Filed Pursuant to Rule 424(b)(3)
Registration No. 333-263905
Registration No. 333-264998

Registration No. 333-267360

Prospectus Supplement No. 7

(to Prospectus dated May 5, 2022)

Prospectus Supplement No. 6

(to Prospectus dated May 25, 2022)

Prospectus Supplement No. 1

(to Prospectus dated September 20, 2022)

Sky Harbour Group Corporation

83,018,942 Shares of Class A Common Stock

7,719,779 Warrants to Purchase Class A Common Stock

This prospectus supplement is a supplement to the prospectus dated May 5, 2022, which forms a part of our Registration Statement on Form S-1 (File No. 333-263905) (as supplemented to date, the “May 5 Prospectus”), the prospectus dated May 25, 2022, which forms a part of our Registration Statement on Form S-1 (File No. 333-264998) (as supplemented to date, the “May 25 Prospectus”) and the prospectus dated September 20, 2022, which forms a part of our Registration Statement on Form S-1 (File No. 333-267360) (as supplemented to date, the “September 20 Prospectus” and, together with the May 5 Prospectus and the May 25 Prospectus, the “Prospectuses”). This prospectus supplement is not a new registration of securities but is being filed solely to update and supplement the information in the Prospectuses with the information contained in our Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on November 10, 2022 (the “Quarterly Report”). Accordingly, we have attached the Quarterly Report to this prospectus supplement.

This prospectus supplement updates and supplements the information in the Prospectuses and is not complete without, and may not be delivered or utilized except in combination with, the Prospectuses, including any amendments or supplements thereto. This prospectus supplement should be read in conjunction with the Prospectuses and if there is any inconsistency between the information in the Prospectuses and this prospectus supplement, you should rely on the information in this prospectus supplement. The May 5 Prospectus, together with this prospectus supplement, relate to (1) the issuance by us of up to 14,519,218 shares of Class A Common Stock, par value $0.0001 per share (the “Class A Common Stock”), including the shares that may be issued upon exercise of warrants to purchase Class A Common Stock at an exercise price of $11.50 per share of Class A Common Stock, consisting of the Public Warrants and the Private Placement Warrants (each as defined in the May 5 Prospectus); and (2) the offer and sale, from time to time, by the selling securityholder identified in the May 5 Prospectus or its permitted transferees, of (i) up to 7,719,779 shares of Class A Common Stock that are issuable upon the exercise of 7,719,779 Private Placement Warrants and (ii) 7,719,779 Private Placement Warrants. The May 25 Prospectus, together with this prospectus supplement, relate to (1) the issuance by us of up to 45,000,000 shares of Class A Common Stock issuable upon redemption of Sky Common Units (as defined in the May 25 Prospectus) and (2) the offer and sale, from time to time, by the selling securityholders identified in the May 25 Prospectus or their permitted transferees, of up to 58,399,724 shares of Class A Common Stock (including shares of Class A Common Stock issuable upon redemption of Sky Common Units). The September 20 Prospectus, together with this prospectus supplement, relate to the offer and resale of up to 10,100,000 shares of Class A Common Stock by B. Riley Principal Capital II, LLC (the “Selling Stockholder”), which include (i) up to 10,000,000 shares of our Class A Common Stock that we may, in our sole discretion, elect to sell to the Selling Stockholder from time to time, pursuant to the Purchase Agreement, dated as of August 18 2022, by and between us and the Selling Stockholder (the “Purchase Agreement”), (ii) 25,000 shares of our Class A Common Stock we issued to the Selling Stockholder and (iii) up to 75,000 additional shares of our Class A Common Stock we may issue if certain conditions are met to the Selling Stockholder as consideration for its commitment to purchase shares of our Class A Common Stock in one or more purchases that we may, in our sole discretion, direct it to make, from time to time, pursuant to the Purchase Agreement.

Our Class A Common Stock and Public Warrants are traded on the New York Stock Exchange American LLC under the symbols “SKYH” and “SKYH WS,” respectively. On November 9, 2022, the closing price of our Class A Common Stock was $3.31 per share, and the closing price of our Public Warrants was $0.34 per share.

Investing in our securities involves risks. See “Risk Factors” in the Prospectuses and in any applicable prospectus supplement.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities or determined if the Prospectuses or this prospectus supplement are truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus supplement is November 10, 2022.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 001-39648

Sky Harbour Group Corporation

(Exact name of registrant as specified in its Charter)

Delaware	85-2732947
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
136 Tower Road, Suite 205
Westchester County Airport White Plains, NY (Address of principal executive offices)	10604 (Zip Code)
(212) 554-5990 Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of Class	Trading Symbols	Name of Exchange on Which Registered
Class A common stock, par value $0.0001 per share	SKYH	NYSE American LLC
Warrants, each whole warrant exercisable for one share of Class A common stock at an exercise price of $11.50 per share	SKYH WS	NYSE American LLC

Securities registered pursuant to Section 12(g) of the Act: None

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. (See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act).

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of November 7, 2022, 14,962,831 shares of Class A common stock, par value $0.0001 per share, and 42,192,250 shares of Class B common stock, par value $0.0001 per share, were issued and outstanding, respectively.

SKY HARBOUR GROUP CORPORATION

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION		2
Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
PART II. OTHER INFORMATION		33
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	33
	Exhibit Index	33
	Signatures	35

ITEM 1. FINANCIAL STATEMENTS

SKY HARBOUR GROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	September 30, 2022			December 31, 2021
	(unaudited)			(audited)
Assets
Cash	$	730		$	6,805
Restricted cash		17,164			197,130
Investments		29,765			-
Restricted investments		145,322			-
Prepaid expenses and other assets		4,001			3,142
Cost of construction		66,654			25,034
Constructed assets, net		14,091			14,500
Right-of-use assets		56,145			56,867
Long-lived assets, net		768			409
Total assets	$	334,640		$	303,887
Liabilities and equity
Accounts payable, accrued expenses and other liabilities	$	15,749		$	10,959
Operating lease liabilities		52,464			61,289
Bonds payable, net of debt issuance costs and premiums		162,156			160,679
Warrants liability		5,082			-
Total liabilities		235,451			232,927
Redeemable Sky Series B Preferred Units		-			54,029
Stockholders’ equity
Preferred stock; $0.0001 par value; 10,000,000 shares authorized as of September 30, 2022; none issued and outstanding		-			-
Class A common stock, $0.0001 par value; 200,000,000 shares authorized as of September 30, 2022; 14,962,831 shares issued and outstanding as of September 30, 2022		1			-
Class B common stock, $0.0001 par value; 50,000,000 shares authorized as of September 30, 2022; 42,192,250 shares issued and outstanding as of September 30, 2022		4			-
Additional paid-in capital		29,254			-
Accumulated deficit		(3,711	)		-
Accumulated other comprehensive loss		(231	)		-
Total Sky Harbour Group Corporation stockholders’ equity		25,317			-
Members’ equity		-			16,931
Non-controlling interests		73,872			-
Total equity		99,189			16,931
Total liabilities and equity	$	334,640		$	303,887

See accompanying Notes to Unaudited Consolidated Financial Statements

2

SKY HARBOUR GROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine months ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Revenue:
Rental revenue	$	431		$	402		$	1,236		$	1,187
Total revenue		431			402			1,236			1,187
Expenses:
Operating		1,228			1,139			3,652			3,283
Depreciation		148			143			447			425
Loss on impairment of long-lived assets		-			-			248			-
General and administrative		3,599			2,340			12,136			4,431
Total expenses		4,975			3,622			16,483			8,139
Other (income) expense:
Interest expense, net of capitalized interest		-			319			-			1,160
Unrealized (gain) loss on warrants		(1,452	)		-			(2,904	)		-
Loss on extinguishment of note payable to related party		-			-			-			250
Total other (income) expense		(1,452	)		319			(2,904	)		1,410
Net loss	$	(3,092	)	$	(3,539	)	$	(12,343	)	$	(8,362	)
Net loss attributable to non-controlling interests		(2,479	)		-			(8,632	)		-
Net loss attributable to Sky Harbour Group Corporation shareholders	$	(613	)	$	(3,539	)	$	(3,711	)	$	(8,362	)
Loss per share
Basic	$	(0.04	)	$	-		$	(0.27	)	$	-
Diluted	$	(0.04	)	$	-		$	(0.27	)	$	-
Weighted average shares
Basic		14,949			-			13,628			-
Diluted		14,949			-			13,628			-

See accompanying Notes to Unaudited Consolidated Financial Statements

3

SKY HARBOUR GROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Net loss	$	(3,092)	$	(3,539)	$	(12,343)	$	(8,362)
Other comprehensive loss, before related income taxes:
Unrealized losses on available-for-sale securities		(147)		-		(231)		-
Total other comprehensive loss	$	(3,239)	$	(3,539)	$	(12,574)	$	(8,362)

See accompanying Notes to Unaudited Consolidated Financial Statements

4

SKY HARBOUR GROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(Unaudited)

	Redeemable Sky Series B					Class A				Class B				Additional					Accumulated Other			Total						Non-
	Preferred Units					Common Stock				Common Stock				Paid-in		Accumulated			Comprehensive			Stockholders’			Members			Controlling			Total
	Shares		Amount			Shares		Amount		Shares		Amount		Capital		Deficit			Loss			Equity			Equity			Interests			Equity
Balance at December 31, 2021		-	$	54,029			-	$	-		-	$	-	$	-	$	-		$	-			-		$	16,931		$	-		$	16,931
Sky incentive compensation prior to recapitalization		-		-			-		-		-		-		-		-			-			-			23			-			23
Net income (loss) prior to recapitalization		-		-			-		-		-		-		-		-			-			-			(1,247	)		-			(1,247	)
Yellowstone Transaction and recapitalization, See Note 3		-		(54,029	)		14,937,581		1		42,192,250		4		28,681		-			-			28,686			(15,707	)		81,024			94,003
Sky incentive compensation following recapitalization		-		-			-		-		-		-		-		-			-			-			-			63			63
Net income (loss) following recapitalization		-		-			-		-		-		-		-		(15,763	)		-			(15,763	)		-			(2,504	)		(18,267	)
Balance at March 31, 2022		-		-			14,937,581		1		42,192,250		4		28,681		(15,763	)		-			12,923			-			78,583			91,506
Share-based compensation		-		-			-		-		-		-		160		-			-			160			-			-			160
Sky incentive compensation		-		-			-		-		-		-		-		-			-			-			-			85			85
Other comprehensive income (loss)		-		-			-		-		-		-		-		-			(84	)		(84	)		-			-			(84	)
Net income (loss)		-		-			-		-		-		-		-		12,665			-			12,665			-			(2,402	)		10,263
Balance at June 30, 2022		-		-			14,937,581		1		42,192,250		4		28,841		(3,098	)		(84	)		25,664			-			76,266			101,930
Share-based compensation		-		-			-		-		-		-		298		-			-			298			-			-			298
Sky incentive compensation		-		-			-		-		-		-		-		-			-			-			-			85			85
Issuance of initial commitment shares		-		-			25,000		-		-		-		112		-			-			112			-			-			112
Exercise of warrants		-		-			250		-		-		-		3		-			-			3			-			-			3
Other comprehensive income (loss)		-		-			-		-		-		-		-		-			(147	)		(147	)		-			-			(147	)
Net income (loss)		-		-			-		-		-		-		-		(613	)		-			(613	)		-			(2,479	)		(3,092	)
Balance at September 30, 2022		-	$	-			14,962,831	$	1		42,192,250	$	4	$	29,254	$	(3,711	)	$	(231	)	$	25,317		$	-		$	73,872		$	99,189

See accompanying Notes to Unaudited Consolidated Financial Statements

5

SKY HARBOUR GROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(Unaudited)

	Redeemable Series B				Class A				Class B				Additional				Accumulated Other		Total					Non-		Total
	Preferred Units				Common Stock				Common Stock				Paid-in		Accumulated		Comprehensive		Stockholders’		Members			Controlling		Equity
	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Deficit		Loss		Equity		Equity			Interests		(Deficit)
Balance at December 31, 2020		-	$	-		-	$	-		-	$	-	$	-	$	-	$	-		-	$	(6,509	)	$	-	$	(6,509	)
Gain on extinguishment of related party loan, net of repurchase of membership interests		-		-		-		-		-		-		-		-		-		-		5,621			-		5,621
Conversion of SH I loan to equity		-		-		-		-		-		-		-		-		-		-		1,250			-		1,250
Issuance of Sky Series A Preferred Units, net of equity issuance costs		-		-		-		-		-		-		-		-		-		-		29,683			-		29,683
Net loss		-		-		-		-		-		-		-		-		-		-		(2,046	)		-		(2,046	)
Balance at March 31, 2021		-		-		-		-		-		-		-		-		-		-		27,999			-		27,999
Equity issuance costs		-		-		-		-		-		-		-		-		-		-		(7	)		-		(7	)
Sky incentive compensation		-		-		-		-		-		-		-		-		-		-		51			-		51
Net loss		-		-		-		-		-		-		-		-		-		-		(2,778	)		-		(2,778	)
Balance at June 30, 2021		-		-		-		-		-		-		-		-		-		-		25,265			-		25,265
Issuance of Sky Redeemable Series B Preferred Units, net of equity issuance costs		-		54,029		-		-		-		-		-		-		-		-		-					-
Issuance of Warrants		-		-		-		-		-		-		-		-		-		-		290			-		290
Equity issuance costs		-		-		-		-		-		-		-		-		-		-		(4	)		-		(4	)
Sky incentive compensation		-		-		-		-		-		-		-		-		-		-		81			-		81
Net loss		-		-		-		-		-		-		-		-		-		-		(3,539	)		-		(3,539	)
Balance at September 30, 2021		-	$	54,029		-	$	-		-	$	-	$	-	$	-	$	-	$	-	$	22,093		$	-	$	22,093

See accompanying Notes to Unaudited Consolidated Financial Statements

6

SKY HARBOUR GROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine months ended
	September 30, 2022			September 30, 2021
Cash flows from operating activities:
Net loss	$	(12,343	)	$	(8,362	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		447			865
Straight-line rent adjustments, net		14			(92	)
Loss on extinguishment of related party loan payable		-			250
Equity-based compensation		826			131
Loss on impairment of long-lived assets		248			-
Non-cash operating lease expense		1,451			2,039
Unrealized gain on warrants		(2,904	)		-
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(1,768	)		(716	)
Right-of-use asset initial direct costs		(9,555	)		-
Accounts payable, accrued expenses and other liabilities		(1,698	)		1,159
Net cash used in operating activities		(25,282	)		(4,726	)
Cash flows from investing activities:
Purchases of long-lived assets		(645	)		(150	)
Payments for cost of construction		(35,597	)		(5,479	)
Issuance of notes receivable		(1,955	)		-
Purchases of available for sale investments		(29,996	)		-
Purchases of held-to-maturity investments		(193,822	)		-
Proceeds from held-to-maturity investments		48,466			-
Net cash used in investing activities		(213,549	)		(5,629	)
Cash flows from financing activities:
Proceeds from issuance of Sky Series A Preferred Units		-			30,000
Proceeds from issuance of Sky Series B Preferred Units and Warrants		-			55,000
Proceeds from issuance of BOC PIPE		45,000			-
Proceeds from Yellowstone trust		15,691			-
Proceeds from exercise of warrants		3			-
Payments for equity issuance costs		(9,153	)		(1,076	)
Payments for debt issuance costs		-			(5,778	)
Refund of debt issuance costs		1,249			-
Payment of loan payable and redemption of Sky membership interest		-			(5,221	)
Payments of loans payable		-			(13,831	)
Proceeds of bonds payable		-			166,589
Proceeds of loans payable		-			1,010
Proceeds of loans payable to related parties		-			630
Net cash provided by financing activities		52,790			227,323
Net (decrease) increase in cash and restricted cash		(186,041	)		216,968
Cash and restricted cash, beginning of year		203,935			72
Cash and restricted cash, end of period	$	17,894		$	217,040

See accompanying Notes to Unaudited Consolidated Financial Statements

7

SKY HARBOUR GROUP CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(in thousands, except share data)

1. Organization and Business Operations

Sky Harbour Group Corporation (“SHG”) is a holding company organized under the laws of the State of Delaware and, through its main operating subsidiary, Sky Harbour LLC and its subsidiaries (collectively, “Sky”), is an aviation infrastructure development company that develops, leases and manages general aviation hangars for business aircraft across the United States. Sky Harbour Group Corporation and its consolidated subsidiaries are collectively referred to as the “Company.”

On January 25, 2022 (the “Closing Date”), our predecessor, Yellowstone Acquisition Company (“Yellowstone”), a special purpose acquisition company incorporated in Delaware on August 25, 2020, consummated the business combination (the “Yellowstone Transaction”) contemplated by the Equity Purchase Agreement, dated as of August 1, 2021 (the “Equity Purchase Agreement”), with Sky, a Delaware limited liability company.

As a result of the closing of the Yellowstone Transaction, and collectively with the other transaction described in the Equity Purchase Agreement, the Company was reorganized as an umbrella partnership-C corporation, or “Up-C”, structure in which substantially all of the operating assets of the Company are held by Sky and SHG’s only substantive assets are its equity interests in Sky (the “Common Units”). As of the Closing Date, SHG owned approximately 26.1% of the common units of Sky (the “Sky Common Units”), and the prior holders of Sky’s Existing Common Units (the “LLC Interests”) owned approximately 73.9% of the Sky Common Units and control the Company through their ownership of the Class B Common Stock, $0.0001 par value (“Class B Common Stock”) of the Company. As of September 30, 2022, the Company and the LLC Interests owned approximately 26.1% and 73.9% of Sky Common Units, respectively. See Notes 2 and 3 for additional discussion related to the Yellowstone Transaction.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements and the related notes (the “Financial Statements”) have been prepared in conformity with the U.S. Securities and Exchange Commission (the “SEC”) requirements for quarterly reports on Form 10-Q, and consequently exclude certain disclosures normally included in audited consolidated financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).These Financial Statements include the accounts of the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Financial Statements should be read in conjunction with the audited consolidated financial statements and the notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as well as the financial statements of Sky for the year ended December 31, 2021 file by the Company on its Current Reports on Form 8-K/A on March 28, 2022, which includes additional disclosures and a summary of the Company's significant accounting policies. In the Company’s opinion, these Financial Statements include all adjustments, consisting of normal recurring items, considered necessary by management to fairly state the Company’s results of operation, financial position, and cash flows. Except for per share data, all dollar amounts are in thousands unless otherwise noted.

Certain historical amounts have been reclassified to conform to the current year’s presentation, including salaries, wages, and benefits associated with operations personnel employed at the Company's hangar development sites. $54 and $123 of amounts previously classified within general and administrative expenses on the consolidated statement of operations for the three and nine months ended September 30, 2021, respectively, have been reclassified to operating expenses. This reclassification had no effect on total expenses, net loss, net loss per common share and had no impact on the Company’s consolidated balance sheets, statement of stockholders’ equity and statement of cash flows for the prior year period.

Notwithstanding the legal form of the Yellowstone Transaction pursuant to the terms therein, the Yellowstone Transaction was accounted for as a reverse recapitalization in accordance with GAAP (the “Reverse Recapitalization”). Under this method of accounting, Yellowstone was treated as the acquired company for financial reporting purposes, and Sky was treated as the accounting acquirer. In accordance with this accounting method, the Yellowstone Transaction was treated as the equivalent of Sky issuing stock for the net assets of Yellowstone, accompanied by a recapitalization.

Sky was deemed the accounting acquirer for purposes of the Yellowstone Transaction based on an evaluation of the following facts and circumstances:

• The LLC Interests, through their ownership of the Class B Common Stock, hold a majority voting interest in the Company;

• The LLC Interests have the ability to nominate and elect the majority of the Company’s Board of Directors;

• Sky’s senior management team comprises the senior management of the Company; and

• Sky’s assets were larger in relative size compared to Yellowstone’s assets prior to the Yellowstone Transaction.

Thus, the financial statements included in this quarterly report for the three and nine months ended September 30, 2022 reflect (i) the historical operating results of Sky prior to the Yellowstone Transaction; (ii) the combined results of Sky and SHG from the date of the Yellowstone Transaction; and (iii) the net assets of SH (formerly Yellowstone) were stated at historical cost, with no goodwill or other intangible assets recorded.

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 financial instruments such as warrants, and estimates and assumptions related to right-of-use assets and operating lease liabilities. Actual results could differ materially from those estimates.

8

Risks and Uncertainties

The Company’s operations have been limited to-date. For most of its history, the Company was engaged in securing access to land through ground leases, and developing and constructing aviation hangars. The major risks faced by the Company is its future ability to obtain additional tenants for the facilities that it constructs, and to contract with such tenants for rental income in an amount that is sufficient to meet the Company’s financial obligations, including increasing construction costs due to inflation.

In March 2020, the World Health Organization declared coronavirus 2019 (“COVID-19”) a global pandemic. The outbreak of COVID-19 caused severe disruptions in the global economy and has adversely impacted businesses and financial markets. During 2020, the Company experienced delays in construction due to COVID-19 mandates such as physical distancing, supply chain issues, and subcontractor availability. In 2020, there was a significant slowdown in the aviation sector in general due to decreased travel which has since eased, particularly in private aviation. During 2021 and 2022 to-date, vaccinations for COVID-19 have become widely distributed among the general population which has resulted in loosened restrictions previously mandated. However, the potential emergence of vaccine-resistant variants of COVID-19 could result in restrictions being mandated again or affect the timing of loosened restrictions. The Company’s management is not able, at this time, to determine what, if any, the ultimate impact COVID-19 will have on its future financial condition, results of operations and cash flows.

Liquidity and Capital Resources

As a result of ongoing construction projects and business development activities, including the development of aircraft hangars and the leasing of available hangar space, the Company has incurred recurring losses and negative cash flows from operating activities since its inception. The Company expects to continue to invest in such activities and generate operating losses in the near future.

The Company obtained long-term financing through bond and equity offerings to fund its construction, lease, and operational commitments, and believes its liquidity is sufficient to allow continued operations for more than one year after the date these financial statements are issued.

Significant Accounting Policies

Basis of Consolidation

SHG is deemed to have a controlling interest of Sky through its appointment as the Managing Member of Sky, in which SHG has control over the affairs and decision-making of Sky. The interests in Sky not owned by the Company are presented as non-controlling interests. Sky’s ownership percentage in each of its consolidated subsidiaries is 100%. There are no unconsolidated variable interest entities (“VIEs”) in which Sky is considered to be the primary beneficiary.

Cash and Restricted Cash

The Company’s cash is held at a major commercial bank, which cash balance may at times exceed the Federal Deposit Insurance Corporation limit. To date, the Company has not experienced any losses on its cash deposits.

Pursuant to the Company’s bond offering described in Note 8, various restricted trust bank accounts were established. Such trust bank accounts are included in Restricted cash and Restricted investments on the consolidated balance sheet as of September 30, 2022 and December 31, 2021.

Investments

Investments of the Company's cash in various U.S. Treasury securities have been classified as available-for-sale and are carried at estimated fair value as determined based upon quoted market prices. Such investments amounted to $29,765 as of September 30, 2022, of which $15,009 will mature in one year or less, and $14,756 will mature in one through five years.

Unrealized gains and losses are excluded from earnings and are reported as a component of comprehensive income (loss). The Company periodically evaluates whether declines in fair values of its available-for-sale securities below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the Company's ability and intent to hold the available-for-sale security until a forecasted recovery occurs. Additionally, the Company assesses whether it has plans to sell the security or it is more likely than not it will be required to sell any available-for-sale securities before recovery of its amortized cost basis. Realized gains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in other (income) expenses. The costs of investments sold is based on the specific-identification method. There are no realized gains or losses on investments for the periods presented. Interest on available-for-sale securities is included in other (income) expenses.

Restricted Investments Held-to-Maturity

Pursuant to provisions within the Master Indenture of the Series 2021 Bonds, as defined in Note 8, the Company invests the funds held in the restricted trust bank accounts in various U.S. Treasury securities. Therefore, such investments are reported as “Restricted investments” in the accompanying consolidated balance sheets.

The Company has the ability and intent to hold these restricted investments until maturity, and as a result, the Company would not expect the value of these investments to decline significantly due to a sudden change in market interest rates. The held-to-maturity restricted investments are carried on the consolidated balance sheet at amortized cost. The carrying amount of such investments was $145,322 on September 30, 2022, of which $107,580 will mature in one year or less, and $37,742 will mature in one through five years.

9

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. The Company allocates a portion of its 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, net of the amortization of debt issuance costs and premiums, and net of interest income earned on bond proceeds, is also capitalized until the capital project is completed.

Constructed assets, net

Constructed assets on the consolidated balance sheets consists principally of developed airplane hangar buildings, and are carried at cost less accumulated depreciation. Once a capital project is complete, the Company begins 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. Constructed assets, net, as of September 30, 2022 and December 31, 2021 consists of the Sugar Land Phase I project, which is being depreciated over approximately 28 years.

Other long-lived assets

Long-lived assets on the consolidated balance sheets consists principally of ground support equipment, software, and computer equipment. Long-lived assets are carried at cost less accumulated depreciation. Maintenance and repair expenses are charged to expense as incurred. Depreciation is recognized on a straight-line basis over 3 to 20 years, based on the estimated useful life of the assets.

Impairment of long-lived assets

The Company’s assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment analyses are based on, in part, the Company’s current plans, intended holding periods and available market information at the time the analyses are prepared. An impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. An impairment loss is measured based on the excess of the property’s carrying amount over its estimated fair value. Estimates of fair value are determined using discounted cash flow models, which consider, among other things, anticipated holding periods, current market conditions and utilize unobservable quantitative inputs, including appropriate capitalization and discount rates. If the estimates of the projected future cash flows, anticipated holding periods, or market conditions change, evaluation of impairment losses may be different and such differences could be material to the consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and other factors that could differ materially from actual results.

Leases

The Company accounts for leases under Accounting Standards Codification (“ASC”) Topic 842, Leases. The Company determines whether a contract contains a lease at the inception of the contract. ASC Topic 842 requires lessees to recognize lease liabilities and right-of-use (“ROU”) assets for all operating leases with terms of more than 12 months on the consolidated balance sheets. The Company has made an accounting policy election to not recognize leases with an initial term of 12 months or less on the Company’s 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 the Company will exercise its options to renew the leases, the renewal terms are included in the lease term and the resulting ROU asset and lease liability balances.

The Company also has tenant leases and accounts for those leases in accordance with the lessor guidance under ASC Topic 842.

The Company has lease agreements with lease and non-lease components; the Company has elected the accounting policy to not separate lease and non-lease components for all underlying asset classes.

The Company has not elected to capitalize any interest cost that is implicit within its operating leases into cost of construction on the consolidated balance sheet, but instead, expenses its ground lease cost in the consolidated statements of operations.

Warrants liability

The Company accounts for the warrants assumed in the Yellowstone Transaction (see Note 9) in accordance with the guidance contained in ASC Topic 815, “Derivatives and Hedging” (“ASC 815”), under which warrants that do not meet the criteria for equity classification and must be recorded as derivative liabilities. Accordingly, the Company classifies the warrants as liabilities carried at their fair value and adjusts 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 or expire, and any change in fair value is recognized in the consolidated statement of operations.

10

Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC Topic 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities; Level 2 – quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data; and Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining the fair value of financial and non-financial assets and liabilities. Accordingly, fair value estimates may be different than the amounts that may ultimately be realized upon sale or disposition of these assets or settlement of these liabilities. See Note 13.

Equity issuance costs

The Company accounts for equity issuance costs as an asset within prepaid expenses and other assets on the consolidated balance sheets until the related equity financing is obtained, and then reclassifies such costs as a reduction in equity. As of December 31, 2021, the Company had $2,696 of equity issuance costs included within prepaid and other assets which were subsequently reclassified as part of accounting for the Yellowstone Transaction. As of September 30, 2022, there were no equity issuance costs included within prepaid expenses and other assets.

Revenue recognition

The Company leases the hangar facilities that it constructs 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 (see Note 7) 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. As of September 30, 2022 and December 31, 2021, the deferred rent receivable included in prepaid expenses and other assets was $73 and $103, respectively.

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. There were no adjustments to rental revenue for uncollectible tenant rental payments in either of the three and nine months ended September 30, 2022 or 2021.

For the three months ended September 30, 2022 and 2021, the Company derived approximately 82% and 90% of its revenue from two tenants, respectively. For the nine months ended September 30, 2022 and 2021, the Company derived 87% and 89% of its revenue from two tenants, respectively. Such tenants have ongoing leases with the Company which expire in December 2023 and November 2025, respectively.

Operating Expenses

For the three and nine months ended September 30, 2022, operating expenses within the consolidated statements of operations includes operating lease expense of $904 and $2,797, respectively. For the three and nine months ended September 30, 2021, operating expense includes operating lease expense of $935 and $2,807, respectively. General and administrative expenses on the consolidated statements of operations also includes $22 and $58 of operating lease expense for the three and nine months ended September 30, 2022, respectively and $17 and $34 of operating lease expense for the three and nine months ended and September 30, 2021, respectively.

Advertising Costs

The Company expenses the cost of advertising and marketing as incurred. Advertising and marketing costs recognized as general and administrative expenses totaled $42 and $268 for three and nine months ended September 30, 2022, respectively. Advertising and marketing costs recognized as general and administrative expenses totaled $106 and $252 for the three and nine months ended September 30, 2021, respectively.

Income Taxes

SHG is classified as a corporation for Federal income tax purposes and is subject to U.S. Federal and state income taxes. SHG includes in income, for U.S. Federal income tax purposes, its allocable portion of income from the “pass-through” entities in which it holds an interest, including Sky. The “pass-through” entities, are not subject to U.S. Federal and certain state income taxes at the entity level, and instead, the tax liabilities with respect to taxable income are passed through to the members, including SHG. As a result, prior to the Yellowstone Transaction, Sky was not subject to U.S. Federal and certain state income taxes at the entity level.

The Company follows the asset and liability method of accounting for income taxes. This method gives consideration to the future tax consequences associated with the differences between the financial accounting and tax basis of the assets and liabilities as well as the ultimate realization of any deferred tax asset resulting from such differences, as well as from net operating losses and other tax-basis carryforwards. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. When a valuation allowance is increased or decreased, a corresponding tax expense or benefit is recorded.

The Company recorded income tax expense of $0 and the effective tax rate was 0.0% for the three and nine months ended September 30, 2022. The effective income tax rate for the three and nine months ended September 30, 2022 differs from the federal statutory rate of 21% primarily due to a full valuation allowance against net deferred tax assets as it is more likely than not that the deferred tax assets will not be realized.

Amounts payable under the Tax Receivable Agreement, as defined in Note 3, are accrued by a charge to income when it is probable that a liability has been incurred and the amount is estimable.

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3. Yellowstone Transaction

As contemplated by the Equity Purchase Agreement, on the Closing Date, the following occurred:

• Yellowstone changed its name to Sky Harbour Group Corporation.

• All outstanding shares of stock held by BOC Yellowstone LLC (the “Sponsor”) were converted into shares of Class A Common Stock, $0.0001 par value (“Class A Common Stock”) of the Company.

• Sky restructured its capitalization and issued to the Company 14,937,581 Sky Common Units, which was equal to the number of outstanding shares of Class A Common Stock immediately after giving effect to the Equity Purchase Agreement. The number of outstanding shares after the Equity Purchase Agreement reflected the redemption of Class A Common Stock (by former holders of the special purpose acquisition company shares that elected to redeem such shares) and the Class A Common Stock issued as a result of the BOC PIPE investment (the “BOC PIPE”), the reclassification of the existing Sky Common Units (other than the Sky Incentive Units, as defined in Note 11), existing Sky Series A preferred units (the “Series A Preferred Units”) and Series B preferred units (the “Series B Preferred Units”) into Sky Common Units.

• Certain adjustments were affected to the number of Sky Incentive Units to reflect the new capital structure.

• SHG was appointed as the managing member of Sky under the Third Amended and Restated Operating Agreement (the “A&R Operating Agreement”).

• The Sky Common Units issued to the Sponsor in respect of Sky’s Series B Preferred Units were converted into 5,500,000 shares of Class A Common Stock of the Company.

• The LLC Interests received one share of Class B Common Stock for each Sky Common Unit that they held, and as consideration for the issuance of 14,937,581 Sky Common Units by Sky to the Company, Yellowstone contributed to Sky the net amount held in the Yellowstone trust account after deducting the amount required to fund the redemption of the Class A Common Stock held by eligible stockholders who properly elected to have their shares redeemed as of the Closing Date and the amount of various transaction costs.

• The Yellowstone Warrants that were issued and outstanding immediately prior to the Closing Date became SHG Warrants.

The following table reconciles the elements of the Yellowstone Transaction to the consolidated statements of changes in equity for the nine months ended September 30, 2022:

	Yellowstone Transaction
Cash - Yellowstone trust and cash, net of redemptions	$	15,691
Cash - BOC PIPE investment		45,000
Less: transaction costs and advisory fees		(12,731	)
Net proceeds from the Yellowstone Transaction	$	47,960
Conversion of Sky Series B preferred units to Class A Common Stock		54,029
Less: Initial fair value of Warrants liability assumed on 1/25/2022		(7,986	)
Net adjustment to total equity from the Yellowstone Transaction	$	94,003

Transaction costs and advisory fees of approximately $12.7 million includes $14.7 million of total transaction costs incurred at or around closing of the Yellowstone Transaction, $0.6 million of transaction costs paid prior to December 31, 2021, less $2.6 million of costs for insurance that was recorded within prepaid expenses and other assets on the Closing Date.

The following table reconciles the number of shares of SHG Common Stock immediately following the consummation of the Yellowstone Transaction:

	Number of shares
Yellowstone Common stock, outstanding prior to Yellowstone Transaction		13,598,898
Less: redemption of Yellowstone Common Stock		(12,061,041	)
Common stock of Yellowstone, net of redemptions		1,537,857
Shares held by Sponsor		3,399,724
Conversion of Sky Series B units to Class A Common Stock		5,500,000
Shares issued in BOC PIPE investment		4,500,000
Class A Common Stock outstanding after the Yellowstone Transaction		14,937,581
Class B Common Stock issued to LLC Interests		42,192,250
Total shares of common stock following the Yellowstone Transaction		57,129,831

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Tax Receivable Agreement

On the Closing Date, in connection with the completion of the Yellowstone Transaction and as contemplated by the Equity Purchase Agreement, the Company, Sky, the LLC Interests, and the TRA Holder Representative, entered into a tax receivable agreement (the “Tax Receivable Agreement”). Pursuant to the Tax Receivable Agreement, the Company will generally be required to pay the LLC Interests 85% of the amount of savings, if any, in U.S. federal, state, local, and foreign taxes that are based on, or measured with respect to, net income or profits, and any interest related thereto that the Company realizes, or is deemed to realize, as a result of certain tax attributes, including:

• existing tax basis in certain assets of Sky and certain of its direct or indirect subsidiaries, including assets that will eventually be subject to depreciation or amortization, once placed in service, attributable to Sky Common Units acquired by the Company from a TRA Holder, as determined at the time of the relevant acquisition;

• tax basis adjustments resulting from taxable exchanges of Sky Common Units (including any such adjustments resulting from certain payments made by the Company under the Tax Receivable Agreement) acquired by the Company from a TRA Holder pursuant to the terms of the A&R Operating Agreement; and

• tax deductions in respect of portions of certain payments made under the Tax Receivable Agreement (each of the foregoing, collectively, the “Tax Attributes”).

As of September 30, 2022, no transactions occurred that would result in a cash tax savings benefit that would trigger the recording of a liability under the terms of the Tax Receivable Agreement.

4. Cost of Construction and Constructed Assets

The Company’s portfolio as of September 30, 2022 includes the following development projects:

● 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).

Constructed assets, net, and cost of construction, consists of the following:

	September 30, 2022			December 31, 2021
Constructed assets, net of accumulated depreciation:
Buildings, SGR (Phase I)	$	15,079		$	15,079
Accumulated depreciation		(988	)		(579	)
	$	14,091		$	14,500
Cost of construction:
OPF; BNA; APA; DVT; ADS	$	66,654		$	25,034

Depreciation expense for the three months ended September 30, 2022 and 2021 totaled $135 and $135, respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 totaled $409 and $404, respectively.

5. Long-lived Assets

Long-lived assets, net, consists of the following:

	September 30, 2022			December 31, 2021
Equipment	$	841		$	200
Software		-			247
		841			447
Accumulated depreciation		(73	)		(38	)
	$	768		$	409

Depreciation expense for the nine months ended September 30, 2022 and 2021 totaled $38 and $22, respectively. Depreciation expense for the three months ended September 30, 2022 and 2021 totaled $13 and $8, respectively. As of September 30, 2022 and December 31, 2021, equipment included approximately $575 and $0, respectively, of purchase deposits towards ground support equipment which are not being depreciated as the assets have not been placed into service.

In June 2022, the Company evaluated the development progress related to its smart hangar app. This evaluation included the decision to abandon previous software development efforts and the transition of development efforts to a new third-party development company. In connection with this evaluation, the Company determined that previously capitalized software costs associated with the abandoned development were not recoverable and recognized an impairment loss of $248 during the nine months ended September 30, 2022.

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6. Supplemental Balance Sheet and Cash Flow Information

Prepaid expenses and other assets

In July 2022, the Company entered into a vendor agreement to acquire construction materials related to the Company's development projects (the “Vendor Agreement”). In connection with the Vendor Agreement, the Company entered into a revolving line of credit loan and security agreement (the "Vendor Loan Agreement"), whereby the Company agreed to provide up to $2.5 million of availability under a revolving credit line to fund the working capital requirements of the vendor, of which $2.0 million was loaned to the vendor during the three and nine months ended September 30, 2022. The Vendor Loan Agreement matures in July 2029 and initially bears interest at a rate of 5% per annum for the first year, and increases by 1% per annum each year on the anniversary date of the Vendor Loan Agreement until its maturity.

Accounts payable, accrued expenses and other liabilities

Accounts payable, accrued expenses and other liabilities, consists of the following:

	September 30, 2022		December 31, 2021
Costs of construction	$	9,678	$	3,450
Employee compensation and benefits		1,822		2,497
Interest		1,735		2,063
Professional Fees		1,785		2,048
Other		729		901
	$	15,749	$	10,959

Supplemental Cash Flow Information

The following table summarizes non-cash investing and financing activities:

	Nine months ended
	September 30, 2022		September 30, 2021
Accrued costs of construction, including capitalized interest	$	10,121	$	5,485
Accrued debt issuance costs		-		293
Accrued equity issuance costs		1,500		1,334
Debt issuance costs and premium amortized to cost of construction		228		920
Net gain on extinguishment of related party notes		-		5,371
Settlement of related party note payable by issuing equity		-		1,250

The following table summarizes non-cash activities associated with the Company’s operating leases:

	Nine months ended
	September 30, 2022			September 30, 2021
Right-of-use assets obtained in exchange for operating lease liabilities	$	2,876		$	25,847
Net decrease in right-of-use assets and operating lease liabilities due to lease remeasurement		(12,189	)		-

The following table summarizes interest paid:

	Nine months ended
	September 30, 2022		September 30, 2021
Interest paid	$	5,533	$	795

The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets to the total shown within the consolidated statements of cash flows:

	Nine months ended
	September 30, 2022		September 30, 2021
Cash, beginning of year	$	6,805	$	-
Restricted cash, beginning of year		197,130		72
Cash and restricted cash, beginning of year	$	203,935	$	72
Cash, end of period	$	730	$	9,481
Restricted cash, end of period		17,164		207,559
Cash and restricted cash, end of period	$	17,894	$	217,040

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7. Leases

Lessee

All of the Company’s leases are classified as operating leases under ASC Topic 842. Management has determined that it is reasonably certain that the Company will exercise its options to renew the leases, and therefore the renewal options are included in the lease term and the resulting ROU asset and operating lease liability balances. As the Company’s lease agreements do not provide a readily determinable implicit rate, nor is the rate available to the Company from its lessors, the Company uses its incremental borrowing rate to determine the present value of the lease payments.

The Company’s lease population does not include any residual value guarantees, and therefore none were considered in the calculation of the ROU and operating lease liability balances. The Company has operating leases that contain variable payments, most commonly in the form of common area maintenance and operating expense charges, which are based on actual costs incurred. These variable payments were excluded from the calculation of the ROU asset and operating lease liability balances since they are not fixed or in-substance fixed payments. These variable payments were not material in amount for both of the three and nine month periods ended September 30, 2022 and 2021. Some of the leases contain covenants that require the Company to construct the hangar facilities on the leased grounds within a certain period and spend a set minimum dollar amount. For one of the leases, the shortfall (if any) must be paid to the lessor. See Note 15.

The Company’s ground leases have remaining terms ranging between 26 to 74 years, including options for the Company to extend the terms. These leases expire between 2049 and 2097, which include all lease extension options available to the Company. Certain of the Company's ground leases contain options to lease additional parcels of land at the Company's option within a specified period of time.

The Company’s ground lease at OPF was entered into in May 2019 through its wholly owned subsidiary, Sky Harbour Opa Locka Airport LLC (“SHOLA”), with AA Acquisitions LLC (“AA”). AA is the master ground lessee of Miami Dade County (“MDC”), the ultimate landowner. On April 29, 2022, the Company, through a wholly-owned subsidiary outside the Obligated Group (as defined in Note 8), purchased AA’s underlying interest in the ground lease for approximately $8.5 million and now leases the OPF property directly from MDC (the “OPF Lease Transaction”). The OPF Lease Transaction also required the Company to pay approximately $1.0 million in assignment fees to MDC, which, along with the $8.5 million purchase price, were recognized as initial direct costs and presented as a component of right-of-use assets. Following the OPF Lease Transaction, SHOLA continues to be obligated under the existing sublease but to an affiliate within the Company. The OPF Lease Transaction extends the term of the lease at OPF for the Company to approximately 57 years. The Company has accounted for the OPF Lease Transaction as a lease modification requiring remeasurement and remeasured the right-of-use asset and operating lease liability utilizing the Company’s incremental borrowing rate as of the date of remeasurement. As a result of the remeasurement, non-cash subtractions to the right-of-use asset and operating lease liability of $12,289 were recorded during April 2022.

On January 1, 2021, the Company commenced an operating lease for a ground lease located at APA (“APA Lease”), with an initial lease term of 41 years (or up to 76 years including extension options). The APA Lease contains an option to lease an additional parcel of land (Phase II) that must be exercised, at the Company’s option, within three-years of the lease’s commencement date.

On May 4, 2021, the Company commenced an operating lease for a ground lease located at DVT (“DVT Lease”), with a lease term of 40 years. The DVT Lease contains an option to lease an additional parcel of land (Phase II) that must be exercised, at the Company’s option, within four-years of the lease’s commencement date.

On June 28, 2022, the Company commenced an operating lease for a ground lease located at ADS (“ADS Lease”). The ADS Lease term is 40 years from the completion of construction with no additional extension options, which is the maximum allowable term permitted by the Town of Addison.

In addition to the Company’s ground leases, the company has operating leases for office space and a ground support vehicle.

15

Supplemental consolidated cash flow information related to the Company’s leases was as follows: 

	Nine months ended
	September 30,		September 30,
	2022		2021
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases as lessee	$	1,384	$	831

Supplemental consolidated balance sheet information related to the Company’s leases was as follows: 

Weighted Average Remaining Lease Term	September 30, 2022			December 31, 2021
Operating leases as lessee (in years)		55.60			54.39
Weighted Average Discount Rate
Operating leases as lessee		4.6	%		4.4	%

The Company’s future minimum lease payments required under leases as of September 30, 2022 were as follows: 

Year Ending December 31,	Operating Leases
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

Lessor

The Company leases the hangar facilities that it constructs to third-party tenants. These leases have been classified as operating leases. The Company does not have any leases classified as sales-type or direct financing leases. Lease agreements with tenants are either on a month-to-month basis or have a defined term with an option to extend the term. The defined term leases vary in length from one to five years with options to renew for additional term(s) given to the lessee. One of the agreements contains an option by either party to terminate with appropriate notice, as defined. There are no options given to the lessee to purchase the underlying assets. The Company determines whether a contract contains a lease at the inception of the contract. 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 residual value guarantees. The Company mitigates risk related to the residual value of the assets by negotiating with current tenants and attempting to secure future tenants through letters of intent prior to the current lease term’s termination and/or the substantial completion of the promised hangar facilities that are presently under construction.

The leases may contain variable fees, most commonly in the form of tenant reimbursements, which are recoveries of the common area maintenance and operating expenses of the property and are recognized as income in the same period as the expenses are incurred. The leases did not have any initial direct costs. The leases do not contain any restrictions or covenants to incur additional financial obligations by the lessee.

Tenant leases to which the Company is the lessor require the following non-cancelable future minimum lease payments from tenants as of September 30, 2022:

Year Ending December 31,	Operating Leases
2022 (remainder of year)	$	443
2023		1,788
2024		824
2025		566
2026		-
Thereafter		-
Total lease payments		3,621
Less rent concessions to be applied at Company’s discretion		(214	)
Total	$	3,407

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8. Bonds payable, Loans payable and interest

Bonds payable

On May 20, 2021, Sky formed a new wholly-owned subsidiary, Sky Harbour Capital LLC, as a parent corporation to its wholly-owned subsidiaries that operate each of the aircraft hangar development sites under its ground leases. Sky Harbour Capital LLC and these subsidiaries form an Obligated Group (the “Obligated Group” or the “Borrowers”) under a series of bonds that were issued in September 2021 with a principal amount of $166.3 million (the “Series 2021 Bonds”). The members of the Obligated Group are jointly and severally liable under the Series 2021 Bonds. SHG and its other subsidiaries are not members of the Obligated Group and have no obligation to repay the bonds.

The Series 2021 Bonds are payable pursuant to a loan agreement dated September 1, 2021 between the Public Finance Authority (of Wisconsin) and the Borrowers. The payments by the Borrowers under the loan agreement are secured by a Senior Master Indenture Promissory Note, Series 2021-1 issued by the Obligated Group under an indenture (the “Master Indenture”). The obligations of the Borrowers are collateralized by certain leasehold and subleasehold deeds of trust or mortgages on the Borrowers’ interests in the development sites and facilities being constructed at each airport where the Borrowers hold ground leases. In addition, the Borrowers have assigned, pledged and granted a first priority security interest in all funds held under the Master Indenture and all right, title and interest in the gross revenues of the Borrowers. Furthermore, Sky, Sky Harbour Holdings LLC and Sky Harbour Capital LLC have each pledged as collateral its respective ownership interest in any of the Borrowers.

The bond trustee established various restricted bank accounts which were initially funded with the bond proceeds and cash on hand. The bond trustee will continue to control the Borrowers’ cash receipts and disbursements under a Trust Agreement. Such restricted funds are available to fund the construction expenditures of the two phases of OPF, BNA, DVT, and APA, and SGR Phase II, and, with certain approvals and supplemental reports, up to $50 million at other airport sites, in addition to certain operating expenses such as ground lease expense. These accounts also include funds to pay debt service through the end of construction at each site and various reserve funds such as a ramp-up reserve, debt service reserve, and a maintenance reserve fund. Such trust bank accounts total approximately $161.3 million, of which $16.0 million and $145.3 million and are included in Restricted cash and Restricted investments, respectively, on the consolidated balance sheet as of September 30, 2022.

The Borrowers have agreed to use all commercially reasonable efforts to jointly maintain a Debt Service Coverage Ratio (as defined in the agreement) of 1.25 for each applicable test period; provided, however, that the failure to maintain this ratio will not be considered an event of default so long as the Obligated Group takes all commercially reasonable action for correcting such deficiency. The measurement of the Debt Service Coverage Ratio will commence with the period ending December 31, 2024. If the Debt Service Coverage Ratio as of the end of any fiscal quarter is less than 1.0, the parent companies of the Borrowers will make contributions to the borrowers or otherwise cause the Debt Service Coverage Ratio to be at least 1.0 within 10 business days of the test date. If the Debt Service Coverage Ratio as of the end of any fiscal quarter is less than 1.25, Sky Harbour Capital LLC must deliver to the trustees, within 120 days, an independent consultant’s report and a specific plan designed to achieve a Debt Service Coverage Ratio of 1.25 in the following fiscal year.

The Series 2021 Bonds have principal amounts, interest rates, and maturity dates as follow: $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 the Company received bond proceeds that were $0.2 million above its face value. The bond premium is being amortized as a reduction of interest expense over the life of the bond. Interest is payable on each January 1 and July 1, commencing January 1, 2022. Principal repayments due under the Series 2021 Bonds are paid annually, commencing July 1, 2032.

The bonds maturing on July 1, 2036 are subject to optional early redemption, at the option of Sky Harbour Capital LLC, on or after July 1, 2028, in whole or in part, at a redemption price equal to the principal amount plus interest accrued to the redemption date. The bonds maturing on July 1, 2041 and July 1, 2054 are subject to optional early redemption, at the option of Sky Harbour Capital LLC, on or after July 1, 2031, in whole or in part, at a redemption price equal to the principal amount plus interest accrued to the redemption date. An extraordinary optional redemption is permitted in the event of damage or destruction of any of the underlying assets.

The Series 2021 Bonds are mandatorily redeemable upon the occurrence of certain events. Upon the sale of an asset by any Borrower, the applicable portion of the Series 2021 Bonds is subject to special mandatory redemption at prices specified in the agreement. Upon the occurrence of a determination of taxability in which the interest income of any of the bonds does not qualify as being excludable from the gross income of the holder (with limited exclusions), the Series 2021 Bonds are subject to mandatory redemption within 60 days, at a redemption price equal to the principal amount plus accrued interest. Upon the termination of any ground lease of a Borrower, and unless certain other certifications can be made, the Series 2021 Bonds are subject to redemption in an amount and at a redemption price as specified in the agreement. In lieu of redemption, the Bonds may be purchased by any of the Borrowers or by any party designated by Sky Harbour Capital LLC.

17

The following table summarizes the Company’s Bonds payable as of September 30, 2022 and December 31, 2021:

	September 30, 2022			December 31, 2021
Bonds payable:
Series 2021 Bonds Principal	$	166,340		$	166,340
Premium on bonds		249			249
Bond proceeds		166,589			166,589
Debt issuance costs		(4,753	)		(6,002	)
Accumulated amortization of debt issuance costs and bond premium		320			92
Total Bonds payable, net	$	162,156		$	160,679

In connection with the issuance of the Bonds Payable, the Company recognized debt issuance costs totaling $6 million which are being amortized into interest using the effective interest method over the life of the bonds. Interest that is incurred at the stated interest rate of the bonds, as well as the amortization of bond premium and amortization of debt issuance costs are capitalized and added to the cost of construction on the consolidated balance sheet. During the three months ended September 30, 2022, the Company received a refund of approximately $1.2 million of debt issuance costs associated with the issuance of the Bonds Payable, and recognized the refund as a reduction of debt issuance costs. See Interest, below.

Loans payable

In connection with two of its development projects, Sky had two secured construction loans that were outstanding through the loans’ respective payoff dates of August 11, 2021 and September 3, 2021.

Sky closed on a construction loan on August 28, 2019 for up to $16.7 million for the development of the SGR project (the “SGR Loan”). The loan bore interest at LIBOR (subject to a minimum of 2.2%) plus 6%, plus pay-in-kind (“PIK”) interest of 2% which was added to the principal amount. The SGR Loan was repaid on September 3, 2021, including all accrued and PIK interest.

On January 23, 2020, Sky closed on a construction loan for up to $46.0 million for the development of the OPF project (the “OPF Loan”). The loan bore interest at LIBOR (subject to a minimum of 1.669%) plus 6%, plus PIK interest of 2% which was added to the principal amount.  An amendment to the loan on March 12, 2021 increased the interest rate to LIBOR (subject to a minimum of 1.669%) plus 8%, plus PIK interest of 2% that was added to the principal amount. The OPF Loan was repaid on August 11, 2021, including all accrued and PIK interest.

Interest

The following table sets forth the details of interest expense:

	Three months ended						Nine months ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Interest	$	1,735		$	589		$	5,205		$	1,402
Amortization of bond premium and debt issuance costs		75			296			228			1,359
Total interest incurred		1,810			885			5,433			2,761
Less: capitalized interest		(1,810	)		(566	)		(5,433	)		(1,601	)
Interest expense	$	-		$	319		$	-		$	1,160

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9. Warrants

As part of Yellowstone’s initial public offering, Yellowstone issued to third-party investors 6,799,439 warrants which entitled the holder to purchase one share of Class A Common Stock at an exercise price of $11.50 per share (the “Public Warrants”). In addition, 7,719,779 private placement warrants were sold to the Sponsor (the “Private Placement Warrants”, and together with the Public Warrants, the “Warrants”). Each Private Warrant allows the Sponsor to purchase one share of Class A Common Stock at an exercise price of $11.50 per share. Following the Yellowstone Transaction, the Warrants remain outstanding under the same terms and conditions to purchase shares of the Company’s Class A Common Stock. As of September 30, 2022, 6,799,189 and 7,719,779 Public and Private Warrants remain outstanding, respectively.

The terms of the Private Warrants are identical to those of the Public Warrants, except for that so long as the Private Warrants are held by the Sponsor or its permitted transferees, they may be exercised on a cashless basis. The Warrants contain an exercise price of $11.50 per share and expire on January 25, 2027. The Company determined the fair value of its Public Warrants based on the publicly listed trading price as of the valuation date. Accordingly, the Public Warrants are classified as Level 1 financial instruments. As the terms of the Private Warrants are identical to those of the Public Warrants, the Company determined the fair value of its Private Warrants based on the publicly listed trading price of the Public Warrants as of the valuation date and have classified the Private Warrants as Level 2 financial instruments.

The closing price of the Public Warrants was $0.35 and $0.55 per warrant on September 30, 2022 and the Closing Date, respectively. The aggregate fair value of the Warrants was approximately $5.1 million and $8.0 million as of September 30, 2022 and the Closing Date, respectively. The Company recorded an unrealized gain of approximately $1.5 million during the three months ended September 30, 2022. During the nine months ended September 30, 2022, the Company recorded an unrealized gain of approximately $2.9 million, reflecting the change in fair value of the Warrants from the Closing Date through September 30, 2022.

10. Equity and Redeemable Equity

Prior to the Yellowstone Transaction

Sky and its members initially entered into a Limited Liability Company Agreement on February 12, 2018. This LLC agreement was subsequently amended and restated on March 12, 2021 (the “A&R Operating Agreement”), which was again amended and restated on September 14, 2021 (the “Second A&R Operating Agreement”). On January 25, 2022, in connection with the Yellowstone Transaction, Sky, its members, and SHG entered into the A&R Operating Agreement.

On March 12, 2021, there was a change in the ownership of Sky such that the former majority member no longer held an interest in Sky pursuant to a redemption agreement (the “Redemption Agreement”), and additional members invested in Sky pursuant to a unit purchase agreement (the “Unit Purchase Agreement”). Pursuant to the Unit Purchase Agreement, Sky’s former minority member (the “Founder”) received founder units of Sky (the “Founder Units”) and the new investors purchased a total of $31.3 million in Series A Preferred Units of Sky. Pursuant to a convertible note and exchange agreement dated March 12, 2021 (the “Convertible Note and Exchange Agreement”), a portion of the proceeds from the issuance of the Series A Preferred Units were used to fully satisfy outstanding note payable between Sky and a related party as described in Note 14.

On August 1, 2021, Sky entered into the Equity Purchase Agreement with Yellowstone. In conjunction with the Equity Purchase Agreement, Boston Omaha Corporation agreed to invest $55.0 million of equity in the form of Redeemable Series B Preferred Units through its affiliate BOC YAC Funding LLC (“BOC YAC”). On September 14, 2021 Sky issued 8,049 Series B Preferred Units to BOC YAC in exchange for the $55.0 million. The Series B Preferred Units contained redemption rights for both Sky and for the holders of the Series B Preferred Units under certain circumstances. Because the Series B Preferred Units were redeemable in cash, they were classified as Temporary Equity, between the Liabilities and Equity sections of the consolidated balance sheet as of December 31, 2021. They were carried at their net issuance price and not reflected at redemption value in the consolidated balance sheet because no Series B Preferred Units were redeemed between December 31, 2021 and January 25, 2022, the date such Units were automatically converted to the Company’s Class A Common Stock equal to the original $55.0 million investment at the conversion price of $10 per share.

Recapitalization

As of December 31, 2021, there were 31,250 Series A Preferred Units, 8,049 Series B Preferred Units, and 27,035 Founder Units authorized, issued and outstanding. As a result of the Reverse Recapitalization on the Closing Date, the Series A Preferred Units and Founder Units converted into 42,192,250 Sky Common Units and the LLC Interests received 42,192,250 shares of SHG’s Class B Common Stock. The Series B Preferred Units converted to 5,500,000 shares of SHG’s Class A Common Stock, and Sky issued 14,937,581 Sky Common Units to SHG, which was equivalent to the total number of shares of the SHG’s Class A Common Stock outstanding on the Closing Date.

As of September 30, 2022, there were 14,962,831 and 42,192,250 shares of Class A Common Stock and Class B Common Stock outstanding, respectively. Holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters submitted to the stockholders for their vote or approval, except as required by applicable law. Holders of Class A Common Stock and Class B Common Stock are entitled to one vote per share on all matters submitted to the stockholders for their vote or approval.

The holders of Class A Common Stock are entitled to receive dividends, as and if declared by the Company’s Board of Directors out of legally available funds. With respect to stock dividends, holders of Class A Common Stock must receive Class A Common Stock. The holders of Class B Common Stock do not have any right to receive dividends other than stock dividends consisting of shares of Class B Common Stock, as applicable, in each case paid proportionally with respect to each outstanding share of Class B Common Stock.

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Forward Purchase Agreement

On January 17, 2022, the Company entered into a forward purchase agreement (the “Forward Purchase Agreement”) with ACM ARRT VII E LLC (the “Counterparty”), pursuant to which the Counterparty had the right, but not the obligation, to purchase up to 7,000,000 shares of Class A Common Stock from shareholders who had redeemed shares, or indicated an interest in redeeming shares, prior to the closing of the Yellowstone Transaction. The Counterparty purchased 664,909 such shares and, immediately following the Closing Date, pursuant to the agreement, the Company paid to the Counterparty a forward price of approximately $6.7 million. The Counterparty also had the right to sell such shares to others during an 18-month term, terminating the Company’s forward purchase obligations, and repaying to the Company a portion of the forward price, in amounts corresponding to the number of shares sold. On March 7, 2022, the Counterparty notified the Company that it had sold the 664,909 shares covered by the agreement. As a result, a total of approximately $6.7 million was remitted to the Company by the Counterparty.

Common Stock Purchase Agreement

On August 18, 2022, the Company 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, subject to the conditions and limitations set forth therein, the Company has the right, but not the obligation, from time to time at the Company's sole discretion over a 36-month term of the Stock Purchase Agreement, to direct B. Riley to purchase up to 10 million shares of the Company's Class A Common Stock in the aggregate.

Under the Stock Purchase Agreement, on any trading day selected by the Company, the Company has the right, in its sole discretion, to present B. Riley with a purchase notice (each, a "VWAP Purchase Notice"), directly B. Riley (as principal) to purchase a specified amount of shares not to exceed the lesser of (i) one million shares of Common Stock and (ii) 20% of the total aggregate number (or volume) of shares of Class A Common Stock traded on the NYSE American at a price(the "VWAP Purchase Price") equal to the product of 0.97 and the VWAP of the Company's Class A Common Stock on the applicable date for each VWAP Purchase Notice, subject to certain limitations contained in the Stock Purchase Agreement. Sales of Class A Common Stock pursuant to the Stock Purchase Agreement, and the timing of any such sales, are solely at the discretion of the Company, and the Company is under no obligation to sell any securities to B. Riley under the Stock Purchase Agreement.

In consideration for entering into the Stock Purchase Agreement and concurrently with the execution of the Stock Purchase Agreement, the Company issued to B. Riley 25,000 shares of Class A Common Stock as initial commitment shares and will issue up to an aggregate of 75,000 shares of its Class A Common Stock as additional commitment shares if certain conditions and milestones are met. The Company recognized expense associated with the issuance of such commitment shares of $112 during the three and nine months ended September 30, 2022 based on the fair value of the Company's Class A Common Stock on the date of issuance.

Non-controlling interests

The LLC Interests’ ownership in Sky is presented as non-controlling interests within the Equity section of the consolidated balance sheet as of September 30, 2022 and represents the Sky Common Units held by holders other than SHG. The holders of LLC Interests may, following the expiration of an applicable lock-up period, exchange Sky Common Units along with an equal number of Class B Common Shares, for Class A Common Shares on the Company. The LLC Interests do not have the option to redeem their Sky Common Units for cash or a variable number of Class A Common Shares, nor does SHG have the option to settle a redemption in such a manner. As of September 30, 2022, the LLC interests owned approximately 73.9% of the Sky Common Units outstanding.

11. Equity Compensation

Restricted Stock Units (“RSUs”)

In May 2022, the Company granted time-based RSUs to certain employees under the Company’s 2022 Incentive Award Plan. A total of 721,000 of time-based awards were granted, which will vest ratably over a four-year period beginning on the first anniversary of the grant date and ending on May 16, 2026. During the three and nine months ended September 30, 2022, the Company recognized stock compensation expense of $298 and $458, respectively. As of September 30, 2022, there are approximately 631,000 non-vested RSUs outstanding with a weighted average grant date fair value of $7.74. The unrecognized compensation costs associated with all unvested RSUs at September 30, 2022 was $4,426.

Sky Incentive Units

In May 2021, Sky granted 3,951 Sky Incentive Units to certain employees. In connection with the Yellowstone Transaction and the execution of the Third A&R Operating Agreement, the number of existing Sky Incentive Units outstanding was adjusted based on a defined unit conversion ratio to reflect the new capital structure (see Note 10) and remain Sky Incentive Units, resulting in 2,807,750 outstanding Sky Incentive Units. These Incentive Units may be exchanged for Sky Common Units at the holder’s discretion upon vesting. There were no changes to the terms or conditions of the Sky Incentive Units effected by the Yellowstone Transaction. The Sky Incentive Units are classified as equity instruments.

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The Sky Incentive Units were valued as of the date of grant using the Option-Pricing Method described in the AICPA Accounting and Valuation Guide entitled Valuation of Privately Held Company Equity Securities Issued as Compensation. The Option-Pricing Method treated profit units (such as Sky Incentive Units) and the capital units outstanding at the time of the valuation (Sky’s Series A Preferred Units, Series B Preferred Units, and the Founder Units) as call options on the total equity value of Sky, with exercise (or strike) prices based on the incremental equity required to repay liquidation preferences for the various holders of Sky interests. The values of the options associated with each strike price were calculated using the Black-Scholes option pricing model based on the grant date. The Sky Incentive Units were classified as Level 3 in the fair value hierarchy. The key inputs and assumptions used in the valuation of the Sky’s Incentive Units were:

Fair value of total equity	$	62,287,970
Term (in years)		5
Risk-free interest rate		0.84	%
Volatility		57	%

Below is a summary of activity related to the Sky Incentive Units for the nine months ended September 30, 2022:

	Sky Incentive		Weighted-average grant
	Units		date fair value
Sky units outstanding as of December 31, 2021 (as previously presented)		3,951	$	318.44
Sky units outstanding as of December 31, 2021 (recast for recapitalization)		2,807,750	$	0.45
Granted		-		-
Forfeitures		-		-
Sky units outstanding as of September 30, 2022		2,807,750	$	0.45
Vested Units outstanding as of September 30, 2022		1,054,293	$	0.45
Non-vested Units outstanding as of September 30, 2022		1,753,457	$	0.45

The Company recognizes equity-based compensation expense on a straight-line basis over the requisite service period and has elected to account for forfeitures of Sky Incentive Units if and when they occur. The Company recorded equity-based compensation expense relating to Sky Incentive Units of $85 and $256 for the three and nine months ended September 30, 2022, respectively, which is recorded within General and Administrative Expenses within the statement of operations, and as a component of the non-controlling interest in the consolidated statement of changes in stockholders’ equity. The Company recorded equity-based compensation expense relating to Sky Incentive Units of $81 and $132 for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, there was $785 of total unrecognized compensation expense that is expected to be recognized over a weighted-average future period of 2.5 years.

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12. Earnings (loss) per Share

Basic earnings (loss) per share of Class A Common Stock is computed by dividing net income (loss) attributable to SHG by the weighted-average number of shares of Class A Common Stock outstanding during the period. Diluted net income (loss) per share of Class A Common Stock is computed by dividing net income (loss) attributable to SHG, adjusted for the assumed exchange of all potentially dilutive securities, by the weighted-average number of shares of Class A Common Stock outstanding adjusted to give effect to potentially dilutive shares using the treasury stock method.

Shares of the Company’s Class B Common Stock do not participate in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B Common Stock under the two-class method has not been presented. For the three and nine months ended September 30, 2021, the membership structure of Sky solely included holders of Sky Common Units that received an equivalent number of Class B Common Stock following the Yellowstone Transaction, and there were no holders that received Class A Common Stock. As the shares of Class B Common Stock are not participating securities, presentation of net loss per share for the three and nine month periods ended September 30, 2021 would not be meaningful to the users of these condensed consolidated financial statements, and such information has not been presented.

		Three Months Ended			Nine Months Ended
		September 30, 2022			September 30, 2022
Numerator:
Net loss	$	(3,092	)	$	(12,343	)
Less: Net loss attributable to non-controlling interests		(2,479	)		(8,632	)
Basic and diluted net loss attributable to Sky Harbour Group Corporation shareholders	$	(613	)	$	(3,711	)
Denominator:
Basic and diluted weighted average shares outstanding		14,949			13,628
Loss per share of Class A Common Stock – Basic and diluted	$	(0.04	)	$	(0.27	)

Potentially dilutive shares associated with the outstanding Warrants were antidilutive for the three and nine months ended September 30, 2022 due to the Company’s net loss position. Thus, 14,518,968 shares issuable upon the exercise of the Warrants were excluded from the calculation of diluted weighted average shares outstanding and diluted loss per share for the three and nine months ended September 30, 2022. 631,000 antidilutive shares associated with the Company's restricted stock units were excluded from the calculation for the three and nine months ended September 30, 2022 due to the Company's net loss position.

13. Financial Instruments

The following table summarizes the carrying value, estimated fair value and classification of our financial instruments as of:

	September 30, 2022
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	730	$	730	$	730	$	-	$	-
Restricted cash		17,164		17,164		17,164		-		-
Investments		29,765		29,765		29,765		-		-
Restricted investments		145,322		142,836		142,836		-		-
	$	192,981	$	190,495	$	190,495	$	-	$	-
Liabilities
Bonds payable	$	162,156	$	131,151	$	-	$	131,151	$	-
Warrants liability		5,082		5,082		2,380		2,702		-
	$	167,238	$	136,233	$	2,380	$	133,853	$	-

	December 31, 2021
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	6,805	$	6,805	$	6,805	$	-	$	-
Restricted cash		197,130		197,130		197,130		-		-
	$	203,935	$	203,935	$	203,935	$	-	$	-
Liabilities
Bonds payable	$	160,679	$	173,093	$	-	$	173,093	$	-
	$	160,679	$	173,093	$	-	$	173,093	$	-

The fair value of the Company’s investments and restricted investments is estimated utilizing Level 1 inputs including prices for U.S. Treasury securities with comparable maturities on active markets. The fair value of the Company’s bonds is estimated utilizing Level 2 inputs including prices for the bonds on inactive markets. See Note 9 for discussion regarding the estimation of the fair value of the warrants. The carrying values of all other financial instruments on the consolidated balance sheets, approximate their fair values due to the short-term nature of these instruments.

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14. Related Party Transactions

Loans payable to Related parties

Sky previously was party to a loan from a company owned by its former majority member. The loan payable bore interest at an annual rate of 5.50% and all interest was PIK interest. On March 12, 2021, pursuant to a Redemption Agreement between Sky and the former majority member, the loan was cancelled and all of the membership interests held by the former majority member were redeemed in exchange for a sum of $5.1 million, plus a Reimbursement and Indemnity Agreement from Sky and the Founder and CEO. Sky recorded a gain on extinguishment of this related party loan payable of $5.6 million, net of related expenses of $0.15 million and net of redemption of membership interests. The gain was recognized as a deemed contribution to stockholders’ equity on the consolidated balance sheet. Interest incurred on the loan payable to for the three and nine months ended September 30, 2021 totaled $0 and $120, respectively.

Beginning in November 2020, Sky entered into a note payable with a related party, SH Investment Fund I LLC, a company controlled by the Founder and CEO. The note payable bore interest at 8% per annum and had a maturity date of November 24, 2021. Amounts payable under the note were drawn by requesting “advances” from the lender, up to $1,000,000, and could be used by Sky only for certain types of expenditures that were approved in advance by the lender. On March 12, 2021, Sky issued 1,250 Series A Preferred Units in full satisfaction of the note payable by the Sky to SH Investment Fund I LLC. The fair value of the 1,250 units was $1.25 million and exceeded the carrying value of the $1.0 million note payable at the time of extinguishment; thereby resulting in a loss on extinguishment of related party debt of $0.25 million which was recorded as a charge in the consolidated statement of operations.

Services

For the three and nine months ended September 30, 2022, the Company paid $40 and $85 respectively, for consulting services, to a company that employed the chief financial officer until prior to July 1, 2021. The Company paid $30 and $92 during the three and nine months ended September 30, 2021 to the same company.

On September 20, 2021, the Company entered into a non-exclusive agreement with Echo Echo, LLC, a related party to the Founder and CEO, for the use of a Beechcraft Baron G58 aircraft. The effective date of the agreement was September 8, 2021 and the agreement automatically renews annually. The agreement can be terminated without penalty if either party provides 35 days written notice, or if the aircraft is sold or otherwise disposed of. The Company is charged per flight hour of use along with all direct operating costs. Additionally, the Company will also incur the pro rata share of maintenance, overhead and insurance costs of the aircraft. For the three and nine months ended September 30, 2022, the Company recognized $50 and $134 of expense, respectively, within General and administrative expense under the terms of this agreement, and the related liability is included in Accounts payable, accrued expenses and other liabilities on the consolidated balance sheet as of September 30, 2022.

15. Commitments and Contingencies

In addition to the lease payment commitments discussed in Note 7, the ground leases to which the Company is a party contain covenants that require the Company to conduct construction of hangar facilities on the leased grounds within a certain period and in some cases, to spend a minimum dollar amount.

With respect to the Company’s SGR Phase II project, the Company is subject to requirements that define (i) a minimum improvement amount of $2.0 million and (ii) that related construction commence by October 2023. If these conditions are not met or otherwise waived or amended, the ground lease for the parcels designated for the SGR Phase II project will automatically terminate.

The APA Lease requires the Company to improve the property in accordance with a development plan included in the lease and to complete such improvements within 24-months of the issuance of permitting documents. The APA Phase I project is still in the permitting phase.

The DVT Lease requires approximately $15.3 million and $14.6 million of improvements to be made for Phase I and for Phase II, if such option is exercised, respectively, within 12-months after receiving permitting documents for each Phase, but in no event later than May 2026. The Company is still in the permitting phase of its DVT Phase I project.

The Company has committed to spend $10.0 million in capital improvements on the ADS construction project. If this amount is not expended, the Company is subject to a reduction of the term of the lease.

The Company has contracts for construction of the OPF Phase I project and the BNA project. The Company may terminate either of the contracts or suspend construction without cause; however, the Company would be subject to paying a penalty under the OPF construction contract of 50% of the unrealized fee which remains to be earned as of the termination date. There is no termination penalty under the BNA construction contract.

16. Accumulated Other Comprehensive Loss

The following table summarizes the components of Accumulated other comprehensive income (loss):

	Unrealized loss on Available-for-sale Securities		Total
Balance as of December 31, 2021	$	-	$	-
Other comprehensive loss		231		231
Balance as of September 30, 2022	$	231	$	231

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. 

Cautionary Note 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 future financial performance, including the Company’s future business plans or objectives, prospective performance and commercial opportunities and competitors, services, pricing, marketing plans, operating expenses, market trends, revenues, liquidity, cash flows and uses 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 availability of construction materials and labor for our development projects;

• our limited operating history makes it difficult to predict future revenues and operating results;

• our ability to implement our construction costs mitigation strategies;

• changes in applicable laws or regulations;

• the possibility that the Company may be adversely affected by other economic, 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 either in development or ongoing operations, the company is targeting fourteen additional airfields in the current growth phase, and an additional 30 in the next.

The table below presents certain information with respect to our portfolio as of 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 - 295.1	80	1,098,112

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

Recent Developments

On June 28, 2022, we entered into an operating lease for a ground lease located at ADS (“ADS Lease”). The ADS Lease term is 40 years from the completion of construction with no additional extension options, which is the maximum allowable term permitted by the Town 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 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. 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.

Construction Material Costs 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 Requirements 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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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 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 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

Three Months Ended 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, 2022			September 30, 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 increased $29, or 7%, primarily as a result of additional tenant leases commencing at SGR during 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

Nine months ended 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, 2022			September 30, 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, 2022, as compared to the nine months ended September 30, 2021. The increase reflects the placement of additional ground support equipment into service 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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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 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, 2022		December 31, 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 Stock 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 the Series 2021 PABs are held in reserve as restricted 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 30, 2022			September 30, 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business and investment objectives, we expect that the primary market risk to which we will be exposed is interest rate risk. Following the issuance of the PABs, all of our indebtedness is now fixed rate debt. However, we may enter into variable rate debt agreements in the future, in which case we intend to hedge against rising benchmark interest rates by entering into hedging strategies with high quality counterparties.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is not currently a party to any material legal proceedings.

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our 2021 Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

(a) See accompanying Exhibit Index included before the signature page of this report for a list of exhibits filed or furnished with this report.

		Incorporated by Reference
Exhibit Number	Description	Schedule/ Form	File No.	Exhibit	Filing Date
3.1	Second Amended and Restated Certificate of Incorporation of Yellowstone Acquisition Company.	8-K	001-39648	3.1	January 31, 2022
3.2	Bylaws of Sky Harbour Group Corporation.	8-K	001-39648	3.2	January 31, 2022
10.1	Common Stock Purchase Agreement, dated as of August 18, 2022, by and between Sky Harbour Group Corporation and B. Riley Principal Capital II, LLC.	8-K	001-39648	10.1	August 19, 2022
10.2	Registration Rights Agreement, dated as of August 18, 2022, by and between Sky Harbour Group Corporation and B. Riley Principal Capital II, LLC.	8-K	001-39648	10.2	August 19, 2022

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31.1 (#)	Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
31.2 (#)	Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
32.1 (##)	Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
32.2 (##)	Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.

101.INS (#)	Inline XBRL Instance Document.
101.SCH (#)	Inline XBRL Taxonomy Extension Schema Document.
101.CAL (#)	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF (#)	Inline XBRL Taxonomy Extension Definition.
101.LAB (#)	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE (#)	Inline XBRL Taxonomy Presentation Linkbase Document.

104 (#) Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.

(#)

Filed herewith.

(##)

The certifications attached as Exhibits 32.1 and 32.2 that accompany this Report, are not deemed filed with the SEC and are not to be incorporated by reference into any filing of Sky Harbour Group Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report irrespective of any general incorporation language contained in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SKY HARBOUR GROUP CORPORATION (Registrant)
By:	/s/ Tal Keinan
Tal Keinan Chief Executive (Principal Executive Officer)
November 10, 2022
By:	/s/ Francisco Gonzalez
Francisco Gonzalez Chief Financial Officer (Principal Financial Officer)
November 10, 2022
By:	/s/ Michael W. Schmitt
Michael W. Schmitt Chief Accounting Officer (Principal Accounting Officer)
November 10, 2022

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