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AAIR > SEC Filings for AAIR > Form 10-Q on 16-Nov-2012All Recent SEC Filings

Show all filings for AVANTAIR, INC

Form 10-Q for AVANTAIR, INC


16-Nov-2012

Quarterly Report


NOTE 1 - OPERATIONS AND MANAGEMENT'S PLANS

Avantair, Inc. and its 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 through the Fractional Ownership program;

(ii) the lease of fractional interests through the Axis Lease program; and

(iii) the sale of flight hour cards through the Edge Card program.

Collectively, participants in each of these programs are referred to herein as "program participants". These services are provided to program participants on the Company's managed aircraft fleet for business and personal use. Avantair's core strategic focus is providing its program participants 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, Florida and Camarillo, California. The Company is currently negotiating the sale of its FBO operations in California, resulting in the Company entering into a non-binding letter of intent to sell this business to an unrelated third party, which is expected to occur by December 31, 2012. There can be no assurance that this transaction will be completed. Effective December 2011, the Company closed its limited FBO services in Caldwell, New Jersey. The Company also leases a facility in Dallas, Texas, which is used to perform maintenance on the Company's aircraft.

The Company's primary operating strategy is to achieve positive cash flows by continuing the Company's cost savings initiatives, flight operation cost reductions associated with strategically eliminating more costly aircraft from its fleet and lowering maintenance costs as a result of driving increased efficiencies through the use of a third party aircraft maintenance operator to provide increased levels of maintenance contract services for its fleet. Revenue for sales by product category can be found in the accompanying condensed consolidated statements of operations for the three months ended September 30, 2012 and 2011, respectively. Sales by product category are as follows:

                                                    Unit Sales for the Three Months Ended
                                           September 30, 2012                  September 30, 2011
New Fractional Ownership program
shares sold                                                  -                                  1.0
Axis Lease program shares leased                           16.0                                26.0
Axis Club Memberships (1)                                    -                                  1.0
Flight hour cards                                          73.0                               110.0

(1) Replaced by Axis Lease program in March 2011

As of September 30, 2012, Avantair operated 57 aircraft within its fleet, which is comprised of 44 fractionally-owned aircraft, 6 company-owned core aircraft and 7 leased and company-managed aircraft.

On October 25, 2012, the Company made an announcement regarding the voluntary stand down of its operations in order to complete a comprehensive review of records and supporting maintenance documentation and an inspection of its aircraft fleet. This voluntary action has been taken in coordination with the Federal Aviation Administration. During the stand down, which has lasted approximately three weeks, the Company furloughed a portion of its employees. Beginning November 8, 2012 the Company started recalling its employees and commenced operating some of its planes on November 11, 2012. The Company believes that approximately a majority of its aircraft may resume flying within a one to two week period. The Company believes that the effect of the operational stand down will negatively impact its cash receipts, its liquidity and retention of program participants in the upcoming two to three month period. In addition, the Company estimates that, separate of charter, it will incur between $0.7 million and $1.0 million for consulting, Federal Aviation Administration, furlough, legal and communications costs. There can be no assurance that we will be able to have additional aircraft flying on the timeline we expect or that these related costs will not exceed our estimates.

Beginning in the second quarter of fiscal year 2013, the Company initiated steps to raise additional capital through multiple offerings of securities. The securities offered will not be and have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. The initial offering involves the sale of senior secured convertible promissory notes and warrants to purchase common stock to members of its Board of Directors and other interested parties (the "Initial Offering"). These notes are expected to be convertible into shares of the Company's common stock and warrants to purchase additional shares of the Company's common stock, subject to the availability of a sufficient number of authorized shares of the Company's common stock. The Company currently expects that the notes will have a five year maturity date, permitting the Company to prepay on or after the second anniversary date of issuance. The Company currently expects that all outstanding principal and unpaid accrued interest on the notes will be automatically convertible into shares of the Company's common stock at a specified conversion rate per share of common stock in the event that, prior to the maturity date, the last reported sales price of the common stock meets certain price thresholds. The Company currently expects that note holders will be able to elect to convert shares of all outstanding principal and unpaid accrued interest under the notes into shares of common stock at any time at a specified conversion price per share of common stock. The Company currently expects that the warrants will have a five year term and will have an exercise price of $0.50 per share, subject to certain adjustments set forth in the warrant and the availability of a sufficient number of authorized shares of the Company's common stock. The Company currently expects that the warrants will be exercisable at the option of the holder and the Company will have the right to repurchase the warrants in the event the last reported sales price of the common stock meets certain price thresholds. The closing of the Initial Offering, if consummated, is anticipated to occur during the middle of the second quarter. In addition, the Company expects to seek to raise additional capital in additional offerings. The terms of these proposed offerings may vary from the terms of the senior secured convertible promissory notes and warrants that may be issued in the Initial Offering. The Company anticipates that it will seek to consummate the additional offerings during the period from December 2012 to March 2013. The issuance of some or all these securities, if one or more of these offerings is consummated, will further substantially dilute the Company's existing stockholders as will additional issuances that will be triggered under anti-dilution and similar provisions of the Company's outstanding securities. There can be no assurance that the Company will be successful in completing these offerings or obtaining shareholder approval for any necessary increases in the authorized shares of common stock related to these offerings. As of November 13, 2012, the Company had unrestricted cash of approximately $2.8 million. If the Company is unable to complete one or more of such offerings or if the amount raised is not adequate, there can be no assurance that the Company can continue operations or meet its ongoing obligations and commitments. In addition, the Company is working with its other vendors, lessors and lenders, to extend payment terms as the Company seeks to raise additional capital.

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 as required by Regulation S-X, Rule 8-03. 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, 2012 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, 2012.


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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, 2012.

Basis of Presentation

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

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the successful recovery of the Company's assets and the satisfaction of its liabilities in the normal course of business. As of September 30, 2012, the Company's recurring net losses resulted in a working capital deficit of approximately $70.2 million and a stockholders' deficit of approximately $53.4 million. In addition to the cost of acquiring aircraft, the Company's primary expenses are related to fuel, aircraft repositioning (i.e., moving an aircraft from one location to another location to accommodate program participant's requirements), flight operations and pilot expenses, maintenance, charters, insurance and selling, general and administrative expenses.

Reclassifications

In an effort to provide greater transparency and better represent the Company's operations, management has reclassified various expenses within the operating expense section of the accompanying condensed consolidated statement of operations for the three month period ended September 30, 2011. These reclassifications are primarily as follows:

Payroll taxes and benefit costs of approximately $0.9 million have been reclassified and apportioned to cost of flight operations and selling expenses from general and administrative expenses;

Third-party fuel sale costs of approximately $0.5 million have been reclassified to cost of fuel from general and administrative expenses;

Cost of used shares of approximately $0.2 million have been reclassified to cost of fractional aircraft share sales from general and administrative expenses

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 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 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 of its depreciable life of its core aircraft to 20 years from its 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, in accordance with ASC 250 "Accounting Changes and Error Corrections", ("ASC 250").

The Company's strategy is to maintain and operate its aircraft for at least 10 years. The 20 year life is representative of the full service life of the aircraft, not an increase in the period that the Company intends to maintain and operate the aircraft.


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Cash-restricted

Restricted cash includes cash where 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 $2.3 million and $2.2 million in cash at September 30, 2012 and June 30, 2012, 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 long-term.

Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts.

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts of approximately $1.4 million and $1.3 million as of September 30, 2012 and June 30, 2012, respectively, for estimated losses arising from the inability of its program participants to make required payments. The Company's estimate is based on factors surrounding the credit risk of certain clients, historical collection experience and a review of the current status of accounts receivable. It is reasonably possible that the Company's estimate of the allowance for doubtful accounts will change if the financial condition of the Company's program participants were to deteriorate resulting in a reduced ability to make payments or program participants fail to make payments as a result of the recent stand down of the fleet.

Inventory

Fuel inventory is valued at the lower of cost (determined by the first-in, first-out method) or market.

Property and Equipment

Property and equipment is recorded at cost and primarily consists of aircraft
which are not fractionalized. Depreciation and amortization is computed using
the straight-line method over the following useful lives:



                 Aircraft                                           5 - 20 years
Office equipment and furniture and fixtures                         5 - 7 years
    Flight management software/hardware                               5 years
                 Vehicles                                             5 years
               Improvements                   Lesser of estimated useful life or the term of the lease

Cost and related accumulated depreciation on assets retired or disposed of are removed from the accounts and any resulting gains or losses are credited or charged to income.

Expenditures for maintenance and repairs of property and equipment are expensed as incurred. Major improvements and interest costs relating to borrowings made for the acquisition of aircraft are capitalized. Modifications that enhance the operating performance or extend the useful lives of airframes or engines on core aircraft are capitalized and depreciated over the remaining estimated useful life of the asset or the remaining lease term, whichever is shorter.

The carrying value of property and equipment to be held and used is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with ASC 360 "Property, Plant and Equipment" ("ASC 360"). Although the Company recognizes that it has incurred net losses since inception, these net losses have been much less significant than in prior periods. Additionally, there has been no material deterioration in the total program participant base and related program participant contracts, though the Company has seen a decrease in new fractional share sales corresponding with the Company's February 2011 introduction of its Axis Lease program. Due to a voluntary stand down of its operations (see Note
1), the Company performed an interim impairment analysis on its property and equipment to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. After assessing the qualitative factors prescribed by ASC 360, the Company concluded that the fair value of the reporting unit was more than the carrying amount. As a result, there is no indication of impairment and further testing as a result of the voluntary stand down is not required.

Goodwill

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


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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.

Due to a voluntary stand down of its operations (see Note 1), the Company performed an interim goodwill impairment analysis to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount, including goodwill. After assessing the qualitative factors prescribed by ASC 350, the Company concluded that the fair value of the reporting unit was more than the carrying amount. As a result, there is no indication of impairment and further testing as a result of the voluntary stand down is not required.

Revenue Recognition

The Company 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 15, 25 or 50 hour flight hour cards. When a program participant 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 program participant 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 program participant in exchange for a fixed monthly fee.

Flight activity and other ancillary billing includes revenue related to billings to the program participants for reimbursable costs incurred by the Company. These reimbursable cost include, but are not limited to, fuel, flight fees, maintenance costs required by Airworthiness Directives or Service Bulletins as mandated by the FAA and not covered by the regular maintenance provided for in the management and maintenance agreement, aircraft upgrades and other ancillary charges. Flight activity and other ancillary billing are recorded on a gross basis as revenue in accordance with ASC 605-45 "Principal Agent Considerations" ("ASC 605-45").

Fractional Aircraft Shares Sold

Fractional shares are typically sold as one-sixteenth shares and require upfront payment for an undivided interest in the aircraft. Upon the purchase of a fractional share, the owner receives title to their interest in the aircraft. The ownership period is indefinite. Revenue for these types of transactions is included in fractional aircraft shares sold in the accompanying condensed consolidated statements of operations.

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 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 ("ASU") 2009-13 "Multiple-Deliverable Revenue Arrangements", which updates ASC 605-25. There were no fractional aircraft shares sold during the three months ended September 30, 2012 requiring recognition under this guidance.

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 owner's option for a determined percent of the original purchase price. The Company discontinued this residual guarantee program in October 2011. 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 September 30, 2012, guarantees under this program totaled approximately $4.8 million and are included in deferred revenue related to fractional aircraft share sales.

Lease Revenue

Lease revenue includes fractional share lease revenue from the Company's Axis Lease program. The lease of a fractional share allows a program participant to lease an interest in the aircraft from the Company in exchange for a monthly lease charge. Unlike the purchase of a fractional ownership interest, program participants do not take title to the aircraft at any point in time. Lease terms typically range from two to ten years.


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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

Fractional owners and lessees are required to enter into a management and maintenance agreement, which grants the program participant the right to use the aircraft for a specified number of hours each year for a fractional owner, and each month for a fractional lessee.

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 their 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 their 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, 25 or 50 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 flight hours are flown.

Axis Club Membership revenue. In February 2009, the Company initiated the Axis Club Membership program. The Axis Club Membership program offered program participants 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. Axis Club Membership fees were paid in advance, deferred and recognized as revenue over the shorter of the three year membership term or the period of . . .

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