Sky Harbour Group Corp: Form 10-Q for the period ended Jun 30, 2024

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, 2023, filed with the Securities Exchange Commission (the “SEC”) on March 27, 2024 (the “Form 10-K”), which is accessible on the SEC’s website at www.sec.gov (http://www.sec.gov).

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

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

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

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

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

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

We seek to develop our home basing hangar campuses on long-term ground leases (or sub-leases thereof) at airports with suitable infrastructure serving metropolitan centers across the United States. We lease each of our properties under long-term ground leases.

The table below presents certain information with respect to our portfolio as of June 30, 2024.

• Addison Airport (“ADS”), Addison, TX (Dallas area);
• Bradley International Airport (“BDL”), Windsor Locks, CT (Hartford area);
• Centennial Airport (“APA”), Englewood, CO (Denver area);
• Chicago Executive Airport (“PWK”), Wheeling, IL (Chicago area);
• Hudson Valley Regional Airport (“POU”), Wappingers Falls, NY (New York area);
• Miami-Opa Locka Executive Airport (“OPF”), Opa Locka, FL (Miami area);
• Nashville International Airport (“BNA”), Nashville, TN;
• Orlando Executive Airport (“ORL”), Orlando, FL;
• Phoenix Deer Valley Airport (“DVT”), Phoenix, AZ;
• San José Mineta International Airport (“SJC”), San Jose, CA; and
• Sugar Land Regional Airport (“SGR”), Sugar Land, TX (Houston area); and
• Washington Dulles International Airport (“IAD”), Dulles, VA (Washington, DC area).

PROPERTIES IN OPERATION

PROPERTIES IN DEVELOPMENT

(1) Our projections associated with the commencement and completion of construction, estimated total construction cost, hangars, and rentable square footage of our properties in development are inherently subjective and require judgement to estimate. We believe that our estimates of construction costs and timelines are subject to variability based on various factors including, but not limited to, changes in anticipated site plans, hangar mix, hangar specifications, executed guaranteed maximum price construction contracts, and general market conditions.

(2) We have not yet formed preliminary estimates regarding the projected construction timeline, total construction costs, or hangar mix associated with our POU Phase II development project.

24

Recent Developments

In May 2024, we entered into the IAD Lease at IAD with MWAA. The IAD Lease covers approximately 18 acres of property at IAD. The initial term of the IAD Lease will be approximately 50 years and expire on March 31, 2074, and contains an option exercisable by us to extend the IAD Lease an additional 10 years following the expiration of the initial term. The IAD Lease requires us to commence construction related to IAD Phase II within five years of the receipt of the certificate of occupancy for IAD Phase I.

In August 2024, we entered into the SLC Lease at SLC with the Salt Lake City Corporation. The SLC Lease covers approximately 8.4 acres of property at SLC. The initial term of the SLC Lease will be 30 years from the earlier of certificate of occupancy or 24 months from the expiration of the diligence period, as defined in the SLC Lease, with lease payments commencing contemporaneously with the term. The SLC Lease contains two options exercisable by us to extend the SLC Lease for an additional 20 years following the expiration of the initial term. Under the terms of the SLC Lease, we are required to make minimum capital improvements of $40 million.

Factors That May Influence Future Results of Operations

Revenues

Our revenues are derived from rents we earn pursuant to the lease agreements we enter into with our tenants. Our ability to expand through new ground leases and tenant leases at airports is integral to our long-term business strategy and requires that we identify and consummate suitable new ground leases or investment opportunities in real estate properties for our portfolio that meet our investment criteria and are compatible with our growth strategy. Our ability to enter into new ground leases and tenant leases on favorable terms, or at all, may be adversely affected by a number of factors. We believe that the business environment of the industry segments in which our tenants operate is generally positive for tenants. However, our existing and potential tenants are subject to economic, regulatory and market conditions that may affect their level of operations and demand for hangar space, which could impact our results of operations. For example, during the year ended December 31, 2023, a tenant renting two hangars at OPF made the determination that it was necessary to change its business plans in the greater Miami market, which ultimately resulted in the negotiated settlement of the tenant’s lease with us and their exit from our OPF hangar campus. Accordingly, we actively monitor certain key factors, including changes in those factors (fuel prices, new aircraft deliveries, hangar rental rates) that we believe may provide early indications of conditions that may affect the level of demand for new leases and our lease portfolio. See “—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 six months ended June 30, 2024 and 2023, our operating lease expense for ground leases was $3.5 million and $1.8 million, respectively. We elect to expense rather than capitalize ground lease expense incurred at hangar campus sites under development and will incur expense under U.S. GAAP regardless of whether our ground leases defer cash rent payments until completion of construction. As we enter into new ground leases at new airport sites, our ground lease expense and associated cash payments to airport landlords will ultimately continue to increase into the future. If airport landlords increase the per acre cost of the ground lease of our target campuses, the operating margins at potential target developments may be impacted negatively.

Interest Expense

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

General and Administrative Expenses

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

Construction Material Costs and Labor

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

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

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

Current Capital Requirements and Future Expenditures for Expansion

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

We previously raised equity capital, along with potential future debt and further equity issuances, including the Private Placement Purchase Agreement entered into on November 1, 2023, see Liquidity and Capital Resources — Private Placement and Securities Purchase Agreement below, to begin to fund additional airport campuses and reach up to 20 airport campuses over the next several years. We also have the ability to access the capital markets through our ATM Facility and through our effective shelf registration statement on Form S-3. On average, each future campus is anticipated to be composed of at least 200,000 rentable square feet and is expected to cost approximately $55 million per campus, with 60% or more to be funded with additional private activity bonds or other indebtedness. All future hangar campus projects are discretionary and require us to identify the appropriate airports with the target hangar demand economics, secure required ground leases and permits, and complete future construction at such sites.

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

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:

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 the fair value of financial instruments such as warrants, estimates and assumptions related to right-of-use assets and operating lease liabilities, and estimates and assumptions used in the determination of the fair value of assets acquired and liabilities assumed in the business combination. Actual results could differ materially from those estimates.

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

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

Revenue Recognition

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

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

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.

Results of Operations

Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023

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

Revenues

Revenues for the three months ended June 30, 2024 were approximately $3.6 million, compared to approximately $1.7 million for the three months ended June 30, 2023. The $1.9 million, or 109%, increase was primarily the result of the commencement of operations at SJC during the three months ended June 30, 2024 and the impact of increased occupancy at our BNA and OPF hangar campuses. Revenue associated with our delivery of aircraft fuel increased approximately $0.4 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Operating Expenses

Operating expenses increased approximately $1.6 million, or 95%, for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. The increase in operated expense is primarily reflective of increased ground lease expense, which increased approximately $1.3 million for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. The increase in ground lease expense was driven primarily by a full quarter of expense associated with the ground lease signed at SJC during the three months ended March 31, 2024. The increase in ground lease expense was also driven by the ground leases signed at PWK, BDL, and POU during the three months ended December 31, 2023, ORL during the three months ended March 31, 2024, and IAD during the three months ended June 30, 2024. Salaries, wages, and benefits associated with our campus personnel increased by approximately $0.2 million, primarily driven by a headcount increase associated with the commencement of operations at our SJC hangar campus. Other operating expenses increased by approximately $0.1 million, primarily driven by increased utility, insurance, and other start-up expenses associated with the commencement of operations at our SJC hangar campus.

Depreciation Expense

Depreciation increased approximately $0.1 million, or 21%, for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. The increase was driven by the placement of additional ground support equipment into service throughout 2023 and 2024 and a full quarter of depreciation related to Rapidbuilt, which was acquired during the three months ended June 30, 2023.

General and Administrative Expenses

For the three months ended June 30, 2024, and 2023, general and administrative expenses were approximately $4.6 million and $3.7 million, respectively. The approximately $0.9 million, or 23%, increase was primarily due to an approximately $0.9 million increase in salaries, wages, and other benefits, driven by an increase in corporate headcount and expense recognized associated with our equity compensation programs. Headcount and compensation expenses increased approximately $0.4 million and non-cash equity compensation expense increased approximately $0.5 million.

Other (Income) Expense

Other income increased from approximately $2.6 million to approximately $9.1 million for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. This increase was primarily due to an approximately $5.6 million difference in the mark-to-market adjustment of the outstanding warrants at June 30, 2024 as compared to June 30, 2023. The increase was also partially due to an approximately $1.0 million increase in other income, primarily due to interest earned on our investments in U.S. Treasuries classified as available for sale.

Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023

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

Revenues

Revenues for the six months ended June 30, 2024 were approximately $6.0 million, compared to approximately $2.8 million for the six months ended June 30, 2023. The $3.2 million, or 112%, increase was primarily the result of the commencement of operations at our SJC hangar campus and the cumulative impact of certain additional tenant leases in place at our BNA and OPF hangar campuses as compared to the six months ended June 30, 2023. The commencement of operations at our SJC hangar campus together with the increase in occupancy at our OPF and BNA hangar campuses for the six months ended June 30, 2024 as compared to June 30, 2023 resulted in increased rental revenues of approximately $2.6 million. Revenue associated with our delivery of aircraft fuel increased approximately $0.6 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Operating Expenses

Operating expenses increased approximately $1.9 million, or 55%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The increase in operated expense is primarily reflective of increased ground lease expense, which increased approximately $1.7 million for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The increase in ground lease expense was driven primarily by a full quarter of expense associated with the ground lease signed at SJC during the three months ended March 31, 2024. The increase in ground lease expense was also driven by new ground leases signed at PWK, BDL, and POU during the three months ended December 31, 2023 and at ORL and IAD during the six months ended June 30, 2024. Salaries, wages, and benefits associated with our campus personnel increased by approximately $0.2 million, primarily driven by a headcount increase associated with the commencement of operations at our SJC hangar campus.

Depreciation Expense

Depreciation increased approximately $0.3 million, or 30%, for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The increase reflects a full six months of depreciation associated with our OPF hangar campus, which opened during the six months ended June 30, 2023. The increase was also partially driven by the placement of additional ground support equipment into service throughout 2023 and 2024 and a full six months of depreciation related to Rapidbuilt, which was acquired during the six months ended June 30, 2023.

General and Administrative Expenses

For the six months ended June 30, 2024, and 2023, general and administrative expenses were approximately $9.5 million and $7.3 million, respectively. The approximately $2.2 million, or 31%, increase was primarily due to an approximately $2.2 million increase in salaries, wages, and other benefits, driven by an increase in corporate headcount and expense recognized associated with our equity compensation programs. Headcount and compensation expenses increased approximately $1.2 million, and non-cash equity compensation expense increased approximately $1.0 million.

Other (Income) Expense

Other expense increased from approximately $1.5 million to approximately $6.9 million for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. This increase was primarily due to an approximately $6.4 million difference in the mark-to-market adjustment of the outstanding warrants at June 30, 2024 as compared to June 30, 2023. The increase was also partially due to an approximately $1.0 million increase in other income, primarily due to interest earned on our investments in U.S. Treasuries classified as available for sale.

Liquidity and Capital Resources

Overview

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

We believe that we have access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional private activity bonds and other debt and the issuance of additional equity securities. We also have the ability to utilize our $100 million ATM Facility or otherwise utilize our registration statement on Form S-3 to access the capital markets. However, as we have recently become a publicly-traded company, we cannot assure you that we will have access to these sources of capital or that, even if such sources of capital are available, that these sources of capital will be available on favorable terms. Our ability to incur additional debt will depend on multiple factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that are or may be imposed by future lenders. Our ability to access the equity and debt capital markets will depend on multiple factors as well, including general market conditions for real estate companies, our degree of leverage, the trading price of our common stock and debt and market perceptions about our Company.

Our cash deposits may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and the majority are maintained with a major financial institution with reputable credit. Our restricted cash is held in trust at a major financial institution pursuant to the Series 2021 Bonds indenture. We monitor the relative credit standing of financial institutions with whom we transact and limit the amount of credit exposure with any one entity. Our portfolio of investments and restricted investments is composed entirely of U.S. Treasury securities as of June 30, 2024.

The following table summarizes our cash and cash equivalents, restricted cash, investments, and restricted investments as of June 30, 2024 and December 31, 2023 (in thousands):

Private Placement and Securities Purchase Agreement

On November 1, 2023, we entered into a Securities Purchase Agreement (the “Private Placement Purchase Agreement”) with certain investors (collectively, the “Investors”), pursuant to which we (i) sold and issued to the Investors on November 2, 2023 an aggregate of 6,586,154 shares (the “Initial PIPE Shares”) of our Class A Common Stock and accompanying warrants to purchase up to 1,141,600 shares of Class A Common Stock (the “Initial PIPE Warrants”), for an aggregate purchase price of $42.8 million (the “Initial Financing”), and (ii) sold and issued to the Investors on November 29, 2023 an aggregate of 2,307,692 shares of our Class A Common Stock (the “Additional PIPE Shares” and, together with the Initial PIPE Shares, the “PIPE Shares”) and accompanying warrants to purchase an aggregate of 400,000 shares of Class A Common Stock (the “Additional PIPE Warrants” and, together with the Initial PIPE Warrants, the “PIPE Warrants”) for an aggregate purchase price of $15.0 million. Together with the Initial Financing, the aggregate PIPE financing through the Private Placement Purchase Agreement totaled approximately $57.8 million.

At-the-Market Facility

On March 27, 2024, we entered into an At Market Issuance Sales Agreement (the “ATM Agreement”) with B. Riley Securities, Inc. (“B. Riley”) with respect to an “at the market” offering program (the “ATM Facility”), under which we may, from time to time, at our sole discretion, issue and sell through B. Riley, acting as sales agent, up to $100 million of shares of Class A Common Stock. Pursuant to the ATM Agreement, we may sell the shares through B. Riley by any method permitted that is deemed an “at the market” offering as defined in Rule 415 under the Securities Act. B. Riley will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the shares from time to time, based upon instructions from us, including any price or size limits or other customary parameters or conditions we may impose. We will pay B. Riley a commission of 3.0% of the gross sales price per share sold under the ATM Agreement, subject to certain reductions. During the three and six months ended June 30, 2024, we sold 7,407 shares of Class A Common Stock under the ATM Facility at a weighted-average sales price of $12.42.

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

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.

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 June 30, 2024, we were in compliance with all debt covenants.

Lease Commitments

The table below sets forth certain information with respect to our future minimum lease payments required under leases as of June 30, 2024 (in thousands):

Contractual Obligations

The following table sets forth our contractual obligations as of June 30, 2024 (in thousands):

Funds to meet interest payments through the first half of 2025 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

The following table summarizes our sources and uses of cash for the six months ended June 30, 2024 and 2023 (in thousands):

Operating Activities

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

Net cash used in operating activities was approximately $5.5 million for the six months ended June 30, 2024, as compared to cash used in operating activities of approximately $5.7 million for the same period in 2023. The $0.2 million decrease in cash used in operating activities was primarily attributable to an approximately $2.1 million decrease in net loss, net of non-cash adjustments. The decrease in net loss, net of non-cash adjustments was primarily driven by an increase in rental revenue and the impact of increases in non-cash operating lease expense and equity-based compensation expense. The decrease was offset by an approximately $1.9 million unfavorable change in the Company's working capital position, which was primarily driven by the timing of vendor payments and tenant receipts.

Investing Activities

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

Net cash provided by investing activities was approximately $54.4 million for the six months ended June 30, 2024, as compared to cash used in investing activities of approximately $16.4 million for the same period in 2023. The increase of approximately $70.8 million of cash provided by investing activities was driven primarily by increases of approximately $142.3 million and $18.0 million in proceeds received from the Company's available for sale and held-to-maturity investments, respectively, and approximately $53.0 million and $6.1 million of decreases in purchase of held-to-maturity investments and capital expenditures, respectively. The increase was offset by an increase of approximately $148.8 million of available for sale U.S. Treasury purchases for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.

Financing Activities

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

Net cash provided by financing activities was approximately $1.0 million for the six months ended June 30, 2024, as compared to net cash used in financing activities of nearly $0 for the same period in 2023. The approximately $1.0 million increase in net cash provided by financing activities was primarily driven by $2.9 million of proceeds received from the exercise of Warrants during the six months ended June 30, 2024, offset by increases of approximately $0.9 million and $0.9 million in payments associated with vested equity awards and loan principal payments, respectively.

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

In connection with the preparation of this Form 10-Q, 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 June 30, 2024. 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 three months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.