UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549










FORM 10-Q









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




For
the quarterly period ended: September 30, 2009





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




For
the transition period from
to




Commission
File Number 000-51115










Avantair, Inc.


(Exact
Name of registrant as specified in its charter)









Delaware
            
            20-1635240(State
      of Incorporation)
            
            (I.R.S.
      Employer I.D. Number)




4311
General Howard Drive


Clearwater,
Florida 33762


(Address
of principal executive offices) (Zip code)





(727)
539- 0071


(Registrant’s
Telephone Number, Including Area Code)







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





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





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





Large
Accelerated Filer  ̈     Accelerated
Filer   ̈


Non-Accelerated
Filer  ̈  
Smaller Reporting Company  þ





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




As of
November 15, 2009, there were 28,627,916 shares of the Company’s common stock,
$.0001 par value per share, outstanding.





CERTAIN
DEFINITIONS





Unless
the context indicates otherwise, the terms “Avantair”, “the Company”, “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
                                    
                                    
                                    1Condensed
      Consolidated Statements of Operations
                                    
                                    
                                    3Condensed
      Consolidated Statements of Changes in Stockholders’
Deficit
                                    
                                    
                                    4Condensed
      Consolidated Statements of Cash Flows
                                    
                                    
                                    5Notes
      to Condensed Consolidated Financial Statements
                                    
                                    
                                    7Item 2.
                                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                    
                                    
                                    16Item 3
                                    Quantitative
      and Qualitative Disclosures about Market Risk
                                    
                                    
                                    21Item 4T.
                                    Controls
      and Procedures
                                    
                                    
                                    21PART II OTHER
      INFORMATIONItem 1.
                                    Legal
      Proceedings.
                                    
                                    
                                    22Item 1A.
                                    Risk
      Factors.
                                    
                                    
                                    22Item 2.
                                    Unregistered
      Sales of Equity Securities and Use of Proceeds.
                                    
                                    
                                    22Item 4.
                                    Submission
      of Matters to a Vote of Security Holders.
                                    
                                    
                                    22Item 6.
                                    Exhibits
                                    
                                    
                                    22Signatures
                                    
                                    
                                    23


i


PART
I





Item
1. Financial Statements.




AVANTAIR,
INC. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets





September 30,
                                    
                                    
                                    June 30,2009
                                    
                                    
                                    2009(Unaudited)
                                    
                                    
                                    (Note 2)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                    
                                    $
                                    5,055,746
                                    
                                    
                                    $
                                    3,773,789Accounts
      receivable, net of allowance for doubtful accounts of $231,559 at
      September 30, 2009 and $187,842 at June 30, 2009
                                    
                                    
                                    6,235,907
                                    
                                    
                                    
                                    5,711,055Inventory
                                    
                                    
                                    119,875
                                    
                                    
                                    
                                    140,997Current
      portion of aircraft costs related to fractional share
sales
                                    
                                    
                                    34,829,890
                                    
                                    
                                    
                                    36,910,206Notes
      receivable
                                    
                                    
                                    158,133
                                    
                                    
                                    
                                    272,731Prepaid
      expenses and other current assets
                                    
                                    
                                    1,228,475
                                    
                                    
                                    
                                    1,278,506Total
      current assets
                                    
                                    
                                    47,628,026
                                    
                                    
                                    
                                    48,087,284Aircraft
      costs related to fractional share sales, net of current
      portion
                                    
                                    
                                    62,166,794
                                    
                                    
                                    
                                    70,199,786Property
      and equipment, at cost, net of accumulated depreciation and amortization
      of $13,938,803 at September 30, 2009 and $11,695,228 at June 30,
      2009
                                    
                                    
                                    28,617,517
                                    
                                    
                                    
                                    29,842,365OTHER
      ASSETSCash
      - restricted
                                    
                                    
                                    2,354,665
                                    
                                    
                                    
                                    2,352,337Deposits
      on aircraft
                                    
                                    
                                    10,468,616
                                    
                                    
                                    
                                    9,264,890Deferred
      maintenance on aircraft engines
                                    
                                    
                                    1,039,685
                                    
                                    
                                    
                                    1,538,175Goodwill
                                    
                                    
                                    1,141,159
                                    
                                    
                                    
                                    1,141,159Other
      assets
                                    
                                    
                                    1,781,350
                                    
                                    
                                    
                                    1,639,407Total
      other assets
                                    
                                    
                                    16,785,475
                                    
                                    
                                    
                                    15,935,968Total
      assets
                                    
                                    $
                                    155,197,812
                                    
                                    
                                    $
                                    164,065,403




See
Notes to Condensed Consolidated Financial Statements.


1


AVANTAIR,
INC. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets





September 30,
                                      
                                      
                                      June 30,2009
                                      
                                      
                                      2009(Unaudited)
                                      
                                      
                                      (Note 2)LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIESAccounts
      payable
                                      
                                      $
                                      5,640,012
                                      
                                      
                                      $
                                      7,307,320Accrued
      liabilities
                                      
                                      
                                      5,671,418
                                      
                                      
                                      
                                      5,010,745Customer
      deposits
                                      
                                      
                                      1,824,978
                                      
                                      
                                      
                                      1,282,936Short-term
      debt
                                      
                                      
                                      11,500,000
                                      
                                      
                                      
                                      11,500,000Current
      portion of long-term debt
                                      
                                      
                                      10,266,419
                                      
                                      
                                      
                                      11,020,590Current
      portion of deferred revenue related to fractional aircraft share
      sales
                                      
                                      
                                      40,606,022
                                      
                                      
                                      
                                      43,385,779Unearned
      management fees and flight hour card revenues
                                      
                                      
                                      24,035,399
                                      
                                      
                                      
                                      17,807,796Total
      current liabilities
                                      
                                      
                                      99,544,248
                                      
                                      
                                      
                                      97,315,166Long-term
      debt, net of current portion
                                      
                                      
                                      18,400,719
                                      
                                      
                                      
                                      20,111,011Deferred
      revenue related to fractional aircraft share sales, net of current
      portion
                                      
                                      
                                      56,702,118
                                      
                                      
                                      
                                      65,071,197Other
      liabilities
                                      
                                      
                                      3,198,883
                                      
                                      
                                      
                                      3,047,329Total
      long-term liabilities
                                      
                                      
                                      78,301,720
                                      
                                      
                                      
                                      88,229,537Total
      liabilities
                                      
                                      
                                      177,845,968
                                      
                                      
                                      
                                      185,544,703COMMITMENTS
      AND CONTINGENCIESSeries
      A convertible preferred stock $.0001 par value, authorized 300,000 shares;
      152,000 shares issued and outstanding
                                      
                                      
                                      14,550,907
                                      
                                      
                                      
                                      14,528,383STOCKHOLDERS'
      DEFICITPreferred
      stock, $.0001 par value, authorized 700,000 shares; none
      issued
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Common
      stock, Class A, $.0001 par value, 75,000,000 shares authorized, 16,977,642
      shares issued and outstanding at September 30, 2009 and 16,463,615 shares
      issued and outstanding at June 30, 2009
                                      
                                      
                                      1,697
                                      
                                      
                                      
                                      1,646Additional
      paid-in capital
                                      
                                      
                                      48,222,616
                                      
                                      
                                      
                                      47,667,493Accumulated
      deficit
                                      
                                      
                                      (85,423,376
                                      )
                                      
                                      
                                      (83,676,822
                                      )Total
      stockholders' deficit
                                      
                                      
                                      (37,199,063
                                      )
                                      
                                      
                                      (36,007,683
                                      )Total
      liabilities and stockholders' deficit
                                      
                                      $
                                      155,197,812
                                      
                                      
                                      $
                                      164,065,403




See
Notes to Condensed Consolidated Financial Statements.


2


AVANTAIR,
INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Operations


Three
Months Ended September 30, 2009 and 2008


(Unaudited)




2009
                                              
                                              
                                              2008RevenueFractional
      aircraft sold
                                              
                                              $
                                              11,978,836
                                              
                                              
                                              $
                                              12,493,716Maintenance
      and management fees
                                              
                                              
                                              17,974,569
                                              
                                              
                                              
                                              17,077,139Flight
      hour card and Axis Club Membership revenue
                                              
                                              
                                              3,858,470
                                              
                                              
                                              
                                              1,844,126Other
      revenue
                                              
                                              
                                              1,393,009
                                              
                                              
                                              
                                              1,261,480Total
      revenue
                                              
                                              
                                              35,204,884
                                              
                                              
                                              
                                              32,676,461Operating
      expensesCost
      of fractional aircraft shares sold
                                              
                                              
                                              10,200,603
                                              
                                              
                                              
                                              10,605,023Cost
      of flight operations
                                              
                                              
                                              12,420,238
                                              
                                              
                                              
                                              11,810,384Cost
      of fuel
                                              
                                              
                                              3,638,902
                                              
                                              
                                              
                                              4,512,406General
      and administrative expenses
                                              
                                              
                                              6,252,381
                                              
                                              
                                              
                                              5,660,787Selling
      expenses
                                              
                                              
                                              985,765
                                              
                                              
                                              
                                              907,751Depreciation
      and amortization
                                              
                                              
                                              1,457,917
                                              
                                              
                                              
                                              1,082,265Total
      operating expenses
                                              
                                              
                                              34,955,806
                                              
                                              
                                              
                                              34,578,616Income
      (loss) from operations
                                              
                                              
                                              249,078
                                              
                                              
                                              
                                              (1,902,155
                                              )Other
      income (expenses)Other
      income
                                              
                                              
                                              2,250
                                              
                                              
                                              
                                              1,200Interest
      income
                                              
                                              
                                              5,163
                                              
                                              
                                              
                                              24,703Interest
      expense
                                              
                                              
                                              (1,623,454
                                              )
                                              
                                              
                                              (1,459,481
                                              )Total
      other expenses
                                              
                                              
                                              (1,616,041
                                              )
                                              
                                              
                                              (1,433,578
                                              )Net
      loss
                                              
                                              
                                              (1,366,963
                                              )
                                              
                                              
                                              (3,335,733
                                              )Preferred
      stock dividend and accretion of expenses
                                              
                                              
                                              (402,115
                                              )
                                              
                                              
                                              (391,513
                                              )Net
      loss attributable to common stockholders
                                              
                                              $
                                              (1,769,078
                                              )
                                              
                                              $
                                              (3,727,246
                                              )Loss
      per common share:Basic
      and diluted
                                              
                                              $
                                              (0.11
                                              )
                                              
                                              $
                                              (0.24
                                              )Weighted-
      average common shares outstanding:Basic
      and diluted
                                              
                                              
                                              16,468,122
                                              
                                              
                                              
                                              15,287,694




See
Notes to Condensed Consolidated Financial Statements.


3


AVANTAIR,
INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Changes in Stockholders’ Deficit


Three
Months Ended September 30, 2009


(Unaudited)




Class A
                                
                                
                                Class B
                                
                                
                                Additional
                                
                                
                                
                                
                                
                                TotalCommon Stock
                                
                                
                                Common Stock
                                
                                
                                Paid-In
                                
                                
                                Accumulated
                                
                                
                                Stockholders'Shares
                                
                                
                                Amount
                                
                                
                                Shares
                                
                                
                                Amount
                                
                                
                                Capital
                                
                                
                                Deficit
                                
                                
                                DeficitBalance
      at June 30, 2009
                                
                                
                                16,463,615
                                
                                
                                $
                                1,646
                                
                                
                                
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                47,667,493
                                
                                
                                $
                                (83,676,822
                                )
                                
                                $
                                (36,007,683
                                )Expenses
      associated with registration of shares
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (97,321
                                )
                                
                                
                                
                                
                                
                                
                                (97,321
                                )Stock-based
      compensation
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                91,700
                                
                                
                                
                                
                                
                                
                                
                                91,700Dividend
      on Series A convertible preferred stock
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (379,591
                                )
                                
                                
                                (379,591
                                )Accretion
      of issuance costs on Series A convertible preferred stock
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (22,524
                                )
                                
                                
                                
                                
                                
                                
                                (22,524
                                )Issuance
      of shares in connection with vested restricted stock, net of shares
      surrendered in lieu of payroll taxes
                                
                                
                                14,027
                                
                                
                                
                                1
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (4,932
                                )
                                
                                
                                
                                
                                
                                
                                (4,931
                                )Sale
      of common stock in connection with private sale
                                
                                
                                500,000
                                
                                
                                
                                50
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                588,200
                                
                                
                                
                                
                                
                                
                                
                                588,250Net
      loss
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (1,366,963
                                )
                                
                                
                                (1,366,963
                                )Balance
      at September 30, 2009
                                
                                
                                16,977,642
                                
                                
                                $
                                1,697
                                
                                
                                
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                48,222,616
                                
                                
                                $
                                (85,423,376
                                )
                                
                                $
                                (37,199,063
                                )




See
Notes to Condensed Consolidated Financial Statements.


4


AVANTAIR,
INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Cash Flows


Three
Months Ended September 30, 2009 and 2008


(Unaudited)





2009
                                
                                
                                2008OPERATING
      ACTIVITIES:Net
      loss
                                
                                $
                                (1,366,963
                                )
                                
                                $
                                (3,335,733
                                )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                                
                                
                                1,457,917
                                
                                
                                
                                1,082,265Amortization
      of deferred interest related to capital lease obligation
                                
                                
                                92,873Stock-based
      compensation
                                
                                
                                91,700
                                
                                
                                
                                95,708Provision
      for uncollectible accounts
                                
                                
                                43,717
                                
                                
                                
                                -Changes
      in operating assets and liabilities:Accounts
      receivable
                                
                                
                                (568,569
                                )
                                
                                
                                (4,907,060
                                )Inventory
                                
                                
                                21,122
                                
                                
                                
                                54,347Deposits
      on aircraft
                                
                                
                                (1,203,726
                                )
                                
                                
                                (928,496
                                )Deferred
      maintenance agreement on aircraft engines
                                
                                
                                498,490
                                
                                
                                
                                201,306Prepaid
      expenses and other current assets
                                
                                
                                50,031
                                
                                
                                
                                147,562Notes
      receivable
                                
                                
                                114,598
                                
                                
                                
                                84,020Aircraft
      costs related to fractional shares
                                
                                
                                10,113,308
                                
                                
                                
                                10,517,728Other
      assets
                                
                                
                                (141,943
                                )
                                
                                
                                48,906Accounts
      payable
                                
                                
                                (1,667,308
                                )
                                
                                
                                556,085Accrued
      liabilities
                                
                                
                                276,151
                                
                                
                                
                                (2,331,532
                                )Unearned
      management fees and flight hour card revenue
                                
                                
                                6,087,853
                                
                                
                                
                                (359,081
                                )Cash-restricted
                                
                                
                                (2,328
                                )
                                
                                
                                (8,600
                                )Customer
      deposits
                                
                                
                                542,042
                                
                                
                                
                                (1,399,201
                                )Other
      liabilities
                                
                                
                                151,554
                                
                                
                                
                                45,732Deferred
      revenue related to fractional aircraft share sales
                                
                                
                                (11,148,836
                                )
                                
                                
                                (3,566,417
                                )Net
      cash provided by (used in) operating activities
                                
                                
                                3,441,683
                                
                                
                                
                                (4,002,461
                                )INVESTING
      ACTIVITIES:Capital
      expenditures
                                
                                
                                (93,319
                                )
                                
                                
                                (275,860
                                )Net
      cash used in investing activities
                                
                                
                                (93,319
                                )
                                
                                
                                (275,860
                                )FINANCING
      ACTIVITIES:Borrowings
      under short- term debt
                                
                                
                                1,000,000
                                
                                
                                
                                525,000Principal
      payments on long-term debt
                                
                                
                                (2,557,336
                                )
                                
                                
                                (1,604,368
                                )Principal
      payments on short-term debt
                                
                                
                                (1,000,000
                                )
                                
                                
                                (5,489,555
                                )Proceeds
      from issuance of stock- net
                                
                                
                                588,250
                                
                                
                                
                                -Cost
      of stock redemption/registration
                                
                                
                                (97,321
                                )
                                
                                
                                (84,682
                                )Net
      cash used in financing activities
                                
                                
                                (2,066,407
                                )
                                
                                
                                (6,653,605
                                )


5


AVANTAIR,
INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Cash Flows


Three
Months Ended September 30, 2009 and 2008


(Unaudited)





2009
                                        
                                        
                                        2008Net
      increase (decrease) in cash and cash equivalents
                                        
                                        $
                                        1,281,957
                                        
                                        
                                        $
                                        (10,931,926
                                        )Cash
      and cash equivalents, beginning of the period
                                        
                                        
                                        3,773,789
                                        
                                        
                                        
                                        19,149,777Cash
      and cash equivalents, end of the period
                                        
                                        $
                                        5,055,746
                                        
                                        
                                        $
                                        8,217,851SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
                                        
                                        $
                                        1,612,293
                                        
                                        
                                        $
                                        1,142,147SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIESAccretion
      of Series A convertible preferred stock
                                        
                                        $
                                        22,524
                                        
                                        
                                        $
                                        22,385Dividends
      payable on Series A convertible preferred stock
                                        
                                        $
                                        379,591
                                        
                                        
                                        $
                                        369,128Flight
      hour cards issued in consideration for equipment
                                        
                                        $
                                        139,750
                                        
                                        
                                        $
                                        -Common
      shares surrendered in lieu of payroll taxes
                                        
                                        $
                                        4,931
                                        
                                        
                                        $
                                        -




See
Notes to Condensed Consolidated Financial Statements.


6


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 “Share Exchange” or “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,
2009.




Avantair
is engaged in the sale of fractional ownership interests and flight hour card
usage of professionally piloted aircraft for personal and business use and the
management of its aircraft fleet. According to AvData, Avantair is the fifth
largest company in the North American fractional aircraft industry. As of
September 30, 2009, Avantair operated 52 aircraft within its fleet, which is
comprised of 46 aircraft for fractional ownership, 5 company owned core aircraft
and 1 leased and company managed aircraft. Avantair also operates fixed flight
based operations (FBO) in Camarillo, California and effective August 1, 2008, in
Caldwell, New Jersey. Through these FBO’s and its headquarters in Clearwater,
Florida, Avantair provides aircraft maintenance, concierge and other services to
its customers as well as to the Avantair fleet.




NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Interim
Reporting




The
accompanying unaudited interim condensed consolidated financial statements were
prepared in accordance with accounting principles generally accepted in the
United States of America and the interim condensed financial statement rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, these statements included all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the condensed
consolidated financial statements. The interim condensed operating results are
not necessarily indicative of the results for a full year or any interim period.
The June 30, 2009 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, 2009.





Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations relating to interim financial statements. These condensed
consolidated financial statements should be read in conjunction with the
Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2009.





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
September 30, 2009, the Company’s recurring losses resulting in a stockholders’
deficit of approximately $37.2 million and a working capital deficiency of
approximately $51.9 million. The Company’s primary sources of operating funds
are the collection of management and maintenance fees from fractional share
owners as well as the sale of fractional ownership shares, flight hour cards and
effective January 2009, Axis Club Memberships. Sales by product category
follow:




Unit
      Sales for the Three Months EndedSeptember
      30, 2009
                  
                  
                  September
      30, 2008New
      Fractional shares
                  
                  
                  2
                  
                  
                  
                  19.5Flight
      hour cards
                  
                  
                  86
                  
                  
                  
                  27Axis
      Club Memberships
                  
                  
                  3
                  
                  
                  
                  N/A




Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. To finance this growth
strategy, including the purchase of additional aircraft to satisfy the demand of
the growing flight hour card product line, the Company has obtained additional
funds through equity financing, including the sale of additional shares of
common and preferred stock, asset sales, accelerated payments of maintenance and
management fees, debt financing, or a combination thereof. During the fiscal
quarter ended September 30, 2009, the Company raised net proceeds of
approximately $0.6 million through an equity offering detailed in Note 4.
Further, by agreement between Avantair, the investors in the June 30, 2009
private placement and that offering’s placement agent, the period for additional
sales of units was extended until October 15, 2009. On October 16, 2009, the
Company sold an additional 8,818,892 shares at a price of $0.95 per share
generating net proceeds of approximately $8.0 million. The Company believes that
its capital on hand, as may be augmented by these means to fund future growth,
is sufficient to continue operations for the next twelve months and the
foreseeable future thereafter.


7


FASB
Codification Discussion




The
Company follows accounting standards set by the Financial Accounting Standards
Board, commonly referred to as the “FASB.” The FASB sets generally accepted
accounting principles (GAAP) that the Company follows to ensure the Company
consistently report its financial condition, results of operations, and cash
flows.  Over the years, the FASB and other designated GAAP-setting
bodies, have issued standards in the form of FASB Statements, Interpretations,
FASB Staff Positions, EITF consensuses, AICPA Statements of Position,
etc.




The FASB
recognized the complexity of its standard-setting process and embarked on a
revised process in 2004 that culminated in the release on July 1, 2009, of the
FASB Accounting Standards Codification, sometimes referred to as the
Codification or ASC. The Codification does not change how the Company accounts
for its transactions or the nature of related disclosures made. However, when
referring to guidance issued by the FASB, the Company now also refers to topics
in the ASC. The above change was made effective by the FASB for periods ending
on or after September 15, 2009. The Company updated references to GAAP to
reflect the guidance in the Codification.




Use
of Estimates




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




Revenue
Recognition




Avantair
is engaged in the sale and management of fractional ownerships of professionally
piloted aircraft for personal and business use and access to its aircraft fleet
through either 15 or 25 hour flight hour cards (either individually or through
the Company’s Axis Club Membership program). In the case of fractional ownership
sales, the aircraft are sold in one-sixteenth shares or multiples thereof. The
purchase agreement grants the customer 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. Flight hour cards provide customers with flight hours for a fixed
fee.




Fractional
Aircraft Shares




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




Management
and Maintenance Agreement




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




Flight
hour card and Axis Club Membership Revenue





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




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


8


Other
Revenues




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




Aircraft
Costs Related To Fractional Sales




The
Company reflects aircraft costs related to the sale of fractional aircraft
shares. As a result of the adoption of FASB ASC Topic 605-25 “Revenue Multiple Element
Arrangement,” the Company recognizes revenue from the sale of fractional
shares as income over the five-year period. The aircraft costs related to sales
of fractional shares consist of the cost of the aircraft and are recorded as an
asset and recognized as the cost of aircraft shares sold over the five-year
period.




Maintenance
Expense Policy




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




Prepaid
Pilot Training




Beginning
in 2008, the costs related to the training of pilots as required by Federal
Aeronautic Regulations are capitalized and amortized over the twelve month
certification period.




Income
Taxes




Income
taxes are accounted for under the asset and liability method in accordance with
FASB ASC Topic 740 “Income
Taxes.” Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is established to reduce deferred tax
assets to the amounts expected to be realized. The Company calculated an annual
effective tax rate to determine the interim period income tax provisions;
however, no tax liability was accrued for the three months ended September 30,
2009, as the Company expects to have sufficient operating loss and tax credit
carryforwards to cover any taxable income.




Effective
July 1, 2007, the Company adopted the provisions of the FASB ASC Topic 740 “Income Taxes.” ASC Topic 740
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by taxing authorities.
The Company has identified its federal tax return and State of Florida tax
return as “major” tax jurisdictions, as defined in ASC 740. The Company
evaluations were performed for the tax years ended 2005 through 2009. The
Company believes that its income tax positions and deductions would be sustained
on audit and does not anticipate any adjustments that would result in a material
change to its financial position. The Company recognizes accrued interest and
penalties related to unrecognized tax benefits as income tax
expense.




Stock-Based
Compensation




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




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




Stock-based
compensation expense related to these plans, which is included in “General and
administrative” costs in the accompanying Condensed Consolidated Statements of
Operations, was $104,434 and $95,708 for the three months ended September 30,
2009 and 2008, respectively. There were no related income tax benefits
recognized in the accompanying Condensed Consolidated Statements of Operations
for the three months ended September 30, 2009 or for the comparable 2008 period.
On September 23, 2009, by recommendation of the Compensation Committee and
approval by the Board of Directors, 25,000 shares of restricted stock were
granted to each of the Company's three named executive officers, effective
October 1, 2009. One-third of the shares will vest one year following the grant
date, and one-twelfth of the shares vest every three months thereafter. As of
September 30, 2009, the Company had 241,834 shares of restricted stock and
150,000 stock options outstanding. The Company made no stock option grants nor
issued warrants during the three months ended September 30,
2009.


9





Accounting for Derivative
Instruments




The
Company accounts for derivative instruments in accordance with FASB ASC Topic
815 “Derivatives &
Hedging,” which establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other financial instruments or contracts. The Company
also considers ASC 815, which provides criteria for determining whether
freestanding contracts that are settled in a company’s own stock, including
common stock warrants, should be designated as either an equity instrument, an
asset or as a liability under ASC 815. The Company evaluates the conversion
feature embedded in its Series A Convertible Preferred Stock at each reporting
period based on the criteria of ASC 815 to determine whether the conversion
feature would be required to be bifurcated from the Preferred Stock and
accounted for separately as a derivative. Based on management’s evaluation, the
embedded conversion feature did not require bifurcation and derivative
accounting as of September 30, 2009.




Fair
Value Measurements




Effective
July 1, 2008, the Company adopted the provisions of FASB ASC Topic 820 “Fair Value Measurements and
Disclosures.” ASC 820, defines fair value, establishes a framework for
measuring fair value in accordance with U.S. GAAP, and expands disclosures about
fair value measurements. ASC 820 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. ASC
820 permits an entity to measure certain financial assets and financial
liabilities at fair value with changes in fair value recognized in earnings each
period. During the three months ended September 30, 2009, the Company has
elected not to use the fair value option permitted under ASC 820 for any of its
financial assets and financial liabilities that are not already recorded at fair
value.




The fair
values of the Company’s assets and liabilities that qualify as financial
instruments under FASB ASC 825 including cash and cash equivalents, restricted
cash, accounts receivable, accounts payable,  accrued expenses,
unearned management fees and charter flight hour card revenues  and
short-term debt are carried at cost, which approximates fair value due to the
short-term maturity of these instruments. Long-term obligations approximate fair
value, given management’s evaluation of the instruments’ current rates compared
to market rates of interest and other factors.




Loss
Per Share




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




For the
three months ended September 30, 2009, a total of 2,025,172 share-equivalents of
potentially dilutive securities were excluded from the calculation of diluted
earnings per share. These securities were comprised of 150,000 options to
purchase shares of common stock and 300,000 unit purchase options (with each
unit consisting of one share and two warrants that expire February 23, 2010)
which were outstanding during the periods but were not included in the
computation of diluted earnings per share because the options’ exercise prices
were greater than the average market price of the common shares, and therefore,
their effect would be anti-dilutive as calculated under the treasury method
promulgated by FASB ASC Topic 260 “Earnings Per Share.”In
accordance with ASC 260’s contingently issuable shares provision, 157,972 shares
of performance-based, unvested common stock awards (“restricted stock”) granted
were not included in the calculation because all the necessary conditions for
vesting had not been satisfied. In addition, 567,200 and 250,000 warrants sold
in connection with the private sale on June 30, 2009 and September 25, 2009,
respectively, to purchase shares of the Company’s common stock were not included
in the calculation of diluted earnings per share as they were
antidilutive. On
October 19, 2009, pursuant to the October 2009 Securities Purchase and Exchange
Agreement, the company exchanged the 817,200 outstanding warrants that had been
issued to existing investors in the June and September private placements for an
aggregate of 516,127 shares of common stock.A total of 14,496,834 of
potentially dilutive securities were excluded from the calculation of diluted
loss per share for the three months ended September 30, 2008 and were comprised
of 14,146,000 warrants to purchase one share of the Company’s common stock,
200,834 shares of restricted stock and 150,000 outstanding options.




Subsequent
Events




Effective
July 1, 2009, the Company adopted the provisions of FASB ASC Topic 855 “Subsequent Events,” which
established principles and standards related to the accounting for and
disclosure of events that occur after the balance sheet date but before the
financial statements are issued. ASC Topic 855 requires an entity to recognize,
in the financial statements, subsequent events that provide additional
information regarding conditions that existed at the balance sheet date.
Subsequent events that provide information about conditions that did not exist
at the balance sheet date shall not be recognized in the financial statements
under ASC Topic 855. We have evaluated subsequent events for recognition or
disclosure through November 16, 2009.





Reclassifications




Certain
balances for the three months ended September 30, 2008 were reclassified to
conform to classifications adopted in the current period.




Recently
Issued Pronouncements





Avantair
is engaged in the sale of fractional ownership interests and flight hour card
usage of professionally piloted aircraft for personal and business use and the
management of its aircraft fleet. The Company follows accounting standards set
by the Financial Accounting Standards Board, commonly referred to as the “FASB.”
The FASB sets generally accepted accounting principles (GAAP) that the Company
follows to ensure it  consistently reports its financial condition,
results of operations, and cash flows. References to GAAP issued by the FASB in
these footnotes are to the FASB Accounting Standards Codification, sometimes
referred to as the Codification or ASC. The FASB finalized the Codification
effective for periods ending on or after September 15, 2009.  The
Company has updated references to GAAP to reflect the guidance in the
Codification.


10


In
December 2007, the FASB issued an accounting standard which 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. The accounting standard also requires the fair value measurement of
certain other assets and liabilities related to the acquisition such as
contingencies. The accounting standard applies prospectively to business
combinations and is effective for fiscal years beginning on or after December
15, 2008. The accounting standard was subsequently codified into ASC Topic 805,
Business Combinations.The adoption of this new FASB ASC Topic 805 did not have a material
impact on the Company’s financial position, results of operations or cash
flows.




In
December 2007, the FASB issued an accounting standard which 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 the accounting standard are to be applied retrospectively and is
effective for fiscal years beginning on or after December 15, 2008. The
accounting standard was subsequently codified into ASC Topic 810 (“Consolidation”).The adoption
of this new FASB ASC Topic 810 did not have a material impact on the Company’s
financial position, results of operations or cash flows.




In June
2008, the FASB issued an accounting standard which states that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents are “participating securities” and therefore should be
included in computing earnings per share using the two-class method. According
to the accounting standard, 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. The accounting standard 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 accounting standard was
subsequently codified into ASC Topic 260, “Earnings Per Share.”The
adoption of the new FSB ASC Topic 260 did not have a material impact on the
Company’s financial position, results of operations or cash flows.




In June
2008, the FASB issued an accounting standard which provides guidance for
determining whether an equity-linked financial instrument (or embedded feature)
issued by an entity is indexed to the entity’s stock. The accounting standard
proscribes a two-step approach under which the entity would evaluate the
instrument’s contingent exercise provisions and then the instrument’s settlement
provisions, for purposes of evaluating whether the instrument (or embedded
feature) is indexed to the entity’s stock.  This accounting standard
is effective for financial statements issued for fiscal years beginning after
December 15, 2008.  The accounting standard was subsequently codified
into ASC Topic 815,“Derivatives and Hedging,”and ASC Topic 718, “Compensation – Stock Compensation.”The adoption of the new FASB ASC Topic 815 did not have a material impact
on the Company’s financial position, results of operations or cash
flows.




In
November 2008, the FASB issued an accounting standard which enhances the
disclosure requirements for separating disclosing information related to
individually significant arrangements and disclosing the qualitative and
quantitative information on an aggregate basis. This new guidance applies
prospectively to revenue arrangements entered into or materially modified in
fiscal years beginning on or after December 15, 2009. The accounting standard
was subsequently codified into ASC Topic 605-25,“Revenue Multiple Element
Arrangement.”The Company is currently evaluating the requirements of ASC
605-25 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.





NOTE
3 - COMMITMENTS AND CONTINGENCIES




Lease
Commitments





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





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





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


11





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 in December 2008,
all of which was, immediately distributed to Avantair. Avantair, as Class B
member, has the rights and obligations to purchase aircraft positions nineteen
and twenty and to fund payment due in connection with these aircraft. EAS has
the option to purchase aircraft nineteen and twenty, which must be exercised by
October 1, 2010; if exercised, EAS shall reimburse Avantair for all payments
made relative to these aircraft and provide all remaining funds required. In the
event that EAS does not exercise the option to purchase aircrafts nineteen and
twenty by October 1, 2010, Avantair will have the right and obligation to
purchase the nineteenth and twentieth aircraft.  If EAS defaults under its
obligations to purchase the aircraft positions, EAS will forfeit all deposits
paid for the undelivered aircraft, including the funds distributed to Avantair.
Avantair will then be responsible for the rights and obligations of the
remaining undelivered aircraft.  If Avantair defaults under its obligations
to purchase the last two aircraft positions, any deposits paid by Avantair in
connection with the undelivered Class B Aircraft will be forfeited.





As of
September 30, 2009, Avantair had contractual commitments to purchase 56
additional Piaggio Avanti II aircraft through 2013. The total commitment,
including a recently proposed price escalation, is valued at approximately
$354.0 million.





Financing
Commitments- Short-term





Short-term
debt consists of the following as of September 30, 2009:




2009Midsouth
      Services, Inc (“Midsouth”)
                  
                  $
                  11,500,000





Midsouth
Services, Inc





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




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




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





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




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





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


12


Financing
Commitments- Long-term





Long-term
debt consists of the following as of September 30, 2009:




Wells
      Fargo Equipment Finance, Inc.
                          
                          $
                          2,994,149CNM,
      Inc.
                          
                          
                          2,725,345Jet
      Support Services, Inc.
                          
                          
                          3,240,641JMMS,
      Inc.
                          
                          
                          3,312,304Century
      Bank, F.S.B.
                          
                          
                          1,869,695Wachovia
      Bank
                          
                          
                          2,500,000Midsouth
      Services, Inc
                          
                          
                          12,025,00428,667,138Less
      current portion
                          
                          
                          (10,266,419
                          )Long-term
      debt
                          
                          $
                          18,400,719





Wells
Fargo Equipment Finance, Inc.





In
February 2005, the Company entered into financing arrangements for the purchase
of three core aircraft under various notes payable with Wells Fargo Equipment
Finance, Inc. In January 2008, the Company sold one of these aircraft and repaid
the outstanding balance on the related note payable. The notes outstanding at
September 30, 2009 totaled approximately $3.0 million and are payable in monthly
installments ranging from $10,644 to $38,480 with interest ranging from 5.96% to
6.12% per annum, through 2012. The notes are collateralized by the
aircraft.




CNM,
Inc.





In August
2007, the Company and CNM executed a new note agreement which converted an
outstanding note obligation of approximately $7.0 million into a term loan
payable monthly over three years and bearing interest at 10.0% per annum.
The Company accounted for this conversion in accordance with FASB ASC 470-50
“Debt Modification &
Extinguishment” (EITF Issue No. 98-14). CNM also assumed a
promissory note due to Wells Fargo Bank for $2.9 million which was included as
part of this new note agreement. Borrowings outstanding under these arrangements
at September 30, 2009 totaled approximately $2.7 million. During October 2009,
the Company repaid the full amount of the loan of approximately $2.7
million.





Jet
Support Services, Inc.





On April
24, 2006, Avantair financed an aircraft maintenance program contract with Jet
Support Services, Inc. (“JSSI”) in the amount of $3.4 million. The promissory
note provided for seven monthly installments of $145,867 and 53 monthly
installments of $45,867, respectively, including interest at 7.0% per year. On
April 15, 2008, the Company entered into a financing arrangement with JSSI by
means of a $5.5 million promissory note. The new note matures on April 1,
2011 and bears interest at the rate of 10.0% per annum, with 35 monthly
payments of principal and interest in an amount of $185,127 beginning on
June 2, 2008. The new note covered the remaining balance of the
aforementioned promissory note of $0.4million, other costs and fees to be paid
by the Company under service agreements with JSSI and related deferred financing
costs of approximately $1.0 million which will be amortized over the life of the
note using the effective interest method. Upon entering into this payment
arrangement and the $5.5 million promissory note, the parties terminated the
airframe maintenance contract and have agreed to apply the unamortized
prepayment ($1,538,175 at June 30, 2009) under the airframe maintenance contract
to the engine maintenance program and will amortize this amount over the
remaining 37 month term of that program.  Borrowings outstanding under
this arrangement at September 30, 2009 totaled approximately $3.2
million.





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





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 September 30, 2009
totaled approximately $1.9 million and is payable in monthly installments of
$27,175 with interest of 8.25% per annum, through August 3, 2012. The note
is collateralized by the aircraft.


13





Wachovia
Bank





On
October 31, 2007, the Company entered into a financing arrangement for the
purchase of one used aircraft at a total purchase price of approximately $4.5
million (inclusive of the value of a flight hour card of 100 hours). Financing
was obtained from Wachovia through a note payable of $3.9 million. This debt
will be repaid monthly over 7 years at an interest rate of the LIBOR rate plus
4.0%. Borrowings outstanding under this arrangement at September 30, 2009
totaled approximately $2.5 million. During September 2009, the Company received
a waiver of compliance with a financial convenant in connection with the
note.





Capital
Lease Transactions





JMMS,
Inc.




The
Company entered into a sale and leaseback agreement, dated August 11, 2006,
with JMMS, LLC (“JMMS”). Under the sale and leaseback agreement, the Company
sold 100.0% of its interest in a core aircraft for $4.2 million and leased back
68.8% of the aircraft for a five year term. The proceeds of the sale and
leaseback arrangement were used to pay down a line of credit. In March 2007, the
Company amended the lease agreement to include a provision for the Company to
buy back the aircraft at the expiration of the term. As a result of the
amendment, the Company has accounted for the sale and leaseback transaction as a
finance lease. JMMS notified the Company of its intention to terminate the sale
and leaseback agreement between the parties effective March 1, 2009, at which
date, pursuant to the agreement, the Company was required to purchase the
aircraft at a cost of no more than the $4.2 million. The Company is currently in
negotiations to obtain financing and pursuing alternative options relating to
the JMMS termination. The closing date of the transaction was initially extended
past March 1, 2009, and in consideration for such extension, the Company made
monthly payments to JMMS totaling $0.9 million through September 30, 2009. In
October 2009, both parties agreed to extend the closing date to on or before
February 28, 2010. In consideration for such extension, the Company will make
two consecutive monthly payments in the amount of $75,000 beginning on November
1, 2009, one monthly payment in the amount of $150,000 in January 2010, and one
monthly payment of $0.2 million in February 2010 or until the closing of the
acquisition of the aircraft.  The total amount of the monthly payments
made to JMMS by the Company shall be deducted from the purchase price on the
closing date. In addition, during the fourth quarter of fiscal year 2009,
the agreement with JMMS matured and therefore has been included in the current
portion of long-term debt on the accompanying condensed consolidated balance
sheet.




Midsouth
Services, Inc.





On
October 10, 2007, Avantair acquired a core aircraft under a capital lease
obligation with Midsouth.  Under the lease agreement, Midsouth
provided funding for the $4.7 million purchase of a pre-owned Piaggio P-180
aircraft and holds title to the Aircraft.  Midsouth leases the Aircraft
exclusively to Avantair on a five year lease at 15.0% interest per annum. 
The monthly lease payments for the term of the lease are $89,000.  At the
end of the five year lease, Avantair shall purchase the Aircraft from Midsouth
at the guaranteed residual value in the amount of approximately $2.3
million.  Avantair also has the option to purchase the Aircraft anytime
during the lease term at the then current guaranteed residual value as set forth
on the amortization schedule without penalty.  The obligation outstanding
at September 30, 2009 totaled approximately $4.1 million.





In April
2009, the Company amended the Lease Agreement previously accounted for as an
operating lease under ASC Topic 840 “Leases” (SFAS 13), dated as
of July 31, 2006 between the Company and Midsouth. Pursuant to the amendment,
the Company is required to pay $74,900 monthly until August 2011, the expiration
of the Lease Agreement. In addition, the Company has agreed to purchase the
leased aircraft for approximately $3.0 million from Midsouth within sixty days
following the expiration of the term of the Lease Agreement. The lease, as
amended, has been classified as a capital lease in the accompanying condensed
consolidated balance sheet. The obligation outstanding at September 30, 2009
totaled approximately $3.8 million.





In April
2009, the Company entered into a Lease Agreement, effective April 6, 2009,
pursuant to which Midsouth leases a Piaggio P-180 aircraft to the Company for a
ten year lease term at a rate of $75,000 per month, plus taxes if applicable.
The Company is required to provide Midsouth with 100 hours of flight time per
year during the lease term. Midsouth has the sole option to terminate the lease
at the end of the fifth year of the term and to require the Company to purchase
the leased aircraft for approximately $3.8 million within ninety days of that
date.  If this option is not exercised by Midsouth, the lease will
continue for the remaining five years of the term and, at the end of the ten
year lease, the Company will be required to purchase the aircraft from Midsouth
for $0.3 million. The obligation outstanding at September 30, 2009 totaled
approximately $4.8 million.





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





NOTE
4 – EQUITY TRANSACTIONS





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




NOTE
5 – SUBSEQUENT EVENTS





In
October 2009, the Company sold 8,818,892 shares of common stock to new investors
at a price per share of $0.95 for net proceeds of approximately $8.0 million
pursuant to the October 16, 2009 Securities Purchase and Exchange Agreement. In
addition, pursuant to the October 16, 2009 Securities Purchase and Exchange
Agreement, on October 19, 2009 the Company exchanged the 817,200 outstanding
warrants that had been issued to existing investors in the June and September
private placements for an aggregate of 516,127 shares of common
stock.  The October 2009 Securities Purchase and Exchange Agreement
terminated the Securities Purchase and Registration Rights Agreement entered
into in connection with the June and September 2009 private
placements.


14




In
connection with the October 2009 private placement, Avantair entered into a new
Registration Rights Agreement with the investors in the June, September and
October private placements. The October 2009 Registration Rights Agreement
requires the company promptly, but not later than 30 days after the closing, to
file a registration statement registering for resale the shares issued to the
investors and to cause the registration statement to be declared effective on or
prior to the 90th day after the closing (or the 150th day, if
the registration statement is reviewed by the SEC). Under the terms of the
Registration Rights Agreement, the Company is obligated to maintain the
effectiveness of the resale registration statement until all securities
registered thereunder are sold or otherwise can be sold pursuant to Rule 144,
without restriction. The Company is required to pay to each investor an amount
in cash each month, as partial liquidated damages, equal to 1.5% of the
aggregate purchase price paid by such investor in the event of failure (i) to
file the registration statement or (ii) to cause the registration statement to
be declared effective, in each case by the date described in the Registration
Rights Agreement, for so long as such failure continues.


On
October 16, 2009, in consideration of services rendered relating to the
Company’s June, September and October 2009 private placements, the Company
issued to a third party and its affiliates 455,887 fully vested warrants which
expire on June 30, 2012, each to purchase one share of the Company’s common
stock at an exercise price of $1.05 per share. The shares issuable upon exercise
of the warrants are entitled to registration rights under the October 2009
Registration Rights Agreement. The
Company may redeem the warrants at any time on or after October 16, 2011 at the
price of $0.01 per warrant provided that the volume weighted average price of
the Company’s common stock has been at least 200.0% of the exercise price of a
warrant for any twenty trading days during any consecutive thirty trading day
period ending on the third trading day preceding the date of the notice of
redemption. The fair value of the warrants (when determined) will be charged to
operations.




On
October 19, 2009, the Company transferred its rights to purchase three Piaggio
Avanti II aircraft to LW Air LLC pursuant to the existing aircraft purchase
agreement between the Company and Piaggio America, Inc. Upon delivery of each
aircraft, Piaggio America will return deposits previously paid on the aircraft
by the Company.  Simultaneous with this transaction, LW Air purchased three
of the aircraft from the manufacturer, the Company entered into an eight-year
management agreement for those aircraft and the Company issued 2,373,260
warrants to a member of LW Air.  Pursuant to the agreement between the
parties, the Company will manage the aircraft for a monthly fee. The agreement
also allows the Company to enter into short-term leases for the use of the
aircraft at a specified dry lease rate per flight hour.  LW Air has also
agreed to purchase one additional aircraft, for a total of four, under the same
terms.




The
warrants issued to the member of LW Air provide for the purchase of 2,373,620
shares of the Company’s common stock at an exercise price of $1.25 per
share.  The warrants expire on October 16, 2012, and the warrants and any
underlying shares purchased upon exercise of the warrants may not be sold,
transferred, assigned or hypothecated, in whole or in part, at any time on or
prior to October 16, 2011, other than to an affiliate of the warrant
holder.  The Company may redeem the warrants held by the member of LW Air
at any time on and after October 16, 2011 at the price of $0.01 per warrant,
provided that the volume weighted average price of the Company’s common stock
has been at least 300.0% of the exercise price of a warrant for any twenty
trading days during any consecutive thirty trading day period ending on the
third trading day preceding the date of the notice of redemption.  One
quarter of the warrants are not currently exercisable, and are subject to
forfeiture, in the event that certain conditions are not satisfied prior to
December 31, 2009.




The
Company will account for the LW Air transaction and the issuance of the warrants
by recording the charges paid to the owner (including the fair value of the
warrants when determined) to the Cost of Flight Operations on a straight-line
basis ratably over the initial term of the agreement.




15


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





Overview




Avantair
is engaged in the sale of fractional ownership interests and flight hour card
usage of professionally piloted aircraft for personal and business use and the
management of its aircraft fleet. According to AvData, Avantair is the fifth
largest company in the North American fractional aircraft industry. As of
November 12, 2009, Avantair operated 55 aircraft within its fleet, which is
comprised of 46 aircraft for fractional ownership, 5 company owned core aircraft
and 4 leased and company managed aircraft.




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




Avantair
generates revenues primarily through the sale of fractional ownership shares of
aircraft, by providing maintenance and management services related to these
aircraft, and from the sale of flight hour cards providing either 15 or 25 hours
of flight time per year of access to its aircraft fleet (either individually or
through the Company’s Axis Club Membership program). The Company markets and
sells fractional ownership interests to individuals and businesses with a
minimum share size of a one-sixteenth ownership interest. Under 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 flight
hour card sales over fractional share sales industry-wide, in January 2009,
Avantair initiated the Axis Club Membership program. This program is designed to
bridge the gap between the financial commitment of a fractional share and flight
hour cards. This new product offers access to blocks of flight hours for a three
year membership fee of $75,000. The program requires Axis Club members to
purchase a minimum of three 25 hour flight hour cards for $80,000 or less,
dependent upon the type of membership purchased, over a three year period. The
program also allows for the conversion of club membership into fractional
ownership. Members are not charged a management fee until they are fractional
owners.




Avantair
presently sources all of its aircraft from a single manufacturer, Piaggio
America, Inc. (“Piaggio”). As of November 15, 2009, Avantair had contractual
commitments to purchase 53 additional Piaggio Avanti II aircraft through 2013.
The total commitment, including a recently proposed price escalation, is valued
at approximately $336.0 million. Our agreement with Piaggio permits the Company
some flexibility to defer a portion of the aircraft deliveries and the Company
has exercised this flexibility at certain times in order to take deliveries in
line with the Company’s sales expectations. During October 2009, Avantair
entered into an agreement with a third party to whom it sold its
rights  to purchase three Piaggio Avanti II aircraft in exchange for
the $2.6 million cost of the deposits paid on the aircraft by the Company. In
connection with this transaction, the Company entered into an eight-year
management agreement with the third party. Pursuant to the agreements, the
Company will manage the aircraft for a monthly fee; the agreement also allows
the Company to enter into short-term leases for the use of the aircraft at a
specified dry lease rate per flight hour.  The third party has also
agreed to purchase one additional aircraft during the remainder of calendar 2009
under the same terms with the Company. These aircraft are anticipated to be
utilized to satisfy fleet demands of the growing flight hour card and Axis Club
Membership Program product lines. In addition to the cost of acquiring aircraft,
Avantair’s primary expenses are related to fuel, aircraft repositioning (i.e.,
moving an aircraft to another location to accommodate a customer’s need and for
demonstration flights for sales purposes), maintenance, charters and
insurance.




In
October 2009, the Company consummated a private sale of its common stock to
investors generating net proceeds of approximately 8.0 million. Together with
the proceeds of private placements consummated in June and September 2009, the
Company received total net proceeds of approximately $9.9 million. (See Note 5
to the Company’s Condensed Consolidated Financial Statements).






The
Company’s primary sources of operating funds are the collection of management
and maintenance fees from fractional share owners as well as the sale of
fractional ownership shares, flight hour cards and, effective January 2009, Axis
Club Memberships.  Sales by product category follow:




Unit
      Sales for the Three Months EndedSeptember
      30, 2009
                  
                  
                  September
      30, 2008New
      Fractional shares
                  
                  
                  2
                  
                  
                  
                  19.5Flight
      hour cards
                  
                  
                  86
                  
                  
                  
                  27Axis
      Club Memberships
                  
                  
                  3
                  
                  
                  
                  N/A





Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. At November 12, 2009, the
Company had 34 fractional aircraft shares available for sale. In addition to the
cost of acquiring aircraft, Avantair’s primary expenses are related to fuel,
aircraft repositioning (i.e., moving an aircraft to another location to
accommodate a customer’s need and for demonstration flights for sales purposes),
maintenance, charters and insurance. To finance this growth strategy, the
Company will continue to actively pursue additional funds through equity
financing, including the sale of additional shares of common and preferred
stock, asset sales, accelerated payments of maintenance and management fees,
debt financing, or a combination thereof. (See Notes 4 and 5 to the Company’s
Condensed Consolidated Financial Statements.) Currently, 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.


16


Critical
Accounting Policies and Estimates





As
discussed in our Form 10-K for the fiscal year ended June 30, 2009, the
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States of
America.  The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgments can be subjective and complex, and consequently, actual results could
differ from those estimates. The Company believes that of its significant
accounting policies, the following may involve a higher degree of judgement and
estimation. The judgments, or the methodology on which the judgments are made,
are reviewed with the Audit Committee.





Revenue
Recognition




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




Fractional
Aircraft Shares Sales.




The
Company does not have objective evidence to determine the fair value and
allocate fractional share revenue from that generated from the management and
maintenance agreement, and, as a result, has adopted the provisions of FASB ASC
Topic 605-25 “Revenue Multiple
Element Arrangement” 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.




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 FASB ASC Topic 605-25 “Revenue Multiple Element
Arrangement,” the Company recognizes revenue from the sale of fractional
shares as income over the five-year period. The aircraft costs related to sales
of fractional shares consist of the cost of the aircraft and are recorded as an
asset and recognized as the cost of aircraft shares sold over the five-year
period.




Maintenance
Expense Policy




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




Stock-Based
Compensation




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


17


Results
of Operations




Three Months Ended September
30, 2009 Compared with Three Months Ended September 30, 2008




Revenues
for the three months ended September 30, 2009 were $35.2 million, an
increase of 7.7% from $32.7 million for the three months ended
September 30, 2008. This increase was the result of a 4.1% decrease in the
revenue generated from the sale of fractional aircraft shares to $12.0 million
for the three months ended September 30, 2009 from $12.5 for the comparable
2008 period, offset by an increase of 5.3% in maintenance and management fees to
$18.0 million for the three months ended September 30, 2009 from $17.1 for
the comparable 2008 period, an increase of 109.2% in flight hour card and Axis
Club Membership revenue to $3.9 million for the three months ended
September 30, 2009 from $1.8 million for the comparable 2008 period, and an
increase of 10.4% in other revenue to $1.4 million for the three months ended
September 30, 2009 from $1.3 million for the comparable 2008
period.





Revenue
from the sale of fractional aircraft shares decreased due to the full
amortization of revenue from shares sold in prior periods, partially offset by
an increase of 4.4% in the average number of total fractional shares sold
through September 30, 2009 from the comparable 2008 period.





The
increase in revenue from maintenance and management fees is primarily due to a
4.4% increase in the average number of fractional shares sold through September
30, 2009 from the comparable 2008 period, coupled with an increase in the
average monthly management fee per shareowner.





Flight
hour card revenue and Axis Club Membership revenue increased $2.0 million
primarily as a result of an increase in flight hour card revenue due to
increased flight hour card sales as a result of the greater acceptance of time
card travel in the existing economy compared to fractional ownership and the
timing of flight hour card utilization by owners during the three months ended
September 30, 2009 from the comparable 2008 period.





Other
revenue was relatively consistent between the two periods due to increased fuel
and remarketing revenue offset by a decrease in demonstration
revenue.





Operating
expenses for the three months ended September 30, 2009 were 1.2% higher than the
three months ended September 30, 2008, with total operating expenses of
$35.0 million compared to $34.6 million, respectively. The cost of fractional
aircraft shares sold decreased to $10.2 million for the three months ended
September 30, 2009 from $10.6 million for the three months ended
September 30, 2008, due to a 4.4% increase in the average number of
fractional shares sold through September 30, 2009 from fractional shares sold
through September 30, 2008. The cost of flight operations, together with the
cost of fuel, decreased 1.6% to $16.1 million for the three months ended
September 30, 2009 from $16.3 million for the three months ended
September 30, 2008, primarily due to:





·
            an
      increase in maintenance expense as a result of an increase in fleet size
      and flight hours, partially offset by decreases in insurance expense and
      aircraft lease expense as a result of the conversion of a Company leased
      aircraft to a Company core aircraft;
and





·
            a
      $0.9 million decrease in cost of fuel due to a 34.0% decrease in the per
      gallon cost of fuel (as a result of Avantair negotiating lower fuel rates
      and also due to the global decrease in fuel costs) coupled with improved
      aircraft utility;





General
and administrative expenses increased 10.5% to $6.3 million for the three months
ended September 30, 2009 from $5.7 million for the three months ended
September 30, 2008, primarily due to a $0.2 million increase in payroll and
related expenses, a $0.2 million increase in expenses related to fixed based
operations primarily as a result to increased volume of fuel sales, and a $0.2
million increase in other expenses due to Company growth.





Selling
expenses increased 8.6% to $1.0 million for the three months ended
September 30, 2009 from $0.9 million for the three months ended
September 30, 2008 due to an increase in commission expenses as a result of
increased flight hour card sales.





Income
from operations was $0.2 million for the three months ended September 30,
2009, an increase from $1.9 million loss from operations for the three months
ended September 30, 2008 for the reasons set forth above.





Interest
expense was $1.6 million for the three months ended September 30, 2009was relatively
consistent with the $1.5 million for the three months ended September 30, 2008,
due to the relative consistency of the short and long- term debt balances
between the two periods.





Net loss
decreased to $1.4 million for the three months ended September 30, 2009
compared to $3.3 million for the three months ended September 30, 2008 due to
the decrease in loss from operations partially offset by the increase in total
other expense discussed above.


18


Liquidity
and Capital Resources





Avantair’s
primary sources of liquidity have been cash provided by operations, cash raised
from its equity offering as Ardent Acquisition Corp., cash provided from its
debt facilities, cash raised in the preferred and common stock offerings, and
other asset- based borrowing (see Notes 4 and 5 to the Company’s condensed
consolidated financial statements). The Company uses its cash primarily to fund
losses from operations, deposits made on aircraft, leasehold improvements, and
to fund the purchase of core aircraft and aircraft which are to be
fractionalized. Cash generated from operations has not been sufficient to
provide for all the working capital needed to meet Avantair’s requirements. At
September 30, 2009 and June 30, 2009, Avantair had a working capital deficit of
approximately $52.0 million and $49.2 million, respectively, and a stockholders’
deficit of approximately $37.2 million and $36.0 million, respectively. As of
September 30, 2009, cash and cash equivalents amounted to approximately $5.1
million and total assets to $155.2 million. The cash and cash equivalent balance
increased $1.3 million from September 30, 2009 and total assets decreased $8.9
million. The increase in cash and cash equivalents occurred primarily as a
result of cash received from the sale of fractional shares, flight hour cards,
Axis Club Memberships, fuel and rent, collection of maintenance and management
fees and other receipts including proceeds from the sale of the Company’s common
stock. On June 30 and September 25, 2009, Avantair sold 567,200 and 250,000
units, respectively, at a price of $2.50 per unit to investors in a private
placement, generating net proceeds of approximately $1.3 and $0.6 million,
respectively (See Notes 4 and 5 to the Company’s condensed consolidated
financial statements). By agreement between Avantair, the investors in the June
30, 2009 private placement and that offering’s placement agent, the period for
additional sales of units was extended until October 15, 2009. In October 2009,
the Company sold an additional 8,818,892 shares at a price of $0.95 per share
generating net proceeds of approximately $8.0 million. Partially offsetting
these receipts are cash disbursements of $1.2 million in payments for deposits
on future aircraft deliveries, and $3.6 million repayment of debt, in addition
to expenditures for the cost of operations, including insurance and capital and
leasehold improvements.




In
January 2009, the Company introduced the Axis Club Membership Program designed
to bridge the gap between the financial commitment of a fractional share and
flight hour card. The current rate of flight hour card sales including those
through the Axis Club Membership will require the Company to acquire aircraft to
satisfy the increased flight hour demands on its core aircraft fleet if its core
utility is strained. During October 2009, Avantair entered into an agreement
with a third party to whom it sold its rights  to purchase three
Piaggio Avanti II aircraft in exchange for the $2.6 million cost of the deposits
paid on the aircraft by the Company. In connection with this transaction, the
Company entered into an eight-year management agreement with the third party.
Pursuant to the agreements, the Company will manage the aircraft for a monthly
fee; the agreement also allows the Company to enter into short-term leases for
the use of the aircraft at a specified dry lease rate per flight
hour.  The third party has also agreed to purchase one additional
aircraft during the remainder of calendar 2009 under the same terms with the
Company. These aircraft are anticipated to be utilized to satisfy fleet demands
of the growing flight hour card and Axis Club Membership Program product lines.
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 to be acquired to service this program will be
available.





The
Company’s primary sources of operating funds are the collection of management
and maintenance fees from fractional share owners as well as the sale of
fractional ownership shares, flight hour cards and, effective January 2009, Axis
Club Memberships.  Sales by product category follow:




Unit
      Sales for the Three Months EndedSeptember
      30, 2009
                  
                  
                  September
      30, 2008New
      Fractional shares
                  
                  
                  2
                  
                  
                  
                  19.5Flight
      hour cards
                  
                  
                  86
                  
                  
                  
                  27Axis
      Club Memberships
                  
                  
                  3
                  
                  
                  
                  N/A





Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. To finance this growth
strategy including the purchase of additional aircraft to satisfy the demand of
the growing flight hour card product line, the Company is actively pursuing
additional funds through equity financing , including the sale of additional
shares of common and preferred stock asset, sales, accelerated payments of
maintenance and management fees, debt financing, or a combination thereof.
Currently, 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.





Financing
Arrangements





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





Wells
      Fargo Equipment Finance, Inc.
                  
                  $
                  2,994,149CNM,
      Inc.
                  
                  
                  2,725,345Jet
      Support Services, Inc.
                  
                  
                  3,240,641JMMS,
      Inc.
                  
                  
                  3,312,304Century
      Bank, F.S.B.
                  
                  
                  1,869,695Wachovia
      Bank
                  
                  
                  2,500,000Midsouth
      Services, Inc
                  
                  
                  12,025,004$
                  28,667,138


19





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 September 30, 2009 totaled approximately
$3.0 million and are payable in monthly installments ranging from $10,644 to
$38,480 with interest ranging from 5.96% to 6.12% per annum, through 2012.
The notes are collateralized by the aircraft.




CNM,
Inc.: In August 2007, the Company and CNM executed a new note agreement which
converted an outstanding note obligation of approximately $7.0 million into a
term loan payable monthly over three years and bearing interest at
10.0% per annum. CNM also assumed a promissory note due to Wells Fargo Bank
for $2.9 million which was included as part of this new note agreement.
Borrowings outstanding under these arrangements at September 30, 2009 totaled
approximately $2.7 million. During October 2009, the Company repaid the
outstanding balance of the promissory note of approximately $2.7
million.





Jet
Support Services, Inc.: On April 24, 2006, Avantair financed an aircraft
maintenance program contract with Jet Support Services, Inc. (“JSSI”) in the
amount of $3.4 million. The promissory note provided for seven monthly
installments of $145,867 and 53 monthly installments of $45,867, respectively,
including interest at 7.0% per year. On April 15, 2008, the Company entered into
a financing arrangement with JSSI by means of a $5.5 million promissory note.
The new note matures on April 1, 2011 and bears interest at the rate of
10.0% per annum, with 35 monthly payments of principal and interest in an
amount of $185,127 beginning on June 2, 2008. The new note covered the
remaining balance of the aforementioned promissory note of $0.4million, other
costs and fees to be paid by the Company under service agreements with JSSI and
related deferred financing costs of approximately $1.0 million which will be
amortized over the life of the note using the effective interest method. Upon
entering into this payment arrangement and the $5.5 million promissory note, the
parties terminated the airframe maintenance contract and have agreed to apply
the unamortized prepayment ($1,538,175 at June 30, 2009) under the airframe
maintenance contract to the engine maintenance program and will amortize this
amount over the remaining 37 month term of that program.  Borrowings
outstanding under this arrangement at September 30, 2009 totaled approximately
$3.2 million.





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




JMMS,
Inc.: On August 11, 2006, the Company entered into a sale and leaseback
agreement with JMMS, LLC (“JMMS”). The lease transaction has been accounted for
as finance lease and provides for monthly payments of $39,500 through
July 11, 2011.  Borrowings outstanding under this arrangement at
September 30, 2009 totaled approximately $3.3 million.





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





Wachovia
Bank: On October 31, 2007, the Company entered into a financing arrangement for
the purchase of one used aircraft at a total purchase price of approximately
$4.5 million (inclusive of the value of a flight hour card of 100 hours).
Financing was obtained from Wachovia through a note payable of $3.9 million.
This debt will be repaid monthly over 7 years at an interest rate of the LIBOR
rate plus 4.0%. Borrowings outstanding under this arrangement at September 30,
2009 totaled approximately $2.5 million.





Midsouth
Services, Inc.: On October 10, 2007, Avantair acquired a core aircraft under a
capital lease obligation with Midsouth Services, Inc.  Under the lease
agreement, Midsouth provided funding for the $4.7 million purchase of a
pre-owned Piaggio P-180 aircraft and holds title to the Aircraft.  Midsouth
leases the Aircraft exclusively to Avantair on a five year lease at 15.0%
interest per annum.  The monthly lease payments for the term of the lease
are $89,000.  At the end of the five year lease, Avantair shall purchase
the Aircraft from Midsouth at the guaranteed residual value in the amount of
approximately $2.3 million.  Avantair also has the option to purchase the
Aircraft anytime during the lease term at the then current guaranteed residual
value as set forth on the amortization schedule without penalty. The
obligation outstanding under this agreement at September 30, 2009 totaled
approximately $4.1 million.




In April
2009, the Company amended the Lease Agreement previously accounted for as an
operating lease, dated as of July 31, 2006 between the Company and Midsouth.
Pursuant to the amendment, the Company is required to pay $74,900 monthly until
August 2011, the expiration of the Lease Agreement. In addition, the Company has
agreed to purchase the leased aircraft for approximately $3.0 million from
Midsouth within sixty days following the expiration of the term of the Lease
Agreement. The lease, as amended, has been classified as a capital lease. The
obligation outstanding under this agreement at September 30, 2009 totaled
approximately $3.8 million.





In April
2009, the Company entered into a Lease Agreement, effective April 6, 2009,
pursuant to which Midsouth leases a Piaggio P-180 aircraft to the Company for a
ten year lease term at a rate of $75,000 per month, plus taxes if applicable.
The Company is required to provide Midsouth with 100 hours of flight time per
year during the lease term. Midsouth has the sole option to terminate the lease
at the end of the fifth year of the term and to require the Company to purchase
the leased aircraft for approximately $3.8 million within ninety days of that
date.  If this option is not exercised by Midsouth, the lease will
continue for the remaining five years of the term and, at the end of the ten
year lease, the Company will be required to purchase the aircraft from Midsouth
for $0.3 million. The obligation outstanding under this agreement at September
30, 2009 totaled approximately $4.8 million.





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.


20





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 Wachovia Bank. The current liability, pursuant to
which Avantair is obligated to pay Wachovia Bank, has an interest rate that is
equal to the LIBOR rate plus 4.0%. At September 30, 2009, the liabilities of
Avantair with exposure to interest rate risk were approximately $2.5
million.




Item
4T. Controls and Procedures.




Evaluation
of Disclosure Controls and Procedures





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





Limitations
on the Effectiveness of Controls and Other Matters





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





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





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





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





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




Changes
to Internal Control Over Financial Reporting




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




CEO
and CFO Certifications





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


21


PART
II - OTHER INFORMATION


Item 1. Legal
Proceedings.





From time
to time, the Company is party to various legal proceedings in the normal course
of business. It is expected that these claims would be covered by insurance
subject to customary deductibles. Those claims, even if lacking merit, could
result in the expenditure of significant financial and managerial resources. At
September 30, 2009, there were no legal proceedings which the Company would
anticipate having a material adverse effect on its financial position, results
of operations or cash flows.




Item 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,
2009.





Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds.





On
October 16, 2009, Avantair, Inc. (the “Company” or “Avantair”) entered into a
Securities Purchase and Exchange Agreement (the “Purchase Agreement”) with the
investors party thereto (the “Investors”) in connection with a PIPE (Private
Investment in a Public Entity) financing.  Pursuant to the Purchase
Agreement, certain new investors purchased shares of common stock in a private
placement for gross proceeds of approximately $8.4 million, or $10.4 million
when combined with the proceeds of two prior placements consummated in June and
September 2009.  The Company intends to use the net proceeds from this
financing transaction to retire approximately $6.0 million of debt, for working
capital and general corporate purposes.




Under the
terms of the Purchase Agreement, Avantair sold approximately 8,818,892 shares of
common stock to the new investors at a price per share of $0.95.  In
addition, pursuant to the October 16, 2009 Securities Purchase and Exchange
Agreement, on October 19, 2009 the Company exchanged the 817,200 outstanding
warrants that had been issued to existing investors in the June and September
private placements for an aggregate of 516,127 shares of common
stock.  The October 2009 Securities Purchase and Exchange Agreement
terminated the Securities Purchase and Registration Rights Agreement entered
into in connection with the June and September 2009 private
placements.




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 September 30,
2009.




Item 6. Exhibits.





See
exhibit index


22




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.





November
16, 2009





Avantair,
      IncBy:
                /s/
      Steven SantoSteven
      SantoChief
      Executive Officer




23




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




24