UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q







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




For
the quarterly period ended: December 31, 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
February 12, 2009, there were 26,324,325 shares of the Company’s common stock,
$.0001 par value per share, outstanding.














CERTAIN
DEFINITIONS





Unless
the context indicates otherwise, the terms “Avantair”, “the Company”, “we”,
“our”, and “us” refer to Avantair, Inc. and, where appropriate, its
subsidiaries, 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 from our single
      manufacturer;


(4)
            the
      loss of key personnel;


(5)
            our
      inability to effectively manage our
growth;


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


(7)
            competitive
      conditions in the fractional aircraft
industry;


(8)
            extensive
      government regulation;


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


(10)
            increases
      in fuel costs;


(11)
            changing
      economic conditions; and


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




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





Table
of Contents





PagePART I FINANCIAL
      INFORMATIONItem 1.
                  Financial
      StatementsCondensed
      Consolidated Balance Sheets
                  
                  
                  1Condensed
      Consolidated Statements of Operations
                  
                  
                  3Condensed
      Consolidated Statement of Changes in Stockholders’ Deficit
                  
                  
                  4Condensed
      Consolidated Statements of Cash Flows
                  
                  
                  5Notes
      to Condensed Consolidated Financial Statements
                  
                  
                  7Item 2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  
                  17Item 3.
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  
                  
                  24Item 4T.
                  Controls
      and Procedures
                  
                  
                  24PART II OTHER
      INFORMATIONItem 1.
                  Legal
      Proceedings.
                  
                  
                  26Item 1A.
                  Risk
      Factors.
                  
                  
                  26Item 2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds.
                  
                  
                  26Item 4.
                  Submission
      of Matters to a Vote of Security Holders.
                  
                  
                  27Item 6.
                  Exhibits
                  
                  
                  27Signatures
                  
                  
                  28


i


PART
I





Item
1. Financial Statements.


AVANTAIR,
INC. AND SUBSIDIARIES
 Condensed
Consolidated Balance Sheets
 
 ASSETS
  December 31,
                                  
                                  
                                  June 30,2009
                                  
                                  
                                  2009(Unaudited)
                                  
                                  
                                  (Note 2)CURRENT
      ASSETSCash
      and cash equivalents
                                  
                                  $
                                  6,845,803
                                  
                                  
                                  $
                                  3,773,789Accounts
      receivable, net of allowance for doubtful accounts of $249,082 at December
      31, 2009 and $187,842 at June 30, 2009
                                  
                                  
                                  8,248,661
                                  
                                  
                                  
                                  5,711,055Inventory
                                  
                                  
                                  145,601
                                  
                                  
                                  
                                  140,997Current
      portion of aircraft costs related to fractional share
sales
                                  
                                  
                                  33,172,942
                                  
                                  
                                  
                                  36,910,206Notes
      receivable
                                  
                                  
                                  8,333
                                  
                                  
                                  
                                  272,731Prepaid
      expenses and other current assets
                                  
                                  
                                  3,476,348
                                  
                                  
                                  
                                  1,278,506Total
      current assets
                                  
                                  
                                  51,897,688
                                  
                                  
                                  
                                  48,087,284Aircraft
      costs related to fractional share sales, net of current
      portion
                                  
                                  
                                  54,434,241
                                  
                                  
                                  
                                  70,199,786Property
      and equipment, at cost, net of accumulated depreciation and amortization
      of $14,089,659 at December 31, 2009 and $11,695,228 at June 30,
      2009
                                  
                                  
                                  24,961,658
                                  
                                  
                                  
                                  29,842,365OTHER
      ASSETSCash
      - restricted
                                  
                                  
                                  2,356,695
                                  
                                  
                                  
                                  2,352,337Deposits
      on aircraft
                                  
                                  
                                  8,068,616
                                  
                                  
                                  
                                  9,264,890Deferred
      maintenance on aircraft engines
                                  
                                  
                                  1,319,368
                                  
                                  
                                  
                                  1,538,175Goodwill
                                  
                                  
                                  1,141,159
                                  
                                  
                                  
                                  1,141,159Other
      assets
                                  
                                  
                                  2,588,806
                                  
                                  
                                  
                                  1,639,407Total
      other assets
                                  
                                  
                                  15,474,644
                                  
                                  
                                  
                                  15,935,968Total
      assets
                                  
                                  $
                                  146,768,231
                                  
                                  
                                  $
                                  164,065,403





See
Notes to Condensed Consolidated Financial Statements.


1





AVANTAIR,
INC. AND SUBSIDIARIES
 Condensed
Consolidated Balance Sheets
 
 LIABILITIES
AND STOCKHOLDERS' DEFICIT
 
 December 31,
                                          
                                          
                                          June 30,2009
                                          
                                          
                                          2009(Unaudited)
                                          
                                          
                                          (Note 2)CURRENT
      LIABILITIESAccounts
      payable
                                          
                                          $
                                          4,744,325
                                          
                                          
                                          $
                                          7,307,320Accrued
      liabilities
                                          
                                          
                                          4,184,869
                                          
                                          
                                          
                                          5,010,745Customer
      deposits
                                          
                                          
                                          1,094,657
                                          
                                          
                                          
                                          1,282,936Short-term
      debt
                                          
                                          
                                          11,000,000
                                          
                                          
                                          
                                          11,500,000Current
      portion of long-term debt
                                          
                                          
                                          4,358,496
                                          
                                          
                                          
                                          11,020,590Current
      portion of deferred revenue related to fractional aircraft share
      sales
                                          
                                          
                                          38,478,834
                                          
                                          
                                          
                                          43,385,779Unearned
      management fee, flight hour card and Axis Club Membershiprevenues
                                          
                                          
                                          26,324,962
                                          
                                          
                                          
                                          17,807,796Total
      current liabilities
                                          
                                          
                                          90,186,143
                                          
                                          
                                          
                                          97,315,166Long-term
      debt, net of current portion
                                          
                                          
                                          17,389,675
                                          
                                          
                                          
                                          20,111,011Deferred
      revenue related to fractional aircraft share sales, net of current
      portion
                                          
                                          
                                          49,734,497
                                          
                                          
                                          
                                          65,071,197Deferred
      revenue related to Axis Club Membership sales, net of current
      portion
                                          
                                          
                                          1,113,221
                                          
                                          
                                          
                                          333,271Other
      liabilities
                                          
                                          
                                          2,745,693
                                          
                                          
                                          
                                          2,714,058Total
      long-term liabilities
                                          
                                          
                                          70,983,086
                                          
                                          
                                          
                                          88,229,537Total
      liabilities
                                          
                                          
                                          161,169,229
                                          
                                          
                                          
                                          185,544,703COMMITMENTS
      AND CONTINGENCIESSeries
      A convertible preferred stock, $.0001 par value, authorized 300,000
      shares; 152,000 shares issued and outstanding
                                          
                                          
                                          14,573,466
                                          
                                          
                                          
                                          14,528,383STOCKHOLDERS'
      DEFICITPreferred
      stock, $.0001 par value, authorized 700,000 shares; none
      issued
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Common
      stock, Class A, $.0001 par value, 75,000,000 shares authorized, 26,323,062
      shares issued and outstanding at December 31, 2009 and 16,463,615 shares
      issued and outstanding at June 30, 2009
                                          
                                          
                                          2,632
                                          
                                          
                                          
                                          1,646Additional
      paid-in capital
                                          
                                          
                                          56,978,048
                                          
                                          
                                          
                                          47,667,493Accumulated
      deficit
                                          
                                          
                                          (85,955,144
                                          )
                                          
                                          
                                          (83,676,822
                                          )Total
      stockholders' deficit
                                          
                                          
                                          (28,974,464
                                          )
                                          
                                          
                                          (36,007,683
                                          )Total
      liabilities and stockholders' deficit
                                          
                                          $
                                          146,768,231
                                          
                                          
                                          $
                                          164,065,403




See
Notes to Condensed Consolidated Financial Statements.


2


AVANTAIR,
INC. AND SUBSIDIARIES
 Consolidated
Statements of Operations
 (Unaudited)
 
 Three Months Ended December 31,
                                            
                                            
                                            Six Months Ended December 31,2009
                                            
                                            
                                            2008
                                            
                                            
                                            2009
                                            
                                            
                                            2008RevenueFractional
      aircraft sold
                                            
                                            $
                                            11,227,309
                                            
                                            
                                            $
                                            14,372,747
                                            
                                            
                                            $
                                            23,206,145
                                            
                                            
                                            $
                                            26,866,462Maintenance
      and management fees
                                            
                                            
                                            18,290,025
                                            
                                            
                                            
                                            17,702,350
                                            
                                            
                                            
                                            36,264,594
                                            
                                            
                                            
                                            34,779,489Flight
      hour card and Axis Club Membership revenue
                                            
                                            
                                            4,976,763
                                            
                                            
                                            
                                            2,125,787
                                            
                                            
                                            
                                            8,835,234
                                            
                                            
                                            
                                            4,492,012Other
      revenue
                                            
                                            
                                            1,270,860
                                            
                                            
                                            
                                            1,213,496
                                            
                                            
                                            
                                            2,663,868
                                            
                                            
                                            
                                            1,952,878Total
      revenue
                                            
                                            
                                            35,764,957
                                            
                                            
                                            
                                            35,414,380
                                            
                                            
                                            
                                            70,969,841
                                            
                                            
                                            
                                            68,090,841Operating
      expensesCost
      of fractional aircraft shares sold
                                            
                                            
                                            9,476,794
                                            
                                            
                                            
                                            12,323,154
                                            
                                            
                                            
                                            19,677,397
                                            
                                            
                                            
                                            22,928,177Cost
      of flight operations
                                            
                                            
                                            13,304,306
                                            
                                            
                                            
                                            12,402,387
                                            
                                            
                                            
                                            25,724,544
                                            
                                            
                                            
                                            24,212,790Gain
      on sale of assets
                                            
                                            
                                            (849,584
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (897,594
                                            )
                                            
                                            
                                            —Cost
      of fuel
                                            
                                            
                                            3,413,770
                                            
                                            
                                            
                                            3,061,019
                                            
                                            
                                            
                                            7,052,671
                                            
                                            
                                            
                                            7,573,425General
      and administrative expenses
                                            
                                            
                                            6,234,754
                                            
                                            
                                            
                                            5,828,778
                                            
                                            
                                            
                                            12,535,145
                                            
                                            
                                            
                                            11,489,545Selling
      expenses
                                            
                                            
                                            1,381,180
                                            
                                            
                                            
                                            1,108,682
                                            
                                            
                                            
                                            2,366,945
                                            
                                            
                                            
                                            2,016,434Depreciation
      and amortization
                                            
                                            
                                            1,408,874
                                            
                                            
                                            
                                            1,318,256
                                            
                                            
                                            
                                            2,866,791
                                            
                                            
                                            
                                            2,400,521Total
      operating expenses
                                            
                                            
                                            34,370,094
                                            
                                            
                                            
                                            36,042,276
                                            
                                            
                                            
                                            69,325,899
                                            
                                            
                                            
                                            70,620,892Income
      (loss) from operations
                                            
                                            
                                            1,394,863
                                            
                                            
                                            
                                            (627,896
                                            )
                                            
                                            
                                            1,643,942
                                            
                                            
                                            
                                            (2,530,051
                                            )Other
      income (expenses)Interest
      and other income
                                            
                                            
                                            10,372
                                            
                                            
                                            
                                            38,704
                                            
                                            
                                            
                                            17,784
                                            
                                            
                                            
                                            27,409Interest
      expense
                                            
                                            
                                            (1,587,319
                                            )
                                            
                                            
                                            (1,294,899
                                            )
                                            
                                            
                                            (3,210,773
                                            )
                                            
                                            
                                            (2,717,182
                                            )Total
      other expenses
                                            
                                            
                                            (1,576,947
                                            )
                                            
                                            
                                            (1,256,195
                                            )
                                            
                                            
                                            (3,192,989
                                            )
                                            
                                            
                                            (2,689,773
                                            )Net
      loss
                                            
                                            
                                            (182,084
                                            )
                                            
                                            
                                            (1,884,091
                                            )
                                            
                                            
                                            (1,549,047
                                            )
                                            
                                            
                                            (5,219,824
                                            )Preferred
      stock dividend and accretion of expenses
                                            
                                            
                                            (372,243
                                            )
                                            
                                            
                                            (372,104
                                            )
                                            
                                            
                                            (774,358
                                            )
                                            
                                            
                                            (763,617
                                            )Net
      loss attributable to common stockholders
                                            
                                            $
                                            (554,327
                                            )
                                            
                                            $
                                            (2,256,195
                                            )
                                            
                                            $
                                            (2,323,405
                                            )
                                            
                                            $
                                            (5,983,441
                                            )Loss
      per common share:Basic
      and diluted
                                            
                                            $
                                            (0.02
                                            )
                                            
                                            $
                                            (0.15
                                            )
                                            
                                            $
                                            (0.11
                                            )
                                            
                                            $
                                            (0.39
                                            )Weighted-average
      common shares outstanding:Basic
      and diluted
                                            
                                            
                                            24,583,880
                                            
                                            
                                            
                                            15,288,523
                                            
                                            
                                            
                                            20,528,498
                                            
                                            
                                            
                                            15,291,035




See
Notes to Condensed Consolidated Financial Statements.


3


AVANTAIR,
INC. AND SUBSIDIARIES
 Condensed
Consolidated Statement of Changes in Stockholders' Deficit
 Six
Months Ended December 31, 2009
 (Unaudited)
 
 Class A
                                        
                                        
                                        Additional
                                        
                                        
                                        
                                        
                                        
                                        TotalCommon Stock
                                        
                                        
                                        Paid-In
                                        
                                        
                                        Accumulated
                                        
                                        
                                        Stockholders'Shares
                                        
                                        
                                        Amount
                                        
                                        
                                        Capital
                                        
                                        
                                        Deficit
                                        
                                        
                                        DeficitBalance
      at June 30, 2009
                                        
                                        
                                        16,463,615
                                        
                                        
                                        $
                                        1,646
                                        
                                        
                                        $
                                        47,667,493
                                        
                                        
                                        $
                                        (83,676,822
                                        )
                                        
                                        $
                                        (36,007,683
                                        )Stock-based
      compensation
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        190,046
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        190,046Dividend
      on Series A convertiblepreferred
      stock
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (729,275
                                        )
                                        
                                        
                                        (729,275
                                        )Accretion
      of issuance costs
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (45,083
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        (45,083
                                        )Issuance
      of shares in connection withvested
      restricted stock, net of sharessurrendered
      in lieu of payroll taxes
                                        
                                        
                                        24,427
                                        
                                        
                                        
                                        2
                                        
                                        
                                        
                                        (10,025
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        (10,023
                                        )Issuance
      of warrants in consideration forservices
      rendered in private placement
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        209,708
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        209,708Issuance
      of warrants in connection withoperating
      lease obligation
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        807,031
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        807,031Sale
      of common stock in connectionwith
      private sale, net of expensesassociated
      with registration of shares
                                        
                                        
                                        9,835,020
                                        
                                        
                                        
                                        984
                                        
                                        
                                        
                                        8,158,878
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        8,159,862Net
      loss
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (1,549,047
                                        )
                                        
                                        
                                        (1,549,047
                                        )Balance
      at December 31, 2009
                                        
                                        
                                        26,323,062
                                        
                                        
                                        $
                                        2,632
                                        
                                        
                                        $
                                        56,978,048
                                        
                                        
                                        $
                                        (85,955,144
                                        )
                                        
                                        $
                                        (28,974,464
                                        )





See
Notes to Condensed Consolidated Financial Statements.


4


AVANTAIR,
INC. AND SUBSIDIARIES
 Condensed
Consolidated Statements of Cash Flows
 Six
Months Ended December 31, 2009 and 2008
 (Unaudited)




2009
                                                  
                                                  
                                                  2008OPERATING
      ACTIVITIES:Net
      loss
                                                  
                                                  $
                                                  (1,549,047
                                                  )
                                                  
                                                  $
                                                  (5,219,824
                                                  )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                                                  
                                                  
                                                  2,866,791
                                                  
                                                  
                                                  
                                                  2,400,521Amortization
      of deferred interest related to capital lease obligation
                                                  
                                                  
                                                  188,326
                                                  
                                                  
                                                  
                                                  —Stock-based
      compensation
                                                  
                                                  
                                                  190,046
                                                  
                                                  
                                                  
                                                  191,416Gain
      on sale of assets
                                                  
                                                  
                                                  (897,594
                                                  )
                                                  
                                                  
                                                  —Bad
      debt expense (recoveries)
                                                  
                                                  
                                                  61,359
                                                  
                                                  
                                                  
                                                  (76,052
                                                  )Changes
      in operating assets and liabilities:Accounts
      receivable
                                                  
                                                  
                                                  (2,598,965
                                                  )
                                                  
                                                  
                                                  (426,536
                                                  )Inventory
                                                  
                                                  
                                                  (4,604
                                                  )
                                                  
                                                  
                                                  3,650Deposits
      on aircraft
                                                  
                                                  
                                                  1,196,274
                                                  
                                                  
                                                  
                                                  (1,628,536
                                                  )Deferred
      maintenance agreement on aircraft engines
                                                  
                                                  
                                                  218,807
                                                  
                                                  
                                                  
                                                  632,889Prepaid
      expenses and other current assets
                                                  
                                                  
                                                  (2,197,842
                                                  )
                                                  
                                                  
                                                  749,938Notes
      receivable
                                                  
                                                  
                                                  264,398
                                                  
                                                  
                                                  
                                                  1,215,006Aircraft
      costs related to fractional shares
                                                  
                                                  
                                                  19,502,809
                                                  
                                                  
                                                  
                                                  11,394,477Other
      assets
                                                  
                                                  
                                                  (142,368
                                                  )
                                                  
                                                  
                                                  227,517Accounts
      payable
                                                  
                                                  
                                                  (2,518,895
                                                  )
                                                  
                                                  
                                                  1,423,510Accrued
      liabilities
                                                  
                                                  
                                                  (1,632,076
                                                  )
                                                  
                                                  
                                                  (3,126,099
                                                  )Unearned
      management fee, flight hour card and Axis Club Membership
      revenue
                                                  
                                                  
                                                  7,933,599
                                                  
                                                  
                                                  
                                                  1,467,442Cash-restricted
                                                  
                                                  
                                                  (4,358
                                                  )
                                                  
                                                  
                                                  (16,260
                                                  )Customer
      deposits
                                                  
                                                  
                                                  (188,279
                                                  )
                                                  
                                                  
                                                  (585,731
                                                  )Deferred
      revenue related to fractional aircraft share sales
                                                  
                                                  
                                                  (20,243,645
                                                  )
                                                  
                                                  
                                                  (11,680,162
                                                  )Deferred
      revenue related to Axis Club Membership sales
                                                  
                                                  
                                                  1,223,767
                                                  
                                                  
                                                  
                                                  —Other
      liabilities
                                                  
                                                  
                                                  31,635
                                                  
                                                  
                                                  
                                                  59,377Net
      cash provided by (used in) operating activities
                                                  
                                                  
                                                  1,700,138
                                                  
                                                  
                                                  
                                                  (2,993,457
                                                  )INVESTING
      ACTIVITIES:Proceeds
      from the sale of asset
                                                  
                                                  
                                                  2,900,000
                                                  
                                                  
                                                  
                                                  —Capital
      expenditures
                                                  
                                                  
                                                  (28,559
                                                  )
                                                  
                                                  
                                                  (501,382
                                                  )Net
      cash provided by (used in) investing activities
                                                  
                                                  
                                                  2,871,441
                                                  
                                                  
                                                  
                                                  (501,382
                                                  )FINANCING
      ACTIVITIES:Borrowings
      under long- term debt
                                                  
                                                  
                                                  56,614
                                                  
                                                  
                                                  
                                                  —Borrowings
      under short- term debt
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  1,125,000Principal
      payments on long-term debt
                                                  
                                                  
                                                  (9,425,749
                                                  )
                                                  
                                                  
                                                  (3,223,881
                                                  )Principal
      payments on short-term debt
                                                  
                                                  
                                                  (500,000
                                                  )
                                                  
                                                  
                                                  (5,741,150
                                                  )Proceeds
      from issuance of stock, net of cost of stock
      redemption/registration
                                                  
                                                  
                                                  8,369,570
                                                  
                                                  
                                                  
                                                  (1,865
                                                  )Net
      cash used in financing activities
                                                  
                                                  
                                                  (1,499,565
                                                  )
                                                  
                                                  
                                                  (7,841,896
                                                  )




5




AVANTAIR,
INC. AND SUBSIDIARIES
 Condensed
Consolidated Statements of Cash Flows
 Six
Months Ended December 31, 2009 and 2008
 (Unaudited)
 
 2009
                        
                        
                        2008Net
      increase (decrease) in cash and cash equivalents
                        
                        $
                        3,072,014
                        
                        
                        $
                        (11,336,735
                        )Cash
      and cash equivalents, beginning of the period
                        
                        
                        3,773,789
                        
                        
                        
                        19,149,777Cash
      and cash equivalents, end of the period
                        
                        $
                        6,845,803
                        
                        
                        $
                        7,813,042SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
                        
                        $
                        3,210,773
                        
                        
                        $
                        2,717,182SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIESAccretion
      of Series A convertible preferred stock
                        
                        $
                        45,083
                        
                        
                        $
                        44,806Dividends
      payable on Series A convertible preferred stock
                        
                        $
                        729,275
                        
                        
                        $
                        718,811Flight
      hour cards issued in consideration for equipment
                        
                        $
                        139,570
                        
                        
                        $
                        —Common
      shares surrendered in lieu of payroll taxes
                        
                        $
                        10,025
                        
                        
                        $
                        —Issuance
      of warrants to underwriter in connection with private sale of common
      stock
                        
                        $
                        209,708
                        
                        
                        $
                        —Issuance
      of warrants to Lorne Weil in connection with aircraft
      agreement
                        
                        $
                        807,031
                        
                        
                        $
                        —Reversal
      of accrued expense
                        
                        $
                        44,100
                        
                        
                        $
                        —




See
Notes to Condensed Consolidated Financial Statements.


6





AVANTAIR,
INC. AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





NOTE
1 - BUSINESS OPERATIONS




General




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





On
October 2, 2006, the Company signed a definitive stock purchase agreement
with Avantair Inc. (“Old Avantair”). The agreement, as amended on
December 15, 2006, provided for Avantair to issue 6,684,822 shares of
common stock to the stockholders of Old Avantair in exchange for all of the
issued and outstanding shares of Old Avantair (the “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
December 31, 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 FBOs and its headquarters in Clearwater,
Florida, Avantair provides aircraft maintenance, concierge and other services to
its customers as well as to the Avantair fleet.




NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Interim
Reporting




The
accompanying unaudited interim condensed consolidated financial statements were
prepared in accordance with accounting principles generally accepted in the
United States of America 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 December
31, 2009, the Company’s recurring losses resulting in a stockholders’ deficit of
approximately $29.0 million and a working capital deficiency of approximately
$38.3 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:


7





Unit Sales for the Three Months EndedDecember 31, 2009
                      
                      
                      December 31, 2008
                      
                      
                      September 30, 2009
                      
                      
                      September 30, 2008New
      Fractional shares
                      
                      
                      5
                      
                      
                      
                      16.5
                      
                      
                      
                      2
                      
                      
                      
                      19.5Flight
      hour cards
                      
                      
                      100
                      
                      
                      
                      53
                      
                      
                      
                      86
                      
                      
                      
                      27Axis
      Club Memberships
                      
                      
                      21
                      
                      
                      
                      N/A
                      
                      
                      
                      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 December 31, 2009, the
Company had 29 fractional aircraft shares available for sale. In addition to the
cost of acquiring aircraft, Avantair’s primary expenses are related to fuel,
aircraft repositioning (i.e., moving an aircraft to another location to
accommodate a customer’s need and for demonstration flights for sales purposes),
maintenance, charters and insurance. To finance its growth strategy, the Company
may continue to actively pursue additional funds through equity financing,
including the sale of additional shares of common and preferred stock, asset
sales, accelerated collection of maintenance and management fees, debt
financing, or a combination thereof. At December 31, 2009, the Company had
approximately $6.8 million of unrestricted cash on hand and assuming there is no
change in sales and expense trends experienced since the fourth quarter of
fiscal 2009, the Company believes that its cash on hand is sufficient to
continue operations for the foreseeable future.





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, warrant valuations 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 an undivided interest in a specified
aircraft. When a customer purchases a fractional share, they are also required
to enter into a five-year management and maintenance agreement which grants the
customer the right to the use of the aircraft for a specified number of hours
each year. Under the terms of the maintenance and management agreement, the
Company agrees to manage, operate and maintain the aircraft on behalf of the
customer in exchange for a fixed monthly fee. Flight hour cards provide
customers with a fixed number of flight hours for a fixed fee.




8




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 ASC
605-25“Multiple- Element
Arrangements” to account for the sale of fractional shares of aircraft.
Accordingly, as the sales of the fractional shares cannot be separated from the
underlying 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.




Other
Revenues




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




Aircraft
Costs Related To Fractional Sales




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




Maintenance
Expense Policy




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




Prepaid
Pilot Training




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.




9




Income
Taxes




Income
taxes are accounted for under the asset and liability method in accordance with
ASC 740“Income Taxes.”
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is established to reduce deferred tax
assets to the amounts expected to be realized. The Company calculated an annual
effective tax rate to determine the interim period income tax provisions;
however, no tax liability was accrued for the three months ended December 31,
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 ASC 740 relating to
uncertain tax positions. ASC 740 prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and measurement of
tax positions taken or expected to be taken in a tax return. For those benefits
to be recognized, a tax position must be more-likely-than-not to be sustained
upon examination by taxing authorities. The Company has identified its federal
tax return and State of Florida tax return as “major” tax jurisdictions, as
defined in ASC 740. The Company evaluations were performed for the tax years
ended 2005 through 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
(the “Plan”), which the Company’s shareholders approved, for employees, certain
non-employees and non-employee directors. Stock-based awards under this plan may
consist of common stock, common stock units, stock options, cash-settled or
stock-settled stock appreciation rights, restricted stock and other stock-based
awards. The Company issues common stock to satisfy stock option exercises or
vesting of stock awards.




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




Stock-based
compensation expense related to these plans, which is included in “General and
administrative” costs in the accompanying Condensed Consolidated Statements of
Operations, was $98,346 and $190,046 for the three and six months ended December
31, 2009 and was $95,708 and $191,416 for the three and six months ended
December 31, 2008, respectively. There were no related income tax benefits
recognized in the accompanying Condensed Consolidated Statements of Operations
for the three or six months ended December 31, 2009 or for the comparable 2008
period. In September 2009, by recommendation of the Compensation Committee and
approval by the Board of Directors, 25,000 shares of restricted stock were
granted to each of the Company's three named executive officers, effective
October 1, 2009. One-third of the shares will vest one year following the grant
date, and one-twelfth of the shares vest every three months thereafter. As of
December 31, 2009, the Company had 291,834 shares of restricted stock and
150,000 stock options outstanding. The Company made no stock option grants nor
issued warrants pursuant to the Plan during the three months ended December 31,
2009.




Accounting
for Derivative Instruments




The
Company accounts for derivative instruments in accordance with ASC 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 December 31,
2009.




10




Fair
Value Measurements




Effective
July 1, 2008, the Company adopted the provisions of ASC 820“Fair Value Measurements and
Disclosures.” ASC 820, defines fair value, establishes a framework for
measuring fair value in accordance with U.S. GAAP, and expands disclosures about
fair value measurements. ASC 820 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. ASC
820 permits an entity to measure certain financial assets and financial
liabilities at fair value with changes in fair value recognized in earnings each
period. During the six months ended December 31, 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 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 and six months ended December 31, 2009, a total of 4,018,892
share-equivalents of potentially dilutive securities were excluded from the
calculation of diluted earnings per share. These securities were comprised of
2,373,620 warrants issued in conjunction with the LW Air transactions (see Note
4) to Lorne Weil, 455,887 warrants issued to EarlyBirdCapital in
consideration for services rendered as placement agent for the Company’s June,
September and October 2009 private placements (see Note 4), 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 ASC 260“Earnings Per Share.” In accordance with ASC 260’s contingently issuable
shares provision, 139,385 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. A total of
14,415,167 share-equivalents of potentially dilutive securities were excluded
from the calculation of diluted loss per share for the three and six months
ended December 31, 2008 and were comprised of 14,146,000 warrants to purchase
one share of the Company’s common stock, 119,167 shares of restricted stock and
150,000 outstanding options.





Subsequent
Events




Effective
July 1, 2009, the Company adopted the provisions of ASC 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 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 855. We
have evaluated subsequent events for recognition or disclosure through February
16, 2010.





Reclassifications




Certain
balances in the prior periods were reclassified to conform to classifications
adopted in the current period.




Recently
Issued Pronouncements





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 605-25. The Company is currently evaluating
the requirements of ASC 605-25 and its impact on its consolidated financial
condition, results of operations and cash flows.




In
October 2009, the FASB issued Accounting Standards Update No. 2009-13, “Multiple-Deliverable
Revenue Arrangements,”which is effective for fiscal years beginning on
or after June 15, 2010, with early adoption permitted. Under the new guidance,
when vendor specific objective evidence or third party evidence for deliverables
in an arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using
the relative selling price method. The new guidance includes new disclosure
requirements on how the application of the relative selling price method affects
the timing and amount of revenue recognition. The Company is currently
evaluating the adoption of this guidance and its impact on its consolidated
financial condition, results of operations and cash flows.
 
 The
Company does not believe that any other recently issued, but not yet effective
accounting standards, if currently adopted would have a material effect on the
Company’s consolidated financial statements.




11




NOTE
3 - COMMITMENTS AND CONTINGENCIES




Operating
Lease Commitments





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





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





During
the second quarter of fiscal 2010, the Company, through an arms-length
transaction, transferred its rights to purchase four Piaggio Avanti II aircraft
to LW Air LLC pursuant to the existing aircraft purchase agreement between the
Company and Piaggio America, Inc. Upon delivery of the aircraft, Piaggio America
returned $2.6 million of deposits previously paid on the aircraft by the
Company.  Simultaneous with this transaction, the Company entered into
an eight-year management agreement for those aircraft and the Company issued
2,373,620 warrants to Lorne Weil, the Managing Member of LW Air LLC (“LW Air”)
(see Note 4). By virtue
of his ownership of the warrants, Mr. Weil is now a significant beneficial owner
of the Company. In addition, since the contractual relationships under the
agreements with LW Air were executed following the date that Mr. Weil became a
significant beneficial owner, the Company recognizes the transaction as a
related party transaction. Pursuant
to the agreement between the parties, the Company will manage each aircraft for
a monthly fee which is variable based upon aircraft flight hours but will not
exceed $56,500 per month. The agreement also allows the Company to enter into
short-term leases for the use of the aircraft at a specified dry lease rate per
flight hour. Included in the December 31, 2009 prepaid and other current
assets balance in the Company’s Condensed Consolidated Balance Sheet is
approximately $0.3 million of advance payments made to LW Air for future use of
these aircraft.





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




Purchase
Commitments





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





As of
December 31, 2009, Avantair had contractual commitments to purchase 52
additional Piaggio Avanti II aircraft through 2013. The total commitment,
including a recently proposed price escalation, is valued at approximately $330
million.





Financing
Commitments- Short-term





Short-term
debt consists of the following as of December 31, 2009:





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




Midsouth
Services, Inc





On April
2, 2009, Avantair entered into two Floor Plan Agreements with Midsouth Services,
Inc (“Midsouth”) to replace Midsouth’s existing Floor Plan Agreements dated July
31, 2008.  The new Floor Plan Agreements extended credit to Avantair
in an increased amount of $11.6 million to be used towards the purchase of new
Piaggio P-180 aircraft.  Each of the new Floor Plan Agreements are
similar to the prior Floor Plan Agreements and cover an amount not to exceed
$5.8 million for a term of twelve months.  The Company has the sole
option to terminate one of the Agreements during the term with ninety days
written notice.  The Company has agreed to pay Midsouth a monthly fee
of $82,500 for each Floor Plan Agreement during the term. Borrowings outstanding
under this arrangement at December 31, 2009 totaled $11.0
million.


12




Financing Commitments-
Long-term





Long-term
debt consists of the following as of December 31, 2009:




Wells
      Fargo Equipment Finance, Inc.
                  
                  $
                  2,891,260Jet
      Support Services, Inc.
                  
                  
                  2,762,312Century
      Bank, F.S.B.
                  
                  
                  1,827,341Wachovia
      Bank
                  
                  
                  2,360,468Other
      long-term debt
                  
                  
                  48,316Midsouth
      Services, Inc
                  
                  
                  11,858,47421,748,171Less
      current portion
                  
                  
                  (4,358,496
                  )Long-term
      debt
                  
                  $
                  17,389,675





Wells
Fargo Equipment Finance, Inc.





In
February 2005, the Company entered into financing arrangements for the purchase
of core aircraft under various notes payable with Wells Fargo Equipment Finance,
Inc. The notes outstanding at December 31, 2009 totaled approximately $2.9
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 ASC 470-50“Debt Modification &
Extinguishment.”  CNM also assumed a promissory note due to
Wells Fargo Bank for $2.9 million which was included as part of this new note
agreement. During October 2009, the Company repaid the full amount of the loan
of approximately $2.7 million.





Jet
Support Services, Inc.





On April
24, 2006, Avantair financed an aircraft maintenance program contract with Jet
Support Services, Inc. (“JSSI”) in the amount of $3.4 million. The promissory
note provided for seven monthly installments of $145,867 and 53 monthly
installments of $45,867, respectively, including interest at 7.0% per year. On
April 15, 2008, the Company entered into a financing arrangement with JSSI by
means of a $5.5 million promissory note. The new note matures on April 1,
2011 and bears interest at 10.0% per annum, with 35 monthly payments of
principal and interest in an amount of $185,127 beginning on June 2, 2008.
The new note covered the remaining balance of $0.4 million of the aforementioned
promissory note, other costs and fees to be paid by the Company under service
agreements with JSSI and related deferred financing costs of approximately $1.0
million which will be amortized over the life of the note using the effective
interest method. Upon entering into this payment arrangement and the $5.5
million promissory note, the parties terminated the airframe maintenance
contract and have agreed to apply the unamortized prepayment ($1,319,368 at
December 31, 2009 and $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 December 31, 2009 totaled approximately
$2.8 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 December 31, 2009
totaled approximately $1.8 million and is payable in monthly installments of
$27,175 with interest of 8.25% per annum, through August 3, 2012. The note
is collateralized by the aircraft.





Wachovia
Bank





On
October 31, 2007, the Company entered into a financing arrangement for the
purchase of one used aircraft at a total purchase price of approximately $4.5
million (inclusive of the value of a flight hour card of 100 hours). Financing
was obtained from Wachovia through a note payable of $3.9 million. This debt
will be repaid monthly over 7 years at an interest rate of the LIBOR rate plus
4.0%. Borrowings outstanding under this arrangement at December 31, 2009 totaled
approximately $2.4 million. During September 2009, the Company received a waiver
of compliance with a financial covenant in connection with the
note.


13





Other
long-term debt





In
October 2009, the Company and Kevco Aviation Inc. executed a $56,614 note
agreement for the purchase equipment. The note outstanding at December 31, 2009
totaled approximately $48,316 and is payable in monthly installments of $2,912
with interest of 3.25% per annum, through May 2011.





Capital
Lease Transactions





JMMS,
Inc.





The
Company entered into a sale and leaseback agreement, dated August 11, 2006, with
JMMS, LLC (“JMMS”). Under the sale and leaseback agreement, the Company sold
100.0% of its interest in a core aircraft for $4.2 million and leased back 68.8%
of the aircraft for a five year term. The proceeds of the sale and leaseback
arrangement were used to pay down a line of credit. In March 2007, the Company
amended the lease agreement to include a provision for the Company to buy back
the aircraft at the expiration of the term. As a result of the amendment, the
Company has accounted for the sale and leaseback transaction as a finance lease.
JMMS notified the Company of its intention to terminate the sale and leaseback
agreement between the parties effective March 1, 2009, at which date, pursuant
to the agreement, the Company was required to purchase the aircraft at a cost of
no more than the $4.2 million. The closing date of the transaction was extended
past March 1, 2009, in consideration for monthly payments to JMMS totaling $1.25
million through December 1, 2009. The total amount of the monthly payments made
to JMMS by the Company since March 1, 2009 were deducted from the aircraft
purchase price. In 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 at June 30, 2009. On December 14, 2009, the Company sold the aircraft to a
third party for $2.9 million and paid the remaining outstanding balance of the
purchase price to JMMS, and realized a gain of $0.8 million.




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 December 31, 2009 totaled approximately $4.0 million.





In April
2009, the Company amended the Lease Agreement previously accounted for as an
operating lease under ASC Topic 840“Leases,” dated as of July
31, 2006 between the Company and Midsouth. Pursuant to the amendment, the
Company is required to pay $74,900 monthly 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 December 31, 2009
totaled approximately $3.1 million, net of deferred interest of $0.7
million.





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





As of
December 31, 2009, the Company had 26,323,062 shares of the common stock
outstanding, 1,058,166 shares of common stock available for future issuance
under its 2006 Long-Term Stock Incentive Plan and warrants to purchase 2,829,507
shares outstanding. In addition, as of December 31, 2009, the Company has
152,000 shares of Series A Preferred Shares outstanding.   The Company has 4,251,857
shares of common stock reserved on its books and records for issuance upon the
conversion of the outstanding Series A Preferred Shares. As a result of the
sales of shares consummated on June 30, September 25, and October 16, 2009, the
conversion price of the Series A Preferred Shares was reduced from $5.15 to
$3.57.


14





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 sale under the Securities Act of 1933,
as amended. By agreement between Avantair, the investors in the June 30, 2009
private placement and that offering’s placement agent, the period for
additional sales of units was extended until October 15, 2009. On September 25,
2009, the Company sold an additional 250,000 units at a price of $2.50 per unit
generating net proceeds of approximately $0.6 million.





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 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
2009 private placements for an aggregate of 516,127 shares of common stock for
no additional consideration.  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. Subsequent to the closing of the September private placement, the
terms of the offer were modified from the price of $2.50 per unit in the first
and second private placements to conform to the price in the October private
placement of $0.95 per common share.  The exchange represents the
equivalent number of shares necessary to cause the per share price paid in the
June and September private placements to equal the price per share in the
October private placement.  The exchange was recorded at its fair
value as an adjustment to paid-in capital and common stock for its par
value.





In
connection with the October 2009 private placement, Avantair entered into a
newRegistration
Rights Agreement with the investors inthe 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 sale the shares issued to the
investors and to cause the registration statement to be declared effective on or
prior to the 150th day after the filing date, as the Company’s registration
statement is being reviewed by the SEC. Under the terms of the Registration
Rights Agreement, the Company is obligated to maintain the effectiveness of the
sale 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.In the opinion of
management, the Company believes that the registration statement will be
declared effective on or prior to the 150th day and
therefore has not accrued any liquidated damages.




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





Stock
      Price (1)
                      
                      $
                      1.15Exercise
      Price (2)
                      
                      $
                      1.05Interest
      Rate (1)
                      
                      
                      1.34
                      %
      (4)Volatility
                      
                      
                      79.93
                      %Time
      to Maturity (2)
                      
                      2.71
      yearsNumber
      of Steps (3)
                      
                      
                      12Exercise
      Factor
                      
                      
                      2.00Minimum
      Market Price
                      
                      $
                      2.10
 
 (1)
      As of the Valuation Date(2)
      Per warrant agreement(3)
      Number of quarterly periods in the 2.71 year term.(4)
      Based on vesting period on date of grant.


15





The
warrants issued in conjunction with the LW Air transactions (see Note 3) to
Lorne Weil, Managing Member of LW Air, provide for the purchase of 2,373,620
shares of the Company’s common stock at an exercise price of $1.25 per share.
The warrants expire on October 16, 2012, and the warrants and any underlying
shares purchased upon exercise of the warrants may not be sold, transferred,
assigned or hypothecated, in whole or in part, at any time on or prior to
October 16, 2011, other than to an affiliate of the warrant holder. The Company
may redeem the warrants held by Lorne Weil at any time on and after October 16,
2011 at the price of $0.01 per warrant, provided that the volume weighted
average price of the Company’s common stock has been at least 300.0% of the
exercise price of a warrant for any twenty trading days during any consecutive
thirty trading day period ending on the third trading day preceding the date of
the notice of redemption. On December 15, 2009, LW Air took delivery of the
fourth aircraft and, as such, has satisfied the conditions for vesting of all
the warrants. The Company 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 calculated in accordance with ASC 820 estimated
at $0.34 per warrant) to the Cost of Flight Operations on a straight-line basis
ratably over the initial term of the agreement. The fair values of the warrants
issued were estimated on the date of grant. A Lattice option-pricing model,
applying the following assumptions, was used to estimate the fair value for the
warrants issued:


Stock
      Price (1)
                      
                      $
                      1.15Exercise
      Price (2)
                      
                      $
                      1.25Interest
      Rate (1)
                      
                      0.015% and 0.066
                      % (4)Volatility
                      
                      
                      78.89
                      %Time
      to Maturity (2)
                      
                      3
      yearsNumber
      of Steps (3)
                      
                      
                      156Suboptimal
      Exercise Factor
                      
                      
                      3.00Minimum
      Market Price
                      
                      $
                      3.75
 
 (1)
      As of the Valuation Date(2)
      Per warrant agreement(3)
      Number of weeks in a 52 week year over a 3 year period.(4)
      Based on vesting period of one and nine weeks.





Due to
its limited history as a public company, the Company has estimated expected
volatility for the EarlyBirdCapital, Inc and Lorne Weil warrant valuations based
on the historical volatility of certain similar companies. The risk-free
interest rate assumptions are based upon observed interest rates appropriate for
the expected term of the warrants.


16


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
February 12, 2010, Avantair operated 55 aircraft within its fleet, which is
comprised of 46 aircraft for fractional ownership, 5 company owned core aircraft
and 4 leased and company managed aircraft.




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




Avantair
generates revenues primarily through the sale of fractional ownership shares of
aircraft, by providing 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 February 12, 2010, Avantair had contractual
commitments to purchase 52 additional Piaggio Avanti II aircraft through 2013.
The total commitment, including a recently proposed price escalation, is valued
at approximately $330 million. The Company’s agreement with Piaggio permits it
some flexibility to defer a portion of the aircraft deliveries and the Company
has exercised this flexibility at certain times in order to take deliveries in
line with the Company’s sales expectations. During the second quarter of fiscal
2010, the Company, through an arms-length transaction, transferred its rights to
purchase four Piaggio Avanti II aircraft to LW Air LLC pursuant to the existing
aircraft purchase agreement between the Company and Piaggio. Upon delivery of
the aircraft, Piaggio returned $2.6 million of deposits previously paid on the
aircraft by the Company.  Simultaneous with this transaction, the
Company entered into an eight-year management agreement for those aircraft and
the Company issued 2,373,620 warrants to Lorne Weil, the Managing Member of LW
Air LLC.  Pursuant to the agreement between the parties, the Company will
manage each aircraft for a monthly fee which is variable based upon aircraft
flight hours but will not exceed $56,500 per month. The agreement also allows
the Company to enter into short-term leases for the use of the aircraft at a
specified dry lease rate per flight hour.  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
October 2009, the Company consummated a private sale of its common stock to
investors generating net proceeds of approximately $8 million. Together
with the proceeds of the private placements consummated in June and September
2009, the Company received total net proceeds of approximately $9.9
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 EndedDecember 31, 2009
                      
                      
                      December 31, 2008
                      
                      
                      September 30, 2009
                      
                      
                      September 30, 2008New
      Fractional shares
                      
                      
                      5
                      
                      
                      
                      16.5
                      
                      
                      
                      2
                      
                      
                      
                      19.5Flight
      hour cards
                      
                      
                      100
                      
                      
                      
                      53
                      
                      
                      
                      86
                      
                      
                      
                      27Axis
      Club Memberships
                      
                      
                      21
                      
                      
                      
                      N/A
                      
                      
                      
                      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 February 12, 2010, the
Company had 29 fractional aircraft shares available for sale. In addition to the
cost of acquiring aircraft, Avantair’s primary expenses are related to fuel,
aircraft repositioning (i.e., moving an aircraft to another location to
accommodate a customer’s need and for demonstration flights for sales purposes),
maintenance, charters and insurance. To finance its growth strategy, the Company
may continue to actively pursue additional funds through equity financing,
including the sale of additional shares of common and preferred stock, asset
sales, accelerated payments of maintenance and management fees, debt financing,
or a combination thereof.


17




At
December 31, 2009 and June 30, 2009, Avantair had assets of approximately $146.8
million and $164.0 million, respectively. For the three and six months ended
December 31, 2009 and the fiscal year ended June 30, 2009, the Company had
revenue of approximately $35.8 million, $71.0 million and $136.8 million,
respectively, and net losses of approximately $0.2 million, $1.5 million and
$4.5 million, respectively. Avantair has incurred losses since inception and may
not be able to generate sufficient net revenue from its business in the future
to achieve or sustain profitability. At December 31, 2009, the Company had
approximately $6.8 million of unrestricted cash on hand and assuming there is no
change in sales and expense trends experienced since the fourth quarter of
fiscal 2009, the Company believes that its cash on hand is sufficient to
continue operations for the foreseeable future.





Critical
Accounting Policies and Estimates





As
discussed in our Form 10-K for the fiscal year ended June 30, 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 judgment and
estimation. The judgments, or the methodology on which the judgments are made,
are reviewed with the Audit Committee.





Revenue
Recognition




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




Fractional
Aircraft Shares Sales




The
Company does not have objective evidence to determine the fair value and
allocate fractional share revenue from that generated from the management and
maintenance agreement, and, as a result, has adopted the provisions of ASC
605-25“Multiple- Element
Arrangements” to account for the sale of fractional shares of aircraft.
Accordingly, as the sales of the fractional shares cannot be separated from the
underlying 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 ASC 605-25,the Company recognizes
revenue from the sale of fractional shares as income over the five-year period.
The aircraft costs related to sales of fractional shares consist of the cost of
the aircraft and are recorded as an asset and recognized as the cost of aircraft
shares sold over the five-year period.




Maintenance
Expense Policy




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


18




Stock-Based
Compensation




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




Results
of Operations




Three
Months Ended December 31, 2009 Compared with Three Months Ended December 31,
2008





Revenues
for the three months ended December 31, 2009 were $35.8 million, an increase of
1.0% from $35.4 million for the three months ended December 31, 2008. This
increase was the result of a 21.9% decrease in the revenue generated from the
sale of fractional aircraft shares to $11.2 million for the three months ended
December 31, 2009 from $14.4 for the comparable 2008 period, offset by an
increase of 3.3% in maintenance and management fees to $18.3 million for the
three months ended December 31, 2009 from $17.7 for the comparable 2008 period,
an increase of 134.1% in flight hour card and Axis Club Membership revenue to
$5.0 million for the three months ended December 31, 2009 from $2.1 million for
the comparable 2008 period, and an increase of 4.7% in other revenue to $1.3
million for the three months ended December 31, 2009 from $1.2 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 0.6% in the average number of total fractional shares through
December 31, 2009 from the comparable 2008 period.





The
increase in revenue from maintenance and management fees is primarily due to a
0.6% increase in the average number of fractional shares through December 31,
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 $2.9 million
primarily due to an increase in flight hour card sales as a result of the
greater acceptance of time card travel in the existing economy compared to
fractional ownership and the timing of flight hour card utilization by owners
during the three months ended December 31, 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.
Demonstration flights that generate demonstration revenue are in anticipation of
a fractional share sale, but not for flight hour time card sales. Demonstration
revenue therefore decreased because of the decrease in fractional share sales,
despite the increases in flight hour time card sales.





Operating
expenses for the three months ended December 31, 2009 were 4.6% lower than the
three months ended December 31, 2008, with total operating expenses of $34.4
million compared to $36.0 million, respectively. The cost of fractional aircraft
shares sold decreased to $9.5 million for the three months ended December 31,
2009 from $12.3 million for the three months ended December 31, 2008, due to the
full amortization of costs that had been deferred from shares sold in prior
periods, partially offset by a 0.6% increase in the average number of fractional
shares sold through December 31, 2009 from fractional shares sold through
December 31, 2008. The gain on sale of assets related to a nonrecurring gain
recognized on the sale of one of the Company’s core aircraft during the three
months ended December 31, 2009, with no gain realized in the comparable 2008
period. The cost of flight operations, together with the cost of fuel, increased
8.1% to $16.7 million for the three months ended December 31, 2009 from $15.5
million for the three months ended December 31, 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
      $0.3 million increase in cost of fuel due to an increase in flight hours
      offset by a decrease in the per gallon cost of
  fuel.


19


General
and administrative expenses increased 7.0% to $6.2 million for the three months
ended December 31, 2009 from $5.8 million for the three months ended December
31, 2008, primarily due to a $0.4 million increase in payroll and related
expenses and a $0.3 million increase in expenses related to fixed based
operations primarily as a result to increased volume of fuel sales, partially
offset by decreases of $0.1 million in computer expenses due to implementation
of financial application software in the prior year and other decreases due to
the result of cost saving initiatives.





Selling
expenses increased 24.6% to $1.4 million for the three months ended December 31,
2009 from $1.1 million for the three months ended December 31, 2008 due to an
increase in commission expenses as a result of increased flight hour card
sales.





Income from operations was $1.4 million
for the three months ended December 31, 2009, an increase from $0.6 million loss
from operations for the three months ended December 31, 2008 for the reasons set
forth above.





Interest
expense increased 22.6% to $1.6 million for the three months ended December 31,
2009 from $1.3 million for the three months ended December 31, 2008, due to an
increase
in the weighted average interest rate on debt outstanding for the three months
ended December 31, 2009 from the comparable 2008 period.





Net loss
decreased to $0.2 million for the three months ended December 31, 2009 compared
to $1.9 million for the three months ended December 31, 2008 due to the decrease
in loss from operations partially offset by the increase in total other expense
discussed above.





Six
Months Ended December 31, 2009 Compared with Six Months Ended December 31,
2008




Revenues
for the six months ended December 31, 2009 were $71.0 million, an increase of
4.2% from $68.1 million for the six months ended December 31, 2008. This
increase was the result of a 13.6% decrease in the revenue generated from the
sale of fractional aircraft shares to $23.2 million for the six months ended
December 31, 2009 from $26.9 for the comparable 2008 period, offset by an
increase of 4.3% in maintenance and management fees to $36.3 million for the six
months ended December 31, 2009 from $34.8 for the comparable 2008 period, an
increase of 96.7% in flight hour card and Axis Club Membership revenue to $8.8
million for the six months ended December 31, 2009 from $4.5 million for the
comparable 2008 period, and an increase of 36.4% in other revenue to $2.7
million for the six months ended December 31, 2009 from $2.0 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 0.6% in the average number of total fractional shares through
December 31, 2009 from the comparable 2008 period.





The
increase in revenue from maintenance and management fees is primarily due to a
0.6% increase in the average number of fractional shares through December 31,
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 $4.3 million
primarily due to an increase in flight hour card sales as a result of the
greater acceptance of time card travel in the existing economy compared to
fractional ownership and the timing of flight hour card utilization by owners
during the six months ended December 31, 2009 from the comparable 2008
period.





Other
revenue increased 36.4% to $2.7 million for the six months ended December 31,
2009 from $2.0 million for the six months ended December 31, 2008, due to
increased fuel and remarketing revenue offset by a decrease in demonstration
revenue. Demonstration flights that generate demonstration revenue are in
anticipation of a fractional share sale, but not for flight hour time card
sales. Demonstration revenue therefore decreased because of the decrease in
fractional share sales, despite the increases in flight hour time card
sales.





Operating
expenses for the six months ended December 31, 2009 were 1.8% lower than the six
months ended December 31, 2008, with total operating expenses of $69.3 million
compared to $70.6 million, respectively. The cost of fractional aircraft shares
sold decreased to $19.7 million for the six months ended December 31, 2009 from
$22.9 million for the six months ended December 31, 2008, due to the full
amortization of costs that had been deferred from shares sold in prior periods,
partially offset by a 0.6% increase in the average number of fractional shares
sold through December 31, 2009 from fractional shares sold through December 31,
2008. The gain on sale of assets related to a nonrecurring gain recognized on
the sale of one of the Company’s core aircraft during the six months ended
December 31, 2009, with no gain realized in the comparable 2008 period. The cost
of flight operations, together with the cost of fuel, increased 3.1% to $32.8
million for the six months ended December 31, 2009 from $31.8 million for the
six months ended December 31, 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
      $0.5 million increase in cost of fuel due to an increase in flight hours
      offset by a decrease in the per gallon cost of
  fuel.


20





General
and administrative expenses increased 9.1% to $12.5 million for the six months
ended December 31, 2009 from $11.5 million for the six months ended December 31,
2008, primarily due to a $0.9 million increase in payroll and related expenses,
and a $0.5 million increase in expenses related to fixed based operations
primarily as a result to increased volume of fuel sales, partially offset by
decreases of $0.1 million in computer expenses due to implementation of
financial application software in the prior year and other decreases due to the
result of cost saving initiatives.





Selling
expenses increased 17.4% to $2.4 million for the six months ended December 31,
2009 from $2.0 million for the six months ended December 31, 2008 due to an
increase in commission expenses as a result of increased flight hour card
sales.





Income from operations was $1.6 million
for the six months ended December 31, 2009, an increase from $2.5 million loss
from operations for the six months ended December 31, 2008 for the reasons set
forth above.





Interest
expense increased 18.1% to $3.2 million for the six months ended December 31,
2009 from $2.7 million for the six months ended December 31, 2008, due to an
increase
in the weighted average interest rate on debt outstanding for the six months
ended December 31, 2009 from the comparable 2008 period.





Net loss
decreased to $1.5 million for the six months ended December 31, 2009 compared to
$5.2 million for the six months ended December 31, 2008 due to the decrease in
loss from operations partially offset by the increase in total other expense
discussed above.





Liquidity
and Capital Resources





Avantair’s
primary sources of liquidity have been cash provided by operations, cash raised
from its equity offering as Ardent Acquisition Corp., cash provided from its
debt facilities, cash raised in the preferred and common stock offerings, and
other asset- based borrowing (see Note 4 to the Company’s condensed consolidated
financial statements for the quarterly period ended December 31, 2009). The
Company uses its cash primarily to fund losses from operations, deposits made on
aircraft, leasehold improvements, and to fund the purchase of core aircraft and
aircraft which are to be fractionalized. Cash generated from operations has not
been sufficient to provide for all the working capital needed to meet Avantair’s
requirements. At December 31, 2009 and June 30, 2009, Avantair had a working
capital deficit of approximately $38.3 million and $49.2 million, respectively,
and a stockholders’ deficit of approximately $29.0 million and $36.0 million,
respectively. As of December 31, 2009, cash and cash equivalents amounted to
approximately $6.8 million and total assets to $147.1 million. The cash and cash
equivalent balance increased $3.1 million from June 30, 2009 and total assets
decreased $17.3 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. In October 2009, in its last tranche of its
private placement, Avantair sold 8,818,892 shares at a price of $0.95 per share
generating net proceeds of approximately $8 million (See Note 4 to the Company’s
condensed consolidated financial statements for the quarterly period ended
December 31, 2009). During the second quarter of fiscal 2010, the Company,
through an arms-length transaction, transferred its rights to purchase four
Piaggio Avanti II aircraft to LW Air LLC pursuant to the existing aircraft
purchase agreement between the Company and Piaggio. In connection with the
arms-length transaction with LW Air LLC (detailed above), the Company entered
into an eight-year management agreement for those aircraft and the Company
issued 2,373,620 warrants to Lorne Weil, the Managing Member of LW Air
LLC.  Pursuant to the agreement between the parties, the Company will
manage each aircraft for a monthly fee which is variable based upon aircraft
flight hours but will not exceed $56,500 per month. The agreement also allows
the Company to enter into short-term leases for the use of the aircraft at a
specified dry lease rate per flight hour.  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. Upon delivery of the aircraft,
Piaggio returned to the Company $2.6 million of deposits previously paid on the
aircraft by the Company. In addition, on December 14, 2009, the Company sold one
of its aircraft to a third party for $2.9 million. Partially offsetting these
receipts are cash disbursements of $2.0 million in payments for deposits on
future aircraft deliveries, and $9.9 million repayment of debt, in addition to
expenditures for the cost of operations, including insurance and capital and
leasehold improvements.




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




Avantair’s
primary growth strategy is to continue to increase the number of fractional
share owners and aircraft under management as well as increase the number of
flight hour cards and Axis Club Memberships sold. At February 12, 2010, the
Company had 29 fractional aircraft shares available for sale. In addition to the
cost of acquiring aircraft, Avantair’s primary expenses are related to fuel,
aircraft repositioning (i.e., moving an aircraft to another location to
accommodate a customer’s need and for demonstration flights for sales purposes),
maintenance, charters and insurance. To finance its growth strategy, the Company
may continue to actively pursue additional funds through equity financing,
including the sale of additional shares of common and preferred stock, asset
sales, accelerated payments of maintenance and management fees, debt financing,
or a combination thereof.


21





At
December 31, 2009 and June 30, 2009, Avantair had assets of approximately $146.8
million and $164.0 million, respectively. For the three and six months ended
December 31, 2009 and the fiscal year ended June 30, 2009, the Company had
revenue of approximately $35.8 million, $71.0 million and $136.8 million,
respectively, and net losses of approximately $0.2 million, $1.5 million and
$4.5 million, respectively. Avantair has incurred losses since inception and may
not be able to generate sufficient net revenue from its business in the future
to achieve or sustain profitability. At December 31, 2009, the Company had
approximately $6.8 million of unrestricted cash on hand and assuming there is no
change in sales and expense trends experienced since the fourth quarter of
fiscal 2009, the Company believes that its cash on hand is sufficient to
continue operations for the foreseeable future.





Financing
Arrangements





Avantair’s
financing arrangements at December 31, 2009, are described below:





Wells
      Fargo Equipment Finance, Inc.
                
                $
                2,891,260Jet
      Support Services, Inc.
                
                
                2,762,312Century
      Bank, F.S.B.
                
                
                1,827,341Wachovia
      Bank
                
                
                2,360,468Other
      long-term debt
                
                
                48,316Midsouth
      Services, Inc
                
                
                11,858,474$
                21,748,171





Wells
Fargo Equipment Finance, Inc.:In February 2005, the
Company entered into financing arrangements for the purchase of core aircraft
under various notes payable with Wells Fargo Equipment Finance, Inc. The notes
outstanding at December 31, 2009 totaled approximately $2.9 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 ASC 470-50“Debt Modification &
Extinguishment.”  CNM also assumed a promissory note due to
Wells Fargo Bank for $2.9 million which was included as part of this new note
agreement. During October 2009, the Company repaid the full amount of the loan
of approximately $2.7 million.





Jet
Support Services, Inc.:On April 24, 2006,
Avantair financed an aircraft maintenance program contract with Jet Support
Services, Inc. (“JSSI”) in the amount of $3.4 million. The promissory note
provided for seven monthly installments of $145,867 and 53 monthly installments
of $45,867, respectively, including interest at 7.0% per year. On April 15,
2008, the Company entered into a financing arrangement with JSSI by means of a
$5.5 million promissory note. The new note matures on April 1, 2011 and
bears interest at 10.0% per annum, with 35 monthly payments of principal
and interest in an amount of $185,127 beginning on June 2, 2008. The new
note covered the remaining balance of $0.4 million of the aforementioned
promissory note, other costs and fees to be paid by the Company under service
agreements with JSSI and related deferred financing costs of approximately $1.0
million which will be amortized over the life of the note using the effective
interest method. Upon entering into this payment arrangement and the $5.5
million promissory note, the parties terminated the airframe maintenance
contract and have agreed to apply the unamortized prepayment ($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 December
31, 2009 totaled approximately $2.8 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 December 31,
2009 totaled approximately $1.8 million and is payable in monthly installments
of $27,175 with interest of 8.25% per annum, through August 3, 2012. The
note is collateralized by the aircraft.





Wachovia
Bank:On October
31, 2007, the Company entered into a financing arrangement for the purchase of
one used aircraft at a total purchase price of approximately $4.5 million
(inclusive of the value of a flight hour card of 100 hours). Financing was
obtained from Wachovia through a note payable of $3.9 million. This debt will be
repaid monthly over 7 years at an interest rate of the LIBOR rate plus 4.0%.
Borrowings outstanding under this arrangement at December 31, 2009 totaled
approximately $2.4 million. During September 2009, the Company received a waiver
of compliance with a financial covenant in connection with the
note.


22


Other
long-term debt: In October 2009, the Company and Kevco Aviation Inc. executed a
$56,614 note agreement for the purchase equipment. The note outstanding at
December 31, 2009 totaled approximately $48,316 and is payable in monthly
installments of $2,912 with interest of 3.25% per annum, through May
2011.





JMMS,
Inc.:The Company
entered into a sale and leaseback agreement, dated August 11, 2006, with JMMS,
LLC (“JMMS”). Under the sale and leaseback agreement, the Company sold 100.0% of
its interest in a core aircraft for $4.2 million and leased back 68.8% of the
aircraft for a five year term. The proceeds of the sale and leaseback
arrangement were used to pay down a line of credit. In March 2007, the Company
amended the lease agreement to include a provision for the Company to buy back
the aircraft at the expiration of the term. As a result of the amendment, the
Company has accounted for the sale and leaseback transaction as a finance lease.
JMMS notified the Company of its intention to terminate the sale and leaseback
agreement between the parties effective March 1, 2009, at which date, pursuant
to the agreement, the Company was required to purchase the aircraft at a cost of
no more than the $4.2 million. The closing date of the transaction was extended
past March 1, 2009, in consideration for monthly payments to JMMS totaling $1.25
million through December 1, 2009. The total amount of the monthly payments made
to JMMS by the Company since March 1, 2009 were deducted from the aircraft
purchase price. In 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 at June 30, 2009. On December 14, 2009, the Company sold the aircraft to a
third party for $2.9 million and paid the remaining outstanding balance of the
purchase price to JMMS, and realized a gain of $0.8 million.




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 December 31, 2009 totaled approximately $4.0
million.





In April
2009, the Company amended the Lease Agreement previously accounted for as an
operating lease under ASC Topic 840“Leases,” dated as of July
31, 2006 between the Company and Midsouth. Pursuant to the amendment, the
Company is required to pay $74,900 monthly 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 December 31, 2009
totaled approximately $3.1 million, net of deferred interest of $0.7
million.





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


23





Item
3. Quantitative and Qualitative Disclosures about Market Risk.





Quantitative
and Qualitative Disclosures about Market Risk





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




Interest
Rate Risk





Avantair
is subject to market risk from exposure to changes in interest rates associated
with its debt facility with Wachovia Bank. The current liability, pursuant to
which Avantair is obligated to pay Wachovia Bank, has an interest rate that is
equal to the LIBOR rate plus 4.0%. At December 31, 2009, the liabilities of
Avantair with exposure to interest rate risk were approximately $2.4
million.




Item
4T. Controls and Procedures.




Evaluation
of Disclosure Controls and Procedures





As of
December 31, 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 December 31, 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 December 31, 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 December 31, 2009, that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.


24




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.


25





PART
II - OTHER INFORMATION


Item 1. Legal
Proceedings.





From time
to time, the Company is party to various legal proceedings in the normal course
of business. It is expected that these claims would be covered by insurance
subject to customary deductibles. Those claims, even if lacking merit, could
result in the expenditure of significant financial and managerial resources. As
of December 31, 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, the Company entered into a Securities Purchase and Exchange
Agreement (the “Purchase Agreement”) with the investors party thereto (the
“Investors”) in connection with a PIPE (Private Investment in a Public Entity)
financing.  Pursuant to the Purchase Agreement, certain new investors
purchased 8,818,892 shares of common stock in a private placement for 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 8,818,892 shares of common stock
to the new investors at a price per share of $0.95.  In addition,
pursuant to the Purchase Agreement, the Company exchanged the 817,200
outstanding warrants that had been issued to existing investors in the two prior
private placements for an aggregate of 516,127 shares of common
stock.  The Purchase Agreement terminated the purchase agreement and
registration rights agreement entered into in connection with the June and
September 2009 private placements.  The securities were issued in a
private placement in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, and Section 3(a)(9)
under the Securities Act of 1933, as amended. Avantair did not engage in any
general solicitation or advertisement for the issuance of these
securities.




On
October 16, 2009, pursuant to an agreement between EarlyBirdCapital, Inc. and
the Company, in consideration for services rendered as placement agent for the
Company’s June, September and October 2009 private placements, the Company
issued to EarlyBirdCapital, Inc. and its affiliates 455,887 fully vested
warrants which expire on June 30, 2012. Each warrant permits the holder to
purchase one share of the Company’s common stock at an exercise price of $1.05
per share. The shares issuable upon exercise of the warrants are entitled to
registration rights under the October 2009 Registration Rights Agreement. The
Company may redeem the warrants at any time on or after October 16, 2011 at the
price of $0.01 per warrant, provided that the volume weighted average price of
the Company’s common stock has been at least 200.0% of the exercise price of a
warrant for any twenty trading days during any consecutive thirty trading day
period ending on the third trading day preceding the date of the notice of
redemption. The fair value of the warrants of $209,708 (see Note 4 to the
Company’s condensed consolidated financial statements for the quarterly period
ended December 31, 2009) has been charged to additional paid-in
capital.





During
the second quarter of fiscal 2010, the Company, through an arms-length
transaction, transferred its rights to purchase four Piaggio Avanti II aircraft
to LW Air LLC pursuant to the existing aircraft purchase agreement between the
Company and Piaggio America, Inc. Upon delivery of the aircraft, Piaggio America
returned $2.6 million of deposits previously paid on the aircraft by the
Company.  Simultaneous with this transaction, the Company entered into
an eight-year management agreement for those aircraft and the Company issued
2,373,620 warrants to Lorne Weil, the Managing Member of LW Air LLC. 
Pursuant to the agreement between the parties, the Company will manage each
aircraft for a monthly fee which is variable based upon aircraft flight hours
but will not exceed $56,500 per month. The agreement also allows the Company to
enter into short-term leases for the use of the aircraft at a specified dry
lease rate per flight hour.





The
warrants issued in conjunction with the LW Air transactions to Lorne Weil,
Managing Member of LW Air, provide for the purchase of 2,373,620 shares of the
Company’s common stock at an exercise price of $1.25 per share. The warrants
expire on October 16, 2012, and the warrants and any underlying shares purchased
upon exercise of the warrants may not be sold, transferred, assigned or
hypothecated, in whole or in part, at any time on or prior to October 16, 2011,
other than to an affiliate of the warrant holder. The Company may redeem the
warrants held by Lorne Weil at any time on and after October 16, 2011 at the
price of $0.01 per warrant, provided that the volume weighted average price of
the Company’s common stock has been at least 300.0% of the exercise price of a
warrant for any twenty trading days during any consecutive thirty trading day
period ending on the third trading day preceding the date of the notice of
redemption. The Company has accounted for the LW Air transaction and the
issuance of the warrants by recording the charges paid to the owner, including
the fair value of the warrants of $807,031 (see Note 4 to the Company’s
condensed consolidated financial statements for the quarterly period ended
December 31, 2009) to the Cost of Flight Operations on a straight-line basis
ratably over the initial term of the agreement.


26





Item 4. Submission of Matters to a Vote of
Security Holders.





No
matters were submitted to a vote of our security holders through the
solicitation of proxies or otherwise during the quarter ended December 31,
2009.




Item 6. Exhibits.





See
exhibit index.


27




SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this Quarterly Report to be signed on its behalf by the undersigned
thereunto duly authorized.





February
16, 2010





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


28


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


29