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Table of Contents

 

 

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: March 31, 2012

 

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

For the transition period from              to             

Commission File Number 000-51115

 

 

Avantair, Inc.

(Exact Name of registrant as specified in its charter)

 

 

 

Delaware   20-1635240

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4311 General Howard Drive

Clearwater, Florida 33762

(Address of principal executive offices) (Zip Code)

(727) 539-0071

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant 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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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   x

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

As of May 10, 2012, there were 26,494,576 shares of the Company’s common stock, $.0001 par value per share, outstanding.

 

 

 


Table of Contents

CERTAIN DEFINITIONS

Unless the context indicates otherwise, the terms “Avantair”, “the Company”, “we”, “our” and “us” refer to Avantair, Inc. and, where appropriate, its subsidiaries. The term “Registrant” means Avantair, Inc.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements relating to future events and the future performance of the Company, including, without limitation, statements regarding the Company’s expectations, beliefs, intentions or future strategies that are signified by the words “expects,” “anticipates,” “intends,” “believes,” or similar language. Our actual results could differ materially from the information contained in these forward-looking statements as a result of various factors, including, but not limited to, the factors outlined in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, 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 generate sufficient cash flows to meet our debt service obligations or other financial obligations;

 

  (4) our inability to obtain acceptable customer contracts;

 

  (5) the loss of key personnel;

 

  (6) our inability to effectively manage our growth;

 

  (7) our inability to acquire additional aircraft and parts from our single manufacturer;

 

  (8) competitive conditions in the fractional aircraft industry;

 

  (9) extensive government regulation;

 

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

 

  (11) changing economic conditions;

 

  (12) increases in fuel costs; and

 

  (13) 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 for the fiscal year ended June 30, 2011 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 may also 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

Table of Contents

 

PART I – FINANCIAL INFORMATION

     1   
  Item 1.  

Financial Statements

     1   
   

Condensed Consolidated Balance Sheets

     1   
   

Condensed Consolidated Statements of Operations

     3   
   

Condensed Consolidated Statement of Changes in Stockholders’ Deficit

     4   
   

Condensed Consolidated Statements of Cash Flows

     5   
   

Notes to Condensed Consolidated Financial Statements

     7   
  Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     19   
  Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     25   
  Item 4.  

Controls and Procedures

     25   

PART II – OTHER INFORMATION

     26   
  Item 1.  

Legal Proceedings

     26   
  Item 1A.  

Risk Factors

     26   
  Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     26   
  Item 3.  

Defaults Upon Senior Securities

     26   
  Item 4.  

Mine Safety Disclosures

     26   
  Item 5.  

Other Information

     26   
  Item 6.  

Exhibits

     26   


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

AVANTAIR, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

ASSETS

 

     March 31,
2012
     June 30,
2011
 
     (Unaudited)      (Note 2)  

Current Assets

     

Cash and cash equivalents

   $ 7,145,852       $ 5,643,305   

Accounts receivable, net of allowance for doubtful accounts of $790,776 and $231,357, respectively

     11,111,690         12,202,020   

Inventory

     386,686         442,634   

Current portion of aircraft costs related to fractional share sales

     11,709,364         20,770,142   

Prepaid expenses and other current assets

     7,113,573         7,012,555   
  

 

 

    

 

 

 

Total current assets

     37,467,165         46,070,656   
  

 

 

    

 

 

 

Long-Term Assets

     

Aircraft costs related to fractional share sales, net of current portion

     2,890,723         9,913,793   

Property and equipment, at cost, net of accumulated depreciation and amortization of $22,026,824 and $21,235,649 respectively

     38,473,434         36,733,929   

Cash - restricted

     2,225,410         2,361,851   

Deposits on aircraft

     7,187,253         9,500,988   

Deferred maintenance on aircraft engines

     369,610         266,087   

Goodwill

     1,141,159         1,141,159   

Other assets

     9,111,253         4,950,035   
  

 

 

    

 

 

 

Total long-term assets

     61,398,842         64,867,842   
  

 

 

    

 

 

 

Total assets

   $ 98,866,007       $ 110,938,498   
  

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

1


Table of Contents

AVANTAIR, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

     March 31,
2012
    June 30,
2011
 
     (Unaudited)     (Note 2)  

Current Liabilities

    

Accounts payable

   $ 9,156,434      $ 5,908,979   

Accrued liabilities

     11,909,195        6,181,807   

Customer deposits

     3,424,258        2,082,160   

Short-term debt

     12,000,000        13,000,000   

Current portion of long-term debt

     5,403,857        7,856,117   

Current portion of deferred revenue related to fractional aircraft share sales

     13,353,125        23,550,037   

Unearned management fee, flight hour card and club membership revenue

     51,648,155        51,437,316   
  

 

 

   

 

 

 

Total current liabilities

     106,895,024        110,016,416   
  

 

 

   

 

 

 

Long-Term Liabilities

    

Long-term debt, net of current portion

     12,398,853        8,198,326   

Deferred revenue related to fractional aircraft share sales, net of current portion

     9,698,343        18,014,232   

Unearned club membership revenue, net of current portion

     377,161        1,353,618   

Other liabilities

     2,635,076        2,658,945   
  

 

 

   

 

 

 

Total long-term liabilities

     25,109,433        30,225,121   
  

 

 

   

 

 

 

Total liabilities

     132,004,457        140,241,537   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

    

Series A convertible preferred stock, $.0001 par value, authorized 300,000 shares; 152,000 shares issued and outstanding

     14,776,356        14,708,088   
  

 

 

   

 

 

 

STOCKHOLDERS’ DEFICIT

    

Preferred stock, $.0001 par value, authorized 700,000 shares; none issued

     —          —     

Common stock, Class A, $.0001 par value, 75,000,000 shares authorized, 26,489,603 and 26,418,246 shares issued and outstanding, respectively

     2,650        2,642   

Additional paid-in capital

     57,662,128        57,212,099   

Accumulated deficit

     (105,579,584     (101,225,868
  

 

 

   

 

 

 

Total stockholders’ deficit

     (47,914,806     (44,011,127
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 98,866,007      $ 110,938,498   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

2


Table of Contents

AVANTAIR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2012     2011     2012     2011  

Revenue

        

Fractional aircraft shares sold and lease revenue

   $ 8,879,476      $ 7,729,333      $ 23,548,667      $ 25,705,734   

Management and maintenance fees

     21,354,850        18,713,993        62,621,620        55,946,175   

Flight hour card and club membership revenue

     7,757,594        8,029,167        25,520,225        21,443,660   

Other revenue

     2,063,298        2,016,100        4,953,385        5,759,678   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     40,055,218        36,488,593        116,643,897        108,855,247   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Cost of fractional aircraft shares sold

     7,133,247        6,618,110        19,403,825        22,255,800   

Cost of flight operations

     17,607,526        16,328,921        52,349,977        51,671,193   

Cost of fuel

     4,550,333        4,112,436        14,220,687        12,648,324   

General and administrative expenses

     7,831,064        7,244,888        23,119,515        20,799,106   

Selling expenses

     1,366,488        1,327,143        4,817,542        4,553,668   

Depreciation and amortization

     990,293        794,941        2,953,254        3,313,297   

Employee termination and other costs

     883,331        —          883,331        —     

Gain on debt extinguishment

     —          —          (438,621     —     

Gain on sale of asset

     (624,179     —          (624,179     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     39,738,103        36,426,439        116,685,331        115,241,388   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     317,115        62,154        (41,434     (6,386,141
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expenses)

        

Interest and other income

     33,002        15,763        113,478        49,916   

Interest expense

     (1,080,255     (1,034,484     (3,376,711     (3,501,015
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

     (1,047,253     (1,018,721     (3,263,233     (3,451,099
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (730,138     (956,567     (3,304,667     (9,837,240

Preferred stock dividend and accretion of expenses

     (372,311     (364,326     (1,117,318     (1,109,054
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (1,102,449   $ (1,320,893   $ (4,421,985   $ (10,946,294
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per common share:

        

Basic and diluted

   $ (0.04   $ (0.05   $ (0.17   $ (0.41
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic and diluted

     26,489,424        26,406,574        26,454,261        26,380,798   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

AVANTAIR, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Deficit

Nine Months Ended March 31, 2012

(Unaudited)

 

     Class A
Common Stock
     Additional
Paid-In
Capital
    Accumulated
Deficit
    Total
Stockholders’
Deficit
 
     Shares      Amount         

Balance at June 30, 2011

     26,418,246       $ 2,642       $ 57,212,099      $ (101,225,868   $ (44,011,127

Stock-based compensation

     —           —           533,531        —          533,531   

Dividend on Series A convertible preferred stock

     —           —           —          (1,049,049     (1,049,049

Accretion of preferred stock issuance costs

     —           —           (68,269     —          (68,269

Issuance of shares in connection with vested restricted stock, net of shares surrendered in lieu of payroll taxes

     71,357         8         (15,233     —          (15,225

Net loss

     —           —           —          (3,304,667     (3,304,667
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

     26,489,603       $ 2,650       $ 57,662,128      $ (105,579,584   $ (47,914,806
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

AVANTAIR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

Nine Months Ended March 31, 2012 and 2011

(Unaudited)

 

     Nine Months Ended March 31,  
     2012     2011  

OPERATING ACTIVITIES:

    

Net loss

   $ (3,304,667   $ (9,837,240

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     2,953,254        3,313,297   

Amortization of deferred interest related to capital lease obligation

     109,276        318,579   

Gain on debt extinguishment

     (438,621     —     

Gain on sale of asset

     (624,179     —     

Stock-based compensation

     533,531        272,327   

Bad debt expense (recoveries)

     559,419        (6,820

Changes in operating assets and liabilities:

    

Accounts receivable

     530,911        (3,401,429

Inventory

     55,948        (202,223

Deposits on aircraft

     913,735        (9,198

Deferred maintenance

     (103,523     (1,012,443

Prepaid expenses and other current assets

     17,732        (1,485,531

Aircraft costs related to fractional shares

     19,513,306        22,066,296   

Other assets

     (4,161,218     (131,305

Accounts payable

     3,247,455        239,379   

Accrued liabilities

     5,689,113        3,423,189   

Unearned management fee, flight hour card and club membership revenue

     590,254        10,605,295   

Cash - restricted

     136,441        (2,521

Customer deposits

     1,342,098        201,963   

Deferred revenue related to fractional aircraft share sales

     (18,512,801     (19,064,959

Unearned club membership revenue

     (1,474,622     (559,496

Other liabilities

     (23,869     221,187   
  

 

 

   

 

 

 

Net cash provided by operating activities

     7,548,973        4,948,347   
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Proceeds from the sale of asset

     627,329        —     

Capital expenditures

     (2,025,367     (216,557
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,398,038     (216,557
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Borrowings under long-term debt

     2,000,000        —     

Dividends paid

     (1,026,000     (1,026,000

Principal payments on long-term debt

     (5,122,388     (3,394,222

Principal payments on short-term debt

     (500,000     (5,800,000
  

 

 

   

 

 

 

Net cash used in financing activities

     (4,648,388     (10,220,222
  

 

 

   

 

 

 

 

5


Table of Contents

AVANTAIR, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

Nine Months Ended March 31, 2012 and 2011

(Unaudited)

 

     Nine Months Ended March 31,  
     2012      2011  

Net increase (decrease) in cash and cash equivalents

   $ 1,502,547       $ (5,488,432

Cash and cash equivalents, beginning of the period

     5,643,305         9,446,619   
  

 

 

    

 

 

 

Cash and cash equivalents, end of the period

   $ 7,145,852       $ 3,958,187   
  

 

 

    

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

     

Interest paid

   $ 3,376,711       $ 3,501,015   
  

 

 

    

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING AND INVESTING ACTIVITIES

     

Accretion of Series A convertible preferred stock

   $ 68,269       $ 67,607   
  

 

 

    

 

 

 

Dividends payable on Series A convertible preferred stock

   $ 342,000       $ 342,000   
  

 

 

    

 

 

 

Common shares surrendered in lieu of payroll taxes

   $ 15,233       $ 25,943   
  

 

 

    

 

 

 

Aircraft purchased under short-term notes payable

   $ 6,100,000       $ 6,000,000   
  

 

 

    

 

 

 

Conversion of short-term note payable to capital lease

   $ 5,200,000       $ —     
  

 

 

    

 

 

 

Flight hour cards issued as partial consideration for repurchase of fractional aircraft shares

   $ 118,750       $ 310,000   
  

 

 

    

 

 

 

Short-term notes payable repayment upon completion of aircraft delivery rights transfer

   $ 1,300,000       $ —     
  

 

 

    

 

 

 

Fractional aircraft shares held for lease transferred to fixed assets

   $ —         $ 10,940,036   
  

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6


Table of Contents

AVANTAIR, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – OPERATIONS AND MANAGEMENT’S PLANS

Avantair, Inc. and subsidiaries (the “Company” or “Avantair”) are in the business of providing private aviation services through three primary flight service programs: (i) the sale of fractional ownership interests (Fractional Ownership program): (ii) the lease of fractional interests (Axis Lease program); and (iii) the sale of flight hour cards (Edge Card program and Axis Club Membership program). These services are provided on the Company’s managed aircraft fleet for business and personal use. Avantair’s core strategic focus is providing its customers with the highest level of safety, service and satisfaction. In addition to providing private aviation services, Avantair provides limited fixed based operation (“FBO”) services in Clearwater, FL and Camarillo, CA. Effective December 2011, the Company closed its limited FBO services in Caldwell, NJ. The Company also leases a facility in Dallas, Texas, which is used to perform maintenance on the Company’s aircraft.

As of March 31, 2012, Avantair operated 57 aircraft within its fleet, which is comprised of 45 aircraft for fractional ownership, 6 company-owned core aircraft and 6 leased and company-managed aircraft.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Reporting

The accompanying unaudited interim condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the interim condensed financial statement rules and regulations of the Securities and Exchange Commission. In the opinion of management, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated financial statements. The interim condensed consolidated operating results are not necessarily indicative of the results for a full year or any interim period. The condensed consolidated balance sheet as of June 30, 2011 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, 2011.

Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP 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, 2011.

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 March 31, 2012, the Company’s recurring losses resulted in a working capital deficit of approximately $69.4 million and a stockholders’ deficit of approximately $48.0 million. The Company’s primary sources of operating funds are the collection of management and maintenance fees from fractional share owners and Axis Lease program lessees, as well as the sale of fractional ownership shares and flight hour cards. Revenue for sales by product category can be found in the accompanying condensed consolidated statements of operations for the three and nine months ended March 31, 2012 and 2011, respectively. Sales by product category are as follows:

 

     Unit Sales for the Three Months Ended      Unit Sales for the Nine Months Ended  
     March 31, 2012      March 31, 2011      March 31, 2012      March 31, 2011  

New Fractional Ownership program shares sold

     6.5         9.0         8.5         18.0   

Axis Lease program shares leased

     11.5         5.5         54.0         5.5   

Axis Club Memberships (1)

     —           6.0         1.0         31.0   

Flight hour cards

     81.0         102.0         271.0         368.0   

 

(1) 

Replaced by Axis Lease program in March 2011

Avantair’s primary growth strategy is to continue to increase the number of fractional share owners and Axis Lease program lessees, increase the number of flight hour cards sold and increase total aircraft under management. At March 31, 2012, the Company had 17 new 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 customers’ requirements), flight operations and pilot expenses, maintenance, charters, insurance and selling, general and administrative expenses. To finance its growth strategy, the Company will continue to actively pursue additional funds through equity financing, including the sale of additional shares of common and preferred stock, asset sales, promotional sales incentives, cash receipts associated with accelerated payments of management and maintenance fees, debt financing or refinancing, or any combination thereof. At March 31, 2012 and June 30, 2011, Avantair had assets of approximately $98.9 million and $110.9 million, respectively. For the three and nine months ended March 31, 2012, the Company had revenue of approximately $40.1 million and $116.6 million, respectively. The Company had net losses of $0.7 million and $3.3 million for the three and nine months ended March 31, 2012, 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 and positive cash flows. At March 31, 2012, the Company had approximately $7.1 million of cash on hand. Based on improving sales, expenses remaining at or below the current level, together with continued facilitation of the measures to finance the Company’s strategy as described above, the Company believes that its cash position can be sufficient to continue operations for at least the next twelve months.

 

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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 the reported financial condition and results of operations; if material, the effects of changes in estimates are disclosed in the notes to the condensed consolidated financial statements. Significant estimates and assumptions by management affect the proper recording of revenue arrangements with multiple deliverables, the allowance for doubtful accounts, the carrying value of long-lived assets, the amortization period of long-lived assets, the provision for (benefit of) income taxes and related deferred tax accounts, certain accrued expenses and contingencies, warrant valuations and management’s assessment of its ability to continue as a going concern.

In January 2011, the Company changed its estimate for the depreciable life of its core aircraft to 20 years from an original seven year life. This change in estimate was based upon an evaluation of the aircrafts’ actual service life. This change in estimate was adopted prospectively and resulted in a $0.5 and $1.5 million reduction in depreciation expense recognized during the three and nine months ended March 31, 2012, respectively.

Cash-restricted

Restricted cash includes cash whereby the Company’s ability to use the funds at any time is contractually limited or is generally designated for specific purposes arising out of certain contractual or other obligations. The Company agreed to restrict approximately $2.2 and $2.4 million in cash at March 31, 2012 and June 30, 2011, respectively, to secure letters of credit related to deposits for leases, provide security for credit card charge backs and to secure fuel purchases. Management believes that these amounts will be restricted for at least one year and, accordingly, has classified such cash as non-current.

Revenue Recognition

Avantair is engaged in the sale, lease and management of fractional ownership interests of professionally piloted aircraft for personal and business use and access to its aircraft fleet through either 15 or 25 hour flight hour cards. In the case of fractional ownership sales, the aircraft ownership interests are generally 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 or enters into a lease of a fractional share through the Company’s Axis Lease program (introduced in February 2011), they are also required to enter into a 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 management and maintenance agreement, the Company agrees to manage, operate and maintain the aircraft on behalf of the customer in exchange for a fixed monthly fee.

Fractional Aircraft Shares Sold and Lease Revenue

Fractional aircraft shares sold and lease revenue includes revenue from fractional aircraft shares sold and fractional lease revenue from the Company’s Axis Lease program.

Revenue from the sale of fractional aircraft shares sold before July 1, 2010 was deferred at the time of sale and is recognized ratably over the term of the related management and maintenance agreement in accordance with Accounting Standards Codification (“ASC”) 605-25 “Multiple-Element Arrangements” (“ASC 605-25”). Revenue from the sale of fractional shares sold after June 30, 2010 are recognized at the time of sale upon adoption of Accounting Standards Update 2009-13 “Multiple-Deliverable Revenue Arrangements”, which updates ASC 605-25. Seven and one-half fractional aircraft shares were sold during the nine months ended March 31, 2012 requiring recognition under this guidance.

 

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During fiscal year 2011, the Company initiated a promotion that offered the sale of select fractional shares which provided a repurchase guarantee at the expiration of the related seven year management and maintenance agreements. The guarantee may be exercised at the customers’ option for a determined percent of the original purchase price. The Company discontinued this residual guarantee program in October 2011, but prior to this date, the Company sold one share during fiscal year 2012. Sales through this promotion have been accounted for as operating leases in accordance with ASC 840 “Leases” and the related revenue earned (less the guaranteed residual value) is recognized ratably over the term of the management and maintenance agreement. At March 31, 2012, guarantees under this program totaled approximately $4.8 million and are included in deferred revenue related to fractional aircraft share sales.

Axis Lease program lease revenue is a contractual monthly fee charged over the term of the lease. Under this program, lessees are permitted to fly a set number of hours divided evenly over the number of months in the term, resulting in the Company recognizing revenue ratably over each month. In the event lessees fly more than their monthly allocated hours, the Company recognizes additional lease revenue based on the overflown hours in that month; however, the cumulative amount recognized over the lease term shall not exceed the total annual lease payment per the lease agreement.

Management and Maintenance Agreements

Revenue earned in connection with the management and maintenance agreements with fractional share owners is recognized monthly over the term of the agreement. If a fractional share owner 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.

Revenue earned in connection with the management and maintenance agreements with Axis Lease program lessees is recognized monthly over the lease term. If an Axis Lease program lessee prepays its management and maintenance fee for a period of one year or longer, the prepayment is recorded as unearned revenue and amortized monthly over the lease term. Under either circumstance, revenue is recognized ratably over each month. In the event lessees fly more than their monthly allocated hours, the Company recognizes additional management and maintenance revenue based on the overflown hours in that month; however, the cumulative amount recognized over the lease term shall not exceed the total annual management and maintenance fee payment per the lease agreement.

Flight hour card and Axis Club Membership Revenue

Flight hour card revenue. The Company sells access to its aircraft fleet through either a 15 or 25 hour flight hour card for flight time without the requirement to purchase an ownership interest 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. The Axis Club Membership program offered 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 required 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 were paid in advance, deferred and recognized over the three year membership term. Payment for flight hour cards sold through the Axis Club Membership program were collected from members in advance of access to the aircraft fleet, deferred and recognized as revenue on an incremental basis over the three year membership term. The Axis Club Membership program was replaced by the Axis Lease program effective March 2011.

Other Revenue

Other revenue is comprised primarily of revenue from demonstration flights, the sale of previously owned fractional aircraft shares and related remarketing fees, and revenue from the sale of fuel and rental of hangar space at the Company’s FBO facilities. Demonstration revenue is earned as the Company charges prospective customers on an hourly basis for each hour the prospective customers 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. Revenue from the sale of previously owned fractional aircraft shares are recorded similar to the sale of new fractional aircraft shares. Remarketing fees are recognized upon the sale of third party used aircraft shares. FBO related revenue from fuel sales and hangar rentals are recorded when goods are delivered or services are rendered.

Referral Incentive Hours

The Company accounts for the additional hours granted to owners under the referral incentive program by expensing costs as they are incurred. Such costs have not been material to date.

Aircraft Costs Related To Fractional Aircraft Shares Sold

Aircraft costs relating to the sale of fractional aircraft shares sold before July 1, 2010 were deferred at the time of sale and are recognized ratably over the term of the related management and maintenance agreement in accordance ASC 605-25. Aircraft costs relating to the sale of fractional shares sold after June 30, 2010 are recognized at the time of sale upon adoption of Accounting Standards Update 2009-13 “Multiple-Deliverable Revenue Arrangements”, which updates ASC 605-25. Seven and a half fractional aircraft shares were sold during the nine months ended March 31, 2012 requiring recognition under this guidance.

 

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During fiscal year 2011, the Company initiated a promotion that offered the sale of select fractional shares which provided a repurchase guarantee at the expiration of the related seven year management and maintenance agreements. The guarantee may be exercised at the customers’ option for a determined percent of the original purchase price. The Company discontinued this residual guarantee program in October 2011, but prior to this date, the Company sold one share during fiscal year 2012. Sales through this promotion have been accounted for as operating leases in accordance with ASC 840 “Leases” and the related costs were capitalized to property, plant and equipment and depreciated over the 20 year useful life of the aircraft.

Maintenance Expense Policy

The Company uses the direct expense method of accounting for non-refurbishment aircraft maintenance. Engine maintenance was performed by third parties under contract which transferred risk through July 2011, and related costs were expensed as incurred. Airframe maintenance is performed in-house and related costs are expensed as incurred. Refurbishments of the Company’s core aircraft, which extend the life of that aircraft, are capitalized and depreciated over its estimated useful life.

Prepaid Pilot Training

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

Property, Plant and Equipment

In January 2012, the Company sold one of its aircraft, a Piper Meridian, for a purchase price of $672,000 less repair costs required in connection with the sale of approximately $48,000. As the aircraft was fully depreciated, the sale resulted as a gain of approximately $624,000, which is recorded in gain on sale of asset in the accompanying condensed consolidated statement of operations.

Income Taxes

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

A valuation allowance is established to reduce deferred tax assets to the amounts expected to be realized. The Company calculated an annual effective tax rate to determine the interim period income tax provisions; however, no tax liability was accrued for the three and nine months ended March 31, 2012, 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 2011. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense.

Stock-Based Compensation

The Company has one stock-based compensation plan, the 2006 Long Term Incentive Plan, which the Company’s shareholders approved (as amended, the “Plan”) to provide awards to employees, certain non-employees and non-employee directors. Stock-based awards under the Plan may consist of common stock, common stock units, stock options, stock-settled stock appreciation rights, restricted stock and other stock-based awards. The Board approved an amendment to the Plan on February 2, 2012 to allow for the grant of deferred shares to non-employee directors of the Company. The Company issues common stock to satisfy stock option exercises or vesting of stock awards.

 

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The Company accounts for stock-based compensation to employees and directors in accordance with ASC 718 “Compensation-Stock Compensation” (“ASC 718”), which requires the recognition of compensation expense for employee stock options and other share-based payments. Under ASC 718, 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 at fair-value at each balance sheet date until the award is settled.

Stock-based compensation expense related to the Plan, which is included in general and administrative expenses in the accompanying condensed consolidated statements of operations, was $178,876 and $533,531 for the three and nine months ended March 31, 2012 and was $82,447 and $272,327 for the three and nine months ended March 31, 2011, respectively. There were no related income tax benefits recognized in the accompanying condensed consolidated statements of operations for the three and nine months ended March 31, 2012 or for the comparable 2011 periods. As of March 31, 2012, the Company had 241,426 shares of restricted stock and 1,376,100 stock options outstanding.

Accounting for Derivative Instruments

The Company accounts for derivative instruments in accordance with ASC 815 “Derivatives and Hedging” (“ASC 815”), which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts. The Company also considers ASC 815, which provides criteria for determining whether freestanding contracts that are settled in a company’s own stock, including common stock warrants, should be designated as either an equity instrument, an asset or as a liability under ASC 815. The Company evaluates the conversion feature embedded in its Series A Convertible Preferred Stock based on the criteria of ASC 815 to determine whether the conversion feature would be required to be bifurcated from the Preferred Stock and accounted for separately as a derivative. Based on management’s evaluation, the embedded conversion feature did not require bifurcation and derivative accounting as of March 31, 2012.

Goodwill and Long-lived Assets

The Company accounts for goodwill and other intangible assets under ASC 350 "Intangibles – Goodwill and Other" (“ASC 350”). ASC 350 eliminates the amortization of goodwill and certain other intangible assets and requires an evaluation of impairment by assessing qualitative factors, and if necessary, applying a fair-value based test. The goodwill impairment test requires qualitative analysis to determine whether is it more likely than not that the fair value of a reporting unit is less than the carrying amount, including goodwill. An indication of impairment through analysis of these qualitative factors initiates a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of the Company’s reporting units based on discounted cash flow models using revenue and profit forecasts and comparing the estimated fair values with the carrying values of the Company’s reporting units which include the goodwill. If the estimated fair values are less than the carrying values, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of the Company’s “implied fair value” requires the Company to allocate the estimated fair value to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared to the corresponding carrying value.

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

Fair Value Measurements

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

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

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

 

   

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

 

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A three-level hierarchy (“Valuation Hierarchy”) for fair value measurements;

 

   

Consideration of the Company’s creditworthiness when valuing liabilities; and

 

   

Disclosures about instruments measured at fair value.

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

 

   

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

 

   

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

 

   

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

During the three and nine months ended March 31, 2012, the Company has elected not to use the fair value option permitted under ASC 820 for any of its financial assets and financial liabilities that are not already recorded at fair value.

Loss Per Share

Basic and diluted loss per share applicable to common stock attributable to common stockholders is computed using the weighted average number of common shares outstanding during the period. Shares used in calculating basic and diluted loss per share exclude common stock equivalents for warrants, stock-based compensation and Series A Convertible Preferred Stock, as these common stock equivalents are anti-dilutive. In future periods, if the Company reports net income attributable to common stockholders and the common stock equivalents for our warrants, stock-based compensation and Series A Convertible Preferred Stock are dilutive, the common stock equivalents will be included in the weighted average shares computation and dividends related to our Series A Convertible Preferred Stock will be added back to net income attributable to common stockholders to calculate diluted earnings per share.

For each of the three and nine months ended March 31, 2012, a total of 8,680,890 share-equivalents of potentially dilutive securities were excluded from the calculation of diluted earnings per share. These securities were comprised of 2,373,620 warrants issued to Lorne Weil in conjunction with the LW Air transactions; 437,887 warrants outstanding as of March 31, 2012 issued to EarlyBirdCapital (“EBC”), in consideration for services rendered as placement agent for the Company’s June, September and October 2009 private placements; 1,376,100 options to purchase shares of common stock which were outstanding during the periods but were not included in the computation of diluted earnings per common 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” (“ASC 260”); and 4,251,857 shares of common stock reserved for issuance upon the conversion of the outstanding Series A Convertible Preferred Shares. In accordance with ASC 260’s contingently issuable shares provision, 241,426 shares of unvested common stock awards (“restricted stock”) granted were not included in the calculation because all the necessary conditions for vesting had not been satisfied.

For the three and nine months ended March 31, 2011, a total of 8,254,089 share-equivalents of potentially dilutive securities were excluded from the calculation of diluted earnings per common share. These securities were comprised of 2,373,620 warrants issued to Lorne Weil in conjunction with the LW Air transactions; 437,887 warrants issued to EarlyBirdCapital (“EBC”) in consideration for services rendered as placement agent for the Company’s June, September and October 2009 private placements; 951,100 options to purchase shares of common stock were outstanding during the periods but were not included in the computation of diluted earnings per common share because the options’ exercise prices were greater than the average market price of the common shares, and therefore, their effect would be anti-dilutive as calculated under the treasury method promulgated by ASC 260 “Earnings Per Share;” and 4,251,857 shares of common stock reserved for issuance upon the conversion of the outstanding Series A Preferred Shares. In accordance with ASC 260’s contingently issuable shares provision, 239,625 shares of restricted stock granted were not included in the calculation because all the necessary conditions for vesting had not been satisfied.

Comprehensive Income

The Company adheres to the provisions of ASC 220, “Comprehensive Income” (“ASC 220”). This pronouncement establishes standards for reporting and display of comprehensive income or loss and its components (revenues, expenses, gains and losses). The pronouncement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be classified by their nature. Furthermore, the Company is required to display the accumulated balances of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. For the three and nine months ended March 31, 2012 and 2011, there were no items that gave rise to other comprehensive income (loss) and net loss equaled comprehensive loss.

 

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Reclassifications

Certain prior year amounts in the accompanying condensed consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications have no effect on the Company’s net income or financial position as previously reported.

Recently Issued Pronouncements

In September 2011, the Financial Accounting Standards Board released Accounting Standards Update No 2011-08, “Intangibles – Goodwill and Other “(Topic 350) (“ASU 2011-08”). This update allows companies to waive comparing the fair value of a reporting unit to its carrying amount in assessing the recoverability of goodwill if, based on qualitative factors, it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. This standard allows for early adoption, and as a result, the Company has chosen to adopt ASU 2011-08 for the fiscal year ending June 30, 2012. The adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations.

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

NOTE 3 – 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, which began in April 2006, is classified as an operating lease and was amended in September 2011 under Amendment Number 1 to the Hangar Lease Agreement (“Amendment Number 1”). In accordance with Amendment Number 1, the Company renegotiated its Clearwater, Florida lease to reduce its ongoing rent expense and fuel flow fees. Under terms of Amendment Number 1, the initial lease term was extended by five months and expires in September 2021. In December 2011, the Company terminated its Caldwell, New Jersey lease and ceased its limited FBO operations at that facility. Simultaneously, the Company agreed to maintain a portion of an aircraft hangar in Caldwell, NJ for $2,000 per month. This hanger lease, which is classified as an operating lease, expires in October 2018 and includes a 90 day mutual termination clause. The Company also has a 15 year lease for its FBO and maintenance operations in Camarillo, California expiring in 2021 which is classified as an operating lease. The Company is in ongoing negotiations with its California landlord and third parties regarding reducing its obligations under the lease. There can be no assurance that the Company will be successful in amending the terms of the existing lease agreement in California. In January 2011, the Company entered into a 3 year operating lease agreement for a facility in Dallas, Texas, which is used to perform maintenance on the Company’s aircraft.

During the second quarter of fiscal year 2010, the Company, in arms-length transactions, transferred its rights to purchase four Piaggio Avanti II aircraft to LW Air pursuant to the existing aircraft purchase agreement between the Company and Piaggio America, Inc. LW Air is controlled by Lorne Weil, a director of the Company. Simultaneous with each of these transactions, the Company entered into an eight-year management agreement for each aircraft. Pursuant to each agreement between the parties, the Company manages the aircraft by arranging, on behalf of the owner, short-term leases for use of the aircraft at a specified dry lease rate per flight hour. In each agreement, the Company guaranteed to the owner monthly cash proceeds out of rental income and/or advances against future rental income equal to $80,000, and the Company is entitled to retain as a management fee all rental income in excess of the amounts payable to the owner, up to a maximum of $56,500 per month. Because the Company did not begin to fully lease the aircraft in the fractional program for several months, the Company did not make approximately $760,000 in payments to the owner. Accordingly, effective July 1, 2010, the terms of each management agreement were amended to reduce the maximum management fee the Company was entitled to retain to $44,000 per month for each aircraft for the eight months ended February 28, 2011, after which the maximum management fee charged continued to be $56,500 per month for each aircraft. Because management fees under each agreement may be earned only on average rental hours up to 100 hours per month, it is anticipated that actual management fees under each agreement will not exceed $25,000 per month. The Company is also required to pay the owner additional amounts if usage of the aircraft exceeds 1,200 hours per year at a specified rate per flight hour. The Company accrued $375,000 for services rendered by a third party in connection with these transactions. The fee is being amortized to aircraft lease expense over the term of the agreements. The Company accounts for the management agreements as operating leases.

Effective December 2010, the Company entered into an aircraft rental agreement with a third party to lease a Pilatus aircraft to be used in the Company’s maintenance operations. Pursuant to this agreement, the Company is obligated to pay $12,961 per month for three years, which provides 300 flight hours per year to the Company. The Company accounts for this agreement as an operating lease.

 

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During July 2011, the Company entered into an aircraft lease agreement with three third parties for the Company to lease a Piaggio Avanti II aircraft. Pursuant to the Aircraft Lease Agreement, the Company is obligated to pay a total of $50,000 per month for ten years, which provides 1,300 flight hours per year to the Company. In addition, the Company is obligated to provide the lessors a total of 125 flight hours per year during the term of the agreement. The Company accounts for this agreement as an operating lease.

In October 2011, the Company, in an arms-length transaction, transferred its rights to purchase one Piaggio Avanti II aircraft to LW Air pursuant to the existing aircraft purchase agreement between the Company and Piaggio America, Inc. LW Air is controlled by Lorne Weil, a director of the Company. Simultaneous with this transaction, the Company entered into an eight-year management agreement for the aircraft. Pursuant to the agreement between the parties, the Company will manage the aircraft by arranging, on behalf of the owner, short-term leases for use of the aircraft at a specified dry lease rate per flight hour. The Company has guaranteed to the owner monthly cash proceeds out of rental income and/or advances against future rental income equal to $75,000, and the Company will be entitled to retain as a management fee all rental income in excess of the amounts payable to owner, up to a maximum of $51,500 per month. Because management fees may be earned only on average rental hours up to 100 hours per month, it is anticipated that actual management fees will not exceed $30,000 per month. The Company is also required to pay owner additional amounts if usage of the aircraft exceeds 1,200 hours per year at a specified rate per flight hour. The Company considered various financing alternatives prior to entering into this transaction and believes that this agreement was the most beneficial for the Company. The Company accrued $124,000 for services rendered by a third party in connection with this transaction. The fee is being amortized to aircraft lease expense over the term of the agreement. The Company accounts for the management agreement as an operating lease.

Effective March 2012, the Company entered into an aircraft rental agreement with a third party to lease another Pilatus aircraft to be used in the Company’s maintenance operations. Pursuant to this agreement, the Company is obligated to pay $22,000 per month for one year, which provides 500 flight hours to the Company over the one year term. The Company accounts for this agreement as an operating lease.

In addition, the Company leases transportation equipment and data processing equipment under operating leases with most having three year terms.

Purchase Commitments

As of March 31, 2012, Avantair had contractual commitments to purchase 48 additional Piaggio Avanti II aircraft through 2013 with a mutual understanding that the aircraft delivery dates can be extended. The total commitment, if exercised during the period, including a proposed price escalation, is valued at approximately $305.1 million.

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 the Phenom 100 aircraft with positions nineteen and twenty and to fund payment due in connection with these aircraft. EAS had the option to purchase aircraft nineteen and twenty which was to have been exercised by October 1, 2010; if exercised, EAS would reimburse Avantair for all payments made relative to these aircraft and provide all remaining funds required. In the event that EAS did not exercise the option to purchase aircrafts nineteen and twenty by October 1, 2010, Avantair would have the right and obligation to purchase the nineteenth and twentieth aircraft. The Company entered into agreements with EAS to extend the exercise requirement in November 2010 and April 2011, which extended the exercise requirement to April 2011 and December 2011, respectively. On November 30, 2011, the exercise requirement was extended an additional six months to June 1, 2012. 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.

Financing Commitments- Short-term

Short-term debt consists of the following as of March 31, 2012:

 

Midsouth Services, Inc

   $ 12,000,000   
  

 

 

 

Short-term debt

   $ 12,000,000   
  

 

 

 

In April 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. The Floor Plan Agreements covered 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 Floor Plan Agreements during the term with ninety days written notice. The Company agreed to pay Midsouth a monthly fee of $82,500 for the first Floor Plan Agreement and $75,000 for a second Floor Plan Agreement. During December 2010, the Company repaid the first Floor Plan Agreement in the amount of $5.8 million and during September 2011, the Company converted the second Floor Plan Agreement in the amount of $5.2 million into a Capital Lease, see Capital Lease Transactions in the paragraphs following.

 

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In March 2011, the Company negotiated financing terms pursuant to a Floor Plan Financing Agreement with Midsouth which shall be used towards the purchase of new Piaggio P-180 aircraft for resale in the fractional program. The March 2011 agreement is similar to the previous arrangements between Midsouth and Avantair in that Midsouth agreed to extend credit to Avantair for the purchase of fractional aircraft for a term of the later of: (1) twelve months or (2) until the date on which the net purchase price for the aircraft financed pursuant to the Floor Plan Agreement is paid. The Company has agreed to pay Midsouth a monthly fee of $65,000 following the commencement of the term pursuant to the Floor Plan Agreement. The aircraft purchase agreement related to the aircraft currently financed pursuant to the Floor Plan Financing Agreement which was modified by the Company recently, requires the Company to purchase the aircraft from the lender on or before July 10, 2012. As of March 31, 2012, borrowings outstanding under the Floor Plan Agreement totaled $6.0 million.

In April 2011, the Company entered into a 12% short-term note payable with Midsouth to finance $0.5 million deposits for one new Piaggio Avanti II aircraft. The Company agreed to pay Midsouth a monthly fee of $5,000 following the commencement of the term pursuant to the Aircraft Deposit Agreement. The term of the agreement, as extended in July 2011, is five months or until the Company takes delivery of the aircraft. During October 2011, the Company repaid the short-term note payable in the amount of $0.5 million.

In May 2011, the Company entered into a 12% short-term note payable with Midsouth to finance $0.7 million deposits for one new Piaggio Avanti II aircraft. The Company agreed to pay Midsouth a monthly fee of $7,000 following the commencement of the term pursuant to the Aircraft Deposit Agreement. The term of the agreement, as extended in July 2011, is four months or until the Company takes delivery of the aircraft. During September 2011, the Company repaid the short-term note payable in the amount of $0.7 million.

In addition, during May 2011, the Company entered into a 9.7% short-term note payable with three third parties to finance $0.6 million deposits for one new Piaggio Avanti II aircraft, pursuant to the Aircraft Deposit Agreement. The term of the agreement is four months or until the Company takes delivery of the aircraft. During July 2011, the Company repaid the short-term note payable in the amount of $0.6 million.

In September 2011, the Company took delivery of one new Piaggio Avanti P-180 aircraft, for resale in the Fractional Ownership program, financed through a Floor Plan Financing Agreement with Midsouth. The financing agreement is similar to the previous arrangements between Midsouth and Avantair with a term of the later of: (1) fifteen months or (2) until the date on which the net purchase price for the aircraft financed pursuant to the Floor Plan Agreement is paid. The Company agreed to pay Midsouth a monthly fee of $72,500 following the commencement of the term pursuant to the Floor Plan Agreement. The aircraft purchase agreement related to the aircraft currently financed pursuant to the Floor Plan Financing Agreement requires the Company to purchase it from the lender on or before December 31, 2012. As of March 31, 2012, borrowings outstanding under the Floor Plan Agreement totaled $6.0 million.

Financing Commitments – Long-term

Long-term debt consists of the following as of March 31, 2012:

 

Midsouth Services, Inc.

   $ 16,385,218   

Iberia Bank

     1,417,492   
  

 

 

 
     17,802,710   

Less current portion

     (5,403,857
  

 

 

 

Long-term debt

   $ 12,398,853   
  

 

 

 

Capital Lease Transactions

Midsouth Services, Inc.

The Company has five separate lease agreements with Midsouth as of March 31, 2012.

In July 2006, the Company entered into a lease agreement, pursuant to which Midsouth leased a core aircraft to the Company. The original lease agreement was accounted for as an operating lease. In April 2009, the Company amended the original lease agreement, pursuant to which the Company was required to pay $74,900 per month, at 11.0% interest per annum until August 2011, the expiration of the amended lease agreement. In addition, the Company agreed to purchase the leased aircraft for approximately $3.0 million from Midsouth within sixty days following the expiration of the amended lease agreement. In August 2011, the Company entered into a second amendment to the aircraft lease agreement to extend the lease term for five years, and decrease monthly payments to $62,500. Upon expiration of the five year term, the Company may purchase, at its sole discretion, the aircraft at a purchase price of approximately $0.3 million. The second amendment to the aircraft lease agreement was evaluated in accordance with ASC 470 “Debt” (“ASC 470”). Based on the Company’s evaluation, the debt transaction did not meet specified criteria causing the transaction to be recorded in accordance with “Debt Modification and Extinguishment” guidance within ASC 470. The obligation outstanding at March 31, 2012 totaled approximately $2.7 million.

 

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On October 10, 2007, Avantair acquired a Piaggio P-180 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 March 31, 2012 totaled approximately $2.8 million.

In April 2009, the Company entered into a lease agreement, pursuant to which Midsouth leases a Piaggio P-180 aircraft to the Company for a ten year lease term at $75,000 per month, at 15.0% interest per annum, plus taxes if applicable. The Company is required to provide Midsouth with 100 hours of flight time per year during the lease term. Hours have been accounted for at their fair value and are liquidated as hours are flown. Midsouth has the sole option to terminate the lease at the end of the fifth year of the lease term and 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 lease 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 March 31, 2012 totaled approximately $4.4 million.

In September 2011, simultaneous with the termination of the Floor Plan Finance Renewal Agreement and Renewal Guaranteed Aircraft Purchase Agreement for a Piaggio P-180 aircraft, the Company entered into a Lease Agreement, pursuant to which Midsouth leases a Piaggio P-180 aircraft to the Company for a five year lease term at $75,000 per month, at 15.0% interest per annum, plus taxes if applicable. Following the expiration of the term of the Lease Agreement, the Company has agreed to purchase the leased aircraft for approximately $3.4 million from Midsouth. The termination of the Floor Plan Financing Agreement and subsequent entrance into the Lease Agreement was evaluated in accordance with ASC 470 “Debt” (“ASC 470”). Based on the Company’s evaluation, the debt transaction met the specified criteria causing the transaction to be recorded in accordance with “Debt Modification and Extinguishment” guidance within ASC 470. In September 2011, in accordance with ASC 470, the Company recognized a gain on debt extinguishment of $438,621, which is included in the accompanying condensed consolidated statements of operations. The Company will account for the lease as a capital lease in the accompanying condensed consolidated balance sheets. The obligation outstanding at March 31, 2012 totaled approximately $4.6 million.

In October 2011, the Company entered into a five year lease agreement with Midsouth for $2.0 million, related to one used aircraft previously financed through a Wells Fargo promissory note. The Company will make principal payments ranging from $24,000 to $29,500 plus interest of 13% per annum. Following the expiration of the term of the lease agreement, the Company has agreed to purchase the leased aircraft for approximately $0.4 million from Midsouth. The obligation outstanding at March 31, 2012 totaled approximately $1.9 million.

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

Wells Fargo Equipment Finance, Inc.

In February 2005, the Company entered into financing arrangements for the purchase of two aircraft under two notes payable with Wells Fargo Equipment Finance, Inc. The notes were 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 were collateralized by both aircraft. In January 2012, in connection with the sale of one of the collateralized aircraft discussed in the Property, Plant and Equipment section in Note 2, the Company paid off one promissory note in the amount of approximately $790,000. In March 2012, the Company repaid the remaining promissory note in the amount of approximately $1.2 million. Accordingly, as of March 31, 2012, there were no obligations outstanding under these financing arrangements.

Iberia Bank

In August 2007, the Company and Iberia Bank, formerly Century Bank F.S.B., executed a $2.2 million note agreement for the purchase of one aircraft. The note 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. The obligation outstanding at March 31, 2012 totaled approximately $1.4 million.

Wells Fargo

On October 31, 2007, the Company and Wells Fargo 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 Wells Fargo through a note payable of $3.9 million. This note was to be repaid monthly over 7 years at an interest rate of the LIBOR rate plus 4.0%. In October 2011, the Company repaid the promissory note in the amount of $1.4 million.

 

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Other Contingencies

Aircraft Incident

In November 2011, one of the Company’s fractionally owned aircraft was involved in an incident (Aircraft Incident), following which the aircraft was declared a total loss by the Company’s insurer. Only minor injuries were sustained by the passengers and crew. The Company was required to maintain insurance on the aircraft that covered its replacement value, which is estimated to be $4.8 million. During December 2011, the Company received $6.5 million of insurance proceeds which was recorded as accrued liabilities as of December 31, 2011. The additional insurance proceeds are a result of the Company insuring its aircraft in excess of the replacement value to reimburse the Company for expenses associated with a reduction in available aircraft in its fleet, including, but not limited to, costs incurred for chartered flights, repositioning aircraft to accommodate customers’ requirements, and maintenance costs associated with higher flight hours on the remaining fleet. These proceeds offset similar expenses for the quarter ended March 31, 2012, and are expected to offset similar expenses in the upcoming quarters. The fractional ownership documents permit the Company to replace the aircraft on behalf of the fractional owners with another aircraft that is substantially similar and has a market value approximately equal to or greater than the market value of the 2007 Piaggio P-180. As of March 31, 2012, the Company purchased the fractional owners’ interest in the aircraft, and simultaneously, the fractional owners of the 2007 Piaggio P-180 entered into new fractional ownership documents for a substantially similar replacement aircraft interest. Additionally, the Company paid a total of approximately $3.3 million and transferred 11.0 fractional shares in connection with this incident during the three months ended March 31, 2012. The Company expects to pay approximately $1.5 million for the remaining 5.0 fractional shares during the three months ended June 30, 2012 to facilitate the remaining transactions associated with this incident.

Employee Termination and Other Costs

During the quarter ended March 31, 2012, the Company developed and implemented plans to improve sales performance and deliver efficiencies within the finance department. These plans were evaluated and recorded in accordance with ASC 420 “Exit or Disposal Cost Obligations” (“ASC 420”). In connection with the changes in the sales and finance departments, the Company incurred various costs and obligations, including severance payouts to employees and other related charges. The Company expects total costs associated with these activities to be approximately $1.0 million. For the three and nine months ended March 31, 2012, the Company recognized approximately $0.9 million in the accompanying condensed consolidated statements of operations as employee termination and other costs, which is included in operating expense. The Company expects to complete these changes during the three months ended June 30, 2012, at which time the remaining $0.1 million will be recognized. As of March 31, 2012, the Company accrued approximately $0.4 million of unpaid employee termination and other expense as accrued liabilities in the accompanying condensed consolidated balance sheets.

NOTE 4 – EQUITY TRANSACTIONS

As of March 31, 2012, the Company had 26,489,603 shares of its common stock outstanding and 1,540,733 shares of common stock available for future issuance under the Company’s 2006 Long-Term Incentive Plan. As of March 31, 2012, the Company had 152,000 shares of Series A Preferred Stock outstanding. The Company has 4,251,857 shares of common stock reserved on its books and records for issuance upon the conversion of the outstanding Series A Preferred Shares. As a result of the sales of shares consummated on June 30, September 25, and October 16, 2009, the conversion price of the Series A Preferred Shares was reduced from $5.15 to $3.57.

By recommendation of the Compensation Committee and approval by the Board of Directors, and in accordance with an Employment Agreement executed July 14, 2011, the Company granted equity compensation to Stephen Wagman, Executive Vice President and Chief Financial Officer, pursuant to the Company’s Amended and Restated 2006 Long-Term Incentive Plan, as follows:

 

   

30,000 shares of restricted stock, subject to a three (3) year vesting period, with one-third of the shares vesting upon each of the first three anniversaries of the date of the Employment Agreement, subject to Mr. Wagman’s continued employment with the Company on each vesting date; and

 

   

425,000 stock options, exercisable at $2.25 per share, subject to a three (3) year vesting period, with one-third of the stock options vesting upon each of the first three anniversaries of the date of the Employment Agreement, subject to Mr. Wagman’s continued employment with the Company on each vesting date and the Company achieving certain financial target goals; provided, however, in the event that less than 100% of the financial target goals are met for each fiscal year during the term of the Employment Agreement, but at least 80% of the goals for such fiscal year are achieved, only one-sixth of the stock options shall vest in lieu of the one-third and the remaining one-sixth shall be forfeited but may be eligible for re-vesting in the event of any renewals of the Employment Agreement.

In February 2012, the Company granted deferred equity compensation to each of its seven Non-Employee Directors, pursuant to the Amended and Restated 2006 Long-Term Incentive Plan, as follows:

 

   

20,000 deferred shares which shall convert into shares of the Company’s common stock on a one-for-one basis upon the earliest of (i) the date of the Non-Employee Director’s cessation of service with the Company, or (ii) the date of a change in control of the Company or 20,000 shares of restricted stock, which shares shall be nontransferable until the earlier of the date of the Non-Employee Director’s cessation of service with the Company or the date of change in control of the Company.

 

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NOTE 5 – SUBSEQUENT EVENTS

In May 2012, the Company entered into a two year lease agreement with Midsouth for $1.2 million, related to one used aircraft previously financed through a Wells Fargo Equipment Finance, Inc. promissory note. The Company will make monthly lease payments to Midsouth in the amount of $55,000, which includes variable interest of 9.9% per annum (based on 4.9% over a floor of 5% prime rate). Following the expiration of the agreement, the Company will receive title to the aircraft. The Company will account for this agreement as a capital lease.

 

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

Overview

Avantair, Inc. and subsidiaries (the “Company” or “Avantair”) are in the business of providing private aviation services through three primary flight service programs: (i) the sale of fractional ownership interests (Fractional Ownership program): (ii) the lease of fractional interests (Axis Lease program); and (iii) the sale of flight hour cards (Edge Card program and Axis Club Membership program). These services are provided on the Company’s managed aircraft fleet for business and personal use. Avantair’s core strategic focus is providing its customers with the highest level of safety, service and satisfaction. In addition to providing private aviation services, Avantair provides limited fixed based operation (“FBO”) services in Clearwater, FL and Camarillo, CA. Effective December 2011, the Company closed its limited FBO services in Caldwell, NJ. The Company also leases a facility in Dallas, Texas, which is used to perform maintenance on the Company’s aircraft.

As of March 31, 2012, Avantair operated 57 aircraft within its fleet, which is comprised of 45 aircraft for fractional ownership, 6 company-owned core aircraft and 6 leased and company-managed aircraft.

Avantair generates revenues primarily through the sale and lease of fractional ownership shares of aircraft, by providing management and maintenance services related to those aircraft, and by providing access to its aircraft fleet through the sale of flight hour cards providing either 15 or 25 hours of flight time per year. The Company markets and sells fractional ownership interests to individuals and businesses, generally with a minimum share size of a one-sixteenth ownership interest. Under management and maintenance agreements with fractional owners and lessees, Avantair provides pilots, maintenance, fuel and hangar space for the aircraft in exchange for a fixed monthly fee.

In response to market conditions and to provide further alternatives for private air travel, the Company initiated the Axis Lease program effective February 2011, which offers many of the same benefits as the Fractional Ownership program with various lease terms, up to ten years, and is available in 25 hour increments, starting at 50 hours per year. The Axis Lease program requires monthly lease payments, together with management and maintenance agreements similar to those in the Fractional Ownership program.

Avantair’s Axis Club Membership program, which was replaced by the Axis Lease program effective March 2011, offered access to blocks of flight hours for a three year membership fee of $75,000. The program required Axis Club members to purchase a minimum of three 25 hour flight hour cards over a three year period. The program also allows for the conversion of club membership into fractional ownership. Members are not charged a management and maintenance fee until they are fractional owners.

Avantair presently sources all of its aircraft from a single manufacturer, Piaggio America, Inc. (“Piaggio”). As of March 31, 2012, Avantair had contractual commitments to purchase 48 additional Piaggio Avanti II aircraft through 2013 with a mutual understanding that the aircraft delivery dates can be extended. The total commitment, if exercised during the period, including a proposed price escalation, is valued at approximately $305.1 million. Avantair believes that the pricing structure afforded by utilizing the Piaggio Avanti aircraft allows Avantair to attract a customer desiring quality at a lower price point than its competitors. Offering the cabin cross section of a mid-size aircraft and the fuel efficiency of a turboprop, along with no hourly fees, allows Avantair to lower the cost of private air travel for a broader range of individuals and businesses.

The Company’s primary sources of operating funds are the collection of management and maintenance fees from Fractional Ownership program owners and Axis Lease program lessees, as well as the sale of fractional ownership shares and flight hour cards. Revenue for sales by product category can be found in the accompanying condensed consolidated statements of operations for the three and nine months ended March 31, 2012 and 2011, respectively. Sales by product category are as follows:

 

     Unit Sales for the Three Months Ended      Unit Sales for the Nine Months Ended  
     March 31, 2012      March 31, 2011      March 31, 2012      March 31, 2011  

New Fractional Ownership program shares sold

     6.5         9.0         8.5         18.0   

Axis Lease program shares leased

     11.5         5.5         54.0         5.5   

Axis Club Memberships (1)

     —           6.0         1.0         31.0   

Flight hour cards

     81.0         102.0         271.0         368.0   

 

(1) 

Replaced by Axis Lease program in March 2011

During the first quarter of fiscal year 2012, the Company began the implementation of a series of cost saving initiatives designed to reduce fixed costs. These initiatives, some of which benefited the Company in the most recent quarter, included:

 

   

a reduction in force involving approximately 25 employees, primarily in the Company’s FBO operations;

 

   

elimination of the Company’s satellite marketing office and related expenses;

 

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renegotiation of the Company’s Florida lease;

 

   

closure of the Company’s limited FBO operations in New Jersey;

 

   

organization and personnel changes within the sales and finance departments; and

 

   

other negotiations with key vendors designed to drive operating and performance efficiencies.

These cost savings initiatives were unrelated to safety of flight operations and staffing in the Company’s pilot, maintenance and owner service departments.

Aircraft Incident

In November 2011, one of the Company’s fractionally owned aircraft was involved in an incident (Aircraft Incident), following which the aircraft was declared a total loss by the Company’s insurer. Only minor injuries were sustained by the passengers and crew. The Company was required to maintain insurance on the aircraft that covered its replacement value, which is estimated to be $4.8 million. During December 2011, the Company received $6.5 million of insurance proceeds which was recorded as accrued liabilities as of December 31, 2011. The additional insurance proceeds are a result of the Company insuring its aircraft in excess of the replacement value to reimburse the Company for expenses associated with a reduction in available aircraft in its fleet, including, but not limited to, costs incurred for chartered flights, repositioning aircraft to accommodate customers’ requirements, and maintenance costs associated with higher flight hours on the remaining fleet. These proceeds offset similar expenses for the quarter ended March 31, 2012, and are expected to offset similar expenses in the upcoming quarters. The fractional ownership documents permit the Company to replace the aircraft on behalf of the fractional owners with another aircraft that is substantially similar and has a market value approximately equal to or greater than the market value of the 2007 Piaggio P-180. As of March 31, 2012, the Company purchased the fractional owners’ interest in the aircraft, and simultaneously, the fractional owners of the 2007 Piaggio P-180 entered into new fractional ownership documents for a substantially similar replacement aircraft interest. Additionally, the Company paid a total of approximately $3.3 million and transferred 11.0 fractional shares in connection with this incident during the three months ended March 31, 2012. The Company expects to pay approximately $1.5 million for the remaining 5.0 fractional shares during the three months ended June 30, 2012 to facilitate the remaining transactions associated with this incident.

Employee Termination and Other Costs

During the quarter ended March 31, 2012, the Company developed and implemented plans to improve sales performance and deliver efficiencies within the finance department. These plans were evaluated and recorded in accordance with ASC 420 “Exit or Disposal Cost Obligations” (“ASC 420”). In connection with the changes in the sales and finance departments, the Company incurred various costs and obligations, including severance payouts to employees and other related charges. The Company expects total costs associated with these activities to be approximately $1.0 million. For the three and nine months ended March 31, 2012, the Company recognized approximately $0.9 million in the accompanying condensed consolidated statements of operations as employee termination and other costs, which is included in operating expense. The Company expects to complete these changes during the three months ended June 30, 2012, at which time the remaining $0.1 million will be recognized. As of March 31, 2012, the Company accrued approximately $0.4 million of unpaid employee termination and other expense as accrued liabilities in the accompanying condensed consolidated balance sheets.

Results of Operations

The following table sets forth key information about our financial results for the three months ended March 31, 2012:

 

     Three Months Ended
March 31,
    Change  
     2012     2011     $     %  

Fractional aircraft shares sold and lease revenue

   $ 8,879,476      $ 7,729,333      $ 1,150,143        15

Management and maintenance fees

     21,354,850        18,713,993      $ 2,640,857        14

Flight hour card and club membership revenue

     7,757,594        8,029,167      $ (271,573     -3

Other revenue

     2,063,298        2,016,100      $ 47,198        2

Cost of fractional aircraft shares sold

     7,133,247        6,618,110      $ 515,137        8

Cost of flight operations

     17,607,526        16,328,921      $ 1,278,605        8

Cost of fuel

     4,550,333        4,112,436      $ 437,897        11

General and administrative expenses

     7,831,064        7,244,888      $ 586,176        8

Selling expenses

     1,366,488        1,327,143      $ 39,345        3

Depreciation and amortization

     990,293        794,941      $ 195,352        25

Employee termination and other costs

     883,331        —        $ 883,331        100

Gain on sale of asset

     (624,179     —        $ (624,179     100

Interest and other income

     33,002        15,763      $ 17,239        109

Interest expense

     (1,080,255     (1,034,484   $ 45,771        4

Net loss

     (730,138     (956,567   $ (226,429     -24

 

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Three months ended March 31, 2012 compared to the three months ended March 31, 2011

Revenue increased as a result of:

 

   

a $1.2 million increase in fractional aircraft shares sold and lease revenue primarily due to the following:

 

   

$2.6 million increase for the sale of six and one-half fractional shares with no residual value guarantee;

 

   

$0.7 million increase in lease revenue, which resulted from the commencement of the Axis Lease program in February 2011;

 

   

offset by $2.2 million of lower revenue recognized on fractional shares sold before July 1, 2010, fully amortized prior to March 31, 2012, under ASC 605-25 “Multiple-Element Arrangements;”

 

   

a $2.6 million increase in management and maintenance fees primarily due to a higher number of lessees paying management and maintenance fees as a result of the commencement of the Axis Lease program in February 2011, together with an increase in the average monthly management fee per share during the three months ended March 31, 2012, compared to the three months ended March 31, 2011; and

 

   

offset by a $0.3 million decrease in flight hour card and club membership revenue due to a decrease in flight hour card utilization together with lower Axis Club Membership revenue, following this program’s replacement in March 2011.

Operating expenses increased as a result of:

 

   

a $0.5 million increase in the cost of fractional aircraft shares sold due to the following:

 

   

$2.5 million increase in costs related to the sale of six and one-half fractional shares with no residual value guarantee;

 

   

offset by $2.0 million of lower costs recognized on fractional shares sold before July 1, 2010, fully amortized prior to March 31, 2012, under ASC 605-25;

 

   

a $1.3 million increase in the cost of flight operations due primarily to the following:

 

   

a $0.9 million increase in pilot expenses due to an increase in payroll, travel, and training costs associated with improving the ratio of pilots to Company aircraft, together with an increasing number of flight hours during the quarter;

 

   

a $0.3 million increase in maintenance and charter expenses due to an increase in the number of additional aircraft and total flight hours;

 

   

a $0.4 million increase in fuel expense due to an increase in the cost of fuel, together with an increase in total flight hours;

 

   

a $0.6 million increase in general and administrative expenses due to an increase of $0.7 million in the cost of used shares sold during the three months ended March 31, 2012 compared to the three months ended March 31, 2011. Additionally, there were increases in payroll and health care premiums, which were offset by a decrease in FBO related costs, driven by closing the Company’s New Jersey FBO operations, together with a decrease in professional services and merchant service fees;

 

   

a $0.2 million increase in depreciation and amortization primarily due to the acquisition of an additional core aircraft subsequent to the three months ended March 31, 2011;

 

   

a $0.9 million increase in employee termination and other costs due to the Company recognizing costs in accordance with ASC 420 “Exit or Disposal Cost Obligations” (“ASC 420”). See Item 1., Note 3 – Commitments and Contingencies for further discussion. No such costs were recognized during the three months ended March 31, 2011; and

 

   

offset by the recognition of a gain on sale of asset of $0.6 million during the three months ended March 31, 2012, associated with the sale of one of the Company’s aircraft. See Item 1., Note 2 – Summary of Significant Accounting Policies for further discussion. No such gain was recognized during the three months ended March 31, 2011.

 

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The following table sets forth key information about our financial results for the nine months ended March 31, 2012:

 

     Nine Months Ended
March 31,
    Change  
     2012     2011     $     %  

Fractional aircraft shares sold and lease revenue

   $ 23,548,667      $ 25,705,734      $ (2,157,067     -8

Management and maintenance fees

     62,621,620        55,946,175      $ 6,675,445        12

Flight hour card and club membership revenue

     25,520,225        21,443,660      $ 4,076,565        19

Other revenue

     4,953,385        5,759,678      $ (806,293     -14

Cost of fractional aircraft shares sold

     19,403,825        22,255,800      $ (2,851,975     -13

Cost of flight operations

     52,349,977        51,671,193      $ 678,784        1

Cost of fuel

     14,220,687        12,648,324      $ 1,572,363        12

General and administrative expenses

     23,119,515        20,799,106      $ 2,320,409        11

Selling expenses

     4,817,542        4,553,668      $ 263,874        6

Depreciation and amortization

     2,953,254        3,313,297      $ (360,043     -11

Employee termination and other costs

     883,331        —        $ 883,331        100

Gain on debt extinguishment

     (438,621     —        $ (438,621     100

Gain on sale of asset

     (624,179     —        $ (624,179     100

Interest and other income

     113,478        49,916      $ 63,562        127

Interest expense

     (3,376,711     (3,501,015   $ (124,304     -4

Net loss

     (3,304,667     (9,837,240   $ (6,532,573     -66

Nine months ended March 31, 2012 compared to the nine months ended March 31, 2011

Revenue increased as a result of:

 

   

a $6.7 million increase in management and maintenance fees primarily due to a higher number of lessees paying management and maintenance fees as a result of the commencement of the Axis Lease program in February 2011, together with an increase in the average monthly management fee per share during the nine months ended March 31, 2012 compared to the nine months ended March 31, 2011;

 

   

a $4.1 million increase in flight hour card and Axis Club Membership revenue due to the following:

 

   

a $3.6 million increase in flight hour card revenue as a direct result of an increase in flight hour card utilization;

 

   

a $0.4 million increase in Axis Club Membership revenue;

 

   

offset by a $2.2 million decrease in fractional aircraft shares sold and lease revenue due to the following:

 

   

$6.9 million of lower revenue recognized on fractional shares sold before July 1, 2010, fully amortized prior to March 31, 2012, under ASC 605-25;

 

   

offset by a $3.0 million increase for the sale of seven and one-half fractional shares with no residual value guarantee;

 

   

also offset by a $1.7 million increase in lease revenue, which resulted from the commencement of the Axis Lease program in February 2011; and

 

   

offset by a $0.8 million decrease in other revenue due primarily to the Company’s decision to limit its FBO operations, including the closure of its New Jersey FBO facility and the resulting impact to fuel and rent revenue.

Operating expenses increased as a result of:

 

   

a $0.7 million increase in the cost of flight operations due to the following:

 

   

a $3.0 million increase in pilot expenses due to an increase in payroll, travel, and training costs associated with improving the ratio of pilots to Company aircraft, together with an increasing number of flight hours during the quarter;

 

   

offset by a $2.3 million decrease in maintenance and charter expenses due to the acceleration of aircraft maintenance during fiscal year 2011 to prepare for peak travel, together with a decrease of $0.3 million in charter expense;

 

   

a $1.6 million increase in fuel expense due to an increase in the cost of fuel, an increase in total flight hours, and increased holiday fuel incentives during the second quarter of fiscal year 2012;

 

   

a $2.9 million decrease in the cost of fractional aircraft shares sold primarily due to the following:

 

   

$5.6 million of lower costs recognized on fractional shares sold before July 1, 2010, fully amortized prior to March 31, 2012, under ASC 605-25;

 

   

offset by an increase of $2.9 million in costs related to the sale of seven and one-half fractional shares with no residual value guarantee;

   

a $2.3 million increase in general and administrative expenses due to an increase in payroll, health care premiums, stock-based compensation, severance payments during the first six months of fiscal year 2012, together with costs related to the closure of the Company’s New Jersey FBO operations. In addition, the Company incurred an additional $0.8 million in the cost of used shares sold during the nine months ended March 31, 2012 compared to the nine months ended March 31, 2011. These increases were offset by a decrease in FBO related costs;

 

   

a $0.4 million decrease in depreciation and amortization due primarily to the change in estimated useful lives of the Company’s core aircraft in January 2011 (See Critical Accounting Policies and Estimates). This decrease was partially offset by additional depreciation due to the acquisition of an additional core aircraft subsequent to the nine months ended March 31, 2011;

 

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a $0.9 million increase in employee termination and other costs due to the Company recognizing costs in accordance with ASC 420 “Exit or Disposal Cost Obligations” (“ASC 420”). See Item 1., Note 3 – Commitments and Contingencies for further discussion. No such costs were recognized during the nine months ended March 31, 2011;

 

   

offset by the recognition of a gain on debt extinguishment of $0.4 million during the nine months ended March 31, 2012 in accordance with ASC 470 “Debt” (“ASC 470”) upon entering into a lease agreement for an aircraft that had been previously financed through a short-term note payable. See Item 1., Note 3 – Commitments and Contingencies for further discussion. No such gain was recognized for the nine months ended March 31, 2011; and

 

   

offset by the recognition of a gain on sale of asset of $0.6 million during the nine months ended March 31, 2012, associated with the sale of one of the Company’s aircraft. See Item 1., Note 2 – Summary of Significant Accounting Policies for further discussion. No such gain was recognized during the nine months ended March 31, 2011.

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 from the preferred and common stock offerings and other asset- based borrowing. The Company uses its cash primarily to fund losses from operations, to make deposits on aircraft, to fund the purchase and lease of core aircraft and to fund the purchase of 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 March 31, 2012 and June 30, 2011, Avantair had a working capital deficit of approximately $69.4 million and $63.9 million, respectively, and a stockholders’ deficit of approximately $48.0 million and $44.0 million, respectively. As of March 31, 2012, cash and cash equivalents were approximately $7.1 million and total assets were $98.9 million. The cash and cash equivalents balance increased $1.5 million from June 30, 2011 and total assets decreased $12.1 million. The increase in cash and cash equivalents occurred primarily as a result of the following:

 

   

$7.5 million of net cash provided by operating activities was due to the receipt of $6.5 million of insurance proceeds, in connection with the aircraft incident described above, of which the Company paid $3.3 million. Additionally, the Company generated net cash of $4.3 million from the normal course of operations;

 

   

$1.4 million of net cash used in investing activities due to capital expenditures of $2 million, offset by proceeds from the sale of one of the Company’s aircraft;

 

   

$4.6 million of net cash used in financing activities due to short and long-term debt payments of $5.6 million, dividend payments of $1.0 million, offset by long-term borrowing of $2.0 million.

Avantair’s primary growth strategy is to continue to increase the number of fractional share owners and Axis Lease program lessees, increase the number of flight hour cards sold and increase total aircraft under management. At March 31, 2012, the Company had 17 new 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 customers’ requirements), flight operations and pilot expenses, maintenance, charters, insurance and selling, general and administrative expenses. To finance its growth strategy, the Company will continue to actively pursue additional funds through equity financing, including the sale of additional shares of common and preferred stock, asset sales, promotional sales incentives, cash receipts associated with accelerated payments of management and maintenance fees, debt financing or refinancing, or any combination thereof. At March 31, 2012 and June 30, 2011, Avantair had assets of approximately $98.9 million and $110.9 million, respectively. For the three and nine months ended March 31, 2012, the Company had revenue of approximately $40.1 million and $116.6 million, respectively. The Company had net losses of $0.7 million and $3.3 million for the three and nine months ended March 31, 2012, 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 and positive cash flows. At March 31, 2012, the Company had approximately $7.1 million of cash on hand. Based on improving sales, expenses remaining at or below the current level, together with continued facilitation of the measures to finance the Company’s strategy described above, the Company believes its cash position can be sufficient to continue operations for at least the next twelve months.

Refer to Note 3 to the accompanying condensed consolidated financial statements for a summary of the Company’s financing arrangements.

Off-Balance Sheet Arrangements

At March 31, 2012, the Company did not have any material commercial commitments (except for those noted in Note 3 “Commitments and Contingencies – Purchase Commitments” in the accompanying condensed consolidated financial statements), including guarantees or standby repurchase obligations, or any relationships with unconsolidated entities or financial partnerships, including entities often referred to as structured finance or special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

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Critical Accounting Policies and Estimates

As discussed in our Form 10-K for the fiscal year ended June 30, 2011, the discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and estimation. The judgments, or the methodology on which the judgments are made, are reviewed with the Audit Committee.

In January 2011, the Company changed its estimate for the depreciable life of its core aircraft to 20 years from an original seven year life. This change in estimate was based upon an evaluation of the aircrafts’ actual service life. This change in estimate was adopted prospectively and resulted in a $0.5 and $1.5 million reduction in depreciation expense recognized during the three and nine months ended March 31, 2012, respectively.

Refer to Note 2 to the accompanying condensed consolidated financial statements for a summary of the Company’s significant accounting policies.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The information called for by this Item is omitted in reliance upon Item 305(e) of Regulation S-K.

 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of March 31, 2012, under the direction of the Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a – 15(e) under the Securities Exchange Act of 1934, as amended. Based on the evaluation, it was concluded that, as of March 31, 2012, 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.

Changes to Internal Control over Financial Reporting

There has been no change to the internal controls over financial reporting during the three months ended March 31, 2012, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

CEO and CFO Certifications

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

 

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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 March 31, 2012, 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.

As a smaller reporting company, we are not required to provide information required by this item.

 

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

None

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

Item 5. Other Information.

None.

 

Item 6. Exhibits.

See exhibit index.

 

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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.

May 11, 2012

 

Avantair, Inc.

By:

 

/s/ Steven Santo

  Steven Santo
  Chief Executive Officer

 

By:  

/s/ Stephen Wagman

  Stephen Wagman
  Chief Financial Officer

 

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Exhibit

Number

  

Description

  10.1†    Director Compensation Policy
  10.2†    Form of Non-Employee Director Restricted Stock Agreement
  31.1    Chief Executive Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
  31.2    Chief Financial Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
  32.1    Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350
  32.2    Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350
101*    The following materials from Avantair, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficit, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text.

 

* Users of the XBRL data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
Management contract or compensatory plan or arrangement