternative options
will be obtained. The lease transaction has been accounted for as a finance
lease under SFAS 13.
  17
 
 Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
 
 Overview
  Avantair
is engaged in the sale and management of fractional ownerships of professionally
piloted aircraft for personal and business use. According to AvData, Avantair is
the fifth largest company in the North American fractional aircraft industry. As
of December 31, 2008, Avantair operated 51 aircraft (which includes 5 core
aircraft) with 58 additional Piaggio Avanti II aircraft on order. Avantair
operates fixed flight based operations (FBO) in Camarillo, California and,
effective August 1, 2008 in Caldwell, New Jersey. The Company also provides
aircraft maintenance, concierge and other services to customers and services to
the Avantair fleet from hangars and office locations in Clearwater, Florida,
Camarillo, California and Caldwell, New Jersey.
  Avantair
generates revenues primarily through the sale of fractional ownership shares of
aircraft, by providing operations, maintenance and management services related
to these aircraft, and from the sale of charter cards providing either 15 or 25
hours of flight time per year of access to its aircraft fleet without the
requirement of purchasing fractional ownership shares. The Company markets and
sells fractional ownership interests to individuals and businesses with a
minimum share size of a 1/16th
ownership interest. Under maintenance and management agreements with fractional
owners, Avantair provides pilots, maintenance, fuel and hangar space for the
aircraft.
 
 In
response to the general economic downturn and the resulting growth of charter
card sales over fractional share sales industry-wide, in January 2009 Avantair
initiated the Axis Club Membership program.  This program is designed
to bridge the gap between the financial commitment of a fractional share and
charter cards.  This new product offers access to blocks of flight
hours for a three year membership fee of $75,000.  The program
requires Axis members to purchase a minimum of three blocks of 25 hours of
flight time for $80,000 or less, dependent upon the number of memberships
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.
 
 As a
relatively new Company, Avantair has expended funds necessary to establish the
operations and business infrastructure required of a fractional airline and has
not generated sufficient cash from operations to fund its growth. Therefore, the
Company has raised additional funds through equity offerings, debt financing and
the sale of assets to fund operations. In connection with future financing of
growth, and depending upon the Company’s generation of cash from operations, the
Company may obtain additional funds through equity financing, including the sale
of additional shares of common stock, assets sales, accelerated payments of
maintenance and management fees, debt financing, or a combination
thereof.
 
 Avantair
presently sources all of its aircraft from a single manufacturer, Piaggio
America, Inc. As of December 31, 2008, Avantair had contractual commitments to
purchase 58 additional Piaggio Avanti II aircraft through 2013 at wholesale
pricing for an aggregate of approximately $338 million from this manufacturer.
The Company has been able to defer aircraft deliveries to bring them
in line with sales expectations based upon existing economic conditions and the
contract provides flexibility to defer aircraft deliveries in the future. At
December 31, 2008, the Company had 22 fractional aircraft shares available for
sale. In addition to the cost of acquiring aircraft, Avantair’s primary expenses
have been related to fuel, aircraft repositioning (i.e., moving an aircraft to
another location to accommodate a customer’s need and demonstration flights for
sales purposes), maintenance, charters and insurance.
 
 As of
December 31, 2008, the Company achieved its goal of profitable income from
operations before depreciation and amortization. Management currently estimates
that income from operations before depreciation and amortization sufficient to
cover interest charges can be achieved on a sustainable basis through either
fully fractionalizing 48 aircraft, increasing the sale of charter cards to 150
on an annual basis (either individually or through the Company’s Axis Membership
Program), or a combination thereof.  At December 31, 2008, the Company
had 43.4 fractionalized aircraft. For the six months ended December 31, 2008,
the Company sold 80 charter cards, including 53 in the quarter ended December
31, 2008.  Therefore, Avantair’s primary growth strategy is to
continue to increase the number of fractional share owners and aircraft under
management as well as increase the number of charter cards sold. The Company
believes income from operations before depreciation and amortization is useful
to investors as it excludes non-cash expenses that do not directly relate to the
operation of fractionalized aircraft. This measure is a supplement to accounting
principles generally accepted in the United States of America (“GAAP”) used to
prepare the Company’s condensed consolidated financial statements and should not
be viewed as a substitute for GAAP measures. In addition, the Company’s non-GAAP
measure may not be comparable to non-GAAP measures of other companies. Income
from operations according to GAAP would include depreciation and amortization
expense, estimated to be approximately $430,000 per month. See also further
discussion at “Liquidity and Capital Resources” section
following.
  18
  Results of Operations
  Three Months Ended December
31, 2008 Compared with Three Months Ended December 31, 2007
  Revenues
for the three months ended December 31, 2008 were $35.4 million, an increase of
23.7% from $28.6 million for the three months ended December 31, 2007. This
increase was the result of a 35% increase in the revenue generated from the sale
of fractional aircraft shares to $14.4 million for the three months ended
December 31, 2008 from $10.6 million for the comparable 2007 period, an increase
of 25.1% in maintenance and management fees to $17.7 million for the three
months ended December 31, 2008 from $14.1 million for the comparable 2007
period, a decrease of 25.1% in charter card and demonstration revenue to $2.1
million for the for the three months ended December 31, 2008 from $2.8
million for the comparable 2007 period, and an increase of 21.7% in FBO and
other revenue to $1.2 million for the three months ended December 31, 2008 from
$1.0 million for the comparable 2007 period.
 
 Revenue
from the sale of fractional aircraft shares increased primarily due to an
increase in the average number of fractional shares sold through December 31,
2008 from fractional shares sold through December 31, 2007. The sale of
fractional shares during the quarter ended December 31, 2008, reflected the
results of enhanced sales initiatives, including an emphasis on a national
market, the marketing of the fuel efficiency of the Piaggio aircraft and the
cost value of an Avantair fractional share compared to light-jet fractional
shares of competitors.
 
 The
increase in revenue from maintenance and management fees is primarily due
to:
 
 ·
              an
      increase in the annual maintenance and management fee to $9,650 from
      $9,400 for new and renewing fractional share owners;
  and
 
 ·
              an
      increase in the number of fractional share
  owners.
 
 Charter
card revenue and demonstration revenue decreased $0.7 million primarily as a
result of a $0.4 million decrease in charter card revenue, despite an increase
in the charter card sales and a related $3.4 million increase in unearned
charter card revenue during the during the second quarter due to the timing of
charter card flight hour utilization by owners, and $0.3 million decrease in
demonstration revenue as a result of an increase in charter card sales where
demonstration flights are not customary and  the reduction in
fractional share sales activity during the three months ended December 31, 2008
from the comparable 2007 period.
 
 FBO and
other revenue increased 21.7% to $1.2 million for the three months ended
December 31, 2008 from $1.0 million for the comparable 2007 period primarily as
a result of increased maintenance services provided.
 
 Operating
expenses for the three months ended December 31, 2008 were 7.8% higher than the
three months ended December 31, 2007, with total operating expenses of $36
million compared to $33.4 million, respectively. The cost of fractional aircraft
shares sold increased to $12.3 million for the three months ended December 31,
2008 from $8.9 million for the three months ended December 31, 2007, due to an
increase in the average number of fractional shares sold through December 31,
2008 from fractional shares sold through December 31, 2007. The cost of flight
operations, together with the cost of fuel, decreased 10.6% to $15.5 million for
the three months ended December 31, 2008 from $17.3 million for the three months
ended December 31, 2007, primarily due to:
 
 ·
                a
      $0.9 million reduction in chartering expenses due to use of the Avantair's
      core aircraft to alleviate scheduling conflicts and use of enhanced flight
      optimization software and flight staff training;·
                a
      $0.3 million decrease in maintenance expense as a result of performing
      certain engine and airframe maintenance through internally maintained
      programs rather than through outsourced services; and·
                an
      8.5% decrease in the per gallon cost of fuel (as a result of Avantair
      negotiating lower fuel rates during the three months ended December 31,
      2008 and also due to the global decrease in fuel costs) coupled with
      improved aircraft
utility.
  19
 
 General
and administrative expenses increased 20.9% to $5.8 million for the three months
ended December 31, 2008 from $4.8 million for the three months ended December
31, 2007, primarily due to $0.8 million of increases comprised of payroll and
related benefits, system improvements and other expenses related to the
Company’s growth, as well as an increase of $0.2 million in legal and accounting
expenses primarily due to the write-off of the expenses incurred for the
withdrawn warrant offering that had been previously capitalized.
 
 Selling
expenses decreased 20.2% to $1.1 million for the three months ended December 31,
2008 from $1.4 million for the three months ended December 31, 2007 due to a
decrease of $0.3 million in marketing expenses as a result of a more directed
approach to marketing implemented during fiscal year 2009.
 
 Loss from
operations was $0.6 million for the three months ended December 31, 2008, a
decrease of 86.9% from $4.8 million for the three months ended December, 2007
for the reasons set forth above.
 
 Total
other expense was $1.3 million for the three months ended December 31, 2008
compared to $0.5 million for the three months ended December 31, 2007, primarily
due to an increase in interest expense of $0.5 million as a result of an
increase in floor plan borrowing agreements incurred to acquire aircraft and
$0.1 million of interest relating to the financing arrangements with Jet Support
Services, Inc.
 
 Net loss
decreased to $1.9 million for the three months ended December 31, 2008 compared
to $5.3 million for the three months ended December 31, 2007 due to the decrease
in loss from operations partially offset by the increase in total other expense
discussed above.
 
 Six Months Ended
December 31, 2008 Compared with Six Months Ended December 31,
2007
 
 Revenues
for the six months ended December 31, 2008 were $68.1 million, an increase of
25.4% from $54.3 million for the six months ended December 31, 2007. This
increase was the result of a 31.4% increase in the revenue generated from the
sale of fractional aircraft shares to $26.9 million for the six months ended
December 31, 2008 from $20.5 million for the comparable 2007 period, an increase
of 28.2% in maintenance and management fees to $34.8 million for the six months
ended December 31, 2008 from $27.1 million for the comparable 2007 period, a
decrease of 9.1% in charter card and demonstration revenue to $4.5 million for
the six months ended December 31, 2008 from $4.9 million for the comparable
2007 period, and an increase of 10.4% in FBO and other revenue to $2.0 million
for the six months ended December 31, 2008 from $1.8 million for the comparable
2007 period.
 
 Revenue
from the sale of fractional aircraft shares increased due to an increase in the
average number of fractional shares sold through December 31, 2008 from
fractional shares sold through December 31, 2007. The sale of fractional shares
during the six months ended December 31, 2008 reflected the results of enhanced
sales initiatives, including an emphasis on a national market, the marketing of
the fuel efficiency of the Piaggio aircraft and the cost value of an Avantair
fractional share compared to light-jet fractional shares of
competitors.
 
 Maintenance
and management fee revenue increased due to a an increase in the annual
maintenance and management fee to $9,650 from $9,400 for new and renewing
fractional share owners and the increase in the number of fractional shares
sold, as previously mentioned.
 
 Charter
card revenue and demonstration revenue decreased $0.5 million primarily as a
result of a $0.5 million decrease in demonstration revenue as a result of the
increase in charter card sales where demonstration flights are not customary and
the reduction in fractional share sales activity during the six months ended
December 31, 2008 from the comparable 2007 period.
 
 FBO and
other revenue were relatively consistent between the two periods due to
increased rent revenue offset by a decrease in remarketing and other
revenue.
  20
  
 Operating
expenses for the six months ended December 31, 2008 were 11.1% higher than the
six months ended December 31, 2007, with total operating expenses of $70.6
million compared to $63.6 million, respectively. The cost of fractional aircraft
shares sold increased to $22.9 million for the six months ended December 31,
2008 from $17.0 million for the six months ended December 31, 2007, due to an
increase in the average number of fractional shares sold through December 31,
2008 from fractional shares sold through December 31, 2007. The cost of flight
operations, together with the cost of fuel, decreased 4.0% to $31.8 million for
the six months ended December 31, 2008 from $33.1 million for the six months
ended December 31, 2007, primarily due to:
  ·
              a
      $2.5 million reduction in chartering expenses due to use of the Avantair's
      core aircraft to alleviate scheduling conflicts and use of enhanced flight
      optimization software and flight staff
training;
 
 ·
              a
      $0.3 million decrease in maintenance expense as a result of performing
      certain engine and airframe maintenance through internally maintained
      programs rather than through outsourced services;
  and
 
 ·
              the
      above were partially offset by an increase of $1.1 million in pilot
      expenses, including salaries and related pilot expenses, training, hotel
      expenses, pilot airfare and living expense due to an increase in pilot
      headcount for the six months ending December 31, 2008 over the comparable
      2007 period.
 
 General
and administrative expenses increased 22.8% to $11.5 million for the six months
ended December 31, 2008 from $9.4 million for the six months ended December 31,
2007, primarily due to $1.7 million of increases comprised of payroll and
related benefits, system improvements and other expenses related to the
Company’s growth, $0.2 million in legal and accounting expenses primarily due to
the write-off of the expenses incurred for the withdrawn warrant offering that
had been previously capitalized, as well as an increase of, $0.2 million in
aggregate increases related to fixed based operations including fuel, equipment
rental and hangar rent expense partially related to the addition of the new
fixed based operation in Caldwell, New Jersey which became effective August 1,
2008.
 
 Selling
expenses decreased 16.4% to $2.0 million for the six months ended December 31,
2008 from $2.4 million for the six months ended December, 2007 due to a decrease
of $0.4 million in marketing expenses as a result of a more directed approach to
marketing implemented during fiscal year 2009.
 
 Loss from
operations was $2.5 million for the six months ended December 31, 2008, a
decrease of 72.8% from $9.3 million for the six months ended December, 2007 for
the reasons set forth above.
 
 Total
other expense was $2.7 million for the six months ended December 31, 2008
compared to $0.8 million for the six months ended December 31, 2007, primarily
due to an increase in interest expense resulting from an increase in floor plan
borrowing agreements incurred to acquire aircraft, financing arrangements with
Jet Support Services, Inc., and the write-off of a private debt placement fee
against other expense in 2007.
 
 Net loss
decreased to $5.2 million for the six months ended December 31, 2008 compared to
$10.1 million for the six months ended December 31, 2007 due to the decrease in
loss from operations partially offset by the increase in total other expense
discussed above.
  21
 
 Liquidity and Capital
Resources
 
 Avantair’s
primary sources of liquidity have been cash provided by operations, cash raised
from its equity offering with Ardent Acquisition Corp., cash provided from its
debt facility with CNM, Inc., cash raised in the preferred stock offering, and
other asset based borrowing. The Company uses its cash primarily to fund losses
from operations, deposits made on fractional aircraft, leasehold improvements,
and the purchase of core aircraft and aircraft which are to be fractionalized
but which have not yet been pre-sold. Cash generated from operations has not
been sufficient to provide for all the working capital needed to meet Avantair’s
present requirements. At December 31, 2008 and June 30, 2008, Avantair had a
working capital deficit of approximately $41.7 million and $30.2 million,
respectively, and an accumulated deficit of approximately $82.2 million and
$77.0 million, respectively. As of December 31, 2008, cash and cash equivalents
amounted to approximately $7.8 million and total assets to $179.1 million. The
cash and cash equivalent balance decreased $11.3 million from June 30, 2008 and
total assets decreased $25.3 million. The decrease in cash and cash equivalents
occurred primarily as a result of repayment of approximately $5.2 million of
indebtedness incurred under floor plan financing of a fractionalized aircraft,
payment of $1.6 million for deposits on future aircraft deliveries, and $3.2
million repayment of debt, in addition to expenditures for the cost of
operations, including amounts accrued at June 30, 2008, insurance and capital
and leasehold improvements.
  Avantair’s
Axis Membership Program, designed to bridge the gap between the financial
commitment of a fractional share and charter cards, may require the Company to
acquire aircraft to satisfy the increased flight hour demands on its core
aircraft fleet if its core utility is strained.  However, there can be
no assurance that membership program sales will be sufficient to compensate for
a decrease in fractional share sales, or that financing of additional aircraft
acquired to service this program will be available.
 
 As of
December 31, 2008, the Company’s recurring losses resulted in an accumulated
deficit of approximately $82.2 million and a working capital deficiency of
approximately $41.7 million. Management currently estimates that income from
operations before depreciation and amortization sufficient to cover interest
charges can be achieved on a sustainable basis through either fully
fractionalizing 48 aircraft, increasing the sale of charter cards to 150 on an
annual basis (either individually or through the Company’s Axis Membership
Program), or a combination thereof.  At December 31, 2008, the Company
had 43.4 fractionalized aircraft. For the six months ended December 31, 2008,
the Company sold 80 charter cards, including 53 in the quarter ended December
31, 2008. Therefore, Avantair’s primary growth strategy is to continue to
increase the number of fractional share owners and aircraft under management as
well as increase the number of charter cards sold. The Company believes income
from operations before depreciation and amortization is useful to investors as
it excludes non-cash expenses that do not directly relate to the operation of
fractionalized aircraft. This measure is a supplement to accounting principles
generally accepted in the United States of America (“GAAP”) used to prepare the
Company’s condensed consolidated financial statements and should not be viewed
as a substitute for GAAP measures. In addition, the Company’s non-GAAP measure
may not be comparable to non-GAAP measures of other companies. Income from
operations according to GAAP would include depreciation and amortization
expense, estimated to be approximately $430,000 per month. In connection with
future financing of growth, the Company may obtain additional funds through
equity financing, including the sale of additional shares of common stock,
assets sales, accelerated payments of maintenance and management fees, debt
financing, or a combination thereof. The Company believes that its capital on
hand, as may be augmented by these means to fund future growth, is sufficient to
continue operations for the foreseeable future.
 
 The Company continuously reviews its
cost structure for means to optimize cash expenditures, such as by establishing
more favorable fuel arrangements with suppliers.As a
component of the Company’s overall cost curtailment initiatives, in January
2009, a nationally recognized, accredited engine maintenance vendor replaced
another vendor (the former engine service vendor) in providing engine
maintenance service for certain Piaggio aircraft engines.  As a
result, the former engine service provider will reimburse the Company
approximately $1.1 million, which represents amounts paid by the Company where
the related services were not performed. In addition, the accompanying condensed
balance sheet includes a liability in the amount of $1.8 million to the former
engine service provider, which is no longer due as a result of this
termination.   The Company will record the transaction as a
reduction of cost of flight operations in the three and nine months ended March
31, 2009.
 
 Financing
Arrangements
 
 Avantair’s
financing arrangements at December 31, 2008, are described below:
 
 Wells
Fargo Equipment Finance, Inc.: In February 2005, the Company entered into
financing arrangements for the purchase of three aircraft under various notes
payable with Wells Fargo Equipment Finance, Inc. In January 2008, the Company
sold one of these aircraft and repaid the outstanding balance on the related
note payable. The notes outstanding at December 31, 2008 in the amount of
$3,293,756 are payable in monthly installments ranging from $10,644 to $38,480
with interest ranging from 5.96% to 6.12% per annum, through 2012. The
notes are collateralized by the aircraft.
 
 CNM,
Inc.: In August 2007, the Company and CNM executed a new note agreement which
converted an outstanding note obligation of approximately $7,000,000 into a term
loan payable monthly over three years and bearing interest at 10% per
annum. CNM also assumed a promissory note due to Wells Fargo Bank for $2,900,000
which was included as part of this new note agreement.
  22
  
  Jet
Support Services, Inc.: On April 24, 2006, Avantair financed an aircraft
maintenance program contract with Jet Support Services, Inc. (“JSSI”) in the
amount of $3.4 million. The promissory note provides for seven monthly
installments of $145,867 and 53 monthly installments of $45,867, respectively,
including interest at 7% per year. On April 15, 2008, the Company entered into a
payment arrangement with JSSI by means of a $5.5 million promissory note. The
note matures on April 1, 2011 and bears interest at the rate of
10% per annum, with 35 monthly payments of principal and interest in an
amount of $185,127 beginning on June 2, 2008. The note covers the balance
of the aforementioned $3.4 million promissory note, other costs and fees to be
paid by the Company under service agreements with JSSI and related deferred
financing costs of approximately $1.0 million which will be amortized over the
life of the note using the effective interest method. In connection with the
parties entering into this payment arrangement and the $5.5 million promissory
note, the parties terminated the airframe maintenance contract and have agreed
to apply the unamortized prepayment under the airframe maintenance contract to
the engine maintenance program and will amortize this amount over the remaining
37 month term of that program.
 
 In
addition, the Company entered into another payment arrangement with JSSI by
means of a $525,000 promissory note dated July 31, 2008 with five monthly
payments of $105,000 commencing August 1, 2008. The note constitutes payment of
the purchase of airframe parts inventory by the Company from JSSI. The Company
repaid the full amount of the term loan in December 2008.
 
 Bank of
America, Inc.: In January 2007, the Company assumed a term loan totaling
$2,290,640 from Bank of America in connection with the acquisition of the
outstanding interest in Aircraft Support. The term loan provided for monthly
installments of $9,550 plus interest at LIBOR plus 2% through July 1, 2011.
The Company repaid the full amount of the term loan with the execution of a new
note agreement with Century Bank on August 2, 2007 as detailed
below.
 
 JMMS,
Inc.: On August 11, 2006, the Company entered into a sale and leaseback
agreement with JMMS, LLC (JMMS). The lease transaction has been accounted for as
finance lease under SFAS 13 and provides for monthly payments of $39,500 through
July 11, 2011.  JMMS notified the Company that it is terminating the
leaseback agreement effective March 1, 2009, at which date, pursuant to the
agreement, Avantair is required to purchase the aircraft at a cost of no more
than the $4.2 million price paid by JMMS.
 
 Century
Bank, F.S.B.: In August 2007, the Company and Century Bank F.S.B. executed a
$2.2 million note agreement for the purchase of one aircraft. The note
outstanding at December 31, 2008 in the amount of $2,018,302 is payable in
monthly installments of $27,175 with interest of 8.25% per annum, through
July 1, 2011. The note is collateralized by the aircraft.
 
 Wachovia
Bank: On October 31, 2007, the Company entered into a financing arrangement for
the purchase of one used aircraft at a total purchase price of approximately
$4.5 million (inclusive of the value of a charter card of 100 hours). Financing
was obtained from Wachovia through a note payable of $3.9 million. This debt
will be repaid monthly over 7 years at an interest rate of the LIBOR rate plus
4.0%.
 
 Midsouth
Services, Inc.: On October 10, 2007, the Company entered into a sale and
leaseback agreement with Midsouth Services, Inc. The lease transaction has been
accounted for as a finance lease under SFAS 13 and provides for monthly payments
of $39,500 through October 1, 2021.
 
 In
addition, on November 18, 2008, the Company entered into an aircraft deposit
agreement with MidSouth, for a term of twelve months, which provides for up to
approximately $600,000 of financing for the payment to the aircraft manufacturer
of deposits on future deliveries. As consideration for providing the deposit for
the aircraft during the term of this agreement, the Company has agreed to pay
MidSouth a monthly transaction fee of $9,000 commencing December
2008.
 
 For
additional information regarding these financing arrangements, see Note 3 to the
Company’s condensed consolidated financial statements.
  Off-Balance
Sheet Arrangements
 
 Avantair
has no off-balance sheet obligations nor guarantees and has not historically
used special purpose entities for any transactions.
  23
 
 Item 3. Quantitative and Qualitative
Disclosures about Market Risk.
 
 Quantitative
and Qualitative Disclosures about Market Risk
  Avantair
is exposed to various market risks, including changes in interest rates. Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as interest rates and foreign currency exchange rates. Avantair
does not enter into derivatives or other financial instruments for trading or
speculative purposes. Avantair has also not entered into financial instruments
to manage and reduce the impact of changes in interest rates and foreign
currency exchange rates, although Avantair may enter into such transactions in
the future.
 
 Interest
Rate Risk
  Avantair
is subject to market risk from exposure to changes in interest rates associated
with its debt facility with Wells Fargo Bank and its debt facility with Wachovia
Bank. The current liability, pursuant to which Avantair is obligated to pay
Wells Fargo Bank, has an interest rate that is 1.0% above prime. 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, 2008,
the liabilities of Avantair with exposure to interest rate risk were
approximately $3.2 million.
  Item
4T. Controls and Procedures.
  As of
December 31, 2008, under the direction of our Chief Executive Officer and Chief
Financial Officer, we 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. This evaluation included a
review of our disclosure controls and procedures to determine if they are
designed to provide reasonable assurance that the information required to be
disclosed in our SEC reports and 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 our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. We concluded that, as of December 31, 2008, our
disclosure controls and procedures were ineffective based on the material
weaknesses in our internal controls over financial reporting.
 
 Management
has made its evaluation of our disclosure controls and procedures as of December
31, 2008. Avantair is aware of the existence of a material weakness in the
design and operation of Avantair’s internal controls over financial reporting
that could adversely affect its ability to record, process, and report financial
information consistent with the assertions of management in the financial
statements and concludes that the internal controls are ineffective as of
December 31, 2008. A material weakness is defined as a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibilitythat a material
misstatement of the company's annual or interim financial statements will not be
prevented or detected on a timely basis.
 
 The
material weakness evaluation first began with the independent audit of the
fiscal years ended June 30, 2004, 2005, 2006 and 2007. The auditors' letter on
material weakness states the following:
 
 ·
              Avantair’s
      accounting files for fiscal 2004 were incomplete, which required
      significant modifications of accounting data for that
    period.
 
 ·
                Costs
      of fractional shares and revenue on certain contracts during the years
      ended June 30, 2006, 2005 and 2004 were not recognized properly due to
      errors made on the electronic worksheets for reporting this
      information.·
                There
      was an insufficient number of accounting staff with the appropriate level
      of knowledge, which contributed to errors and deficiencies in financial
      reporting and
disclosures.
  24
  
 During
fiscal 2008, Avantair:
 
 ·
              hired
      additional accounting personnel with the appropriate level of knowledge to
      properly record transactions in the general ledger and prepare financial
      statements in accordance with accounting principles generally accepted in
      the United States of America.
 
 ·
              and
      has engaged consultants who are assisting the Company in implementation of
      a new back-office accounting software package which will further improve
      the accounting process and related internal
  controls.
  In
fiscal 2009, Avantair intends to achieve sustainable compliance by building an
efficient infrastructure that enables repeatable and reliable actions. The
compliance infrastructure will entail a control framework which:
 
 ·
                will
      ensure that relevant information is identified and communicated in a
      timely manner.
  ·
              will
      develop policies and procedures that help ensure that actions identified
      to manage risk are executed and
timely.
  ·
                will
      determine whether internal controls are adequately designed, executed,
      effective and adaptive.
  ·
              will
      perform evaluations of internal and external factors that impact the
      organization’s performance.
 
 The
control conscience of the Company is a priority, and management intends to
increase due diligence in all areas. This due diligence will include a review of
internal controls, a formal cultural and environmental assessment of the
company, and training regarding the COSO framework and the internal control
requirements of Sarbanes-Oxley. The Company has taken steps beginning in fiscal
year 2009 by hiring a Director of Financial Reporting and Sarbanes Oxley
Compliance. The initial roles and responsibilities of the position
include:
 
 ·
                        assisting
      department management in understanding and documenting its existing
      business processes, risks and controls.·
                        assisting
      management with the development and documentation of its control
      objectives and related control activities.·
                        assisting
      management in assessing the effectiveness of its controls and provide
      recommendation for improvement.·
                        assisting
      management in deploying an internal control self-assessment
      process.·
                        assisting
      management with the adoption of technologies to support its documentation,
      evaluation and monitoring of controls.
 In
addition, during the first quarter of fiscal year 2009, the Company established
a Financial Reporting Committee (FRC) to assist in the oversight of (1) the
integrity of the Company's financial statements, (2) the Company's compliance
with legal and regulatory requirements and (3) the preparation and presentation
of the Company’s financial statements; accounting and financial reporting
principles; internal controls; and procedures designed to assure compliance with
accounting standards and applicable laws and regulations.
  The
committee will further assist by (1) making recommendations on reducing
unnecessary complexity in the Company’s financial reporting system and making
financial reports clearer and more understandable to investors, (2) examining
the Company’s financial reporting system in order to make recommendations
intended to increase the usefulness of financial information to financial
statement users, including employees, customers, vendors and investors, (3)
seeking to ensure that the provision of financial information by the company
complies with relevant accounting and related legal requirements, (4) ensuring
to the best of their knowledge that the Company's financial statements and
disclosures are complete and accurate and are in accordance with generally
accepted accounting or auditing principles and applicable laws, rules and
regulations.
  Because
Avantair has not completed its remediation plan, management has concluded that a
material weakness in the operation of our disclosure controls and procedures
exists and that controls are ineffective at December 31, 2008. Any failure to
effectively address a material weakness or other control deficiency of Avantair
or implement required new or improved controls, or difficulties encountered in
their implementation, could disrupt Avantair’s ability to process key components
of its results of operations and financial condition timely and accurately and
cause Avantair to fail to meet its reporting obligations under rules of the
Securities and Exchange Commission.
  There has
been no change in the our internal control over financial reporting during the
fiscal quarter ended December 31, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
  25
  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 involving principally commercial charter party disputes. It is
expected that these claims would be covered by insurance if they involve
liabilities that arise from collision, other casualty, death or personal
injuries to crew, subject to customary deductibles. Those claims, even if
lacking merit, could result in the expenditure of significant financial and
managerial resources. At December 31, 2008, there were no legal proceedings
which outside counsel anticipates would have a material adverse effect on the
Company’s 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,
2008.
 
 Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds.
 
 Effective
August 1, 2008, 2,951,457 shares of common stock underlying the Company's Series
A Convertible Preferred Stock were registered and are freely tradable pursuant
to the declaration of the Company’s Registration Statement on Form S-1 (No.
333-152036) filed by the Company on June 30, 2008.
 
 In
addition, on June 17, 2008, the Company filed with the Securities and Exchange
Commission a post-effective amendment on Form S-3 to the Company’s Registration
Statement on Form S-1 (No. 333-121028). Upon effectiveness of the amendment, the
registration statement was available for the issuance of shares of common stock
upon exercise of the Company’s outstanding publically traded
warrants.
 
 On
November 14, 2008, the Company commenced a warrant retirement program, which
offered the holders of its 13,800,000 publically traded warrants the opportunity
to exercise those warrants on an amended term for a limited time. The Company
modified the 13,800,000 warrants to reduce the per-share exercise price from
$5.00 to $2.75. In addition, for each warrant exercised by a holder at the
reduced exercise price, the holder would have had the option to engage in a
cashless exercise by exchanging ten additional warrants for one additional share
of common stock. Warrants tendered for cashless exercise may only be tendered in
groups of ten and no fractional shares were to be issued for odd lots of nine or
less. Pursuant to a tender offer that expired on December 12, 2008, the Company
announced the completion of the warrant retirement program. Under the tender
offer, no warrants were exercised and the Company decided not to extend the
offer. The original terms of the warrants are now reinstituted and the warrants
will expire on February 23, 2009, unless earlier redeemed according to their
original terms.
  Item 4. Submission of Matters to a Vote of
Security Holders.
 
 No
matters were submitted to a vote of our security holders through the
solicitation of proxies or otherwise during the quarter ended December 31,
2008.
  Item 6. Exhibits.
 
 See
exhibit index.
  26
  SIGNATURES
 
 Pursuant
to the requirements 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
13, 2009
 
 Avantair,
      Inc.By:
                    /s/
      Steven SantoSteven
      SantoChief
      Executive
Officer
  
  
  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