SKY HARBOR GROUP CORP MANAGEMENT REPORT OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

The following analysis of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and the
notes included elsewhere in this Quarterly Report on Form 10-Q (this "Form
10-Q"), as well as the information contained in our Annual Report on Form 10-K
for the year ended December 31, 2021, filed with the Securities Exchange
Commission (the "SEC") on March 28, 2022 (the "Form 10-K"), which is accessible
on the SEC's website at www.sec.gov. As described in Note 1 to the accompanying
consolidated financial statements, the comparative period for the results of
operations included herein are of Sky Harbour, LLC for the three and nine
months ended September 30, 2021.



Caution Regarding Forward-Looking Statements



This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). These forward-looking statements can be identified by the use of
forward-looking terminology, including the words "believes," "estimates,"
"anticipates," "expects," "intends," "plans," "may," "might," "will,"
"potential," "projects," "predicts," "continue," or "should," or, in each case,
their negative or other variations or comparable terminology. There can be no
assurance that actual results will not materially differ from expectations.
These statements are based on management's current expectations, but actual
results may differ materially due to various factors, including, but not limited
to:


• expectations regarding the Company’s strategies and its future financial prospects

performance, including future business plans or Company objectives,

performance outlook and business opportunities and competitors,

services, prices, marketing plans, operating expenses, market trends,

revenues, liquidity, cash flow and use of cash, capital expenditures and

    the Company's ability to invest in growth initiatives;


• the effects of general economic conditions, including inflation, rising

interest rates and the availability of building materials and labor for our

    development projects;


• our limited operating history makes it difficult to forecast future revenues

    and operating results;


• our ability to implement our construction cost mitigation strategies;


  • changes in applicable laws or regulations;


• the possibility that the Company will be adversely affected by other economic factors,

    business, and/or competitive factors; and



  • our financial performance.




The forward-looking statements contained in this Form 10-Q are based on our
current expectations and beliefs concerning future developments and their
potential effects on us. Future developments affecting us may not be those that
we have anticipated. These forward-looking statements involve a number of risks,
uncertainties (some of which are beyond our control) and other assumptions that
may cause actual results or performance to be materially different from those
expressed or implied by these forward-looking statements. These risks and
uncertainties include, but are not limited to, those factors described under the
heading "Risk Factors" in the Form 10-K. Should one or more of these risks or
uncertainties materialize, or should any of our assumptions prove incorrect,
actual results may vary in material respects from those projected in these
forward-looking statements. We undertake no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as may be required under applicable securities laws.
These risks and others described in the Form 10-K may not be exhaustive.



By their nature, forward-looking statements involve risks and uncertainties
because they relate to events and depend on circumstances that may or may not
occur in the future. We caution you that forward-looking statements are not
guarantees of future performance and that our actual results of operations,
financial condition and liquidity, and developments in the industry in which we
operate may differ materially from those made in or suggested by the
forward-looking statements contained in this prospectus. In addition, even if
our results or operations, financial condition and liquidity, and developments
in the industry in which we operate are consistent with the forward-looking
statements contained in this prospectus, those results or developments may not
be indicative of results or developments in subsequent periods.



Overview and Background



Sky Harbour is a real estate and infrastructure company providing Home Basing
Solutions ("HBS") for business aircraft. HBSs are campuses composed of 10-20
(typical) large business aviation hangars, aircraft ramp, automobile parking,
office and auxiliary space, with dedicated aviation line services. Sky Harbour
develops its HBS campuses on a greenfield basis at key airports across the
United States, leases individual hangars to aircraft tenants on a long-term
basis and operates its facilities autonomously. As of 2022, SKYH is the only
publicly traded developer of business aviation infrastructure in the United
States.



The physical footprint of the US business aviation fleet grew by almost
28,000,000 square feet in the ten years preceding the Covid-19 pandemic, with
hangar supply lagging dramatically, especially in key growth markets. The
post-pandemic surge in consumption of private aviation services is driving
accelerated fleet growth, further widening the supply-demand gap. The constant
increase in average aircraft length and wingspan, and historically low
retirements of the oldest business jets in the US fleet, suggest that 2022 may
see the most dramatic footprint growth of the US business aviation fleet on
record. Data from the major business aviation OEMs suggest that order backlog
for new business aviation aircraft is almost $47 billion, with one OEM
forecasting an industry-wide outlook of up to 8,500 new business jet deliveries
over the next decade. Reported business aircraft activity increased 12.3% for
the eight months ended August 31, 2022 as compared to pre-pandemic activity
during the same period in 2019.



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Sky Harbour's real estate-centric business model is uniquely optimized to
capture this market opportunity. Sky Harbour realizes economies of scale in
construction through a proprietary prototype hangar design replicated at HBS
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, Sky Harbour revenues
are mostly derived from long-term rental agreements, offering stability and
forward visibility of revenues and cash flows. This allows Sky Harbour to fund
its development through the public bond market, providing capital efficiency and
mitigating refinance risk.


With six airport campuses under development or in operation, the company is targeting fourteen additional airfields in the current growth phase, and 30 more in the next.

The table below presents certain information relating to our portfolio at
September 30, 2022.


  ? Sugar Land Regional Airport ("SGR"), Sugar Land, TX (Houston area);
  ? Miami-Opa Locka Executive Airport ("OPF"), Opa-Locka, FL (Miami area);
  ? Nashville International Airport ("BNA"), Nashville, TN;
  ? Centennial Airport ("APA"), Englewood, CO (Denver area);
  ? Phoenix Deer Valley Airport ("DVT"), Phoenix, AZ; and
  ? Addison Airport ("ADS"), Addison, TX (Dallas area).




                               Scheduled                    Estimated
                                                              Total
                             Construction     Scheduled    Construction
                                                              Cost1
  Facility       Status          Start     Completion Date    ($mm)       Hangars   Square Footage
SGR Phase I     Complete       Complete       Complete        $15.1          7          66,080
SGR Phase II Predevelopment  October 2023   January 2025   10.3 - 12.0       4          58,400
OPF Phase I  In Construction  August 2021   November 2022  31.2 - 33.2      12         160,092
OPF Phase II Predevelopment  December 2022   March 2024    28.1 - 32.7       7         102,077
BNA Phase II In Construction   July 2021    October 2022   25.8 - 26.8      10         149,069
APA Phase I  In Construction  August 2022   November 2023  37.2 - 43.2       9         133,530
APA Phase II Predevelopment   August 2023   November 2024  28.6 - 33.2       9         103,400
DVT Phase I     In Design    December 2022   March 2024    32.5 - 37.8       8         115,864
DVT Phase II Predevelopment  November 2023  February 2024  28.2 - 32.8       8         105,000
ADS Phase I  Predevelopment  January 2023    April 2024    24.4 - 28.3       6         104,600
   Total                                                     $261.4 -       80        1,098,112
                                                              295.1



Note 1: The Total Construction Cost Estimate includes the estimated direct construction expenditures associated with each facility. For completed facilities, this amount includes direct construction expenditures and other amounts (for example, capitalized labor and interest) that are included in capitalized cost under GAAP.


Recent Developments


On June 28, 2022, we entered into an operating lease agreement for a ground lease located in ADS (“ADS Lease”). The term of the ADS lease is 40 years from completion of construction without further extension options, which is the maximum term allowed by the City of Addison, Texas.



On October 27, 2022, we substantially completed the construction of its BNA
Phase II development project. We expect that our total construction costs
associated with this project to be slightly less than our initial estimated
construction cost. In connection with the substantial completion of our BNA HBS
campus, the tenant leases associated with our constructed hangars will commence
starting in November 2022.


Factors That May Affect Future Operating Results


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. 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 "-Risks
Related to our Business and Operations" within the Form 10-K for more
information about the risks related to our tenants and our lease payments.



Ground Lease Expense



One of our largest expenses is the lease payments under our ground leases. For
the nine months ended September 30, 2022 and 2021, our operating lease expense
for ground leases was $2.8 million and $2.8 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 private
activity bonds (see Private Activity Bonds, below) 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.



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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.



Costs of building materials and labor



When constructing our HBS 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 campus and the time it is completed. Typically,
the materials and most of the components used to construct our HBS 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.



In late August 2022, we received revised final construction bids related to our
APA Phase I and DVT Phase I HBS campus development projects. The final bids
received were both meaningfully higher than our original price estimates due to
spikes in both construction material and labor costs, along with decreased labor
availability. We have updated our estimates for total construction costs for all
future projects to reflect these price spikes. 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
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 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 and DVT 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 development
project, our total construction costs were lower than both our original pricing
estimate and the project's contracted guaranteed maximum price, and, despite the
current environment, we expect that the total construction costs at our BNA
Phase II and OPF Phase I HBS campus development projects will be completed
slightly below our original estimates for each project. 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 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 needs and future expenditures for expansion



We previously funded our wholly owned subsidiary Sky Harbour Capital LLC ("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 bond
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 consummated the Yellowstone Transaction on January 25, 2022, to raise
additional equity capital to, along with potential future bond 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 new future campus
is composed of an average of 10-20 hangars and is expected to cost approximately
$40 million per campus, with 60% or more to be funded with additional public
activity bonds (the "PABs"). 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
$1.1 billion, with approximately 65 to 75% anticipated from long term PABs 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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Significant 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 loans and bonds used to fund the capital projects are also capitalized
until the capital project is completed.



Once a capital project is completed, the cost of the capital project is reclassified to constructed assets on the attached balance sheet and we begin depreciating the constructed asset on a straight-line basis over the lesser of the term. life of the asset or the remaining life. of the related ground lease, including the terms of renewal provided.


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 these leases in accordance with the lessor’s guidelines 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


Three months completed September 30, 2022 Compared to the three months ended
September 30, 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).



                                                         Three months ended
                                                                        September 30,
                                                September 30, 2022          2021            Change
Revenue:
Rental revenue                                  $               431     $         402     $        29
Total revenue                                                   431               402              29

Expenses:
Operating                                                     1,228             1,139              89
Depreciation                                                    148               143               5
General and administrative                                    3,599             2,340           1,259
Total expenses                                                4,975             3,622           1,353

Other (income) expense:
Interest expense, net of capitalized interest                     -               319            (319 )
Unrealized (gain) loss on warrants                           (1,452 )               -          (1,452 )
Total other (income) expense                                 (1,452 )             319          (1,771 )

Net income (loss)                               $            (3,092 )   $      (3,539 )   $       447




Revenues


Revenues have increased $29or 7%, primarily due to additional tenant leases commencing at SGR in the third quarter of 2022.


Operating Expenses



Operating expenses increased $89, or 8%, for the three months ended September
30, 2022, as compared to the three months ended September 30, 2021. The increase
reflects higher operating costs as we prepare to commence operations at our BNA
and OPF campuses in the fourth quarter of 2022. Salaries, wages, and benefits
associated with our campus personnel increased by $124, primarily driven
by headcount increases at our BNA and OPF campuses. These increases were offset
by a $32 decrease in ground lease expense, primarily driven by lower lease costs
due to the OPF Lease Transaction (see Note 7) executed in the second quarter of
2022.



Depreciation Expense



Depreciation expense for the three months ended September 30, 2022, and 2021 was
$148 and $143, respectively. The increase reflects the placement of additional
ground support equipment into service during the third quarter of 2022.



General and administrative expenses



For the three months ended September 30, 2022, general and administrative
expenses increased by $1,259 as compared to the three months ended September 30,
2021, primarily due to $664 increase in other administrative expenses, driven by
increases in insurance, franchise taxes, and computer and software
expenses. Salaries, wages, and benefits increased by $407, largely attributable
to 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 talented human capital. Marketing and other pursuit costs
increased $219 year-over-year, reflecting our growth strategy in securing
airport site acquisitions and potential tenants. These increases were offset by
a $31 decrease in professional fees, which was primarily driven by decreased in
legal and accounting related costs due to our efforts to internalize job
functions.



Other Income



Other income increased from a loss of $319 to income of $1,452 for the three
months ended September 30, 2022 as compared to the three months ended September
30, 2021, primarily due to a $1,452 mark-to-market adjustment of the outstanding
warrants at September 30, 2022. These warrants were issued by Yellowstone as
part of its initial public offering. As a result, the warrants were not
reflected in Sky's financial statements for the three months ended September 30,
2021.



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Results of Operations


End of nine months September 30, 2022 Compared to the nine months ended September 30, 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).



                                                      Nine months ended
                                               September 30,     September 30,
                                                   2022              2021            Change
Revenue:
Rental revenue                                 $       1,236     $       1,187     $        49
Total revenue                                          1,236             1,187              49

Expenses:
Operating                                              3,652             3,283             369
Depreciation                                             447               425              22
Loss on impairment of long-lived assets                  248                 -             248
General and administrative                            12,136             4,431           7,705
Total expenses                                        16,483             8,139           8,344

Other (income) expense:
Interest expense, net of capitalized
interest                                                   -             1,160          (1,160 )
Unrealized (gain) loss on warrants                    (2,904 )               -          (2,904 )
Loss on extinguishment of note payable to
related party                                              -               250            (250 )
Total other (income) expense                          (2,904 )           1,410          (4,314 )

Net loss                                       $     (12,343 )   $      (8,362 )   $    (3,981 )




Revenues



Revenues for the nine months ended September 30, 2022 were $1,236, compared to
$1,187 for the nine months ended September 30, 2021. The increase primarily
resulted from additional tenant leases commencing at SGR during the second and
third quarters of 2022.



Operating Expenses



Operating expenses increased $369, or 11%, primarily driven by a $235 increase
in salaries, wages, and benefits associated with our campus personnel. The
increase was reflective of headcount increases at BNA and OPF as we prepare to
commence operations at our BNA and OPF campuses in the fourth quarter of 2022,
and a headcount increase at SGR to accommodate increased tenant activity.
Insurance expense increased $72, primarily driven by additional policies in
effect at our BNA and OPF campuses.



Depreciation Expense


Depreciation increased $22 for the nine months ended September 30, 2022compared to the nine months ended September 30, 2021. The increase reflects the entry into service of additional ground support equipment throughout 2022.

General and administrative expenses



For the nine months ended September 30, 2022, and 2021, general and
administrative expenses were $12,136, as compared to $4,431, respectively. The
increase was primarily driven by a $4,261 increase in salaries, wages, and
benefits, which is 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 $1,679 driven primarily by insurance,
franchise taxes, and computer and software expenses. Professional fees increased
$1,190 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. Marketing
and other pursuit costs increased $575 year-over-year, reflecting our growth
strategy in securing airport site acquisitions and potential tenants.



Other (Income) Expenses



Other (income) expenses increased from a $1,410 expense to $2,904 of income for
the nine months ended September 30, 2022 as compared to the nine months ended
September 30, 2021, primarily due to a $2,904 mark-to-market gain of the
outstanding warrants at September 30, 2022. These warrants were issued by
Yellowstone as part of its initial public offering. As a result, the warrants
were not reflected in Sky's financial statements for the nine months ended
September 30, 2021.



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Cash 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 campuses (see Construction Material Costs and Labor, above) 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 PABs
and other 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 bonds and market perceptions about our company.



The following table summarizes our cash and cash equivalents, restricted cash,
investments, and restricted investments as of September 30, 2022 and December
31, 2021:



                                                       September 30,     December 31,
                                                           2022              2021
Cash and cash equivalents                              $         730     $       6,805
Restricted cash                                               17,164           197,130
Investments                                                   29,765                 -
Restricted investments                                       145,322                 -
Total cash, restricted cash, investments, and
restricted investments                                 $     192,981     $     203,935



Common Share Purchase Agreement



On August 18, 2022, we entered into a Common Stock Purchase Agreement and a
Registration Rights Agreement (collectively referred to as the "Purchase
Agreement") with B. Riley Principal Capital, LLC ("B. Riley"). Pursuant to the
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.



Equity Financing



On January 25, 2022 we completed the Yellowstone Transaction. On the Closing
Date, 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 Senior Special Facility Revenue Bonds
(Aviation Facilities Project), Series 2021 (the "PABs"). The 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 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 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.



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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. As of September 30, 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 September 30,
2022 (in thousands):



                           Amount Due
2022 (remainder of year)   $       420
2023                             1,949
2024                             2,128
2025                             2,176
2026                             2,188
Thereafter                     196,878
Total lease payments           205,739
Less imputed interest         (153,275 )
Total                      $    52,464




Contractual Obligations



The following table sets forth our contractual obligations as of September 30,
2022 (in thousands):



                                      2022
                                   (remainder
                                    of year)        2023-2024       2025-2026       Thereafter        Total
Principal Payments of Long-Term
Indebtedness                      $          -     $         -     $         -     $    166,340     $ 166,340
Interest Payments on Long-Term
Indebtedness                                 -          13,881          13,881          132,950       160,712
Lease Commitments                          420           4,077           4,364          196,878       205,739

Total                             $        420     $    17,958     $    18,245     $    496,168     $ 532,791



Interest payments for the first three years on Series 2021 PABs are held in reserve as cash and restricted investments.

Off-balance sheet arrangements

We do not maintain any off-balance sheet arrangements.


Cash Flows



Historical Cash Flows


The following table summarizes our sources and uses of cash for the nine months ended September 30, 2022 and 2021 (in thousands):


                                                                 Nine months ended
                                                            September       September 30,
                                                             30, 2022           2021
Cash and restricted cash at beginning of period            $    203,935     $          72
Net cash used in operating activities                           (25,282 )          (4,726 )
Cash used in investing activities                              (213,549 )          (5,629 )
Net cash provided by financing activities                        52,790     

227 323

Cash and restricted cash at end of period                  $     17,894     $     217,040




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Operating Activities- Net cash used in operating activities was $25.3 million
for the nine months ended September 30, 2022, as compared to cash used in
operating activities of $4.7 million for the same period in 2021. The $20.6
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 $7.1 million increase in net loss, net of non-cash
adjustments. The increase it net loss was 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- Cash used in investing activities was $213.5 million for
the nine months ended September 30, 2022, as compared to cash used in investing
activities of $5.6 million for the same period in 2021. The increase of
$207.9 million in cash used in investing activities was driven primarily by the
$193.8 million purchase 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
$30.1 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 $48.5 million received at maturity of
certain of the Company's restricted investments.



Financing Activities- Net cash provided by financing activities was $52.8
million for the nine months ended September 30, 2022, as compared to net cash
provided by financing activities of $227.3 million for the same period in 2021.
The $174.5 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 2021-1 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.

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