Sky Harbour Group Corp (SKYH)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our audited financial statements and the notes related thereto which are included in “Item 8. Financial Statements and Supplementary Data” of this Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Special Note Regarding Forward-Looking Statements,” “Item 1A. Risk Factors” and elsewhere in this Report.

Overview and Background

We are an aviation infrastructure development company building the first nationwide network of home basing hangar campuses for business aircraft. We develop, lease, and manage general aviation hangars across the United States, targeting airfields in markets with significant aircraft populations and high hangar demand. Our home basing hangar campuses feature exclusive private hangars and a full suite of dedicated services specifically optimized for home-based, versus transient, aircraft.

The physical footprint of the U.S. business aviation fleet grew by almost 36 million square feet in the past fourteen years, with hangar supply lagging dramatically, especially in key growth markets. As the fleet of private jets in the United States continues to grow, with recent new aircraft deliveries exceeding retirements, demand for hangar space is at a premium in part because new jets require taller tail clearances and more square footage of hangar space and the pace of new hangar construction has lagged behind the demand. The cumulative square footage of the business aircraft fleet in the United States increased 61% between 2010 and 2023. Moreover, over that same period, there was an 102% increase in the square footage of larger private jets – those with greater than a 24-foot tail height. A recent study conducted by a business aircraft manufacturer forecasted that business aircraft will only continue to grow in the next ten years, with up to 8,500 new business jet deliveries worth over $285 billion expected to be delivered between 2025 and 2034, with over two-thirds of the deliveries expected to be comprised of larger private jets. This forecast is further supported by data from the major business aviation manufacturers that suggest the current order backlog for new business aviation aircraft as of December 31, 2024 is over $52 billion, an increase of approximately 6% over the prior year.

These larger footprint aircraft do not fit in much of the existing hangar infrastructure and impose stacking challenges and constraints in the traditional shared or community hangars operated by fixed-base operators (“FBO”). The addition of winglets (the vertical extensions on aircraft wingtips) on most modern business jets inhibits wing-over-wing storage. Aircraft hangars are in high demand and short supply, with some airports compiling waiting lists that can exceed several years.

We believe our scalable, real estate-centric business model is uniquely positioned to capture this market opportunity and address the increased imbalance between the supply and demand for private jet storage. We intend to capitalize on the existing hangar supply constraints at major U.S. airports by targeting high-end tenants in markets where there is a shortage of private and FBO hangar space, or where such hangars are or are becoming obsolete.

We expect to realize economies of scale in construction through a prototype hangar design replicated at our home basing hangar campuses across the United States. This allows for centralized procurement, straightforward permitting processes, efficient development processes, and the best hangar in business aviation. Unlike a service company, our revenues are mostly derived from long-term rental agreements, offering stability and forward visibility of revenues and cash flows. This allows the Company to fund its development through the public bond market, providing capital efficiency and mitigating refinance risk.

For a more complete description of our operations, including our home basing hangar campus development projects, refer to Item 1 — Business.

Recent Developments

In September 2024, we entered into a Securities Purchase Agreement (the “2024 Purchase Agreement”) with certain investors (collectively, the “Initial 2024 Investors”), pursuant to which, among other things, we agreed to sell and issue to the Initial 2024 Investors at an initial closing an aggregate of 3,352,106 shares (the “Initial 2024 PIPE Shares”) of our Class A Common Stock for an aggregate net purchase price of approximately $31.8 million (the “Initial 2024 Closing”), and agreed to sell and issue to the Initial 2024 Investors at a second closing, at the option of the Initial 2024 Investors, up to an aggregate of number of shares equal to the number of each such Initial 2024 Investor's Initial 2024 PIPE Shares purchased in the Initial 2024 Closing at the same purchase price of $9.50 per share (the “Second 2024 Closing” and, together with the Initial Closing, the “2024 Financing”).

The 2024 Purchase Agreement provided that, at any time prior to the Initial 2024 Closing, and at our sole discretion, additional investors (“Additional 2024 Investors” and, together with the Initial 2024 Investors, the “2024 Investors” ) could execute a joinder to the 2024 Purchase Agreement pursuant to which they would agree to purchase additional shares of Class A Common Stock (the “Additional 2024 PIPE Shares”) in the Initial 2024 Closing, along with the option to purchase Second Closing 2024 PIPE Shares (as defined below).

In October 2024, the Additional 2024 Investors each executed a joinder to the 2024 Purchase Agreement, pursuant to which the Additional 2024 Investors agreed to purchase, and we agreed to sell, an aggregate of 603,684 Additional 2024 PIPE Shares (together with the Initial 2024 PIPE Shares, the “First Closing 2024 PIPE Shares”) for an aggregate purchase price of $5.7 million. The Initial 2024 Closing of the 2024 Financing occurred on October 25, 2024, and 3,955,790 First Closing 2024 PIPE Shares were issued to the 2024 Investors for an aggregate purchase price of $37.6 million.

In December 2024, we sold and issued to the 2024 Investors an aggregate of 3,955,790 shares (the “Second Closing 2024 PIPE Shares” and, together with the First Closing 2024 PIPE Shares, the “2024 PIPE Shares”) for an aggregate purchase price of approximately $37.6 million (the “Second 2024 Closing”). Inclusive of the Initial 2024 Closing, we issued and sold an aggregate of 7,911,580 shares of Class A Common Stock for an aggregate purchase price of approximately $75.2 million.

In December 2024, we completed the acquisition of CloudNine at Camarillo LP (“CloudNine”) and Sky 805 LLC (“Sky 805”) in exchange for approximately $32 million in aggregate cash consideration (collectively, the “Camarillo Acquisitions”). Substantially all of the cash consideration paid in connection with the Camarillo Acquisitions was utilized to satisfy the pre-existing senior and subordinated debt obligations of CloudNine and Sky 805, which were not legally assumed by us. We did not assume any other debt in connection with the Camarillo Acquisitions. CloudNine's principal asset is an approximately 120,000-square-foot hangar and office complex at Camarillo Airport (“CMA”) in Camarillo, California, located in the greater Los Angeles metropolitan area. Sky 805 is the holder of related ground leases (the “CMA Leases”) and fixed-based operator rights at CMA.

In December 2024, we entered into a ground lease agreement (the “TTN Lease”) at Trenton-Mercer Airport (“TTN”) with the County of Mercer, New Jersey. The TTN Lease covers approximately 10 acres of property at TTN. The initial term of the TTN Lease will be 30 years from the earlier of certificate of occupancy or 36 months from the lease commencement date, as defined in the TTN Lease, with lease payments commencing contemporaneously with the term. The TTN Lease contains an option exercisable by the Company to extend the TTN Lease for an additional 20 years following the expiration of such initial term.

In January 2025, we transferred the listing of our Class A Common Stock and Warrants from the NYSE American LLC to the New York Stock Exchange.

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Factors That May Influence Future Results of Operations

Airfield and Tenant Portfolio Growth

Our future success depends upon our ability to attract and retain tenants for hangars at our home basing hangar campuses. The extent to which we achieve growth in our customer base materially influences our business and results of operations. Any number of factors could affect our ability to grow our customer base, including tenant preferences for hangar space and related services, including size and location of the hangar, as well as general economic conditions. The level and volatility of fuel prices may also impact the general aviation industry and our ability to attract and retain tenants. In addition, our ability to attract and retain customers may be dependent on other factors outside of our control, including the future trend of private aircraft sizes and the availability of alternative hangars, including size, location and/or services provided. Any significant decline in our customer base, or in our rate of growth, could have a material adverse effect on our business and results of operations, which could, in turn, result in a decline in the trading price of our securities.

Our ability to expand through new ground leases at airports is also integral to our long-term business strategy and requires that we identify and consummate suitable new ground leases or investment opportunities in real estate properties for our portfolio that meet our investment criteria and are compatible with our growth strategy. Our ability to enter into new ground leases on favorable terms, or at all, may be adversely affected by certain significant factors. We may not be able to negotiate new ground leases with airport authorities on attractive terms or at all, and we may encounter competition from other potential ground lessors, which could significantly increase the lease rate for properties we seek to lease. In our efforts to secure new ground leases, we may incur significant costs and divert management attention in connection with evaluating and negotiating such ground leases, including ground leases that we are subsequently unable to execute. In addition, even if we enter into letters of intent or conditional agreements for new ground leases of airport properties, these agreements are subject to customary closing conditions, including, but not limited to, the satisfactory results of our due diligence investigations and local government and municipal authority approvals.

Construction Material Costs and Labor

When constructing our home basing hangar campuses, we use various materials, assemblies, and labor components. We contract for our materials and labor with various general contractors under guaranteed maximum price (GMP) contracts upon receipt of building permits. This allows us to mitigate certain inflationary pressures associated with increases in certain building materials and labor costs between the time construction begins at a hangar campus and the time it is completed. Typically, the materials and most of the components used to construct our hangar campuses are readily available in the United States, and we attempt to procure such materials from domestic sources where and when possible. We monitor the supply markets and ensure robust competition to achieve the best prices available. Typically, the price changes that most significantly influence our development operations are price increases in steel, concrete, and labor. In February 2025, the President of the United States issued an executive order reimposing tariffs on steel imports from all sources, ending country and product exemptions, and broadening the application of the tariffs to fabricated steel products. This order became effective on March 12, 2025. There can be no assurance as to when or if these or other import tariffs, quotas or other duties may be enacted, enforced, extended, modified or terminated in the future, or the extent of the impact of such tariffs will have on the cost of our construction materials. We believe that it is possible that market conditions, including recent and proposed changes in trade policies, may lead to continued increases in construction costs and market rental rates for hangars within our development projects. However, there can be no assurance that we will be able to increase the lease rates for the hangars within our hangar campuses to absorb these increased costs, if at all.

In May 2023, we acquired a controlling interest in Rapidbuilt, a metal building and hangar door manufacturer, that we expect will ultimately result in an increase in quality and a reduction in the overall cost of the metal building and hangar door components at future development projects. We expect that over time this vertical integration will enable us to deliver metal buildings to most of our development sites in shorter times as compared to the anticipated lead times associated with conventional metal building fabricators. We believe internal building fabrication will provide us opportunities to aggressively target continued schedule compression at most of our development projects in the future. In December 2023, we engaged several structural engineering firms to perform an independent peer review of the hangar buildings designed for our DVT Phase I and APA Phase I development projects. The independent peer reviews determined a significant design defect existed within our prototype hangar building designs that required retrofitting to both meet and exceed our standards and the respective local building codes. The anticipated retrofitting efforts were also applied to ADS Phase I, and we believe the aggregate additional cost of such retrofits totaled between $26 to $28 million. Such retrofitting efforts required an additional three to five months of construction duration for each project impacted. Given the design enhancements implemented at our APA Phase I, DVT Phase I, and ADS Phase I development projects, our total construction costs for these projects were each greater than our original estimates, and outside of the scope of the original guaranteed maximum price construction contracts. In March 2024, we funded the increase in estimated costs by contributing $27 million of our corporate cash holdings to SHC, thereby restricting the use of such cash to the project scope of the Series 2021 Bonds.

Our projections associated with the commencement and completion of construction, estimated total construction cost, hangars, and rentable square footage of our properties in development are inherently subjective and require judgement to estimate. We believe that our estimates of construction costs and timelines are subject to variability based on various factors including, but not limited to, changes in anticipated site plans, hangar mix, hangar specifications, executed guaranteed maximum price construction contracts, and general market conditions. In May 2024, we updated many of our preliminary estimates based on our intention to begin incorporating a larger hangar prototype into our home basing hangar campuses, which is intended to provide an increase in rentable square footage of hangar, office, and lounge space upon completion. This larger hangar prototype requires an increase in construction materials and components, and we expect its incorporation into multiple future development projects will ultimately result in cost savings through the realization of economies of scale. Our updated estimates of total construction costs do not include projections of potential cost reductions due to such efficiencies, and we continue to reevaluate our preliminary and updated estimates from time to time over the course of the development lifecycle. We intend to continue to aggressively mitigate inflationary pressures, reduce construction costs to the greatest extent possible, and pursue compressed development schedules. We currently structure our guaranteed maximum price construction contracts with shared savings clauses to incentivize the general contractors to reduce construction costs. No assurance can be given that our cost mitigation strategies will be successful, the costs of our ongoing and future projects will not exceed budgets or the guaranteed maximum price for such projects, or that the completion will not be delayed beyond the projected completion dates.

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Increases in Market Interest Rates and Future Costs of Borrowing

Economic conditions and actions by policymaking bodies contributed to rising interest rates, which, along with increases in our borrowing levels, could increase our future borrowing costs. While the Federal Reserve reduced interest rates in September, November, and December 2024 and has indicated the potential for further rate cuts, interest rates remain relatively high and there can be no certainty with respect to the occurrence, timing, or magnitude of further interest rate cuts by the Federal Reserve, and thus no certainty with respect to the ultimate impact on our borrowing costs. We expect to issue additional debt to finance future site developments and elevated interest rates would impact our overall economic performance. In addition, we are subject to credit spreads demanded by fixed income investors. As a non-rated issuer, increases in general of credit spreads in the market, or for us, may result in a higher cost of borrowing in the future. We intend to access the bond market on an opportunistic basis. In addition, we may hedge against rising benchmark interest rates by entering into hedging strategies with high quality counterparties.

Current Capital Requirements and Future Expenditures for Expansion

We previously funded SHC with over $200 million to fund the two phases at our initial five ground leased airport locations. We maintain the ability to include up to $50 million in new projects outside the original five locations to be funded with a portion of the existing proceeds held by the trustee as long as certain approvals and supplemental consultant reports are provided showing that such new project would result in better coverage of debt service than previously contemplated projects. We exercised this ability utilizing approximately $26 million of the $50 million available and received the requisite approvals and reports in March 2023 with respect to our ADS Phase I development project.

We previously raised equity capital, along with potential future debt and further equity issuances, including the 2024 Purchase Agreement and 2023 Purchase Agreement entered into on September 16, 2024 and November 1, 2023, respectively, see Liquidity and Capital Resources — Private Placement and Securities Purchase Agreement below, to begin to fund additional airport campuses and reach up to 20 airport campuses over the next several years. We also have the ability to access the capital markets through our ATM Facility and through our effective shelf registration statement on Form S-3. On average, each future campus is anticipated to be composed of 200,000 rentable square feet and is expected to cost approximately $60 million per campus, with 65% to 75% or more to be funded with additional private activity bonds or other indebtedness. All future hangar campus projects are discretionary and require us to identify the appropriate airports with the target hangar demand economics, secure required ground leases and permits, and complete future construction at such sites.

The cumulative 20 airport site business plan is estimated to cost approximately $1.2 billion, with approximately 65% to 75% anticipated from private activity bonds and the balance with equity or equity-linked financing. Our ability to raise additional equity and/or debt financing will be subject to a number of risks, including our ability to obtain financing upon reasonable terms, if at all, costs of construction, delays in constructing new facilities, operating results, and other risk factors. In the event that we are unable to obtain additional financing, we may be required to raise additional equity capital, creating additional dilution to existing stockholders. There can be no assurance that we would be successful in raising such additional equity capital on favorable terms, if at all.  Even if we can obtain such additional equity financing if needed, there can be no assurance that we would be successful in raising such additional financing on favorable terms, if at all.

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Key Business Metrics

We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of the continuing operations of our business. These metrics include:

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Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies:

Cost of Construction

Cost of construction on the consolidated balance sheets is carried at cost. The cost of acquiring an asset includes the costs necessary to bring a capital project to the condition necessary for its intended use. Costs are capitalized once the construction of a specific capital project is probable. Construction labor and other direct costs of construction are capitalized. Professional fees for engineering, procurement, consulting, and other soft costs that are directly identifiable with the project and are considered an incremental direct cost are capitalized. We allocate a portion of our internal salaries to both capitalized cost of construction and to compensation and benefits expense based on the percentage of time certain employees worked in the related areas. Interest costs on the loans and bonds used to fund the capital projects are also capitalized until the capital project is completed. Once a capital project is complete, the cost of the capital project is reclassified to Constructed Assets on the accompanying balance sheet and we begin to depreciate the constructed asset on a straight-line basis over the lesser of the life of the asset or the remaining term of the related ground lease, including expected renewal terms.

Leases

We account for leases under Accounting Standards Codification (“ASC”) Topic 842, Leases. We determine whether a contract contains a lease at the inception of the contract. ASC Topic 842 requires lessees to recognize operating lease liabilities and right-of-use (“ROU”) assets for all leases with terms of more than 12 months on the consolidated balance sheets. We have made an accounting policy election that will keep leases with an initial term of 12 months or less off our consolidated balance sheets and will result in recognizing those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. When management determines that it is reasonably certain that we will exercise our options to renew the leases, the renewal terms are included in the lease term and the resulting ROU asset and operating lease liability balances. We have elected to not capitalize any interest cost that is implicit within our operating leases into cost of construction on the consolidated balance sheet, but instead, we expense our ground lease cost in the consolidated statements of operations.

We have lease agreements with lease and non-lease components; we have elected the accounting policy to not separate lease and non-lease components for all underlying asset classes.

Revenue Recognition

We lease hangar facilities that we construct to third parties. The lease agreements are either on a month-to-month basis or have a defined term and may have options to extend the term. Some of the leases contain options to terminate the lease by either party with given notice. There are no options given to the lessee to purchase the underlying assets. Rental revenue is recognized in accordance with ASC Topic 842, Leases, and includes (i) fixed payments of cash rents, which represents revenue each tenant pays in accordance with the terms of its respective lease and is recognized on a straight-line basis over the term of the lease and (ii) variable payments of tenant reimbursements, which are recoveries of all or a portion of the common area maintenance and operating expenses of the property and are recognized in the same period as the expenses are incurred.

The Company evaluates the collectability of tenant receivables for payments required under the lease agreements. If the Company determines that collectability is not probable, the Company recognizes any difference between revenue amounts recognized to date under ASC 842 and payments that have been collected from the lessee, including any additional rent or lease termination fees, as a current period adjustment to rental revenue.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include assumptions used within impairment analyses, estimated useful lives of depreciable assets and amortizable costs, estimates of inputs utilized in determining incentive compensation expense and equity instruments such as warrants, estimates and assumptions related to right-of-use assets and operating lease liabilities. Actual results could differ materially from those estimates.

Recent Accounting Pronouncements

See “Note 2 — Basis of Presentation and Significant Accounting Policies” in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements including the expected dates of adoption and effects on results of operations and financial condition.

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Results of Operations

Year ended December 31, 2024 Compared to the Year ended December 31, 2023

The following table sets forth a summary of our consolidated results of operations for the periods indicated below and the changes between the periods (in thousands).

Revenues

Rental revenues for the year ended December 31, 2024 were approximately $12.7 million, compared to approximately $7.1 million for the year ended December 31, 2023. The approximately $5.6 million, or 78%, increase was primarily the result of the commencement of operations at SJC during the three months ended June 30, 2024 and the impact of increased occupancy at our BNA and OPF hangar campuses during the year ended December 31, 2024.

Fuel revenues for the year ended December 31, 2024 were approximately $2.1 million, compared to approximately $0.4 million for the year ended December 31, 2023. The approximately $1.6 million, or 371%, increase was primarily the result of an increase in fuel gallons uplifted at our BNA and OPF hangar campuses due to increased occupancy, the commencement of operations at SJC during the three months ended June 30, 2024, and fuel sales at our CMA operation, where our fuel revenues and the related expenses are recognized on a gross basis.

Operating Expenses

Campus operating expenses increased approximately $0.9 million, or 29%, from approximately $3.1 million for the year ended December 31, 2023, to approximately $4.0 million for the year ended December 31, 2024. Salaries, wages, and benefits associated with our hangar campus personnel increased approximately $0.6 million, primarily driven by the commencement of operations at our SJC hangar campus in April 2024, and headcount increases at our BNA and OPF hangar campuses. Other campus operating expenses increased approximately $0.3 million, primarily driven by increased insurance, property taxes, and utilities associated with operations at each of our hangar campuses.

Fuel expenses for the year ended December 31, 2024 were approximately $0.6 million, compared to approximately $0.2 million for the year ended December 31, 2023. The approximately $0.4 million, or 159%, increase was primarily the result of the CMA Transaction during the three months ended December 31, 2024, and the related impact of recognizing certain fuel revenue and expenses on a gross basis.

Ground lease expenses increased approximately $4.7 million, or 120%, from approximately $3.9 million for the year ended December 31, 2023, to approximately $8.6 million for the year ended December 31, 2024. The increase in ground lease expense was driven primarily by expense recognized associated with the ground and hangar lease signed at SJC during the three months ended March 31, 2024. The increase in ground lease expense was also driven by the ground leases signed at PWK, BDL, and POU during the three months ended December 31, 2023, ORL during the three months ended March 31, 2024, IAD during the three months ended June 30, 2024, SLC during the three months ended September 30, 2024, and the ground leases assumed as part of the CMA Transaction during the three months ended December 31, 2024.

Depreciation increased approximately $0.4 million, or 19%, for the year ended December 31, 2024, as compared to the year ended December 31, 2023. The increase primarily reflects a full year of depreciation related to Rapidbuilt, which was acquired during the three months ended June 30, 2023 and a full year of depreciation expense associated with our OPF hangar campus, which opened during the three months ended March 31, 2023.

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Operating Expenses - Continued

Pursuit and marketing expenses for the year ended December 31, 2024 were approximately $2.0 million, compared to approximately $1.5 million for the year ended December 31, 2023. The approximately $0.5 million, or 33%, increase was primarily the result of investment in our growth strategy in securing airport site acquisitions and potential tenants throughout the year.

Compensation and benefits expenses increased approximately $3.6 million, or 35%, to $13.9 million for the year ended December 31, 2024, as compared to approximately $10.3 million for the year ended December 31, 2023. The increase was primarily driven by an increase in corporate headcount and expense recognized associated with our equity compensation programs. Headcount and compensation expenses increased approximately $1.8 million, and non-cash equity compensation expense increased approximately $1.6 million.

For the years ended December 31, 2024 and 2023, other general and administrative expenses were approximately $3.5 million and approximately $3.3 million, respectively. The approximately $0.2 million increase was primarily driven by slight increases in professional fees and technology costs due to the expansion of the business and headcount, offset by a slight decrease in corporate insurance premiums.

Other (Income) Expenses

Other (income) expenses for the year ended December 31, 2024 was approximately $33.3 million of expense as compared to approximately $8.5 million of expense for the year ended December 31, 2023. The approximately $24.8 million, or 294%, increase in expense was primarily due to an approximately $25.9 million variance related to the mark-to-market of the outstanding Warrants at December 31, 2024 as compared to December 31, 2023. The impact of the change in fair value of the Warrants was offset by an approximately $1.2 million increase in other income associated with interest earned and realized gains on our available-for-sale U.S. Treasury investment activity.

Non-GAAP Financial Measures

To supplement our results presented in accordance with GAAP, we utilize Adjusted EBITDA, a non-GAAP financial measure that excludes or adjusts certain items. We define Adjusted EBITDA as net income before (i) depreciation and amortization expense, (ii) interest expense, (iii) interest income, (iv) non-cash stock-based compensation expense, (v) non-cash gains and losses resulting from the change in fair value of our liability-classified warrants, (vi) non-cash operating lease expense, (vii) non-cash operating lease income, (viii) provision for income taxes, (ix) other non-cash expenses, including, but not limited to, the impairment of long-lived assets, gains or losses arising from the disposition of assets, losses on extinguishment of debt, and other non-cash non-operating expenses.

Management uses Adjusted EBITDA to facilitate operating performance comparisons from period to period. We believe this non-GAAP financial measure provide investors, analysts and other interested parties useful information to evaluate our business performance as the removal of certain non-cash expenses and income, they facilitate company-to-company operating performance comparisons. While we believe this non-GAAP financial measure is useful in evaluating our business, it should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, this non-GAAP financial measures may not be the same as a similarly entitled measure reported by other companies, limiting their usefulness as comparative measures. See below for a reconciliation of net income (loss) to Adjusted EBITDA, as well as “Key Business Metrics” for further discussion of Adjusted EBITDA.

Adjusted EBITDA

A reconciliation of net income (loss) to Adjusted EBITDA is presented below:

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Liquidity and Capital Resources

Overview

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund the construction of new assets, fund working capital and other general business needs. Our primary sources of cash include the potential issuance of equity and debt securities and rental payments from tenants. Our long-term liquidity requirements include lease payments under our ground leases with airport authorities, repaying principal and interest on outstanding borrowings, funding the construction costs of our hangar campus development projects (see “— Construction Material Costs and Labor”), funding for operations, and paying accrued expenses.

We believe that we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional private activity bonds and other debt and the issuance of additional equity securities. We also have the ability to utilize our ATM Facility or otherwise utilize our shelf registration statement on Form S-3 to access the capital markets. However, as we have recently become a publicly-traded company, we cannot assure you that we will have access to these sources of capital or that, even if such sources of capital are available, that these sources of capital will be available on favorable terms. Our ability to incur additional debt will depend on multiple factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that are or may be imposed by future lenders. Our ability to access the equity and debt capital markets will depend on multiple factors as well, including general market conditions for real estate companies, our degree of leverage, the trading price of our common stock and debt and market perceptions about our Company.

Our cash deposits may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and the majority are maintained with a major financial institution with reputable credit. Our restricted cash is held in trust at a major financial institution pursuant to the Series 2021 Bonds indenture. We monitor the relative credit standing of financial institutions with whom we transact and limit the amount of credit exposure with any one entity. Our portfolio of investments and restricted investments is composed entirely of U.S. Treasury securities as of December 31, 2024.

The following table summarizes our cash and cash equivalents, restricted cash, investments, and restricted investments as of December 31, 2024 and 2023 (in thousands):

2024 Private Placement and Securities Purchase Agreement

On September 16, 2024, we entered into the 2024 Purchase Agreement with the Initial 2024 Investors relating to, among other things, the issuance and sale to the Initial 2024 Investors at an initial closing an aggregate of 3,352,106 Initial 2024 PIPE Shares of our Class A Common Stock for an aggregate purchase price of $31.8 million. On October 25, 2024, the Additional 2024 Investors each executed a joinder to the 2024 Purchase Agreement, pursuant to which the Additional 2024 Investors agreed to purchase, and we agreed to sell, an aggregate of 603,684 Additional 2024 PIPE Shares for an aggregate purchase price of $5.7 million. The Initial 2024 Closing under the 2024 Purchase Agreement occurred on October 25, 2024, and 3,955,790 First Closing 2024 PIPE Shares were issued to the Investors for an aggregate purchase price of $37.6 million. In December 2024, we sold and issued to the 2024 Investors an aggregate of 3,955,790 Second Closing 2024 PIPE Shares for an aggregate purchase price of approximately $37.6 million (the “Second 2024 Closing”). Inclusive of the Initial 2024 Closing, we issued and sold an aggregate of 7,911,580 shares of Class A Common Stock for an aggregate purchase price of approximately $75.2 million. See “Note 11 — Equity” in the Notes to Consolidated Financial Statements for additional information regarding the 2024 Purchase Agreement.

2023 Private Placement and Securities Purchase Agreement

On November 1, 2023, we entered into a Securities Purchase Agreement (the “2023 Purchase Agreement”) with certain investors (collectively, the “2023 Investors”), pursuant to which we sold and issued to the 2023 Investors at an initial closing an aggregate of 6,586,154 shares of our Class A Common Stock (the “Initial 2023 PIPE Shares”) and accompanying warrants to purchase up to 1,141,600 shares of Class A Common Stock (the “Initial PIPE Warrants”), for an aggregate purchase price of $42.8 million (the "Initial 2023 Financing"). On November 29, 2023, pursuant to the terms of the 2023 Purchase Agreement, we sold and issued to the 2023 Investors an aggregate of 2,307,692 shares of our Class A Common Stock (the “2023 Additional PIPE Shares” and, together with the 2023 Initial PIPE Shares, the “2023 PIPE Shares”) and accompanying warrants to purchase an aggregate of 400,000 shares of Class A Common Stock (the “Additional PIPE Warrants” and, together with the Initial PIPE Warrants, the “PIPE Warrants”) for an aggregate purchase price of $15.0 million. The aggregate PIPE financing through the 2023 Purchase Agreement totaled approximately $57.8 million. See “Note 11 — Equity” in the Notes to Consolidated Financial Statements for additional information regarding the 2023 Purchase Agreement.

At-the-Market Facility

On March 27, 2024, we entered into an At Market Issuance Sales Agreement (the “ATM Agreement”) with B. Riley Securities, Inc. (“B. Riley”) with respect to an “at the market” offering program (the “ATM Facility”), under which we may, from time to time, at our sole discretion, issue and sell through B. Riley, acting as sales agent, up to $100 million of shares of Class A Common Stock. Pursuant to the ATM Agreement, we may sell the shares through B. Riley by any method permitted that is deemed an “at the market” offering as defined in Rule 415 under the Securities Act. B. Riley will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the shares from time to time, based upon instructions from us, including any price or size limits or other customary parameters or conditions we may impose. We pay B. Riley a commission of 3.0% of the gross sales price per share sold under the ATM Agreement, subject to certain reductions.  During the year ended December 31, 2024, the Company sold 79,676 shares of Class A Common Stock under the ATM Facility at a weighted-average sales price of $13.75. As a result, we have approximately $98.9 million in remaining capacity under our ATM Facility.

We are not obligated to sell any shares under the ATM Agreement. The offering of shares pursuant to the ATM Agreement will terminate upon the earlier to occur of (i) the issuance and sale, through B. Riley, of all of the shares subject to the ATM Agreement and (ii) termination of the ATM Agreement in accordance with its terms. We have made limited sales under the ATM Facility to date and will only do so when our stock price is at prices our Board deems appropriate.

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Private Activity Bonds

On September 14, 2021, SHC completed an issuance through the Public Finance Authority (Wisconsin) of $166.3 million of Series 2021 PABs. The Series 2021 Bonds are comprised of three maturities: $21.1 million bearing interest at 4.00%, due July 1, 2036; $30.4 million bearing interest at 4.00%, due July 1, 2041; and $114.8 million bearing interest at 4.25%, due July 1, 2054. The Series 2021 Bond that has a maturity date of July 1, 2036 was issued at a premium, and Sky received bond proceeds that were $0.2 million above its face value. The net proceeds from the issuance of the Series 2021 Bonds proceeds are being used to (a) finance or refinance the construction of various aviation facilities consisting of general aviation aircraft hangars and storage facilities located and to be located on the SGR site, the OPF site, the BNA site, the APA site, the DVT site, and following our March 2023 election to reallocate a portion of the net proceeds, the ADS site; (b) fund debt service and other operating expenses such as ground lease expense during the initial construction period; (c) fund deposits to the Debt Service Reserve Fund; and (d) pay certain costs of issuance related to the Series 2021 Bonds.

Debt Covenants

The Series 2021 Bonds contain financial and non-financial covenants, including a debt service coverage ratio, a restricted payments test and limitations on the sale, lease, or distribution of assets. To the extent that SHC does not comply with these covenants, an event of default or cross-default may occur under one or more agreements, and we or our subsidiaries may be restricted in our ability to pay dividends, issue new debt or access our leased facilities. The Series 2021 Bonds are collateralized on a joint and several basis with the property and revenues of all SHC subsidiaries and their assets financed or to be financed from the proceeds of the Series 2021 Bonds.

Covenants in the Series 2021 Bonds require SHC to maintain a debt service coverage ratio (as defined in the relevant documents) of at least 1.25 for each applicable test period, commencing with the quarter ending December 31, 2024. The Series 2021 Bonds are subject to a Continuing Disclosure Agreement whereby SHC is obligated to provide electronic copies of (i) monthly construction reports, (ii) quarterly reports containing quarterly financial information of SHC and (iii) annual reports containing audited consolidated financial statements of SHC to the Municipal Securities Rulemaking Board. As of December 31, 2024, we were in compliance with all debt covenants.

Lease Commitments

The table below sets forth certain information with respect to our future minimum lease payments required under operating and finance leases as of December 31, 2024 (in thousands):

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2024 (in thousands):

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements.

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Cash Flows

Historical Cash Flows

The following table summarizes our sources and uses of cash for the years ended December 31, 2024 and 2023 (in thousands):

Operating Activities

Cash provided by operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business. Our working capital consists primarily of cash, receivables from tenants, prepaid expenses, accounts payable, accrued compensation, accrued other expenses, and lease liabilities. The timing of collection of our tenant receivables, and the timing of spending commitments and payments of our accounts payable, accrued expenses, accrued payroll and related benefits, all affect these account balances.

Net cash used in operating activities was approximately $9.1 million for the year ended December 31, 2024, as compared to approximately $7.7 million of net cash used in operating activities for the same period in 2023. The approximately $1.4 million increase in net cash used in operating activities was primarily attributable to a $3.4 million unfavorable change in the Company's working capital position, which was primarily driven by the timing of spending commitments and payments of our accounts payable and other accrued expenses. This increase was offset by an approximately $2.0 million decrease in net loss, net of non-cash adjustments. The decrease in net loss, net of non-cash adjustments, was primarily driven by an increase in revenue which outpaced the growth in cash operating expenses.

Investing Activities

Our primary investing activities have consisted of payments related to the cost of construction at our various home basing hangar campus development projects, investment in U.S. Treasury Securities, and acquisition activities. As our business expands, we expect to continue to invest in our current and anticipated future portfolio of home basing hangar campus development projects.

Net cash used in investing activities was approximately $43.9 million for the year ended December 31, 2024, compared to net cash used in investing activities of approximately $16.3 million for the same period in 2023. The increase of approximately $27.6 million of net cash used in investing activities was driven primarily by the CMA asset acquisition during the three months ended December 31, 2024, which drove a increase of approximately $31.7 million, and a $20.9 million increase in capital expenditures during the year ended December 31, 2024 as compared to the year ended December 31, 2023. These increases were offset by the aggregate impact of our strategy to invest surplus cash in U.S. Treasury securities, which was comprised of an approximately $172.0 million decrease in purchases of held-to-maturity investments, an approximately $169.4 million increase in proceeds received from available-for-sale investments, an approximately $190.2 million increase in purchases of available-for-sale investments, and an approximately $124.0 million decrease in proceeds received from held-to-maturity investments for the year ended December 31, 2024 as compared to the year ended December 31, 2023.

Financing Activities

Our primary financing activities have consisted of equity capital raised to fund the growth of our business and proceeds from debt obligations incurred to finance our home basing hangar campus development projects. We expect to raise additional equity capital and issue additional indebtedness as our business grows.

Net cash provided by financing activities was $75.1 million for the year ended December 31, 2024, compared to $54.9 million for the same period in 2023. The approximately $20.2 million increase in net cash provided by financing activities was primarily driven by the equity financing completed during the year ended December 31, 2024, as compared to the year ended December 31, 2023. During the year ended December 31, 2024, the Company received approximately $75.2 million of proceeds during the fourth quarter due to the issuance of Class A Common Stock in connection with the 2024 Purchase Agreement. During the year ended December 31, 2023, the Company received $57.8 million of proceeds during the respective fourth quarter due to the issuance of Class A Common Stock and Warrants in connection with the 2023 Purchase Agreement. The increase in net cash provided by financing activities was further driven by an approximately $3.0 million increase in proceeds received from the exercise of our outstanding Warrants and an approximately $1.1 million increase in net proceeds received from the issuance of Class A Common Stock through the ATM Facility.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our audited financial statements and the notes related thereto which are included in “Item 8. Financial Statements and Supplementary Data” of this Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Special Note Regarding Forward-Looking Statements,” “Item 1A. Risk Factors” and elsewhere in this Report.

Overview and Background

We are an aviation infrastructure development company building the first nationwide network of home basing hangar campuses for business aircraft. We develop, lease, and manage general aviation hangars across the United States, targeting airfields in markets with significant aircraft populations and high hangar demand. Our home basing hangar campuses feature exclusive private hangars and a full suite of dedicated services specifically optimized for home-based, versus transient, aircraft.

The physical footprint of the U.S. business aviation fleet grew by almost 28 million square feet in the ten years preceding the beginning of the COVID-19 pandemic, with hangar supply lagging dramatically, especially in key growth markets. As the fleet of private jets in the United States continues to grow, with recent new aircraft deliveries exceeding retirements, demand for hangar space is at a premium in part because new jets require more square footage of hangar space and the pace of new hangar construction has lagged behind the demand. The cumulative square footage of the business aircraft fleet in the United States increased 50% between 2010 and 2021. Moreover, over that same period, there was an 81% increase in the square footage of larger private jets – those with greater than a 24-foot tail height. A recent study conducted by a business aircraft manufacturer forecasted that business aircraft will only continue to grow in the next ten years, with up to 8,500 new business jet deliveries worth over $275 billion expected to be delivered between 2024 and 2033, further supported by data from the major business aviation manufacturers that suggest the current order backlog for new business aviation aircraft is over $49 billion.

These larger footprint aircraft do not fit in much of the existing hangar infrastructure and impose stacking challenges and constraints in the traditional shared or community hangars operated by FBOs. The addition of winglets (the vertical extensions on aircraft wingtips) on most modern business jets inhibits wing-over-wing storage. Aircraft hangars are in high demand and short supply, with some airports compiling waiting lists that can exceed several years.

We believe our scalable, real estate-centric business model is uniquely optimized to capture this market opportunity and address the increased imbalance between the supply and demand for private jet storage. We intend to capitalize on the existing hangar supply constraints at major U.S. airports by targeting high-end tenants in markets where there is a shortage of private and FBO hangar space, or where such hangars are or are becoming obsolete.

We expect to realize economies of scale in construction through a prototype hangar design replicated at our hangar campuses across the United States. This allows for centralized procurement, straightforward permitting processes, efficient development processes, and the best hangar in business aviation. Unlike a service company, our revenues are mostly derived from long-term rental agreements, offering stability and forward visibility of revenues and cash flows. This allows the Company to fund its development through the public bond market, providing capital efficiency and mitigating refinance risk.

For a more complete description of our operations, including our home basing hangar campus development projects, refer to Item 1 — Business.

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Recent Developments

On October 11, 2023, we entered into a ground lease agreement (the “PWK Lease”) with PWK. The term of the PWK Lease will be 50 years and is divided into two parcels, together allowing for the development of a hangar campus on up to 25 acres of land at PWK.

On November 1, 2023, we entered into a Securities Purchase Agreement (the “Private Placement Purchase Agreement”) with certain investors (collectively, the “Investors”), pursuant to which we sold and issued to the Investors at an initial closing an aggregate of 6,586,154 shares (the “Initial PIPE Shares”) of our Class A Common Stock and accompanying warrants to purchase up to 1,141,600 shares of Class A Common Stock (the “Initial PIPE Warrants”), for an aggregate purchase price of $42.8 million (the "Initial Financing").

On November 29, 2023 (the “Second Closing Date”), pursuant to the terms of the Private Placement Purchase Agreement, we sold and issued to the Investors an aggregate of 2,307,692 shares of our Class A Common Stock (the “Additional PIPE Shares” and, together with the Initial PIPE Shares, the “PIPE Shares”) and accompanying warrants to purchase an aggregate of 400,000 shares of Class A Common Stock (the “Additional PIPE Warrants” and, together with the Initial PIPE Warrants, the “PIPE Warrants”) for an aggregate purchase price of $15.0 million. Together with the Initial Financing, the aggregate PIPE financing through the Private Placement Purchase Agreement totaled approximately $57.8 million.

On December 13, 2023, we entered into a ground lease agreement (the “BDL Lease”) at BDL with the Connecticut Airport Authority (“CAA”). The BDL Lease covers a parcel containing approximately 8 acres of land at BDL. The initial term of the BDL Lease will be 30 years with options exercisable by the Company to extend the BDL Lease an additional 20 years.

On December 13, 2023, we entered into a ground lease agreement at POU with the County of Dutchess, New York (the “POU Lease”). The POU Lease covers two parcels containing approximately 7 acres of land at POU.

In December 2023 and March 2024, the Company updated its forecasted construction expenditures and timelines as a result of an independent peer review of the hangar buildings designed for our DVT Phase I and APA Phase I development projects. See “Factors That May Influence Future Results of Operations — Construction Material Costs and Labor” for more information.

On March 23, 2024, the Company, through a wholly-owned subsidiary of the Company, entered into a ground lease agreement (the “SJC Lease”) at San Jose Mineta International Airport (“SJC”) with the City of San Jose. The SJC Lease covers approximately 7 acres of property. The initial term of the SJC Lease will be 20 years from May 1, 2024, and contains a mutual option to extend the SJC Lease an additional 5 years following the expiration of the initial term.

On March 27, 2024, the Company, through a wholly-owned subsidiary of the Company, entered into a ground lease agreement (the “ORL Lease”) at Orlando Executive Airport (“ORL”) with the Greater Orlando Aviation Authority (“GOAA”). The ORL Lease covers a parcel containing approximately 20 acres of land at ORL. The initial term of the ORL Lease will be 30 years from expiration of construction period.

Factors That May Influence Future Results of Operations

Revenues

Our revenues are derived from rents we earn pursuant to the lease agreements we enter into with our tenants. Our ability to expand through new ground leases and tenant leases at airports is integral to our long-term business strategy and requires that we identify and consummate suitable new ground leases or investment opportunities in real estate properties for our portfolio that meet our investment criteria and are compatible with our growth strategy. Our ability to enter into new ground leases and tenant leases on favorable terms, or at all, may be adversely affected by a number of factors. We believe that the business environment of the industry segments in which our tenants operate is generally positive for tenants. However, our existing and potential tenants are subject to economic, regulatory and market conditions that may affect their level of operations and demand for hangar space, which could impact our results of operations. For example, during the year ended December 31, 2023, a tenant renting two hangars at OPF made the determination that it was necessary to change its business plans in the greater Miami market, which ultimately resulted in the negotiated settlement of the tenant’s lease with us and their exit from our OPF hangar campus. Accordingly, we actively monitor certain key factors, including changes in those factors (fuel prices, new aircraft deliveries, hangar rental rates) that we believe may provide early indications of conditions that may affect the level of demand for new leases and our lease portfolio. See “Risk Factors—Risks Related to our Business and Operations” for more information about the risks related to our tenants and our lease payments.

Operating Expense

One of our largest expenses are the lease payments payable under our ground leases. For the years ended December 31, 2023 and 2022, our operating expense related to ground leases was $4.0 million and $3.7 million, respectively. As we enter into new ground leases at new airport sites, our payments to airport landlords will continue to increase into the future. If airport landlords increase the per acre cost of the ground lease of our target campuses, the operating margins at potential target developments may be impacted negatively.

Interest Expense

Economic conditions and actions by policymaking bodies are contributing to rising interest rates, which, along with increases in our borrowing levels, could increase our future borrowing costs. We expect to issue additional debt to finance future site developments and higher interest rates would impact our overall economic performance. In addition, we are subject to credit spreads demanded by fixed income investors. As a non-rated issuer, increases in general of credit spreads in the market, or for us, may result in a higher cost of borrowing in the future. We intend to access the bond market on an opportunistic basis. In addition, we may hedge against rising benchmark interest rates by entering into hedging strategies with high quality counterparties.

General and Administrative Expenses

The general and administrative expenses reflected in our statement of operations are reflective of the professional, legal and consulting fees, payroll costs, and other general and administrative expenses, including those necessary to support our business as a public company such as expenses associated with corporate governance, SEC reporting, and other compliance matters. While we expect that our general and administrative expenses will rise in some measure as our portfolio of campuses grows, we expect that such expenses as a percentage of our portfolio will decrease over time due to efficiencies, economies of scale, insourcing of job functions, and cost control measures.

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Construction Material Costs and Labor

When constructing our home basing hangar campuses, we use various materials and components. We contract for certain of our materials and labor with general contractors under guaranteed maximum price contracts upon receipt of building permits. This allows us to mitigate certain of the risks associated with increases in certain building materials and labor costs between the time construction begins on a hangar campus and the time it is completed. Typically, the materials and most of the components used to construct our hangar campuses are readily available in the United States. We continue to monitor the supply markets to achieve the best prices available. Typically, the price changes that most significantly influence our operations are price increases in steel, concrete, and labor. We believe that recent inflationary pressures and market conditions will lead to continued increases in construction costs as well as market rental rates for hangars within our hangar campus development projects. However, there can be no assurance that we will be able to increase the lease rates for the hangars within our hangar campuses to absorb these increased costs and/or delays, if at all.

In May 2023, we acquired a controlling interest in a metal building and hangar door manufacturer, that we expect will ultimately result in an increase in quality and a reduction in the overall cost of the metal building and hangar door components at future home basing hangar campus development projects. We expect that over time this vertical integration will enable us to deliver metal buildings to each development site in shorter timeframes, which we believe will reduce the overall construction duration of each development project in the future. In December 2023, we engaged several structural engineering firms to perform an independent peer review of the hangar buildings designed for our DVT Phase I and APA Phase I development projects. The independent peer reviews determined a significant design defect existed within our prototype hangar building designs that will require retrofitting to both meet and exceed our standards and the respective local building codes. The anticipated retrofitting efforts are also expected to be applied to ADS Phase I, and we project that the aggregate additional cost of such retrofits could total $26 to $28 million and require an additional three to five months of construction time for each project impacted.

We intend to continue to aggressively take action to mitigate inflationary pressures, reduce construction costs, and shorten development schedules, both in the near term at our APA Phase I, DVT Phase I, and ADS Phase I development projects, and in the long term at future projects. We structure our guaranteed maximum price construction contracts with shared savings clauses to incentivize the general contractors to reduce construction costs. Given the planned design enhancements at our APA Phase I, DVT Phase I, and ADS Phase I development projects, we anticipate that our total construction costs for these projects to each be greater than our original estimates, and outside of the scope of the guaranteed maximum price construction contracts. We intend to fund the increase in estimated costs by contributing additional corporate cash holdings to SHC, thereby restricting the use of the cash to the project scope of the Series 2021 Bonds. No assurance can be given that our cost mitigation strategies will be successful, the costs of our ongoing and future projects will not exceed budgets or the guaranteed maximum price for such projects, or that the completion will not be delayed beyond the projected completion dates.

Current Capital Requirements and Future Expenditures for Expansion

We previously funded SHC with over $200 million to fund the two phases at our initial five ground leased airport locations. We maintain the ability to include up to $50 million in new projects outside the original five locations to be funded with a portion of the existing proceeds held by the trustee as long as certain approvals and supplemental consultant reports are provided showing that such new project would result in better coverage of debt service than previously contemplated projects. We exercised this ability utilizing approximately $26 million of the $50 million available and received the requisite approvals and reports in March 2023 with respect to our ADS Phase I development project.

We previously raised equity capital, along with potential future debt and further equity issuances, including the Private Placement Purchase Agreement entered into on November 1, 2023, see Note 12 — Equity and Redeemable Equity in the Notes to Consolidated Financial Statements, to begin to fund additional airport campuses and reach up to 20 airport campuses over the next several years. On average, each future campus is anticipated to be composed of at least 100,000 rentable square feet and is expected to cost approximately $55 million per campus, with 60% or more to be funded with additional private activity bonds or other indebtedness. All future hangar campus projects are discretionary and require us to identify the appropriate airports with the target hangar demand economics, secure required ground leases and permits, and complete future construction at such sites.

The cumulative 20 airport site business plan is estimated to cost approximately $1.2 billion, with approximately 65% to 75% anticipated from long-term private activity bonds and the balance with equity or equity linked financing. Our ability to raise additional equity and/or debt financing will be subject to a number of risks, including our ability to obtain financing upon reasonable terms, if at all, costs of construction, delays in constructing new facilities, operating results, and other risk factors. In the event that we are unable to obtain additional financing, we may be required to raise additional equity capital, creating additional dilution to existing stockholders. There can be no assurance that we would be successful in raising such additional equity capital on favorable terms, if at all.  Even if we can obtain such additional equity financing if needed, there can be no assurance that we would be successful in raising such additional financing on favorable terms, if at all.

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Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies:

Cost of Construction

Cost of construction on the consolidated balance sheets is carried at cost. The cost of acquiring an asset includes the costs necessary to bring a capital project to the condition necessary for its intended use. Costs are capitalized once the construction of a specific capital project is probable. Construction labor and other direct costs of construction are capitalized. Professional fees for engineering, procurement, consulting, and other soft costs that are directly identifiable with the project and are considered an incremental direct cost are capitalized. We allocate a portion of our internal salaries to both capitalized cost of construction and to general and administrative expense based on the percentage of time certain employees worked in the related areas. Interest costs on the debt used to fund the capital projects are also capitalized until the capital project is completed.  Once a capital project is complete, the cost of the capital project is reclassified to Constructed Assets on the accompanying balance sheet and we begin to depreciate the constructed asset on a straight-line basis over the lesser of the life of the asset or the remaining term of the related ground lease, including expected renewal terms.

Leases

We account for leases under Accounting Standards Codification (“ASC”) Topic 842, Leases. We determine whether a contract contains a lease at the inception of the contract. ASC Topic 842 requires lessees to recognize operating lease liabilities and right-of-use (“ROU”) assets for all leases with terms of more than 12 months on the consolidated balance sheets. We have made an accounting policy election that will keep leases with an initial term of 12 months or less off our consolidated balance sheets and will result in recognizing those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. When management determines that it is reasonably certain that we will exercise our options to renew the leases, the renewal terms are included in the lease term and the resulting ROU asset and operating lease liability balances. We have elected to not capitalize any interest cost that is implicit within our operating leases into cost of construction on the consolidated balance sheet, but instead, we expense our ground lease cost in the consolidated statements of operations.

We have lease agreements with lease and non-lease components; we have elected the accounting policy to not separate lease and non-lease components for all underlying asset classes.

Revenue Recognition

The Company leases the hangar facilities that it constructs to third parties. The Company determines whether a contract contains a lease at the inception of the contract. The lease agreements are either on a month-to-month basis or have a defined term and may have options to extend the term. Some of the leases contain options to terminate the lease by either party with given notice. The Company expects to continue to derive benefit from the underlying assets after the end of the lease term through further leasing arrangements. The underlying assets are the leasehold interest that the Company has in connection with its ground leases. There are no options given to the lessee to purchase the underlying assets.

Rental revenue is recognized in accordance with ASC 842 and includes fixed payments of cash rents, which represents revenue each tenant pays in accordance with the terms of its respective lease and is recognized on a straight-line basis over the term of the lease. Rental revenue and the corresponding rent and other receivables are recorded net of any concessions and uncollectible tenant receivables for all periods presented. The Company evaluates the collectability of tenant receivables for payments required under the lease agreements. If the Company determines that collectability is not probable, the Company recognizes any difference between revenue amounts recognized to date under ASC 842 and payments that have been collected from the lessee, including any additional rent or lease termination fees, as a current period adjustment to rental revenue.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include assumptions used within impairment analyses, estimated useful lives of depreciable assets and amortizable costs, estimates of inputs utilized in determining incentive compensation expense and equity instruments such as warrants, estimates and assumptions related to right-of-use assets and operating lease liabilities. Actual results could differ materially from those estimates.

Recent Accounting Pronouncements

See “Note 2 — Basis of Presentation and Significant Accounting Policies” in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements including the expected dates of adoption and effects on results of operations and financial condition.

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Results of Operations

Year ended December 31, 2023 Compared to the Year ended December 31, 2022

The following table sets forth a summary of our consolidated results of operations for the periods indicated below and the changes between the periods (in thousands).

Revenues

Revenues for the year ended December 31, 2023 were approximately $7.6 million, compared to approximately $1.8 million for the year ended December 31, 2022. The approximately $5.7 million, or 311%, increase was primarily the result of tenant leases commencing at our OPF and BNA hangar campuses during the year ended December 31, 2023, as well as the cumulative impact of certain additional tenant leases in place at our SGR and BNA hangar campuses as compared to the year ended December 31, 2022.

Operating Expenses

Operating expenses increased approximately $2.1 million, or 42%, from approximately $5.0 million for the year ended December 31, 2022, to approximately $7.2 million for the year ended December 31, 2023. The increase is primarily reflective of the cumulative impact of the commencement of operations at our BNA and OPF hangar campuses, which opened during the three months ended December 31, 2022 and March 31, 2023, respectively. Salaries, wages, and benefits associated with our hangar campus personnel increased by approximately $0.6 million, primarily driven by headcount increases at our BNA and OPF hangar campuses. Other operating expenses increased approximately $1.3 million, primarily driven by increased insurance, property taxes, and utilities associated with operations at our OPF, BNA, and SGR hangar campuses. Ground lease expense increased approximately $0.2 million, primarily due to new ground leases signed at PWK, BDL, and POU during the three months ended December 31, 2023.

Depreciation Expense

Depreciation increased approximately $1.6 million, or 228%, for the year ended December 31, 2023, as compared to the year ended December 31, 2022. The increase primarily reflects the opening of our OPF hangar campus during the three months ended March 31, 2023, the opening of our BNA hangar campus during the three months ended December 31, 2022, long-lived assets recognized as part of the Rapidbuilt Acquisition, and the placement of additional ground support equipment into service throughout 2022 and 2023.

General and Administrative Expenses

For the years ended December 31, 2023 and 2022, general and administrative expenses were approximately $15.1 million and approximately $14.7 million, respectively. The approximately $0.4 million increase was primarily driven by an approximately $2.6 million increase in salaries, wages, and benefits, which reflects an increase in full-time and contracted employees and the impact of an increase in expense recognized in connection with our equity compensation program. The increase was partially offset by an approximately $1.4 million decrease in professional fees, which was primarily driven by decreased in legal and accounting related costs due non-recurring transaction costs incurred during the year ended December 31, 2023, and our efforts to internalize job functions, and an approximately $0.8 million decrease in other administrative expenses, primarily due to decreased corporate insurance premiums.

Other (Income) Expenses

Other (income) expenses for the year ended December 31, 2023 was approximately $8.4 million of expense as compared to approximately $5.2 million of income for the year ended December 31, 2022. The shift from income to expense was primarily due to an approximately $13.7 million variance related to the mark-to-market of the outstanding warrants at December 31, 2023 as compared to December 31, 2022. These warrants consist of Public Warrants and Private Warrants initially issued by YAC as part of its initial public offering, and PIPE Warrants issued in November 2023 in connection with the Private Placement Purchase Agreement. The variance was also partially attributable to an approximately $0.5 million increase in interest expense due to the assumption of additional indebtedness as part of the Rapidbuilt Acquisition.

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Liquidity and Capital Resources

Overview

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund the construction of new assets, fund working capital and other general business needs. Our primary sources of cash include the potential issuance of equity and debt securities and rental payments from tenants. Our long-term liquidity requirements include lease payments under our ground leases with airport authorities, repaying principal and interest on outstanding borrowings, funding the construction costs of our hangar campus development projects (see “— Construction Material Costs and Labor”), funding for operations, and paying accrued expenses.

We believe that we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional private activity bonds and other debt and the issuance of additional equity securities. For example, as described further below in November 2023 we completed a $57.8 million PIPE, and we may seek to opportunistically raise additional private capital again in the future. Furthermore, we are now eligible to file a registration statement on Form S-3 and plan to do so. We believe that we will be able to utilize such a registration statement to efficiently access capital. However, we cannot assure you that we will have access to these sources of capital or that, even if such sources of capital are available, that these sources of capital will be available on favorable terms. Our ability to incur additional debt will depend on multiple factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that are or may be imposed by future lenders. Our ability to access the equity and debt capital markets will depend on multiple factors as well, including general market conditions for real estate companies, our degree of leverage, the trading price of our common stock and debt and market perceptions about our Company.

Our cash deposits may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and the majority are maintained with a major financial institution with reputable credit. Our restricted cash is held in trust at a major financial institution pursuant to the Series 2021 Bonds indenture. We monitor the relative credit standing of financial institutions with whom we transact and limit the amount of credit exposure with any one entity. Our portfolio of investments and restricted investments is composed entirely of U.S. Treasury securities as of December 31, 2023.

The following table summarizes our cash and cash equivalents, restricted cash, investments, and restricted investments as of December 31, 2023 and 2022 (in thousands):

Private Placement and Securities Purchase Agreement

On November 1, 2023, we entered into the Private Placement Purchase Agreement with certain Investors, pursuant to which we (i)  sold and issued to the Investors on November 2, 2023 an aggregate of 6,586,154 PIPE Shares and accompanying PIPE Warrants to purchase up to 1,141,600 shares of Class A Common Stock, for an aggregate purchase price of $42.8 million, and (ii) sold and issued to the Investors on November 29, 2023 an aggregate of 2,307,692 PIPE Shares and accompanying PIPE Warrants to purchase up to an aggregate of 400,000 shares of Class A Common Stock for an aggregate purchase price of $15.0 million. The aggregate PIPE financing through the Private Placement Purchase Agreement totaled approximately $57.8 million. See “Note 12 — Equity and Redeemable Equity” in the Notes to Consolidated Financial Statements for additional information regarding the Private Placement Purchase Agreement.

Common Stock Purchase Agreement

On August 18, 2022, we entered into a Common Stock Purchase Agreement (the “Stock Purchase Agreement”) with B. Riley Principal Capital II, LLC (“B. Riley”). Pursuant to the Stock Purchase Agreement, we have the right, in our sole discretion, to sell to B. Riley up to 10 million shares of our Class A Common Stock at 97% of the volume weighted average price of our Class A Common Stock calculated in accordance with the Stock Purchase Agreement, over a period of 36 months subject to certain limitations and conditions contained in the Stock Purchase Agreement. Sales and timing of any sales of Class A Common Stock are solely at our election, and we are under no obligation to sell any securities to B. Riley under the Stock Purchase Agreement. As consideration for B. Riley’s commitment to purchase shares of our Class A Common Stock, we have issued 25,000 shares of our Class A Common Stock to B. Riley as initial commitment shares and may issue up to an aggregate of 75,000 shares of our Class A Common Stock to B. Riley as additional commitment shares if certain conditions are met. As of December 31, 2023, we have sold no shares of our Class A Common Stock to B. Riley pursuant to the Stock Purchase Agreement. See “Note 12 — Equity and Redeemable Equity” in the Notes to Consolidated Financial Statements for additional information regarding the Stock Purchase Agreement.

Equity Financing

On the Closing Date, we completed the Yellowstone Transaction, YAC changed its name to Sky Harbour Group Corporation, and Sky restructured its capitalization, issuing its Sky Common Units to the Company. As a result of the Yellowstone Transaction, the Sky Common Units that Sky issued to BOC YAC in respect of its Series B Preferred Units were converted into 5,500,000 shares of the Company’s Class A Common Stock and holders of Sky Common Units received one share of the Company’s Class B Common Stock for each Common Unit. As consideration for the issuance of Sky Common Units to the Company, YAC contributed approximately $48 million of net proceeds to us, consisting primarily of the BOC PIPE, and the amount held in the YAC trust account, net of redemptions and transaction costs.

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Private Activity Bonds

On September 14, 2021, SHC completed an issuance through the Public Finance Authority (Wisconsin) of $166.3 million of Series 2021 PABs. The Series 2021 Bonds are comprised of three maturities: $21.1 million bearing interest at 4.00%, due July 1, 2036; $30.4 million bearing interest at 4.00%, due July 1, 2041; and $114.8 million bearing interest at 4.25%, due July 1, 2054. The Series 2021 Bond that has a maturity date of July 1, 2036 was issued at a premium, and Sky received bond proceeds that were $0.2 million above its face value. The net proceeds from the issuance of the Series 2021 Bonds proceeds are being used to (a) finance or refinance the construction of various aviation facilities consisting of general aviation aircraft hangars and storage facilities located and to be located on the SGR site, the OPF site, the BNA site, the APA site, the DVT site, and following our March 2023 election to reallocate a portion of the net proceeds, the ADS site; (b) fund debt service and other operating expenses such as ground lease expense during the initial construction period; (c) fund deposits to the Debt Service Reserve Fund; and (d) pay certain costs of issuance related to the Series 2021 Bonds.

Debt Covenants

The Series 2021 Bonds contain financial and non-financial covenants, including a debt service coverage ratio, a restricted payments test and limitations on the sale, lease, or distribution of assets. To the extent that SHC does not comply with these covenants, an event of default or cross-default may occur under one or more agreements, and we or our subsidiaries may be restricted in our ability to pay dividends, issue new debt or access our leased facilities. The Series 2021 Bonds are collateralized on a joint and several basis with the property and revenues of all SHC subsidiaries and their assets financed or to be financed from the proceeds of the Series 2021 Bonds.

Covenants in the Series 2021 Bonds require SHC to maintain a debt service coverage ratio (as defined in the relevant documents) of at least 1.25 for each applicable test period, commencing with the quarter ending December 31, 2024. The Series 2021 Bonds are subject to a Continuing Disclosure Agreement whereby SHC is obligated to provide electronic copies of (i) monthly construction reports, (ii) quarterly reports containing quarterly financial information of SHC and (iii) annual reports containing audited consolidated financial statements of SHC to the Municipal Securities Rulemaking Board. As of December 31, 2023, we were in compliance with all debt covenants.

Lease Commitments

The table below sets forth certain information with respect to our future minimum lease payments required under operating and finance leases as of December 31, 2023 (in thousands):

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2023 (in thousands):

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements.

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Cash Flows

Historical Cash Flows

The following table summarizes our sources and uses of cash for the years ended December 31, 2023 and 2022 (in thousands):

Operating Activities

Cash provided by operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business. Included in net cash used in operating activities are certain non-recurring legal, accounting, and consulting costs incurred for up to four quarters as a result of becoming a public company. Our working capital consists primarily of cash, receivables from tenants, prepaid expenses, accounts payable, accrued compensation, accrued other expenses, and lease liabilities. The timing of collection of our tenant receivables, and the timing of spending commitments and payments of our accounts payable, accrued expenses, accrued payroll and related benefits, all affect these account balances.

Net cash used in operating activities was $7.7 million for the year ended December 31, 2023, as compared to $27.5 million of net cash used in operating activities for the same period in 2022. The approximately $19.8 million decrease in net cash used in operating activities was primarily attributable to a $15.5 million favorable change in the Company's working capital position, which was primarily driven by $9.6 million of initial direct costs associated with the purchase of our former landlord's leasehold interest at OPF during the year ended December 31, 2022. The decrease was also partially attributable to a $4.3 million decrease in net loss, net of non-cash adjustments. The decrease in net loss was primarily driven by an increase in revenue and a decrease in non-recurring general and administrative expenses incurred in the expansion of our business, including transaction-related expenses incurred during the year ended December 31, 2023.

Investing Activities

Our primary investing activities have consisted of payments related to the cost of construction at our various home basing hangar campus development projects and investment in U.S. Treasury Securities. As our business expands, we expect to continue to invest in our current and anticipated future portfolio of home basing hangar campus development projects.

Net cash used in investing activities was approximately $16.3 million for the year ended December 31, 2023, compared to net cash used in investing activities of approximately $187.8 million for the same period in 2022. The decrease of $171.5 million of net cash used in investing activities was driven primarily by an increase of approximately $193.4 of proceeds received from the Company's held-to-maturity investments during the year ended December 31, 2023 as compared to the year ended December 31, 2022. The decrease was also attributable to a decrease of approximately $21.8 million of held-to-maturity U.S. Treasury purchases. The decrease in net cash used in investing activities attributable to our net held-to-maturity U.S. Treasury investments was offset by an increase of approximately $25.5 million of available for sale U.S. Treasury investment purchases and a decrease of approximately $10.9 million of proceeds received from such investments during the year ended December 31, 2023 as compared to the same period in 2022. In addition, the decrease was offset by an approximately $10.4 million increase in capital expenditures during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Financing Activities

Our primary financing activities have consisted of capital raised to fund the growth of our business and proceeds from debt obligations incurred to finance our home basing hangar campus development projects. We expect to raise additional equity capital and issue additional indebtedness as our business grows.

Net cash provided by financing activities was $54.8 million for the year ended December 31, 2023, compared to $52.8 million for the same period in 2022. The approximately $2.0 million increase in net cash provided by financing activities was primarily driven by the equity financing completed during the year ended December 31, 2023, as compared to the year ended December 31, 2022. During the year ended December 31, 2023, the Company received $57.8 million of proceeds during the fourth quarter due to the issuance of Class A Common Stock and Warrants in connection with the Private Placement Purchase Agreement. During the year ended December 31, 2022, the Company received $45.0 million of proceeds from the issuance of the BOC PIPE and $15.7 million of gross proceeds from the YAC trust account, both occurring in the first quarter. The proceeds received during the first calendar quarter of 2022 were offset by the payment of approximately $9.2 million of equity issuance costs during the same period.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our audited financial statements and the notes related thereto which are included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Special Note Regarding Forward-Looking Statements,” “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Overview and Background

We are an aviation infrastructure development company building the first nationwide network of HBS hangar campuses for business aircraft. We develop, lease, and manage general aviation hangars across the United States, targeting airfields in markets with significant aircraft populations and high hangar demand. Our HBS hangar campuses feature exclusive private hangars and a full suite of dedicated services specifically optimized for home-based, versus transient, aircraft.

The physical footprint of the U.S. business aviation fleet grew by almost 28 million square feet in the ten years preceding the beginning of the COVID-19 pandemic, with hangar supply lagging dramatically, especially in key growth markets. As the fleet of private jets in the United States continues to grow, with recent new aircraft deliveries exceeding retirements, demand for hangar space is at a premium in part because new jets require more square footage of hangar space and the pace of new hangar construction has lagged behind the demand. The cumulative square footage of the business aircraft fleet in the United States increased 50% between 2010 and 2021. Moreover, over that same period, there was an 81% increase in the square footage of larger private jets – those with greater than a 24-foot tail height. A recent study conducted by a business aircraft manufacturer forecasted that business aircraft will only continue to grow in the next ten years, with up to 8,500 new business jet deliveries worth almost $275 billion expected to be delivered between 2023 and 2032, further supported by data from the major business aviation manufacturers that suggest the current order backlog for new business aviation aircraft is almost $47 billion.

These larger footprint aircraft do not fit in much of the existing hangar infrastructure and impose stacking challenges and constraints in the traditional shared or community hangars operated by FBOs. The addition of winglets (the vertical extensions on aircraft wingtips) on most modern business jets inhibits wing-over-wing storage. Aircraft hangars are in high demand and short supply, with some airports compiling waiting lists that can exceed several years.

We believe our scalable, real estate-centric business model is uniquely optimized to capture this market opportunity and address the increased imbalance between the supply and demand for private jet storage. We intend to capitalize on the existing hangar supply constraints at major U.S. airports by targeting high-end tenants in markets where there is a shortage of private and FBO hangar space, or where such hangars are or are becoming obsolete.

We realize economies of scale in construction through a proprietary prototype hangar design replicated at HBS hangar campuses across the United States. This allows for centralized procurement, straightforward permitting processes, efficient development processes, and the best hangar in business aviation. Unlike a service company, our revenues are mostly derived from long-term rental agreements, offering stability and forward visibility of revenues and cash flows. This allows the Company to fund its development through the public bond market, providing capital efficiency and mitigating refinance risk.

For a more complete description of our operations, including our HBS hangar campus development projects, refer to Item 1 — Business.

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Recent Developments

On October 27, 2022, we substantially completed the construction of our BNA Phase II development project. The total construction costs incurred associated with the project were slightly less than our initial estimated construction costs. In connection with the substantial completion of our BNA HBS hangar campus, certain tenant leases associated with our constructed hangars commenced starting in November 2022.

On January 19, 2023, we amended our existing ground lease agreement with the Town of Addison, TX to include additional parcels of land that will effectively double the land available for development at our ADS HBS hangar campus project.

On February 1, 2023, we substantially completed the construction of our OPF Phase I development project. In connection with the substantial completion of the OPF Phase I hangar campus, tenant leases for certain of our constructed hangars commenced starting in February 2023.

On March 22, 2023, we satisfied the requirements within the Series 2021 PABs indenture to fund construction costs associated with our ADS Phase I development project with proceeds received from our Series 2021 PABs. See “Note 18 — Subsequent Events — Series 2021 PABs Scope Modification” in the Notes to Consolidated Financial Statements for additional information regarding the modification of the scope of our Series 2021 PABs. The approval and exercise of such rights will allow approximately $26 million of proceeds to be used to fund the ADS Phase I development project, and is projected to improve our debt service coverage associated with the Series 2021 PABs.

Factors That May Influence Future Results of Operations

Revenues

Our revenues are earned pursuant to the lease agreements we enter into with our tenants. Our ability to expand through new ground leases and tenant leases at airports is integral to our long-term business strategy and requires that we identify and consummate suitable new ground leases or investment opportunities in real estate properties for our portfolio that meet our investment criteria and are compatible with our growth strategy. Our ability to enter into new ground leases and tenant leases on favorable terms, or at all, may be adversely affected by a number of factors. We believe that the business environment of the industry segments in which our tenants operate is generally positive for tenants. However, our existing and potential tenants are subject to economic, regulatory and market conditions that may affect their level of operations and demand for hangar space, which could impact our results of operations. Accordingly, we actively monitor certain key factors, including changes in those factors (fuel prices, new aircraft deliveries, hangar rental rates) that we believe may provide early indications of conditions that may affect the level of demand for new leases and our lease portfolio. See “Risk Factors—Risks Related to our Business and Operations” for more information about the risks related to our tenants and our lease payments.

Operating Expense

One of our largest expenses are the lease payments payable under our ground leases. For the years ended December 31, 2022 and 2021, our operating expense related to ground leases was $3.7 million and $3.7 million, respectively. As we enter into new ground leases at new airport sites, our payments to airport landlords will continue to increase into the future. If airport landlords increase the per acre cost of the ground lease of our target campuses, the operating margins at potential target developments may be impacted negatively.

Interest Expense

Economic conditions and actions by policymaking bodies are contributing to rising interest rates, which, along with increases in our borrowing levels, could increase our future borrowing costs. We expect to issue additional debt to finance future site developments and higher interest rates would impact our overall economic performance. In addition, we are subject to credit spreads demanded by fixed income investors and bank lenders. As a non-rated issuer, increases in general of credit spreads in the market, or for us, may result in a higher cost of borrowing in the future. We intend to access the bond market on an opportunistic basis. In addition, we may hedge against rising benchmark interest rates by entering into hedging strategies with high quality counterparties.

General and Administrative Expenses

The general and administrative expenses reflected in our statement of operations are reflective of the professional, legal and consulting fees, payroll costs, and other general and administrative expenses, including those necessary to support our business as a public company such as expenses associated with corporate governance, SEC reporting, and other compliance matters. While we expect that our general and administrative expenses will rise in some measure as our portfolio of campuses grows, we expect that such expenses as a percentage of our portfolio will decrease over time due to efficiencies, economies of scale, insourcing of job functions, and cost control measures.

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Construction Material Costs and Labor

When constructing our HBS hangar campuses, we use various materials and components. We generally contract for our materials and labor under guaranteed maximum price contracts upon receipt of building permits. This allows us to mitigate the risks associated with increases in building materials and labor costs between the time construction begins on an HBS hangar campus and the time it is completed. Typically, the materials and most of the components used to construct our HBS hangar campuses are readily available in the United States. In addition, the majority of our materials are supplied to us by our contractors and is included in the price of our contract with such contractors. We continue to monitor the supply markets to achieve the best prices available. Typically, the price changes that most significantly influence our operations are price increases in steel, concrete, and labor. We believe that recent inflationary pressures and market conditions will lead to continued increases in construction costs as well as market rental rates for hangars within our HBS hangar campus development projects. However, there can be no assurance that we will be able to increase the lease rates for the hangars within our HBS hangar campuses to absorb these increased costs and/or delays, if at all.

We intend to continue to aggressively take action to mitigate these inflationary pressures, reduce construction costs, and shorten development schedules, both in the near term at our APA Phase I, DVT Phase I, and ADS Phase I development projects, and in the long term at future projects. We structure our guaranteed maximum price construction contracts with shared savings clauses to incentivize the general contractors to reduce construction costs. At our SGR Phase I and BNA Phase II development projects, our total construction costs were lower than both our original pricing estimate and the project’s contracted guaranteed maximum price.

In July 2022, we entered an exclusive strategic vendor partnership with a metal building and hangar door manufacturer that we expect to result in a reduction in the cost of the metal building and hangar door components at all future HBS hangar campuses. As our strategic partnership grows, we expect this vertical integration will enable us to deliver metal buildings to each development site in shorter timeframes, which we believe will reduce the overall construction duration of each development project. No assurance can be given that our cost mitigation strategies will be successful, the costs of our projects will not exceed budgets or the guaranteed maximum price for such projects, or that the completion will not be delayed beyond the projected completion dates.

Current Capital Requirements and Future Expenditures for Expansion

We previously funded SHC with over $200 million to fund the two phases at each of our five ground leased airport locations. These construction funds and reserves are held at the bondholder trustee.

We maintain the ability to include up to $50 million in new projects outside the original five locations to be funded with a portion of the existing proceeds held by the trustee as long as certain approvals and supplemental consultant reports are provided showing that such new project would result in better coverage of debt service than previously contemplated projects. We exercised this ability and received the requisite approvals and reports in March 2023 with respect to our ADS Phase I development project.

We consummated the Yellowstone Transaction on January 25, 2022, to raise additional equity capital to, along with potential future debt and further equity issuances, begin to fund additional airport campuses and reach up to 20 airport campuses over the next several years. On average, each future campus is anticipated to be composed of an average of 10-20 hangars and is expected to cost approximately $55 million per campus, with 60% or more to be funded with additional public activity bonds. All these future hangar campus projects are discretionary and require us to identify the appropriate airports with the target hangar demand economics, secure required ground leases and permits, and complete future construction at such sites.

The cumulative 20 airport site business plan is estimated to cost approximately $1.2 billion, with approximately 65% to 75% anticipated from long-term private activity bonds and the balance with equity or equity linked financing. The equity portion of this business plan has been partially funded upon the closing of the Yellowstone Transaction, which included an additional $45 million equity investment from Boston Omaha through the BOC PIPE.  Our ability to raise additional equity and/or debt financing will be subject to a number of risks, including our ability to obtain financing upon reasonable terms, if at all, costs of construction, delays in constructing new facilities, operating results, and other risk factors. In the event that we are unable to obtain additional financing, we may be required to raise additional equity capital, creating additional dilution to existing stockholders. There can be no assurance that we would be successful in raising such additional equity capital on favorable terms, if at all.  Even if we can obtain such additional equity financing if needed, there can be no assurance that we would be successful in raising such additional financing on favorable terms, if at all.

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Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies:

Cost of Construction

Cost of construction on the consolidated balance sheets is carried at cost. The cost of acquiring an asset includes the costs necessary to bring a capital project to the condition necessary for its intended use. Costs are capitalized once the construction of a specific capital project is probable. Construction labor and other direct costs of construction are capitalized. Professional fees for engineering, procurement, consulting, and other soft costs that are directly identifiable with the project and are considered an incremental direct cost are capitalized. We allocate a portion of our internal salaries to both capitalized cost of construction and to general and administrative expense based on the percentage of time certain employees worked in the related areas. Interest costs on the debt used to fund the capital projects are also capitalized until the capital project is completed.

Once a capital project is complete, the cost of the capital project is reclassified to Constructed Assets on the accompanying balance sheet and we begin to depreciate the constructed asset on a straight-line basis over the lesser of the life of the asset or the remaining term of the related ground lease, including expected renewal terms.

Leases

We account for leases under Accounting Standards Codification (“ASC”) Topic 842, Leases. We determine whether a contract contains a lease at the inception of the contract. ASC Topic 842 requires lessees to recognize operating lease liabilities and right-of-use (“ROU”) assets for all leases with terms of more than 12 months on the consolidated balance sheets. We have made an accounting policy election that will keep leases with an initial term of 12 months or less off our consolidated balance sheets and will result in recognizing those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. When management determines that it is reasonably certain that we will exercise our options to renew the leases, the renewal terms are included in the lease term and the resulting ROU asset and operating lease liability balances.

We also have tenant leases and account for those leases in accordance with the lessor guidance under ASC Topic 842.

We have lease agreements with lease and non-lease components; we have elected the accounting policy to not separate lease and non-lease components for all underlying asset classes.

We have elected to not capitalize any interest cost that is implicit within our operating leases into cost of construction on the consolidated balance sheet, but instead, we expense our ground lease cost in the consolidated statements of operations.

Revenue Recognition

We lease hangar facilities that we construct to third parties. The lease agreements are either on a month-to-month basis or have a defined term and may have options to extend the term. Some of the leases contain options to terminate the lease by either party with given notice. There are no options given to the lessee to purchase the underlying assets. Rental revenue is recognized in accordance with ASC Topic 842, Leases, and includes (i) fixed payments of cash rents, which represents revenue each tenant pays in accordance with the terms of its respective lease and is recognized on a straight-line basis over the term of the lease and (ii) variable payments of tenant reimbursements, which are recoveries of all or a portion of the common area maintenance and operating expenses of the property and are recognized in the same period as the expenses are incurred.

The Company evaluates the collectability of tenant receivables for payments required under the lease agreements. If the Company determines that collectability is not probable, the Company recognizes any difference between revenue amounts recognized to date under ASC 842 and payments that have been collected from the lessee, including security deposit amounts held, as a current period adjustment to rental revenue.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include assumptions used within impairment analyses, estimated useful lives of depreciable assets and amortizable costs, estimates of inputs utilized in determining incentive compensation expense and equity instruments such as warrants, estimates and assumptions related to right-of-use assets and operating lease liabilities. Actual results could differ materially from those estimates.

Recent Accounting Pronouncements

See “Note 2 — Basis of Presentation and Significant Accounting Policies”in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements including the expected dates of adoption and effects on results of operations and financial condition.

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Results of Operations

Year ended December 31, 2022 Compared to the Year ended December 31, 2021

The following table sets forth a summary of our consolidated results of operations for the periods indicated below and the changes between the periods (in thousands).

Revenues

Revenues for the year ended December 31, 2022 were approximately $1.8 million, compared to approximately $1.6 million for the year ended December 31, 2021. The 17% increase primarily resulted from additional tenant leases commencing at SGR during the second and third quarters of 2022 and BNA during late 2022.

Operating Expenses

Operating expenses increased approximately $0.6 million, or 13%, from approximately $4.5 million for the year ended December 31, 2021 to approximately $5.0 million for the year ended December 31, 2022. This increase was primarily driven by an approximately $0.4 million increase in salaries, wages, and benefits associated with our campus personnel. The increase was reflective of a headcount increase at BNA associated with the opening of the BNA campus in the three months ended December 31, 2022, an increase at OPF as we prepare to commence operations in the three months ending March 31, 2023, and a headcount increase at SGR to accommodate increased tenant activity. Repair and maintenance expense associated with our hangars and related ground service equipment increased approximately $0.1 million, primarily driven by increased operations at our BNA and SGR campuses.

Depreciation Expense

Depreciation increased approximately $0.1 million, or 18%, for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The increase reflects the opening of our BNA campus during the three months ended December 31, 2022 and the placement of additional ground support equipment into service throughout 2022.

General and Administrative Expenses

For the years ended December 31, 2022, and 2021, general and administrative expenses were approximately $14.7 million and approximately $8.7 million, respectively. The approximately $6.0 million increase was primarily driven by an approximately $2.5 million increase in salaries, wages, and benefits, which reflects an increase in full-time and contracted employees. The increase also reflects the implementation of stock and cash incentive compensation programs instituted to attract and retain employees. Other administrative expenses increased approximately $2.2 million driven primarily by insurance, franchise taxes, and computer and software expenses. Marketing and pursuit costs increased approximately $0.6 million in the year ended December 31, 2022, compared to the year ended December 31, 2021, reflecting our growth strategy in securing airport site acquisitions and potential tenants. Professional fees increased approximately $0.7 million due to an increase in legal, accounting, and consulting costs as compared to the prior year primarily as a result of becoming a public company.

Other (Income) Expenses

Other (income) expenses increased from approximately $1.4 million of other expense to approximately $5.2 million of other income for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase was primarily due to an approximately $5.1 million mark-to-market gain of the outstanding warrants at December 31, 2022. These warrants were issued by YAC as part of its initial public offering. As a result, the warrants were not reflected in Sky’s financial statements for the Year ended December 31, 2021.

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Liquidity and Capital Resources

Overview

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund the construction of new assets, fund working capital and other general business needs. Our primary sources of cash include the potential issuance of equity and debt securities and rental payments from tenants. Our long-term liquidity requirements include lease payments under our ground leases with airport authorities, repaying principal and interest on outstanding borrowings, funding the construction costs of our HBS hangar campuses (see  “— Construction Material Costs and Labor”) funding for operations, and paying accrued expenses.

We believe that we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional private activity bonds and other debt and the issuance of additional equity securities. However, as a new publicly-traded company, we cannot assure you that we will have access to these sources of capital or that, even if such sources of capital are available, that these sources of capital will be available on favorable terms. Our ability to incur additional debt will depend on multiple factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that are or may be imposed by future lenders. Our ability to access the equity and debt capital markets will depend on multiple factors as well, including general market conditions for real estate companies, our degree of leverage, the trading price of our common stock and debt and market perceptions about our Company.

Our cash deposits may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and the majority are maintained with a major financial institution with reputable credit. Our restricted cash is held in trust at a major financial institution pursuant to the Series 2021 PABs indenture. We monitor the relative credit standing of financial institutions with whom we transact and limit the amount of credit exposure with any one entity. Our portfolio of investments and restricted investments is composed entirely of U.S. Treasury securities as of December 31, 2022.

The following table summarizes our cash and cash equivalents, restricted cash, investments, and restricted investments as of December 31, 2022 and 2021 (in thousands):

Common Stock Purchase Agreement

On August 18, 2022, we entered into the Stock Purchase Agreement with B. Riley. Pursuant to the Stock Purchase Agreement, we have the right, in our sole discretion, to sell to B. Riley up to 10 million shares of our Class A Common Stock at 97% of the volume weighted average price of our Class A Common Stock calculated in accordance with the Purchase Agreement, over a period of 36 months subject to certain limitations and conditions contained in the Purchase Agreement. Sales and timing of any sales of Class A Common Stock are solely at our election, and we are under no obligation to sell any securities to B. Riley under the Purchase Agreement. As consideration for B. Riley’s commitment to purchase shares of our Class A Common Stock, we have issued 25,000 shares of our Class A Common Stock to B. Riley as initial commitment shares and may issue up to an aggregate of 75,000 shares of our Class A Common Stock to B. Riley as additional commitment shares if certain conditions are met. As of December 31, 2022, we have sold no shares of our Class A Common Stock to B. Riley pursuant to the Stock Purchase Agreement. See “Note 10 — Equity and Redeemable Equity” in the Notes to Consolidated Financial Statements for additional information regarding the Stock Purchase Agreement.

Equity Financing

On the Closing Date, we completed the Yellowstone Transaction, Yellowstone changed its name to Sky Harbour Group Corporation, and Sky restructured its capitalization, issuing its Sky Common Units to the Company. As a result of the Yellowstone Transaction, the Sky Common Units that Sky issued to BOC YAC in respect of its Series B Preferred Units were converted into 5,500,000 shares of the Company’s Class A Common Stock and holders of Sky Common Units received one share of the Company’s Class B Common Stock for each Common Unit. As consideration for the issuance of Sky Common Units to the Company, Yellowstone contributed approximately $48 million of net proceeds to us, consisting primarily of the BOC PIPE, and the amount held in the Yellowstone trust account, net of redemptions and transaction costs.

Private Activity Bonds

On September 14, 2021, SHC completed an issuance through the Public Finance Authority (Wisconsin) of $166.3 million of Series 2021 PABs. The Series 2021 PABs are comprised of three maturities: $21.1 million bearing interest at 4.00%, due July 1, 2036; $30.4 million bearing interest at 4.00%, due July 1, 2041; and $114.8 million bearing interest at 4.25%, due July 1, 2054. The Series 2021 PAB that has a maturity date of July 1, 2036 was issued at a premium, and Sky received bond proceeds that were $0.2 million above its face value. The net proceeds from the issuance of the Series PABs proceeds are being used to (a) finance or refinance the construction of various aviation facilities consisting of general aviation aircraft hangars and storage facilities located and to be located on the SGR site, the OPF site, the BNA site, the APA site, the DVT site, and following our March 2023 election to reallocate a portion of the net proceeds, the ADS site; (b) fund debt service and other operating expenses such as ground lease expense during the initial construction period; (c) fund deposits to the Debt Service Reserve Fund; and (d) pay certain costs of issuance related to the Series PABs.

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Debt Covenants

The Series 2021 PABs contain financial and non-financial covenants, including a debt service coverage ratio, a restricted payments test and limitations on the sale, lease, or distribution of assets. To the extent that SHC does not comply with these covenants, an event of default or cross-default may occur under one or more agreements, and we or our subsidiaries may be restricted in our ability to pay dividends, issue new debt or access our leased facilities. The Series 2021 PABs are collateralized on a joint and several basis with the property and revenues of all SHC subsidiaries and their assets financed or to be financed from the proceeds of the Series 2021 PABs.

Covenants in the Series 2021 PABs require SHC to maintain a debt service coverage ratio (as defined in the relevant documents) of at least 1.25 for each applicable test period, commencing with the quarter ending December 31, 2024. The Series 2021 PABs are subject to a Continuing Disclosure Agreement whereby SHC is obligated to provide electronic copies of (i) monthly construction reports, (ii) quarterly reports containing quarterly financial information of SHC and (iii) annual reports containing audited consolidated financial statements of SHC to the Municipal Securities Rulemaking Board. As of December 31, 2022, we were in compliance with all debt covenants.

Lease Commitments

The table below sets forth certain information with respect to our future minimum lease payments required under operating leases as of December 31, 2022 (in thousands):

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2022 (in thousands):

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements.

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Cash Flows

Historical Cash Flows

The following table summarizes our sources and uses of cash for the Year ended December 31, 2022 and 2021 (in thousands):

Operating Activities

Cash provided by operating activities is significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business. Included in net cash provided by operations are certain non-recurring legal, accounting, and consulting costs incurred for up to four quarters as a result of becoming a public company and a one-time outflow associated with the purchase of a leasehold interest at OPF. Our working capital consists primarily of cash, receivables from tenants, prepaid expenses, accounts payable, accrued compensation, accrued other expenses, and lease liabilities. The timing of collection of our tenant receivables, and the timing of spending commitments and payments of our accounts payable, accrued expenses, accrued payroll and related benefits, all affect these account balances.

Net cash used in operating activities was $27.5 million for the year ended December 31, 2022, compared to $6.6 million for the same period in 2021. The $20.9 million increase in cash used in operating activities was primarily attributable to the $9.6 million of initial direct costs associated with the purchase of our former landlord's leasehold interest at OPF. The increase was also partially attributable to a $5.0 million increase in net loss, net of non-cash adjustments, and a $6.2 decrease in working capital. The increase in net loss and changes in working capital were primarily driven by general and administrative expenses incurred in the expansion of our business, including transaction-related expenses and other expenses related to corporate governance.

Investing Activities

Our primary investing activities have consisted of payments related to the cost of construction at our various HBS hangar campus development projects and investment in U.S. Treasury Securities. As our business expands, we expect to continue to invest in our current and anticipated future portfolio of HBS development projects.

Cash used in investing activities was $187.9 million for the year ended December 31, 2022, compared to $16.0 million for the same period in 2021. The increase of $171.9 million in cash used in investing activities was driven primarily by $193.8 million of purchases of held-to-maturity U.S. Treasury securities during the first and third quarters of 2022, the $30.0 million purchase of available-for-sale U.S. Treasury securities during the second quarter, and a $29.1 million increase in payments for costs of construction due to the Company’s ongoing construction projects at BNA, OPF, APA, and DVT. These increases were offset by proceeds of $79.1 million received at maturity of certain of the Company’s restricted investments.

Financing Activities

Our primary financing activities have consisted of capital raised to fund the growth of our business and proceeds from debt obligations incurred to finance our HBS hangar campus development projects. We expect to raise additional equity capital and issue additional indebtedness as our business grows.

Net cash provided by financing activities was $52.8 million for the year ended December 31, 2022, compared to $226.4 million for the same period in 2021. The $173.6 million decrease in net cash provided by financing activities was primarily driven by $166.5 million of bond proceeds received during the third quarter of 2021 due to the issuance of the Series 2021 PABs, and $55.0 million of proceeds received from the issuance of the Sky Series B Preferred Units during the third quarter of 2021, and $30.0 million of proceeds from the issuance of Series A Preferred Units in the first quarter of 2021. These decreases were offset by $45.0 million of proceeds received from the issuance of the BOC PIPE and $15.7 million of gross proceeds from the Yellowstone trust account, both occurring in the first quarter of 2022.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise indicated, references in this section to the terms “YAC,” the “Company,” “we,” “our” and “us” refer to Yellowstone Acquisition Company prior to the Business Combination. The term “Sky” refers to Sky Harbour LLC. The financial information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations is that of YAC prior to the Business Combination because the Business Combination was consummated after the period covered by the financial statements included in this Annual Report on Form 10-K. Accordingly, the historical financial information included in this Annual Report on Form 10-K, unless otherwise indicated or as the context otherwise requires, is that of YAC prior to the Business Combination.

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our audited financial statements and the notes related thereto which are included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Certain information contained in the discussion and analysis set forth below includes forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Special Note Regarding Forward-Looking Statements,” “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Overview

We are an aviation infrastructure development company building the first nationwide network of Home-Basing Solutions (“HBS”) for business aircraft. We develop, lease and manage general aviation hangars across the United States, targeting airfields in markets with significant aircraft populations and high hangar demand. Our HBS campuses feature exclusive private hangars and a full suite of dedicated services specifically designed for home-based aircraft.

As the fleet of private jets in the United States continues to grow, with recent new aircraft deliveries exceeding retirements, demand for hangar space is at a premium in part because new jets require more square footage of hangar space and the pace of new hangar construction has lagged behind the demand. The cumulative square footage of the business aircraft fleet in the United States increased 42% between 2010 and 2020. Moreover, over that same period, there was a 70% increase in the square footage of larger private jets – those with greater than a 24-foot tail height. The larger footprint aircraft impose stacking challenges and constraints in the traditional shared or community hangars operated by fixed-base operators (“FBO”). The addition of winglets (the vertical extensions on aircraft wingtips) on most modern business jets inhibits wing-over-wing storage. Aircraft hangars are in high demand and short supply, with some airports compiling waiting lists that can exceed several years.

Our scalable business strategy addresses the increased imbalance between the supply and demand for private jet storage, including the lack of hangar facilities able to accommodate larger aircraft, by growing our portfolio of HBS campuses at key airports across the United States. We target airports with excess demand for private hangar space, typically near metropolitan areas, which include both established and growing markets. We intend to capitalize on the existing hangar supply constraints, particularly for high-end tenants.

We were a former blank check company incorporated as a Delaware corporation and formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. We are an emerging growth company and, as such, we are subject to all of the risks associated with emerging growth companies. We completed our initial public offering on October 26, 2020 and Business Combination on January 25, 2022. We had no substantive operations prior to the completion of the Business Combination.

Results of Operations

Prior to the completion of the Business Combination on January 25, 2022, we neither engaged in any operations nor generated any revenues to date. Our only activities from inception to December 31, 2021 were organizational activities, those necessary to prepare for the IPO, and identifying a target company for a Business Combination and the completion of the Business Combination. We expect to generate non-operating income in the form of interest income on cash and marketable securities held after the IPO.

For the year ended December 31, 2021, and for the period from August 25, 2020 (date of inception) through December 31, 2020, we had net income/(loss) of $2,946,919 and  ($3,024,804), respectively.  We recognized $6,095,170 and ($2,070,328) of income/(loss) related to the change in fair value of our warrants liabilities for the calendar year ended December 31, 2021 and for the period from August 25, 2020 (date of inception) through December 31, 2020, respectively.

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Liquidity and Capital Resources

Overview

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund the construction of new assets, fund working capital and other general business needs. Our primary sources of cash include the issuance of equity and debt securities and operating cash flows. Our long-term liquidity requirements include lease payments under our ground leases with airport authorities, repaying principal and interest on outstanding borrowings, funding our operations and paying accrued expenses. Yellowstone did not have any long-term contractual obligations as of December 31, 2021.

We believe that following the Business Combination, as a publicly traded company, we will have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional debt and the issuance of additional equity securities. However, as a new public company, we cannot assure you that we will have access to these sources of capital or that, even if such sources of capital are available, that these sources of capital will be available on favorable terms. Our ability to incur additional debt will depend on multiple factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that are or may be imposed by future lenders. Our ability to access the equity and debt capital markets will depend on multiple factors as well, including general market conditions for real estate companies, our degree of leverage, the trading price of our common stock and market perceptions about our company.

Yellowstone Activity and Business Combination

The registration statement for our IPO was declared effective on October 21, 2020. On October 26, 2020, we consummated our IPO of 12,500,000 Units, at $10.00 per Unit, generating gross proceeds of $125.0 million, and incurring offering costs of approximately $7.3 million (including $6.9 million in underwriters' fees). The underwriters were granted a 45-day option from the October 21, 2020 IPO to purchase up to 1,875,000 additional Units to cover over-allotments, if any, at $10.00 per Unit.  On December 1, 2020, the underwriters' over-allotment option was exercised resulting in the purchase of an additional 1,098,898 Units.

Simultaneously with the closing of the IPO, we consummated the private placement of 7,500,000 Private Placement Warrants to our sponsor, each exercisable to purchase one share of Class A common stock at $11.50 per share, at a price of $1.00 per Private Placement Warrant, generating gross proceeds to us of $7.5 million. In connection with the partial exercise of the underwriter's over-allotment option, our sponsor purchased an additional 219,779 Private Placement Warrants at a price of $1.00 per Private Placement Warrant, generating additional gross proceeds of $219,779.

Upon the closing of the IPO, $127,500,000 ($10.20 per Unit) of the net proceeds of the sale of the Units in the IPO, including proceeds of the sale of the private placement warrants, were placed in a trust account located in the United States at JP Morgan Chase Bank, N.A. with Continental Stock Transfer & Trust Company acting as trustee, and are invested in U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act, with a maturity of 185 days or less, or in any open-ended investment company that holds itself out as a money market fund meeting certain conditions of Rule 2a-7 of the Investment Company Act, as determined by us (or our management), until the earlier of: (i) the completion of a Business Combination and (ii) the distribution of the funds in the trust account to our stockholders, as described below. Upon the closing of the underwriter's over-allotment option, an additional $11,208,760 in proceeds from the exercise of the over-allotment and the sale of the additional private placement warrants were placed in the trust account, resulting in total funds held in the trust account of $138,716,226, inclusive of earned interest on investments held in the trust account.

On September 27, 2021, the Sponsor agreed to loan the Company an aggregate of up to $1,000,000 to cover expenses related to the Proposed Business Combination pursuant to a promissory note (the “Note”). This loan bears interest at the Federal Short Term Rate published pursuant to Section 1274(d) of the Internal Revenue Code, compounded annually.  The loan is payable on the earlier of the date on which the Company consummates its Business Combination or the date that the Company’s winding up is effective.  The principal balance, together with all accrued interest thereon, may be prepaid at any time at the election of the Company. As of December 31, 2021, there was $1,000,000 outstanding under the Note. The Note was fully repaid in connection with the Business Combination.

As of December 31, 2021, we had assets held in the trust account of $138,760,121 consisting of $69,378,000 in U.S. treasury securities with a maturity of 185 days or less as well as $69,382,121 of money market funds . Investment income on the trust account may be used by us to pay taxes. Through December 31, 2021, we did not withdraw any funds from the investment income on the trust account. In addition, $114,626 of cash was held outside of the trust account and is available for working capital purposes as of December 31, 2021. At the closing of the Business Combination, we received an aggregate of $46 million of net proceeds to us, consisting primarily of the BOC PIPE, and the amount held in the Yellowstone trust account, net of redemptions and transaction costs, including $4,759,615 paid to the underwriters of the Yellowstone IPO as a deferred underwriting commission. Following the Business Combination, we had cash and cash equivalents of approximately $53.2 million and restricted cash and cash equivalents of approximately $197.1 million.

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For the year ended December 31, 2021, and for the period from August 25, 2020 (date of inception) through December 31, 2020, cash used in operating activities was $1,965,292 and $708,213, respectively, consisting of formation and operating costs.

Private Activity Bonds

On September 14, 2021, a subsidiary of Sky completed an issuance through the Public Finance Authority (Wisconsin) of $166,340,000 of Senior Special Facility Revenue Bonds (Aviation Facilities Project), Series 2021 (the “PABs”). The PABs are comprised of three maturities: $21,085,000 bearing interest at 4.00%, due July 1, 2036; $30,435,000 bearing interest at 4.00%, due July 1, 2041; and $114,820,000 bearing interest at 4.25%, due July 1, 2054. The Series 2021 Bond that has a maturity date of July 1, 2036 was issued at a premium, and Sky received bond proceeds that were $249,436 above its face value. The net proceeds from the issuance of the PABs proceeds are being used to (a) finance or refinance the construction of various aviation facilities consisting of general aviation aircraft hangars and storage facilities located and to be located on the SGR site, the OPF site, the BNA site, the APA site, and the DVT site; (b) fund debt service and other operating expenses such as ground lease expense during the initial construction period; (c) fund deposits to the Debt Service Reserve Fund; and (d) pay certain costs of issuance related to the PABs.

Debt Covenants

The PABs contain financial and non-financial covenants, including a debt service coverage ratio, a restricted payments test and limitations on the sale, lease, or distribution of assets. To the extent that SHC does not comply with these covenants, an event of default or cross-default may occur under one or more agreements, and we or our subsidiaries may be restricted in our ability to pay dividends, issue new debt or access our leased facilities. The PABs are collateralized on a joint and several basis with the property and revenues of all SHC subsidiaries and their assets financed or to be financed from the proceeds of the PABs.

Covenants in the PABs require SHC to maintain a debt service coverage ratio (as defined in the relevant documents) of at least 1.25 for each applicable test period, commencing with the quarter ending December 31, 2024. The PABs are subject to a Continuing Disclosure Agreement whereby SHC is obligated to provide electronic copies of (i) monthly construction reports, (ii) quarterly reports containing quarterly financial information of SHC and (iii) annual reports containing audited consolidated financial statements of SHC to the Municipal Securities Rulemaking Board.

Lease Commitments

The table below sets forth certain information with respect to Sky’s future minimum lease payments required under operating leases as of December 31, 2021 (all of which were assumed by us in connection with the Business Combination):

Contractual Obligations

The following table sets forth the contractual obligations of Sky as of December 31, 2021 (dollars in thousands):

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Interest payments due on the Series 2021 PABs is held in reserve as restricted cash for the first three years.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies:

Net Loss Per Common Share

Net (loss) income per share of common stock is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. We apply the two-class method in calculating earnings per share. Accretion associated with the redeemable shares of Class A common stock is excluded from earnings per share as the redemption value approximates fair value.

As of December 31, 2021 and December 31, 2020, we had outstanding warrants to purchase up to 14,519,228 shares of Class A common stock. The weighted average of these shares was excluded from the calculation of diluted net (loss) income per share of common stock since the exercise of the warrants is contingent upon the occurrence of future events. As of December 31, 2021, we did not have any dilutive securities or other contracts that could, potentially, be exercised or converted into shares of common stock and then share in our earnings. As a result, diluted net (loss) income per common share is the same as basic net (loss) income per common share for the periods presented.

Redeemable Shares of Class A Common Stock

All of the 13,598,898 shares of Class A common stock sold as parts of the Units in the Public Offering contain a redemption feature. In accordance with the Accounting Standards Codification 480-10-S99-3A (“ASC 480”), “Classification and Measurement of Redeemable Securities”, redemption provisions not solely within the control of the Company require the security to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity’s equity instruments, are excluded from the provisions of ASC 480. The Company classifies all shares of Class A common stock as redeemable.

Warrants Liability

We account for the warrants in accordance with the guidance contained in Accounting Standards Codification 815 (“ASC 815”), “Derivatives and Hedging”, under which the warrants do not meet the criteria for equity treatment and must be recorded as derivative liabilities. Accordingly, we classify the warrants as liabilities at their fair value and adjust the warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrants are exercised, and any change in fair value is recognized in our statement of operations. The fair value of the Private Placement Warrants and the Public Warrants issued in connection with the Public Offering have been measured based on the listed market price of such Warrants.

Recently issued accounting pronouncements not yet adopted

Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s financial statements based on current operations of the Company. The impact of any recently issued accounting standards will be re-evaluated on a regular basis or if a Business Combination is completed where the impact could be material.