References in this report (the "Quarterly Report") to "we," "us" or the
"Company" refer to Pono Capital Corp. References to our "management" or our
"management team" refer to our officers and directors, and references to the
"Sponsor" refer to Mehana Equity LLC. The following discussion and analysis of
the Company's financial condition and results of operations should be read in
conjunction with the condensed consolidated financial statements and the notes
thereto contained elsewhere in this Quarterly Report. Certain information
contained in the discussion and analysis set forth below includes
forward-looking statements that involve risks and uncertainties.
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes "forward-looking statements" that are not
historical facts and involve risks and uncertainties that could cause actual
results to differ materially from those expected and projected. All statements,
other than statements of historical fact included in this Quarterly Report
including, without limitation, statements in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position, business strategy and the plans and objectives of
management for future operations, are forward-looking statements. Words such as
"expect," "believe," "anticipate," "intend," "estimate," "seek" and variations
and similar words and expressions are intended to identify such forward-looking
statements. Such forward-looking statements relate to future events or future
performance, but reflect management's current beliefs, based on information
currently available. A number of factors could cause actual events, performance
or results to differ materially from the events, performance and results
discussed in the forward-looking statements. For information identifying
important factors that could cause actual results to differ materially from
those anticipated in the forward-looking statements, please refer to the Risk
Factors section of the Company's annual report on Form 10-K filed with the U.S.
Securities and Exchange Commission (the "SEC"). The Company's securities filings
can be accessed on the EDGAR section of the SEC's website at www.sec.gov. Except
as expressly required by applicable securities law, the Company disclaims any
intention or obligation to update or revise any forward-looking statements
whether as a result of new information, future events or otherwise.
Overview
We are a blank check company incorporated in Delaware on February 12, 2021. We
were formed for the purpose of effecting a merger, capital stock exchange, asset
acquisition, stock purchase, reorganization or similar business combination with
one or more businesses (the "Business Combination"). We are an emerging growth
company and, as such, the Company is subject to all of the risks associated with
emerging growth companies. We intend to effectuate our Business Combination
using cash from the proceeds of the Initial Public Offering and the sale of the
Private Warrants, our capital stock, debt or a combination of cash, stock and
debt.
We expect to continue to incur significant costs in the pursuit of our
acquisition plans. We cannot assure you that our plans to raise capital or to
complete our initial Business Combination will be successful.
On March 17, 2022, we entered into an Agreement and Plan of Merger (the "Merger
Agreement"), by and among Pono, Pono Merger Sub, Inc., a Delaware corporation
and wholly-owned subsidiary of Pono ("Merger Sub"), Benuvia, Inc., a Delaware
corporation ("Benuvia"), Mehana Equity, LLC, in its capacity as Purchaser
Representative, and Shannon Soqui, in his capacity as Seller Representative.
Pursuant to the Merger Agreement, at the closing of the transactions
contemplated by the Merger Agreement (the "Closing"), Merger Sub was to merge
with and into Benuvia, with Benuvia continuing as the surviving corporation (the
"Surviving Corporation").
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As consideration for the Merger, the holders of Benuvia securities collectively
were entitled to receive from us, in the aggregate, a number of our securities
with an aggregate value equal to (the "Merger Consideration") (a) Four Hundred
Million U.S. Dollars ($400,000,000) minus (b) the amount by which the aggregate
amount of any outstanding indebtedness (minus cash held by Benuvia) of Benuvia
at Closing (the "Closing Net Indebtedness") exceeds Forty Million Dollars
($40,000,000), and minus (c) the value of the options of Benuvia held by
employees and consultants that are vested at the Closing that are assumed by us
("Vested Options"), with each Benuvia stockholder receiving, for each share of
Benuvia common stock held, a number of shares of our common stock equal to (i)
the Per Share Price, divided by (ii) $10.00 (the total portion of the Merger
Consideration amount payable to all Benuvia Stockholders in accordance with the
Merger Agreement is also referred to herein as the "Stockholder Merger
Consideration").
The Merger Consideration otherwise payable to Benuvia stockholders was subject
to the withholding of two escrows: (i) a number of shares of our common stock
equal to five percent (5.0%) of the Merger Consideration to be placed in escrow
for post-closing adjustments (if any) to the Merger Consideration and (ii) a
number of shares mutually agreeable between Benuvia and us not to exceed twenty
percent (20.0%) of the Merger Consideration (the "Price Protection Escrow
Amount") to be held for downside protection for non-redeeming stockholders
following Closing.
The Merger Consideration was subject to adjustment after the Closing based on
confirmed amounts of the Closing Net Indebtedness of Benuvia as of the Closing
Date. If the adjustment was a negative adjustment in favor of us, the escrow
agent was to distribute to us a number of shares of our common stock with a
value equal to the absolute value of the adjustment amount. If the adjustment
was a positive adjustment in favor of Benuvia, we would issue to the Benuvia
stockholders an additional number of shares of our common stock with a value
equal to the adjustment amount.
The Business Combination Agreement and related agreements are further described
in our Current Report on Form 8-K filed with the SEC on March 18, 2022.
Termination of Merger Agreement
On August 8, 2022, the Company and Benuvia mutually terminated the Merger
Agreement pursuant to Section 8.1(a) of the Merger Agreement, effective
immediately. Neither party was required to pay the other a termination fee as a
result of the mutual decision to terminate the Merger Agreement.
Results of Operations
We have neither engaged in any operations nor generated any operating revenues
to date. Our only activities for the six months ended June 30, 2022 and for the
period from February 12, 2021 (inception) through June 30, 2021 were
organizational activities, those necessary to prepare for the Initial Public
Offering ("Initial Public Offering") and identifying a target company for a
business combination. The Company will not generate any operating revenues until
after the completion of its initial Business Combination, at the earliest. The
Company generates non-operating income in the form of interest income on cash
and cash equivalents from the proceeds derived from the Initial Public Offering.
We incur expenses as a result of being a public company (for legal, financial
reporting, accounting and auditing compliance), as well as for due diligence
expenses.
For the three months ended June 30, 2022, we recorded net income of $1,360,529,
which resulted from a gain on fair value of warrant liability of $1,605,125, a
gain on fair value of Sponsor Working Capital Loan of $1,000, and interest and
dividend income on investments held in the Trust Account in the amount of
$157,623, partially offset by franchise tax expenses of $50,000, income tax
expense of $ 2,914, and operating and formations costs of $400,305.
For the three months ended June 30, 2021, we had net income of $5, which
resulted fully from operating and formation costs.
For the six months ended June 30, 2022, we recorded net income of $3,011,070,
which resulted from a gain on fair value of warrant liability of $3,702,064, a
gain on fair value of the Sponsor Working Capital Loan of $1,000, and interest
and dividend income on investments held in the Trust Account in the amount of
$169,377, partially offset by operating and formation costs of $758,457, income
tax expense of $2,914, and franchise tax expense of $100,000.
For the period from February 12, 2021 (inception) through June 30, 2021, we had
a net loss of $224, which resulted fully from formation costs.
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Going Concern, Liquidity and Capital Resources
For the six months ended June 30, 2022, net cash used in operating activities
was $491,970, which was due to the change in fair value of the warrant liability
of $3,702,064, change in fair value of the Sponsor Working Capital Loan of
$1,000 and interest and dividend income on the investments held in the Trust
Account of $169,377, partially offset by net income of $3,011,070 and changes in
working capital of $369,401.
For the period from February 12, 2021 (inception) through June 30, 2021 net cash
provided by operating activities was $5, which was due to the formation costs
paid by a stockholder in the form of a capital contribution of $229, partially
offset by our net loss of $224.
For the six months ended June 30, 2022, net cash provided by financing
activities was $175,000 due to proceeds received from the issuance of a Sponsor
Working Capital Loan.
For the period from February 12, 2021 (inception) through June 30, 2021, net
cash provided by financing activities was $25,000 due to proceeds received from
the issuance of Class B common stock to the Sponsor.
There were no investing activities for the six months ended June 30, 2022 or for
the period from February 12, 2021(inception) through June 30 2021.
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates fair value. The Company had $20,625 and
$337,595 in cash and no cash equivalents as of June 30, 2022 and December 31,
2021, respectively.
At June 30, 2022 and December 31, 2021, substantially all of the assets held in
the Trust Account were held in mutual funds.
The accompanying condensed consolidated financial statements have been prepared
in conformity with GAAP, which contemplates continuation of the Company as a
going concern and the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company has incurred and expect to
continue to incur significant costs in pursuit of the Company's financing and
acquisition plans. Management plans to address this uncertainty with the
successful closing of the Business Combination. The Company will have until
August 13, 2022 (or up to February 13, 2023, as applicable) to consummate a
Business Combination. If a Business Combination is not consummated by February
13, 2023, less than one year after the date these condensed consolidated
financial statements are issued, there will be a mandatory liquidation and
subsequent dissolution of the Company. Management has determined that the
mandatory liquidation, should a Business Combination not occur, and potential
subsequent dissolution, as well as the Company's working capital deficit, raises
substantial doubt about the Company's ability to continue as a going concern. No
adjustments have been made to the carrying amounts of assets or liabilities
should the Company be required to liquidate after February 13, 2023. The Company
intends to complete the proposed Business Combination before the mandatory
liquidation date. However, there can be no assurance that the Company will be
able to consummate any Business Combination by February 13, 2023. Based upon the
above analysis, management determined that these conditions raise substantial
doubt about the Company's ability to continue as a going concern within less
than one year after the date the condensed consolidated financial statements are
issued. The condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities, which would be considered
off-balance sheet arrangements as of June 30, 2022 and December 31, 2021. We do
not participate in transactions that create relationships with unconsolidated
entities or financial partnerships, often referred to as variable interest
entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements. We have not entered into any off-balance sheet
financing arrangements, established any special purpose entities, guaranteed any
debt or commitments of other entities, or purchased any non-financial assets.
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Contractual Obligations
Promissory Note - Related Party
On March 22, 2021, the Company issued an unsecured promissory note to an
affiliate of the Sponsor (the "Promissory Note"), pursuant to which the Company
could borrow up to an aggregate of $300,000 to cover expenses related to the
IPO. The Promissory Note was non-interest bearing and was payable on the earlier
of (i) July 31, 2021 or (ii) the consummation of the IPO. On August 6, 2021, the
Company repaid the outstanding balance under the Promissory Note.
Sponsor Working Capital Loans
In order to finance transaction costs in connection with a Business Combination,
our Sponsor may provide us with a loan of up to $1,500,000 as may be required
("Sponsor Working Capital Loans"). Such Sponsor Working Capital Loans would
either be repaid upon the consummation of a Business Combination, without
interest, or, at the lender's discretion, up to $1,500,000 of such loans may be
converted upon consummation of a Business Combination into additional Placement
Units at a price of $10.00 per Unit. In the event that a Business Combination
does not close, we may use a portion of proceeds held outside the Trust Account
to repay the Sponsor Working Capital Loans, but no proceeds held in the Trust
Account would be used to repay the Sponsor Working Capital Loans. As of March
31, 2022 and December 31, 2021, there were no amounts outstanding under any
Sponsor Working Capital Loans. On April 1, 2022, we drew $110,000 from the
Sponsor Working Capital Loan with our Sponsor. On May 24, 2022, we drew down
another $65,000 on the same Sponsor Working Capital Loan. As of June 30, 2022,
there was $175,000 outstanding under the Sponsor Working Capital Loan.
Underwriting Agreement
We do not have any long-term debt, capital lease obligations, operating lease
obligations or long-term liabilities. The underwriter is entitled to a deferred
fee of three percent (3.00%) of the gross proceeds of the Offering upon closing
of the Business Combination, or $3,450,000. The deferred fee will be paid in
cash upon the closing of a Business Combination from the amounts held in the
Trust Account, subject to the terms of the underwriting agreement.
On August 13, 2021, the underwriter has given the Company a rebatement of
$350,000. The total cash underwriting fee is $1,950,000 and the deferred
underwriting fee is $3,450,000. The deferred fee will be forfeited by the
underwriters solely in the event that we fail to complete a Business
Combination, subject to the terms of the underwriting agreement.
Critical Accounting Policies
The preparation of condensed consolidated financial statements and related
disclosures in conformity with accounting principles generally accepted in the
United States of America 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 condensed consolidated
financial statements, and income and expenses during the periods reported.
Actual results could materially differ from those estimates. We have identified
the following critical accounting policies:
Warrant Liabilities
We account for the Warrants in accordance with the guidance contained in
Accounting Standards Codification ("ASC") 815-40 - Derivatives and Hedging -
Contracts in Entity's Own Equity under which the Warrants do not meet the
criteria for equity treatment and must be recorded as liabilities. Accordingly,
we classify the Warrants as liabilities at their fair value and adjust the
Warrants to fair value at each reporting period. This liability is subject to
re-measurement at each balance sheet date until exercised, and any change in
fair value is recognized in our condensed consolidated statements of operations.
The Private Placement Warrants and the Public Warrants for periods where no
observable traded price was available are valued using a Monte Carlo simulation.
For periods subsequent to the detachment of the Public Warrants from the Units,
the Public Warrant quoted market price was used as the fair value as of each
relevant date.
Class A Common Stock Subject to Possible Redemption
We account for our common stock subject to possible conversion in accordance
with the guidance in ASC Topic 480 - Distinguishing Liabilities from Equity.
Shares of Class A Common Stock subject to mandatory redemption are classified as
a liability instrument and measured at fair value. Conditionally redeemable
common stock (including common stock that features redemption rights that are
either within the control of the holder or subject to redemption upon the
occurrence of uncertain events not solely within our control) are classified as
temporary equity. At all other times, common stock is classified as
stockholders' equity. Our common stock features certain redemption rights that
are considered to be outside of our control and subject to occurrence of
uncertain future events. Accordingly, shares of Class A Common Stock subject to
possible redemption are presented at redemption value as temporary equity,
outside of the stockholders' equity section of our condensed consolidated
balance sheets.
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Net Income (Loss) per Common Share
Net income (loss) per common share is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding for the
period. The Company applies the two-class method in calculating earnings per
share. Remeasurement associated with the redeemable shares of Class A common
stock is excluded from earnings per share as the redemption value approximates
fair value.
Recent Accounting Standards
In August 2020, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") 2020-06, Debt - Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in
Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06") to simplify accounting for
certain financial instruments. ASU 2020-06 eliminates the current models that
require separation of beneficial conversion and cash conversion features from
convertible instruments and simplifies the derivative scope exception guidance
pertaining to equity classification of contracts in an entity's own equity. The
new standard also introduces additional disclosures for convertible debt and
freestanding instruments that are indexed to and settled in an entity's own
equity. ASU 2020-06 amends the diluted earnings per share guidance, including
the requirement to use the if-converted method for all convertible instruments.
ASU 2020-06 is effective for fiscal years beginning after December 15, 2023 and
should be applied on a full or modified retrospective basis, with early adoption
permitted for fiscal years beginning after December 15, 2020. We adopted ASU
2020-06 effective January 1, 2022 using the modified retrospective method of
transition. The adoption of ASU 2020-06 did not have a material impact on the
financial statements for the six months ended June 30, 2022 and for the period
from February 12, 2021 (inception) through June 30, 2021.
Our management does not believe that any recently issued, but not yet effective,
accounting standards, if currently adopted, would have a material effect on the
accompanying condensed consolidated financial statements.
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