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AAIR > SEC Filings for AAIR > Form 10-Q on 13-Jun-2013All Recent SEC Filings

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Form 10-Q for AVANTAIR, INC


13-Jun-2013

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. In January 2013, the Company ceased its FBO operations at its Camarillo, CA facility and entered into a sublease agreement with an unrelated third party. The Company will retain a portion of one hangar which may be used for maintenance of the Company's aircraft. The sublease agreement transferred all FBO operations to the unrelated third party and established a base rent schedule that reflects the reduced occupancy of the facility. 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 third party aircraft maintenance operators to provide increased levels of maintenance contract services for its fleet. Revenue by product category can be found in the accompanying consolidated statements of operations for the three and nine months ended March 31, 2013 and 2012, respectively. Sales units by product category are as follows:

                                       Unit Sales for the Three Months                Unit Sales for the Nine Months
                                                    Ended                                         Ended
                                   March 31,                 March 31,               March 31,              March 31,
                                      2013                      2012                   2013                   2012

New Fractional Ownership
program shares sold                         10                          6.5                   10                    8.5
Axis Lease program shares
leased                                      -                          11.5                   25                     54
Axis Club Memberships (1)                   -                            -                    -                       1
Flight hour cards                           74                           81                  198                    271

(1) Replaced by Axis Lease program in March 2011.

As of March 31, 2013, Avantair managed 56 aircraft within its fleet, which is comprised of 43 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 was taken in coordination with the Federal Aviation Administration. During the stand down, which 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 aircraft on November 11, 2012 with a return to service of a majority of its fleet by November 19, 2012. The effect of the operational stand down negatively impacted the Company's cash receipts, liquidity and retention of program participants. Separate of charter and costs associated with retention of program participants, the Company incurred approximately $1.2 million for consulting, Federal Aviation Administration, furlough, legal, communication and other costs.

Beginning in the second quarter of fiscal year 2013, the Company initiated steps to raise additional capital through multiple offerings of securities. On November 30, 2012, the Company entered into a Note and Warrant Purchase Agreement (the "Purchase Agreement") providing for the issuance of an aggregate of up to $10.0 million in principal amount of senior secured convertible promissory notes (the "Notes") and warrants to purchase up to an aggregate of 40,000,000 shares of common stock (the "Warrants"). 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. At the initial closing, which occurred on November 30, 2012, the Company issued to certain members of the Company's Board of Directors and their affiliates Notes in an aggregate principal amount of $2.8 million and Warrants to purchase an aggregate of 11,200,000 common shares (the "Initial Closing"). On February 1, 2013, February 28, 2013 and March 20, 2013, the Company issued to eleven accredited investors, that are also participants in the fractional ownership program, Notes in an aggregate principal amount of $2.96 million and Warrants to purchase an aggregate of 11,850,000 shares of common stock. At an additional closing on March 29, 2013, the Company issued to an accredited investor a Note in an aggregate principal amount of $1.97 million and Warrants to purchase an aggregate of 7,880,000 shares of common stock (the "Additional Closing"). In addition, on January 17, 2013, the Company, the holders of the Notes and Warrants and Barry Gordon, as collateral agent, entered into the Amendment to Note and Warrant Purchase Agreement, Senior Secured Convertible Promissory Notes, Warrants, Security Agreement and Registration Rights Agreement (the "Note Financing Amendment"). The Notes bear interest at an initial rate of 2.0% per annum, which increased to 12.0% per annum since the Company was unsuccessful in obtaining stockholder approval by March 31, 2013 to increase the Company's authorized shares of common stock so that a sufficient number of shares are reserved for the conversion of the Notes. Holders of the Notes may, at their option, elect to convert all outstanding principal and accrued but unpaid interest on the Notes into shares of common stock at a conversion price of $0.25 per share, but may convert only a portion of such Notes if an inadequate number of authorized shares of common stock is available to effect such optional conversion. Holders of the Notes are entitled to certain anti-dilution protections. As part of certain note and warrant agreements, the Company has provided holders with the option to convert the note or exercise the warrant into the Company's common stock at a specified strike price. In order to prevent dilution, if the new strike price is lower than the original strike price on the day of conversion or exercise, the strike price would be lowered to the new conversion or exercise price. The Company has determined that these types of down round protection terms are considered derivatives.


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The Company may prepay the Notes on or after November 28, 2014. The Notes have a maturity date of November 28, 2015, unless the Notes are earlier converted or an event of default or liquidation event occurs. The Warrants are exercisable at an exercise price of $0.50 per share, which exercise price is subject to certain anti-dilution protections, however the Warrants may not be exercised unless a sufficient number of authorized shares of common stock are available for the exercise of the Warrants. The Warrants expire on November 30, 2017. If the Company is unable to raise additional capital or 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 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 consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and the interim 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 consolidated financial statements as required by Regulation S-X, Rule 8-03. The interim consolidated operating results are not necessarily indicative of the results for a full year or any interim period. The 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.

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 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 consolidated financial statements.

The accompanying 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, 2013, the Company's recurring net losses resulted in a working capital deficit of approximately $71.6 million and a stockholders' deficit of approximately $61.7 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 a program participant's requirements), flight operations and pilot expenses, maintenance, charters, insurance and selling, general and administrative expenses.

Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As reflected in the accompanying financial statements, the Company has incurred recurring losses prior to the current period, has used significant cash in support of its operating activities and, based upon current operating levels, requires additional capital or significant reconfiguration of its operation to sustain its operations for the foreseeable future. For the nine months ended March 31, 2013, the Company has incurred losses of $10.5 million and had an accumulated deficit of $122 million since inception.

For the next twelve months, the Company anticipates significant cash and capital needs to finance its business and cover its ongoing working capital needs in order to continue operations. The Company is currently in the arrears on various lease and vendor payments. The Company is funding monthly operations with cash receipts and incremental equity on an as needed basis. In order to cover its daily cash needs, the Company is considering raising additional funds in the form of equity of capital, senior loans through private placements, loan applications or any other alternative approach. The Company's ability to obtain needed financing may be impaired by factors such as the capital markets, and the fact it is not profitable, which could impact the availability or cost of future financings. If the Company does not secure these funds, it may be forced to suspend or terminate operations.

On June 6, 2013, the Company commenced visual inspections and records review of the time controlled parts on its aircraft by voluntarily ceasing flying each aircraft during the period until the inspection with respect to such aircraft is completed in order to ensure the highest degree of compliance and safety. An audit of the time controlled parts was already underway during scheduled maintenance checks as part of its new safety system; however, the Company was notified of an anonymous call received questioning the adequacy of the system for monitoring time controlled parts. As such, it is the Company's policy to fully investigate such claims. The Company anticipates that it will begin release of aircraft back into service on a continual basis this week following the completion of these inspections. The Company believes that the effect of the aircraft inspections may negatively impact its cash receipts, its liquidity and retention of program participants in the upcoming two to three month period.

The unaudited interim consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. The continuation of the Company as a going concern is dependent upon the ability of the Company to generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain profitability and obtaining additional funding.

Reclassifications

Management has reclassified various expenses within the operating expense section of the accompanying consolidated statements of operations for the three and nine months ended March 31, 2012. These reclassifications are primarily as follows:

Payroll taxes and benefit costs of approximately $1.2 million and $3.1 million have been reclassified and apportioned to cost of flight operations and selling expenses from general and administrative expenses for the three and nine months ended March 31, 2012;

Third-party fuel sale costs of approximately $0.4 million and $1.3 million have been reclassified to cost of fuel from general and administrative expenses for the three and nine months ended March 31, 2012; and

Cost of used shares of less than $0.7 million and $0.9 million have been reclassified to cost of fractional aircraft share sales from general and administrative expenses for the three and nine months ended March 31, 2012.

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 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 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 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 Accounting Standards Codification ("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 $2.0 million and $2.2 million in cash at March 31, 2013 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 $1.5 million and $1.3 million as of March 31, 2013 and June 30, 2012, respectively, for estimated losses arising from the inability of its program participants to make required payments. For the nine months ended March 31, 2013, the Company increased the allowance for doubtful accounts by $0.5 million and wrote off $0.3 million of accounts receivable balances against the allowance for doubtful accounts. 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. The Company's estimate of the allowance for doubtful accounts is subject to change if the financial condition of the Company's program participants were to deteriorate resulting in a reduced ability to make payments.

Inventory

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

Concentration of Credit Risk and Sources of Supply

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash. At times, the Company's cash balances may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation ("FDIC") insurance limits. As of March 31, 2013, the Company had cash and cash equivalent balance of $2.2 million in excess of the federally insured limit of $250,000. All the Company's cash in banks at March 31, 2013 was deposited in non-interest checking accounts.

The Company relies on three third-party fuel suppliers and generally relies on several suppliers for maintenance and other repairs for its aircrafts.

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 has had net losses and a current goodwill impairment charge, long-lived assets are not impaired because cash flow from use or ultimate sale of such aircraft support net book value.

Goodwill

During the third quarter of fiscal 2013, the Company experienced weaker operating performance and lowered its financial outlook. Taking these factors into account, the Company reassessed its financial outlook and consequently reevaluated the recoverability of goodwill. The Company performed the two-step impairment test and concluded that the Company's carrying value exceeded its fair value. Based on the Company's analyses, the implied fair value of goodwill was substantially lower than the carrying value of goodwill for the reporting unit. As a result, in the third quarter of fiscal 2013, the Company recorded a goodwill impairment charge of $1.1 million, representing all of the remaining goodwill for the Company.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset.

If the carrying amount of an asset exceeds its undiscounted estimated future cash flows, an impairment review is performed. An impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. The Company concluded that there was no impairment to be recorded for its long-lived assets as of March 31, 2013.


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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 March 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 costs include, but are not limited to, fuel, flight fees, maintenance costs required by Airworthiness Directives or Service Bulletins as mandated by the Federal Aviation Administration ("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 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", ("ASU 2009-13") which updates ASC 605-25. There were no fractional aircraft shares sold during the three months ended March 31, 2013 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" ("ASU 840") 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, 2013, guarantees under this program totaled approximately $4.9 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.

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 . . .

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