As filed with the Securities and Exchange Commission on October 3, 2023
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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(Exact name of registrant as specified in its charter)
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| | 6770 | 85-2303279 | ||
| (State or Other Jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer |
1450 Brickell Avenue, Suite 1420
Miami, FL 33131
Telephone: (305) 577-0031
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
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Felipe MacLean
c/o Clover Leaf Capital Corp.
1450 Brickell Avenue, Suite 1420
Miami, FL 33131
Telephone: (305) 577-0031
(Name, address, including zip code, and telephone number, including area code, of agent for service)
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Copies to:
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Barry I. Grossman, Esq. |
Aaron M. Schleicher, Esq. |
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Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective and after all conditions under the Merger Agreement to consummate the proposed merger are satisfied or waived.
If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the 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 | ☐ | |||||
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| ☒ | 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 7(a)(2)(B) of the Securities Act.
If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:
Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ☐
Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ☐
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary proxy statement/prospectus is not complete and may be changed. These securities may not be issued until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary proxy statement/prospectus is not an offer to sell these securities and does not constitute the solicitation of offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY PROXY STATEMENT/PROSPECTUS — SUBJECT TO COMPLETION,
DATED OCTOBER 3, 2023
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS OF
CLOVER LEAF CAPITAL CORP.
AND
PROSPECTUS FOR UP TO [•] SHARES OF CLASS A COMMON STOCK OF CLOVER LEAF CAPITAL CORP.
To the Stockholders of Clover Leaf Capital Corp.:
You are cordially invited to attend the special meeting of the stockholders (the “Special Meeting”) of Clover Leaf Capital Corp. (“Clover Leaf”), which will be held at [•] a.m., Eastern Time, on [•], 2023. The Board of Directors of Clover Leaf (the “Clover Leaf Board”) has determined to convene and conduct the Special Meeting in a virtual meeting format at [•]. Stockholders will NOT be able to attend the Special Meeting in-person. The accompanying proxy statement/prospectus includes instructions on how to access the virtual Special Meeting and how to listen and vote from home or any remote location with internet connectivity. You or your proxy holder will be able to attend and vote at the Special Meeting by visiting [•] and using a control number assigned by Continental Stock Transfer & Trust Company and printed on your proxy card. To register and receive access to the Special Meeting, registered stockholders and beneficial stockholders (those holding shares through a stock brokerage account or by a bank or other holder of record) of Clover Leaf will need to follow the instructions applicable to them provided in the accompanying proxy statement/prospectus.
On June 1, 2023, Clover Leaf entered into an Agreement and Plan of Merger (as it may be amended or supplemented from time to time, the “Merger Agreement”) with CL Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of Clover Leaf (“Merger Sub”), Yntegra Capital Investments LLC, a Delaware limited liability company, in the capacity as the representative from and after the Effective Time (as defined in the Merger Agreement) for the stockholders of Clover Leaf (other than Digital Ally (as defined below) as of immediately prior to the Effective Time and its successors and assignees) in accordance with the terms and conditions of the Merger Agreement (the “Sponsor” or the “Purchaser Representative”), Kustom Entertainment, Inc., a Nevada corporation (the “Kustom Entertainment”), and Digital Ally, Inc., a Nevada corporation and the sole stockholder of Kustom Entertainment (“Digital Ally”) (all of the transactions contemplated by the Merger Agreement, including the issuances of securities thereunder, the “Business Combination”). You are being asked to vote on the Business Combination and certain other related matters.
Pursuant to the Merger Agreement, subject to the terms and conditions set forth therein upon the consummation of the transactions contemplated by the Merger Agreement (the “Closing”), Merger Sub will merge with and into Kustom Entertainment (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Transactions”), with Kustom Entertainment continuing as the surviving corporation in the Merger and a wholly-owned subsidiary of Clover Leaf. In the Merger, all of the issued and outstanding capital stock of Kustom Entertainment immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, in exchange for the right for Digital Ally to receive the Merger Consideration (as defined herein). It is proposed that, upon consummation of the Transactions, Clover Leaf will change its name to “Kustom Entertainment, Inc.” Clover Leaf, following the Business Combination, is referred to herein as the “Company” or the “Combined Company.”
The total consideration to be received by security holders of Kustom Entertainment at the Closing in connection with the Merger (the “Merger Consideration”) will be a number of newly issued shares of Combined Company Common Stock, par value $0.0001 per share (the “Combined Company Common Stock”) with an aggregate value equal to $125,000,000, subject to adjustments for Kustom Entertainment’s closing debt (net of cash) and based on a deemed value of $11.14 per share of Combined Company Common Stock.
Digital Ally will also distribute to its stockholders (the “Digital Ally Stockholders”) 15% of the Combined Company Common Stock received as Merger Consideration immediately following the Closing (the “Digital Ally Distribution”) and intends to distribute the balance of such shares following a six-month lock-up period.
In addition to the Merger Consideration described above, Stanton E. Ross, the Chief Executive Officer of Kustom Entertainment, will also have a contingent right to receive up to 259,336 shares of Combined Company Common Stock, after the Closing, based on the revenue of the surviving corporation in the Merger during the fiscal years ending December 31, 2023 and 2024, as described further herein.
It is anticipated that upon completion of the Business Combination, the public stockholders of Clover Leaf before the Business Combination (the “Clover Leaf Public Stockholders”) would retain an ownership interest of approximately 15.6% in the Combined Company, the Sponsor will retain an ownership interest of approximately 22.8% of the Combined Company,
the Digital Ally Stockholders will own approximately [•]% of the Combined Company, and Digital Ally will own approximately [•]% of the Combined Company after the contemplated Digital Ally Distribution, which is distributed concurrently with the Closing. The foregoing ownership percentages with respect to the Combined Company following the Business Combination include 1,796,875 shares of Clover Leaf Common Stock that may be issued upon the conversion of Clover Leaf’s outstanding public rights and assume that (i) there are no redemptions of any shares by the Clover Leaf Public Stockholders in connection with the Business Combination and (ii) Clover Leaf does not engage in any kind of additional equity financing prior to the Closing. Assuming there is a maximum redemption of shares by the Clover Leaf Public Stockholders, the Clover Leaf Public Stockholders will retain an ownership interest of approximately 12.3% of the Combined Company, that the Sponsor will retain an aggregate ownership interest of approximately 23.7% of the Combined Company, the Digital Ally Stockholders will own approximately [•]% of the Combined Company, and Digital Ally will own approximately [•]% of the Combined Company after the contemplated Digital Ally Distribution, which is distributed concurrently with the Closing. If the actual facts are different from these assumptions (which they are likely to be), the percentage of ownership and voting power retained by the Clover Leaf stockholders will be different. See “Share Calculations and Ownership Percentages” and “Unaudited Pro Forma Condensed Combined Financial Information.”
Clover Leaf’s Units, Clover Leaf Class A Common Stock and Clover Leaf’s public rights are traded on the Nasdaq Capital Market (“Nasdaq”) under the symbols “CLOEU,” “CLOE” and “CLOER,” respectively. On [•], 2023, the record date for the Special Meeting (the “Record Date”), the closing sale prices of Clover Leaf’s Units, shares of Clover Leaf Class A Common Stock and Clover Leaf’s public rights were $[•], $[•] and $[•], respectively. Upon the Closing, Clover Leaf’s Units will be separated into their component securities and cease to exist as separate securities, and all of Clover Leaf’s rights will be converted into Combined Company Common Stock and cease trading. Clover Leaf intends to apply for the listing of the Class A Common Stock of the Combined Company following completion of the Business Combination on the Nasdaq or any applicable national securities exchange.
Only holders of record of shares of Clover Leaf Class A Common Stock and Clover Leaf Class B Common Stock at the close of business on [•], 2023 are entitled to notice of the Special Meeting and the right to vote and have their votes counted at the Special Meeting and any adjournments or postponements of the Special Meeting.
The accompanying proxy statement/prospectus provides Clover Leaf stockholders with detailed information about the Business Combination and other matters to be considered at the Special Meeting. Clover Leaf urges its stockholders to carefully read this entire document and the documents incorporated herein by reference. Clover Leaf stockholders should also carefully consider the risk factors described in “Risk Factors” beginning on page 20 of the accompanying proxy statement/prospectus.
The accompanying proxy statement/prospectus may refer to important business and financial information about Clover Leaf reflected in documents Clover Leaf has filed with the Securities and Exchange Commission that are not included in or delivered with this proxy statement/prospectus. You may access these and other filings of Clover Leaf with the Securities and Exchange Commission by visiting its website at www.sec.gov or by requesting them from in writing or by telephone at the following address:
[•]
You will not be charged for any of these documents that you request. Stockholders requesting documents should do so by [•], 2023 in order to receive them before the Special Meeting.
After careful consideration, the Clover Leaf Board has unanimously approved the Merger Agreement and the Business Combination and determined that each of the proposals described in the accompanying proxy statement/prospectus is in the best interests of Clover Leaf and recommends that you vote “FOR” each of these Proposals.
The accompanying proxy statement/prospectus provides Clover Leaf stockholders with detailed information about the Business Combination and other matters to be considered at the Special Meeting. Clover Leaf urges you to read the accompanying proxy statement/prospectus, including the financial statements and annexes and other documents referred to therein, carefully and in their entirety. In particular, when you consider the recommendation regarding these Proposals by the Clover Leaf Board, you should keep in mind that Clover Leaf’s directors and officers have interests in the Business Combination that are different from or in addition to, or may conflict with, your interests as a Clover Leaf stockholder. For instance, rather than liquidating
Clover Leaf, the Sponsor will benefit from the completion of the Business Combination and may be incentivized to complete the Business Combination, even if the transaction is unfavorable to stockholders of Clover Leaf. In addition, you should carefully consider the matters discussed under “Risk Factors” beginning on page 20 of the accompanying proxy statement/prospectus. See also the section entitled “The Business Combination Proposal — Interests of Clover Leaf’s Sponsor, Directors and Officers and Advisors in the Business Combination” for additional information.
Your vote is very important. To ensure your representation at the Special Meeting, please complete and return the enclosed proxy card or submit your proxy by following the instructions contained in the accompanying proxy statement/prospectus and on your proxy card. Please submit your proxy promptly whether or not you expect to participate in the meeting. Submitting a proxy now will NOT prevent you from being able to vote online during the virtual Special Meeting. If you hold your shares in “street name,” you should instruct your broker, bank or other nominee how to vote in accordance with the voting instruction form you receive from your broker, bank or other nominee.
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Very truly yours, |
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Felipe MacLean |
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Chief Executive Officer and Chairman of the Board |
If you return your proxy card signed and without an indication of how you wish to vote, your shares will be voted in favor of each of the proposals and for the election of each of the directors proposed by Clover Leaf for election.
TO EXERCISE YOUR REDEMPTION RIGHTS, YOU MUST (1) IF YOU HOLD SHARES OF CLOVER LEAF CLASS A COMMON STOCK THROUGH UNITS, SEPARATE YOUR UNITS INTO THE UNDERLYING SHARES OF CLOVER LEAF CLASS A COMMON STOCK AND PUBLIC RIGHTS PRIOR TO EXERCISING YOUR REDEMPTION RIGHTS WITH RESPECT TO THE PUBLIC SHARES, (2) SUBMIT A WRITTEN REQUEST, INCLUDING THE LEGAL NAME, PHONE NUMBER AND ADDRESS OF THE BENEFICIAL OWNER OF THE SHARES FOR WHICH REDEMPTION IS REQUESTED, TO THE TRANSFER AGENT AT LEAST TWO BUSINESS DAYS PRIOR TO THE DATE OF THE SPECIAL MEETING, THAT YOUR PUBLIC SHARES BE REDEEMED FOR CASH AND (3) DELIVER YOUR STOCK CERTIFICATES (IF ANY) AND OTHER REDEMPTION FORMS TO THE TRANSFER AGENT, PHYSICALLY OR ELECTRONICALLY USING THE DEPOSITORY TRUST COMPANY’S DWAC (DEPOSIT/WITHDRAWAL AT CUSTODIAN) SYSTEM, IN EACH CASE, IN ACCORDANCE WITH THE PROCEDURES AND DEADLINES DESCRIBED IN THE PROXY STATEMENT/PROSPECTUS. IF THE BUSINESS COMBINATION IS NOT CONSUMMATED, THEN THE PUBLIC SHARES WILL NOT BE REDEEMED FOR CASH. IF YOU HOLD THE SHARES IN STREET NAME, YOU WILL NEED TO INSTRUCT THE ACCOUNT EXECUTIVE AT YOUR BANK, BROKER OR OTHER NOMINEE TO WITHDRAW THE SHARES FROM YOUR ACCOUNT IN ORDER TO EXERCISE YOUR REDEMPTION RIGHTS. SEE “THE SPECIAL MEETING — REDEMPTION RIGHTS” IN THE PROXY STATEMENT/PROSPECTUS FOR MORE SPECIFIC INSTRUCTIONS.
Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of the Business Combination or the other transactions contemplated thereby, as described in the accompanying proxy statement/prospectus, or passed upon the adequacy or accuracy of the disclosure in the accompanying proxy statement/prospectus. Any representation to the contrary is a criminal offense.
The accompanying proxy statement/prospectus is dated [•], 2023, and is first being mailed to stockholders of Clover Leaf on or about [•], 2023.
Clover Leaf Capital Corp.
1450 Brickell Avenue, Suite 1420
Miami, FL 33131
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On [•], 2023
[•] a.m. Eastern Time
[•], 2023
TO THE STOCKHOLDERS OF CLOVER LEAF CAPITAL CORP.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the “Special Meeting”) of Clover Leaf Capital Corp., a Delaware corporation (“Clover Leaf”), will be held virtually at [•] a.m. Eastern Time on [•], 2023. The Clover Leaf Board of Directors (the “Clover Leaf Board”) has determined to convene and conduct the Special Meeting in a virtual meeting format at [•]. Stockholders will NOT be able to attend the Special Meeting in-person. The accompanying proxy statement/prospectus includes instructions on how to access the virtual Special Meeting and how to listen and vote from home or any remote location with internet connectivity. You or your proxy holder will be able to attend and vote at the Special Meeting by visiting [•] and using a control number assigned by Continental Stock Transfer & Trust Company. The Special Meeting will be held for the purpose of considering and voting on the proposals (the “Proposals”) described below and in the accompanying proxy statement/prospectus. To register and receive access to the virtual meeting, registered stockholders and beneficial stockholders (those holding shares through a stock brokerage account or by a bank or other holder of record) of Clover Leaf will need to follow the instructions applicable to them provided in the accompanying proxy statement/prospectus. At the Special Meeting, Clover Leaf stockholders will be asked to consider and vote upon the following Proposals:
(i) The NTA Proposal (Proposal 1) — To consider and vote on the approval and adoption of the amendments to the current Certificate of Incorporation of Clover Leaf (as amended from time to time, the “Current Charter”), which amendments (the “NTA Amendments”) shall be effective, if adopted and implemented by Clover Leaf, prior to the consummation of the proposed Business Combination, to remove from the Current Charter requirements limiting Clover Leaf’s ability to redeem shares of Clover Leaf Class A Common Stock and consummate an initial business combination if the amount of such redemptions would cause Clover Leaf to have less than $5,000,001 in net tangible assets (“NTA”). The NTA Proposal is conditioned upon the approval of the Business Combination Proposal. Therefore, if the Business Combination Proposal is not approved, then the NTA Proposal will have no effect, even if approved by Clover Leaf stockholders. The NTA Proposal is described in more detail in the accompanying proxy statement/prospectus under the heading “The NTA Proposal (Proposal 1).”
(ii) The Business Combination Proposal (Proposal 2) — To consider and vote on a proposal to approve and adopt the Agreement and Plan of Merger, dated as of June 1, 2023 (as it may be amended or supplemented from time to time, the “Merger Agreement”), by and among Clover Leaf, with CL Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of Clover Leaf (“Merger Sub”), Yntegra Capital Investments LLC, a Delaware limited liability company, in the capacity as the representative from and after the Effective Time (as defined in the Merger Agreement) for the stockholders of Clover Leaf (other than Digital Ally (as defined below) as of immediately prior to the Effective Time and its successors and assignees) in accordance with the terms and conditions of the Merger Agreement (the “Sponsor” or the “Purchaser Representative”), Kustom Entertainment, Inc., a Nevada corporation (the “Kustom Entertainment”), and Digital Ally, Inc., a Nevada corporation and the sole stockholder of Kustom Entertainment (“Digital Ally”), and approve the transactions contemplated thereby, including the merger of Merger Sub with and into Kustom Entertainment, with Kustom Entertainment continuing as the surviving corporation and as a wholly-owned subsidiary of Clover Leaf, and the issuance of Clover Leaf securities as Merger Consideration thereunder, as described in more detail in the accompanying proxy statement/prospectus (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Business Combination”).
The Business Combination Proposal is described in more detail in the accompanying proxy statement/prospectus under the heading “The Business Combination Proposal (Proposal 2).” A copy of the Merger Agreement is attached to the accompanying proxy statement/prospectus as Annex A.
(iii) The Charter Proposal (Proposal 3) — To consider and vote upon a proposal to approve and adopt, in connection with the Business Combination, the proposed new amended and restated certificate of incorporation of Clover Leaf (the “Proposed Charter”) in the form attached to the accompanying proxy statement/prospectus as Annex B. The Charter Proposal is conditioned on the approval of the Business Combination Proposal. Therefore, if the Business Combination Proposal is not approved, then the Charter Proposal will have no effect, even if approved by Clover Leaf stockholders. The Charter Proposal is described in more detail in the accompanying proxy statement/prospectus under the heading “The Charter Proposal (Proposal 3).”
(iv) Advisory Charter Proposals (Proposals 4 — 6) — To consider and vote, on an advisory and non-binding basis, on four separate Proposals to approve certain governance provisions in the Proposed Charter. These separate votes are not otherwise required by Delaware law, separate and apart from the Charter Proposal, but are required by SEC guidance requiring that stockholders have the opportunity to present their views on important corporate governance provisions. The Business Combination is not conditioned on the separate approval of the Advisory Charter Proposals (separate and apart from approval of the Charter Proposal). The Advisory Charter Proposals are described in more detail in the accompanying proxy statement/prospectus under the heading “The Advisory Charter Proposals (Proposals 4 — 6).”
(v) The Incentive Plan Proposal (Proposal 7) — To consider and vote upon a proposal to approve the 2023 Stock Incentive Plan (the “Incentive Plan”), the form of which is attached to the accompanying proxy statement/prospectus. The Clover Leaf Board has adopted the Incentive Plan, subject to the approval of the Clover Leaf stockholders and contingent upon the Closing. If approved, the Incentive Plan will be effective upon the Closing. The Incentive Plan Proposal is described in more detail in the accompanying proxy statement/prospectus under the heading “The Incentive Plan Proposal (Proposal 7).”
(vii) The Nasdaq Proposal (Proposal 8) — To consider and vote upon, for purposes of complying with the applicable listing rules of the Nasdaq Stock Market (“Nasdaq”), the issuance of the shares of Class A Common Stock to be issued in connection with the Business Combination. The Nasdaq Proposal is described in more detail in the accompanying proxy statement/prospectus under the heading “The Nasdaq Proposal (Proposal 9).”
(x) The Adjournment Proposal (Proposal 9) — To consider and vote upon a proposal to adjourn the Special Meeting to a later date or dates, if necessary, at the determination of the Clover Leaf Board or the chairman of the Special Meeting. We refer to this proposal as the “Adjournment Proposal.”
Only holders of record of the Class A Common Stock, par value $0.0001 per share, of Clover Leaf (the “Clover Leaf Class A Common Stock”), and the Class B Common Stock, par value $0.0001 per share, of Clover Leaf (the “Clover Leaf Class B Common Stock” and together with the Clover Leaf Class A Common Stock, the “Clover Leaf Common Stock”) at the close of business on [•], 2023 (“Record Date”) are entitled to notice of the Special Meeting and to vote at the Special Meeting and any adjournments or postponements of the Special Meeting. A complete list of Clover Leaf stockholders of record entitled to vote at the Special Meeting will be available for ten days before the Special Meeting at the principal executive offices of Clover Leaf for inspection by stockholders during ordinary business hours for any purpose germane to the Special Meeting.
Pursuant to the Current Charter, in connection with the Business Combination, the public stockholders of Clover Leaf before the Business Combination (the “Clover Leaf Public Stockholders”) may elect to have Clover Leaf redeem, effective upon the closing of the Business Combination, shares of Clover Leaf Class A Common Stock then held by them for cash equal to a pro rata portion of the aggregate amount on deposit in the Trust Account as of two (2) business days prior to the consummation of the Business Combination, including interest earned on the funds held in the Trust Account and not previously released to Clover Leaf in connection with Permitted Withdrawals, divided by the number of then outstanding public shares, subject to the limitations described herein. As of [•], 2023, based on funds in the Trust Account of approximately $[•] as of such date, the pro rata portion of the funds available in the Trust Account for the redemption of public shares of Clover Leaf Class A Common Stock was approximately $[•] per share. Clover Leaf Public Stockholders are not required to attend or vote at the Special Meeting in order to elect to have Clover Leaf redeem their shares of Clover Leaf Class A Common Stock for cash. This means that public stockholders who hold shares of Clover Leaf Class A Common Stock on or before [•], 2023 (two (2) business days before the Special Meeting) will be eligible to elect to have their shares of Clover Leaf Class A Common Stock redeemed for cash in connection with the Special Meeting, whether or not they are holders as of the Record Date, and whether or not
such shares are voted at the Special Meeting. A public stockholder, together with any of such stockholder’s affiliates or any other person with whom such public stockholder is acting in concert or as a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), will be restricted from electing to have shares redeemed without Clover Leaf’s prior consent if, in the aggregate such stockholder’s shares or, if part of such a group, the group’s shares, for which redemption is sought exceeds 15% or more of the shares of Clover Leaf Common Stock included in the units of Clover Leaf sold in the Clover Leaf initial public offering (the “IPO”) (including overallotment securities sold to Clover Leaf’s underwriters in connection with the IPO). Holders of Clover Leaf’s outstanding public rights and Units do not have redemption rights with respect to such securities in connection with the Business Combination. Holders of outstanding Clover Leaf Units must separate the underlying shares of Clover Leaf Class A Common Stock and public rights prior to exercising redemption rights with respect to the public Clover Leaf Class A Common Stock.
The Sponsor and Clover Leaf’s officers and directors have agreed to waive their redemption rights with respect to any shares of Clover Leaf Class A Common Stock they may hold in connection with the consummation of the Business Combination, and such shares will be excluded from the pro rata calculation used to determine the per share redemption price. Currently, the Sponsor and Clover Leaf’s officers and directors beneficially own 68.3% of the issued and outstanding shares of Clover Leaf Class A Common Stock, giving effect to the conversion of the one remaining share of Clover Leaf Class B Common Stock immediately prior to the effective time of the Merger (the “Effective Time”) at a one-to-one conversion ratio. The Sponsor and Clover Leaf’s officers and directors have agreed to vote any shares of Clover Leaf Common Stock owned by them on the Record Date in favor of the Business Combination and the other Proposals.
Your vote is very important, regardless of the number of shares of Clover Leaf Class A Common Stock that you own. The approval of the NTA Proposal requires the affirmative vote of holders of fifty percent (50%) of the issued and outstanding shares of Clover Leaf Common Stock as of the Record Date, voting as a single class. The approval of the Business Combination Proposal requires the affirmative vote of holders of a majority of the shares of the Clover Leaf Common Stock that are voted at the Special Meeting, voting together as a single class. The approval of the Charter Proposal requires the affirmative vote of holders of (i) at least a majority of the issued and outstanding shares of Clover Leaf Common Stock as of the Record Date, voting as a single class, (ii) at least a majority of the issued and outstanding shares of Clover Leaf Class A Common Stock as of the Record Date, voting as a separate class and (iii) at least a majority of the issued and outstanding shares of Clover Leaf Class B Common Stock as of the Record Date, voting as a separate class. Assuming a quorum is present, approval of the Advisory Charter Proposals, the Incentive Plan Proposal, the Nasdaq Proposal and the Adjournment Proposal each requires a majority of the votes cast thereon by the holders of the shares of Clover Leaf Common Stock represented in person online or by proxy and entitled to vote thereon at the Special Meeting, voting together as a single class.
If the Business Combination Proposal is not approved, the Charter Proposal, the Advisory Charter Proposals, the Incentive Plan Proposal, and the Nasdaq Proposal will not be presented to the Clover Leaf stockholders for a vote. The NTA Proposal is conditioned upon the approval of the Business Combination Proposal. Therefore, if the Business Combination Proposal is not approved, then the NTA Proposal will have no effect, even if approved by Clover Leaf stockholders. The approval of the Business Combination Proposal and the Charter Proposal, the Incentive Plan Proposal, and the Nasdaq Proposal are preconditions to the consummation of the Business Combination.
The Clover Leaf Board has adopted and approved the Merger Agreement and recommends that Clover Leaf stockholders vote “FOR” all of the Proposals presented to Clover Leaf stockholders at the Special Meeting. In arriving at its recommendations, the Clover Leaf Board carefully considered a number of factors described in the accompanying proxy statement/prospectus. When you consider the recommendation of the Clover Leaf Board, you should keep in mind that directors and officers of Clover Leaf have interests in the Business Combination that may conflict with your interests as a stockholder. For instance, rather than liquidating Clover Leaf, the Sponsor will benefit from the Business Combination and may be incentivized to complete the Business Combination, even if the transaction is unfavorable to stockholders. See the section entitled “The Business Combination Proposal — Interests of Clover Leaf’s Sponsor, Directors and Officers and Advisors in the Business Combination” for a further discussion of these considerations.
All Clover Leaf stockholders are cordially invited virtually to attend the Special Meeting and we are providing the accompanying proxy statement/prospectus and proxy card in connection with the solicitation of proxies to be voted at the Special Meeting (or any adjournment or postponement thereof). To ensure your representation at the Special Meeting, however, you are urged to complete, sign, date and return the enclosed proxy card as soon as possible. If your
shares are held in an account at a brokerage firm, bank or other nominee, you must instruct your broker, bank or other nominee on how to vote your shares or, if you wish to virtually attend the Special Meeting and vote, obtain a proxy from your broker, bank or other nominee.
Your vote is important regardless of the number of shares you own. Whether you plan to attend the Special Meeting or not, please sign, date and return the enclosed proxy card as soon as possible in the envelope provided. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted.
Your attention is directed to the proxy statement/prospectus accompanying this notice (including the annexes thereto) for a more complete description of the proposed Business Combination and related transactions and each of the proposals. We encourage you to read this proxy statement/prospectus carefully. If you have any questions or need assistance voting your shares, please contact [•], our proxy solicitor, using the contact information provided in the enclosed proxy statement/prospectus.
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By Order of the Board of Directors of Clover Leaf |
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Felipe MacLean |
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Chief Executive Officer and Chairman of the Board |
IF YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE, YOUR SHARES WILL BE VOTED IN FAVOR OF EACH OF THE PROPOSALS.
TO EXERCISE YOUR REDEMPTION RIGHTS, YOU MUST (1) IF YOU HOLD SHARES OF CLOVER LEAF CLASS A COMMON STOCK THROUGH UNITS, ELECT TO SEPARATE YOUR UNITS INTO THE UNDERLYING SHARES OF CLOVER LEAF CLASS A COMMON STOCK AND PUBLIC RIGHTS PRIOR TO EXERCISING YOUR REDEMPTION RIGHTS WITH RESPECT TO THE PUBLIC SHARES, (2) SUBMIT A WRITTEN REQUEST, INCLUDING THE LEGAL NAME, PHONE NUMBER AND ADDRESS OF THE BENEFICIAL OWNER OF THE SHARES FOR WHICH REDEMPTION IS REQUESTED, TO THE TRANSFER AGENT AT LEAST TWO BUSINESS DAYS PRIOR TO THE VOTE AT THE SPECIAL MEETING, THAT YOUR PUBLIC SHARES BE REDEEMED FOR CASH AND (3) DELIVER YOUR STOCK CERTIFICATES (IF ANY) AND OTHER REDEMPTION FORMS TO THE TRANSFER AGENT, PHYSICALLY OR ELECTRONICALLY USING THE DEPOSITORY TRUST COMPANY’S DWAC (DEPOSIT/WITHDRAWAL AT CUSTODIAN) SYSTEM, IN EACH CASE, IN ACCORDANCE WITH THE PROCEDURES AND DEADLINES DESCRIBED IN THE PROXY STATEMENT/PROSPECTUS. IF THE BUSINESS COMBINATION IS NOT CONSUMMATED, THEN THE PUBLIC SHARES WILL NOT BE REDEEMED FOR CASH. IF YOU HOLD THE SHARES IN STREET NAME, YOU WILL NEED TO INSTRUCT THE ACCOUNT EXECUTIVE AT YOUR BANK, BROKER OR OTHER NOMINEE TO WITHDRAW THE SHARES FROM YOUR ACCOUNT IN ORDER TO EXERCISE YOUR REDEMPTION RIGHTS. SEE “THE SPECIAL MEETING — REDEMPTION RIGHTS’’ IN THIS PROXY STATEMENT/PROSPECTUS FOR MORE SPECIFIC INSTRUCTIONS.
ABOUT THIS DOCUMENT
This document, which forms part of a registration statement on Form S-4 filed with the Securities and Exchange Commission (the “SEC”) by Clover Leaf, constitutes a prospectus of Clover Leaf under the Securities Act of 1933, as amended (the “Securities Act”), with respect to the shares of Clover Leaf Common Stock to be issued to Digital Ally under the Merger Agreement. This document also constitutes a notice of a meeting and a proxy statement of Clover Leaf under Section 14(a) of the Exchange Act with respect to the Special Meeting at which Clover Leaf stockholders will be asked to consider and vote on a Proposal to approve and adopt the Business Combination by the approval and adoption of the Merger Agreement, among other matters.
This proxy statement/prospectus also registers under the Securities Act the potential distribution of 15% of the Merger Consideration received by Digital Ally, which will be distributed to Digital Ally stockholders and certain other securityholders as of the record date in connection with the Merger. In the Digital Ally Distribution, all of Digital Ally’s stockholders as of the record date will receive a pro rata number of shares of Combined Company Common Stock, par value $0.0001 per share (the “Combined Company Common Stock”). Information about the Digital Ally Distribution and the shares of Combined Company Common Stock to be distributed thereto is provided in the this joint proxy statement/prospectus under the heading “Selling Shareholders and Plan of Distribution”. The Combined Company will not receive any proceeds from any such offer or sale by the selling shareholders.
This proxy statement/prospectus is dated as of the date set forth on the cover hereof. You should not assume that the information contained in this proxy statement/prospectus is accurate as of any date other than that date on the cover hereof, or the date referenced herein, as applicable. You should not assume that the information incorporated by reference into this proxy statement/prospectus is accurate as of any date other than the date of such incorporated document. Neither the mailing of this proxy statement/prospectus to Clover Leaf stockholders nor the issuance by Clover Leaf of its securities in connection with the Business Combination will create any implication to the contrary.
Information contained in this proxy statement/prospectus regarding Clover Leaf and its business, operations, management and other matters has been provided by Clover Leaf and its representatives and information contained in this proxy statement/prospectus regarding Kustom Entertainment and its business, operations, management and other matters has been provided by Kustom Entertainment and its representatives.
This proxy statement/prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities, or the solicitation of a proxy or consent, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction.
If you would like additional copies of this proxy statement/prospectus or if you have questions about the Business Combination or the Proposals to be presented at the Special Meeting, please contact Clover Leaf’s proxy solicitor listed below. You will not be charged for any of the documents that you request.
[•]
In order for you to receive timely delivery of the documents in advance of the Special Meeting to be held on [•], 2023, you must request the information by [•], 2023.
For a more detailed description of the information incorporated by reference in this proxy statement/prospectus and how you may obtain it, see the section captioned “Where You Can Find More Information” beginning on page 188 of this proxy statement/prospectus.
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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED |
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SELECTED HISTORICAL FINANCIAL INFORMATION OF KUSTOM ENTERTAINMENT |
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SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED |
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COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE FINANCIAL INFORMATION |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CLOVER LEAF |
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F-1 |
i
TRADEMARKS
This proxy statement/prospectus includes trademarks of Kustom Entertainment and others, which are protected under applicable intellectual property laws and are the property of Kustom Entertainment or its subsidiaries. This proxy statement/prospectus also includes other trademarks, trade names and service marks that are the property of their respective owners. Solely for convenience, in some cases, the trademarks, trade names and service marks referred to in this proxy statement/prospectus are listed without the applicable®, ™ and SM symbols, but they will assert, to the fullest extent under applicable law, their rights to these trademarks, trade names and service marks.
MARKET AND INDUSTRY DATA
This proxy statement/prospectus includes industry position, forecasts, market size and growth and other data that Clover Leaf and Kustom Entertainment obtained or derived from internal company reports, independent third-party reports and publications, surveys and studies by third parties and other industry data. Some data are also based on good faith estimates, which are derived from internal company research or analyses or review of internal company reports as well as the independent sources referred to above. Although both Clover Leaf and Kustom Entertainment believe that the information on which the companies have based these estimates of industry position and industry data are generally reliable, the accuracy and completeness of this information is not guaranteed and they have not independently verified any of the data from third-party sources nor have they ascertained the underlying economic assumptions relied upon therein. Clover Leaf’s and Kustom Entertainment’s internal company reports have not been verified by any independent source. Statements as to industry position are based on market data currently available. While Clover Leaf and Kustom Entertainment are not aware of any misstatements regarding the industry data presented herein, these estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this proxy statement/prospectus.
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FREQUENTLY USED TERMS
Unless otherwise stated or unless the context otherwise requires, the terms “we,” “us,” “our,” and “Clover Leaf” refer to Clover Leaf Capital Corp., and if the context requires, to the Combined Company following consummation of the Business Combination, which will be renamed “Kustom Entertainment, Inc.”
In this document:
“2022 Extension Note” means the promissory note in the aggregate principal amount of $2,776,246 issued by Clover Leaf in connection with the 2022 Extensions, pursuant to which the Sponsor agreed to loan to Clover Leaf such amount in connection with the 2022 Extensions.
“2022 Extensions” means the Extensions from July 22, 2022 to October 22, 2022 and October 22, 2022 to July 22, 2023 approved by Clover Leaf stockholders.
“2023 Extension Note” means the promissory note in the aggregate principal amount of $360,000 issued by Clover Leaf in connection with the 2023 Extension, pursuant to which the Sponsor agreed to loan to Clover Leaf such amount in connection with the 2023 Extension.
“2023 Extension” means the Extension from July 22, 2023 to January 22, 2024 approved by Clover Leaf stockholders.
“Adjustment Shares” means up to 864,452 shares of Clover Leaf Class B Common Stock (or shares of Clover Leaf Class A Common Stock, if such shares of Clover Leaf Class B Common Stock have been converted to shares of Class A Common Stock prior to the Closing) that will be forfeited by the Sponsor.
“Advisory Charter Proposals” means the proposals to (i) change the corporate name of the Combined Company to “Kustom Entertainment, Inc.” at and from the time of the Business Combination; (ii) increase the authorized shares of capital stock of the Combined Company to [•] shares of capital stock, consisting of (a) [•] shares of Class A Common Stock, and (b) [•] shares of undesignated preferred stock and (iii) remove certain blank check provisions that will no longer be necessary upon consummation of the Business Combination.
“ASU” means Accounting Standards Update.
“Business Combination” means the proposed business combination of Clover Leaf and Kustom Entertainment pursuant to the terms of the Merger Agreement and the other transactions contemplated by the Merger Agreement.
“BirdVu Jets” means BirdVu Jets, Inc., a wholly-owned subsidiary of Kustom Entertainment.
“CCPA” means the California Consumer Privacy Act.
“CPPA” means the California Privacy Protection Agency.
“CPRA” means the California Privacy Rights Act.
“Class A Common Stock” means the shares of Class A common stock, par value $0.0001 per share, of the Combined Company.
“Closing” means the closing of the Business Combination.
“Code” means the Internal Revenue Code of 1986, as amended.
“Clover Leaf” means Clover Leaf Capital Corp., a Delaware corporation, which will be renamed “Kustom Entertainment, Inc.” following the Closing.
“Clover Leaf Board” means the board of directors of Clover Leaf prior to the Business Combination.
“Clover Leaf Class A Common Stock” means the Class A Common Stock, par value $0.0001 per share, of Clover Leaf, prior to the Business Combination.
“Clover Leaf Class B Common Stock” means the Class B Common Stock, par value $0.0001 per share, of Clover Leaf, prior to the Business Combination.
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“Clover Leaf Common Stock” means the Clover Leaf Class A Common Stock and Clover Leaf Class B Common Stock.
“Clover Leaf Pubic Stockholders” means the public stockholders of Clover Leaf before the Business Combination.
“Clover Leaf Sponsor Shares” means Clover Leaf Class B Common Stock initially purchased by the Sponsor in the Private Placement prior to the IPO, and the shares of Clover Leaf Class A Common Stock to be issued upon the conversion thereof in accordance with the terms of the Current Charter.
“Clover Leaf Stockholder Approval” means the approval of the shareholders of Clover Leaf of the Merger Agreement, the transactions contemplated thereby and related matters.
“Closing Indebtedness” means all indebtedness of Kustom Entertainment determined in accordance with GAAP or other applicable accounting principles as of the Closing.
“Combined Company” refers to Clover Leaf (which will be renamed “Kustom Entertainment, Inc.” after the Business Combination, and which will include Kustom Entertainment and any other direct or indirect subsidiaries of Kustom Entertainment, to the extent applicable) from and after the Closing.
“Combined Company Common Stock” refers to the Class A Common Stock and the Class C Common Stock of the Combined Company subsequent to the Business Combination.
“Company Registration Rights Agreement” means the registration rights agreement to be entered into by Clover Leaf, the Sponsor, and Digital Ally Stockholder party thereto, effective as of the Closing.
“Conversion” means the conversion of 3,457,806 shares of Clover Leaf Class B Common Stock held by the Sponsor into an equal number of shares of Class A Common Stock that took place on July 20, 2023.
“COVID-19 pandemic” means the SARS-CoV-2 pandemic.
“Current Charter” means Clover Leaf’s certificate of incorporation filed with the Secretary of State of the State of Delaware on February 12, 2021, as amended on June 9, 2021 and July 19, 2023.
“Digital Ally” means Digital Ally, Inc., a Nevada corporation and the sole stockholder of Kustom Entertainment.
“Digital Ally Stockholders” means the stockholders of Digital Ally.
“Digital Ally Distribution” means 15% of Combined Company Common Stock received by Digital All Stockholders as Merger Consideration immediately following the Closing.
“DGCL” means the General Corporation Law of the State of Delaware, as amended.
“DOJ” means Department of Justice.
“DTC” means The Depository Trust Company.
“DWAC” means The Depository Trust Company’s Deposit Withdrawal At Custodian.
“Earn-Out Payment” means the 259,336 Earnout Shares that the Sponsor will transfer to the Chief Executive Officer of the Company if the revenue of the business for the Earn-Out Period achieves certain benchmarks in the applicable fiscal year.
“Earn-Out Period” means either of the fiscal years 2023 and 2024 of Clover Leaf.
“Earnout Shares” means up to 345,780 shares of Clover Leaf Class A Common Stock and up to 518,672 Clover Leaf Sponsor Shares that will be forfeited by the Sponsor and transferred to the Chief Executive Officer of Kustom Entertainment at the Closing.
“Effective Time” means the effective time of the Merger in accordance with the Merger Agreement.
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“Excess Shares” means the shares sold in Clover Leaf’s IPO that public stockholders will be restricted from seeking related redemption rights if Clover Leaf seeks stockholder approval of its initial business combination and does not conduct redemptions in connection with its initial business combination pursuant to the tender offer rules, as provided for in the Current Charter.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Extension” means an extension of the date by which Clover Leaf must consummate its initial business combination.
“Extension Notes” means the 2022 Extension Note and the 2023 Extension Note.
“Fairness Opinion” or “Opinion” means the fairness opinion, dated as of May 31, 2023, rendered by Newbridge.
“FINRA” means Financial Industry Regulatory Authority.
“First Extension” means the extension of the date by which Clover Leaf had to complete its initial business combination from July 22, 2022 to October 22, 2022, or such earlier date as determined by the Clover Leaf Board, as approved by the stockholders of Clover Leaf at a 2022 special meeting of stockholders.
“FTC” means Federal Trade Commission.
“GAAP” means generally accepted accounting principles in the United States.
“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
“Incentive Plan” means the 2023 Stock Incentive Plan of the Combined Company, in the form included as Annex D to this proxy statement/prospectus.
“Insider Letter” means the letter agreement, dated July 19, 2021, by and among Clover Leaf, its officers and directors, and the Sponsor.
“Insiders” means Clover Leaf’s officers and directors (at the time of the IPO), the Sponsor and each transferee of Clover Leaf Sponsor Shares.
“Interim Period” means the period between the signing of the Merger Agreement and the earlier of the Closing or the termination of the Merger Agreement in accordance with its terms.
“IPO” means the initial public offering of Clover Leaf’s securities that it consummated on June 11, 2021.
“IPO Prospectus” means the final prospectus of Clover Leaf, dated June 8, 2021 in connection with the IPO, as filed with the SEC pursuant to Rule 424(b) under the Securities Act on June 9, 2021 (File No. 333-254492).
“IPO Underwriter” means Maxim in its capacity as financial advisor to Clover Leaf in connection with the Business Combination.
“IRS” means the U.S. Internal Revenue Service.
“Kustom 440” means Kustom 440, Inc., a wholly-owned subsidiary of Kustom Entertainment.
“Kustom Entertainment” means Kustom Entertainment, Inc., a Nevada corporation, prior to the Business Combination. References herein to Kustom Entertainment will include its subsidiaries to the extent reasonably applicable.
“Kustom Entertainment Board” means the board of directors of Kustom Entertainment.
“Kustom Entertainment Common Stock” means, collectively, the Common Stock, par value $0.001 per share, of Kustom Entertainment prior to the Business Combination.
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“Lock-Up Agreement” means the lock-up agreement entered into simultaneously with the execution and delivery of the Merger Agreement, pursuant to which Digital Ally agreed to certain transfer and other restrictions for a period of time after the Closing, as set forth in such agreements, as may be amended, modified or supplemented.
“Maxim” means Maxim Group, LLC.
“Material Adverse Effect” means any fact, event occurrence, change or effect that has had or would reasonably be expected to have, individually or in the aggregate, a material adverse effect on the business, assets, liabilities, results of operations, prospects or condition (financial or otherwise) of such person or entity and its subsidiaries, taken as a whole, or the ability of such person or entity or any of its subsidiaries on a timely basis to consummate the transactions contemplated by the Merger Agreement or the ancillary documents to which it is a party or bound or to perform its obligations thereunder, in each case subject to certain customary exceptions.”
“Merger” means the merger of Merger Sub with and into Kustom Entertainment, with Kustom Entertainment continuing as the surviving corporation and as a wholly-owned subsidiary of Clover Leaf, in accordance with the terms of the Merger Agreement.
“Merger Agreement” means the Agreement and Plan of Merger, dated as of June 1, 2023, as it may be amended or supplemented from time to time, by and among Clover Leaf, Merger Sub, Sponsor (as Purchaser Representative), Kustom Entertainment, and Digital Ally.
“Merger Consideration” means the consideration to be delivered to the holders of Kustom Entertainment common stock in connection with the Merger equal to (i) $125 million, minus (ii) the aggregate amount of all Closing Indebtedness.
“Merger Sub” means CL Merger Sub, Inc., a Nevada corporation and wholly-owned subsidiary of Clover Leaf.
“Nasdaq” means the Nasdaq Capital Market.
“Newbridge” means Newbridge Securities Corporation.
“Non-Competition Agreements” means the non-competition and non-solicitation agreements to be entered into by certain executives of Kustom Entertainment pursuant to the terms of the Merger Agreement.
“NTA” means net tangible assets.
“NTA Amendments” means amendments to the Current Charter to remove from the Current Charter requirements limiting Clover Leaf’s ability to redeem shares of Clover Leaf Class A Common Stock and initiate an initial business combination if the amount of such redemptions would cause Clover Leaf to have less than $5,000,001 in NTA.
“Outside Date” means, for purposes of, and as used in, the Merger Agreement, the date of January 22, 2024, or an applicable earlier date if mutually determined by Clover Leaf and Kustom Entertainment.
“PCI” means Payment Card Industry.
“PIPE Investment” means any subscription agreements entered by Clover Leaf with investors relating to a private equity investment in connection with the Transactions.
“Post-Closing Board” means the board of directors of Clover Leaf after the Closing.
“Private Placement” means the private placement consummated simultaneously with the IPO in which Clover Leaf issued the Private Placement Units to the Sponsor.
“Proposals” means the NTA Proposal, the Business Combination Proposal, the Charter Proposal, the Advisory Charter Proposals, the Incentive Plan Proposal, the ESPP Proposal, the Nasdaq Proposal and the Adjournment Proposal.
“Proposed Bylaws” means the amended and restated bylaws of the Combined Company in the form included as Annex C to this proxy statement/prospectus, to be adopted by Clover Leaf upon consummation of the Business Combination.
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“Proposed Charter” means the proposed new amended and restated certificate of incorporation of Clover Leaf in the form included as Annex B to this proxy statement/prospectus, to be adopted by Clover Leaf pursuant to the Charter Proposal.
“Proxy Statement” means this proxy statement/prospectus.
“Public Rights” means the rights of Clover Leaf Public Stockholders, for each Unit, to receive one-twentieth (1/20) of a share of Class A Common Stock upon the consummation of the Company’s initial business combination and contingent rights to receive, in certain circumstances, following the initial business combination Redemption time, one-fifteenth of a share of Class A Common Stock and up to 143,750 Representative Shares.
“Public Shares” means Clover Leaf Class A Common Stock underlying the Units sold in the IPO, including any overallotment securities acquired by Clover Leaf’s underwriters.
“Public Stockholders” means holders of Class A Common Stock underlying the Units sold in the IPO, including any overallotment securities acquired by Clover Leaf’s underwriters.
“Public Units” means Units sold in the IPO.
“Purchaser Representative” means the Sponsor, in its capacity as Purchaser Representative from and after the Closing in accordance with the terms of the Merger Agreement.
“Record Date” means the close of business on [•], 2023, the date on which only holders of record of the Clover Leaf Common Stock are entitled to notice of the Special Meeting and to vote at the Special Meeting and any adjournments or postponements of the Special Meeting.
“Redemption” means the right of the holders of Clover Leaf Common Stock to have their shares redeemed in accordance with the procedures set forth in this proxy statement/prospectus and the Current Charter.
“Reference Time” means close of business of the Company on the date at which the Closing is actually held, in accordance with the Merger Agreement.
“Related Agreements” means the Lock-Up Agreement and Sponsor Forfeiture Letter.
“Representative Units” means Units purchased by the IPO Underwriter consisting one share of Clover Leaf Class A Common Stock and one right to receive one-eighth of one share of Clover Leaf Class A Common Stock.
“Required Extension” means an extension of Clover Leaf’s deadline to consummate its initial business combination for an additional six months that, as part of the Merger Agreement, Clover Leaf agreed to seek and use its reasonable best efforts to obtain.
“Required Proposals” means the Business Combination Proposal, the Charter Proposal, the Incentive Plan Proposal, and the Nasdaq Proposal.
“Sarbanes-Oxley Act” means the Sarbanes-Oxley Act of 2002.
“Second Extension” means the extension of the date by which Clover Leaf had to complete its initial business combination from October 22, 2022 to July 22, 2023, or such earlier date as determined by the Clover Leaf Board, as approved by the stockholders of Clover Leaf at the 2022 special meeting of stockholders.
“SEC” means the U.S. Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended.
“Special Meeting” means the special meeting of the stockholders of Clover Leaf, to be held virtually at [•] a.m., Eastern Time on [•], 2023.
“Sponsor” means Yntegra Capital Investments LLC, a Delaware limited liability company.
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“Sponsor Forfeiture Letter” means the letter agreement entered into simultaneously with the execution and delivery of the Merger Agreement pursuant to which the Sponsor agreed to forfeit and transfer the Earnout Shares to the Chief Executive Officer of the Company, as may be amended, modified or supplemented.
“Summary Pro Forma Information” means the summary unaudited pro forma condensed combined financial information included in this proxy statement/prospectus.
“Termination Fee” means an amount equal to $1,750,000 plus all expenses incurred by Clover Leaf in connection with the Merger Agreement that Kustom Entertainment will pay if it terminates the Merger Agreement.
“Third Extension” means the extension of the date by which Clover Leaf had to complete its initial business combination from July 22, 2023 to January 22, 2024, or such earlier date as determined by the Clover Leaf Board, as approved by the stockholders of Clover Leaf at the 2023 special meeting of stockholders.
“TicketSmarter” means TicketSmarter, Inc., a wholly-owned subsidiary of Kustom Entertainment.
“Transaction Expenses” means the aggregate unpaid fees and expenses of Clover Leaf and Kustom Entertainment immediately prior to the Closing incurred in connection with or related to the authorization, preparation, negotiation, execution or performance of the Merger Agreement, any Ancillary Agreements related thereto and all other matters related to the consummation of the Merger Agreement.
“Transactions” means the Business Combination, including the Merger and all of the transactions contemplated by the Merger Agreement and the Ancillary Agreements.
“Trust Account” means the trust account of Clover Leaf held for its public stockholders.
“Underwriting Agreement” means that certain underwriting agreement, dated as of July 19, 2021 by and between Clover Leaf and the IPO Underwriter.
“Units” means the units issued in the IPO (including overallotment units acquired by the IPO Underwriter) consisting of one (1) share of Clover Leaf Class A Common Stock and one right to receive one-eighth (1/8) of one Public Share upon the consummation of an initial business combination.
Share Calculations and Ownership Percentages
Unless otherwise specified (including in the sections entitled “Unaudited Pro Forma Condensed Combined Financial Information” and “Beneficial Ownership of Securities”), the share calculations and ownership percentages set forth in this proxy statement/prospectus with respect to the Combined Company’s stockholders following the Business Combination are for illustrative purposes only and assume the following (certain capitalized terms below are defined elsewhere in this proxy statement/prospectus):
1. That Digital Ally exercises appraisal rights in connection with the Merger.
2. That Kustom Entertainment does not issue any additional equity or equity-linked securities prior to the Closing.
3. That no Public Stockholders exercise their redemption rights prior to (in the event that, in connection with a meeting of Clover Leaf stockholders convened prior to the Closing Date, if any, Public Stockholders are provided an opportunity to redeem Public Shares in accordance with the terms of the Current Charter) or in connection with the Closing of the Business Combination. Please see the section entitled “The Special Meeting — Redemption Rights.”
4. That there are no transfers or forfeitures of securities held by the Sponsor on or prior to the Closing Date.
5. That 14,478,734 Clover Leaf rights are converted into 1,809,842 shares of Combined Company Stock at Closing, and that the sole outstanding share of Class B Common Stock is converted into one share of Combined Company Stock at Closing.
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6. That, other than as described above, there are no issuances of equity securities by Clover Leaf prior to the Closing.
7. That there will be no adjustment to the number of the Combined Company Common Stock issued to Digital Ally in the Merger for Kustom Entertainment’s Closing Net Indebtedness, provided, however, that the actual amount of Kustom Entertainment’s Closing Net Indebtedness, which will be determined as of the Reference Time in accordance with the terms of the Merger Agreement, is not yet known and may be a positive number resulting in additional shares of Combined Company Common Stock issued to Digital Ally in the Merger.
The share calculations and ownership percentages set forth in this proxy statement/prospectus with respect to the Combined Company’s stockholders following the Business Combination also do not include any shares reserved for issuance in connection with, or equity awards that may be made in connection with or following completion of the Business Combination pursuant to the Incentive Plan, and do not give effect to any potential dilutive issuances of equity or equity-linked securities.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this proxy statement/prospectus may constitute “forward-looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. These include, without limitation, statements regarding the financial position, business strategy and the plans and objectives of management for future operations, including as they relate to the potential Business Combination, of Clover Leaf. These statements constitute projections, forecasts and forward-looking statements, and are not guarantees of performance. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this proxy statement/prospectus, forward-looking statements may be identified by the use of words such as “estimate,” “continue,” “could,” “may,” “might,” “possible,” “predict,” “should,” “would,” “plan,” “project,” “forecast,” “intend,” “will,” “expect,” “anticipate,” “believe,” “seek,” “target,” “designed to,” “future,” “opportunity,” “strategy,” “will likely result,” or other similar expressions that predict or indicate future events or trends or that are not statements of historical facts. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.
Clover Leaf and Kustom Entertainment caution readers of this proxy statement/prospectus that these forward-looking statements are subject to risks and uncertainties, most of which are difficult to predict and many of which are beyond Clover Leaf’s and Kustom Entertainment’s control, which could cause the actual results to differ materially from the expected results. These forward-looking statements include, but are not limited to, statements regarding estimates and forecasts of financial and performance metrics, projections of market opportunity and market share, potential benefits and the commercial attractiveness to its customers of products and services sold through Kustom Entertainment’s platform, the potential success of Kustom Entertainment’s marketing and expansion strategies, potential benefits of the Business Combination (including with respect to stockholder value), and expectations related to the terms and timing of the Business Combination. These statements are based on various assumptions, whether or not identified in this proxy statement/prospectus, and on the current expectations of Kustom Entertainment’s and Clover Leaf’s management and are not predictions of actual performance. These forward-looking statements are provided for illustrative purposes only and are not intended to serve as, and must not be relied on by any investor as, a guarantee, an assurance, a prediction or a definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. These forward-looking statements are subject to a number of risks and uncertainties, including:
• rapid changes in the competitive industries and markets in which Kustom Entertainment operates or plans to operate and the risk of downturns;
• changes in applicable laws or regulations affecting Kustom Entertainment’s business;
• the ability of Kustom Entertainment to implement business plans, forecasts, and other expectations after the completion of the Business Combination, and identify and realize additional opportunities;
• risks related to Kustom Entertainment’s limited operating history, the rollout and/or expansion of its business and the timing of expected business milestones;
• risks related to Kustom Entertainment’s potential inability to achieve or maintain profitability and generate significant revenue;
• current and future conditions in the global economy, including as a result of economic uncertainty, and its impact on Kustom Entertainment, its business and the markets in which it operates;
• the ability of Kustom Entertainment to retain existing advertisers and consumer and business members and attract new advertisers and consumer and business members;
• the potential inability of Kustom Entertainment to manage growth effectively;
• the ability to recruit, train and retain qualified personnel;
• estimates for the prospects and financial performance of Kustom Entertainment’s business may prove to be incorrect or materially different from actual results;
• the risk that demand for Kustom Entertainment’s services may be decreased due to a decrease in the number of large-scale sporting events, concerts and theater shows;
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• the risk that the Business Combination may not be completed by Clover Leaf’s Business Combination deadline, even if extended by its stockholders;
• the risk that changes in internet search engine algorithms and dynamics, or search engine disintermediation, or changes in marketplace rules could have a negative impact on traffic for Kustom Entertainment’s sites and ultimately, its business and results of operations;
• the risk that any decrease in the willingness of artists, teams and promoters to continue to support the secondary ticket market may result in decreased demand for Kustom Entertainment’s services;
• the risk of the occurrence of extraordinary events, such as terrorist attacks, disease epidemics or pandemics, severe weather events and natural disasters;
• the risk that because Kustom Entertainment’s operations are seasonal and its results of operations vary from quarter to quarter and year over year, its financial performance in certain financial quarters or years may not be indicative of, or comparable to, Kustom Entertainment’s financial performance in subsequent financial quarters or years;
• the risk that periods of rapid growth and expansion could place a significant strain on Kustom Entertainment’s resources, including its employee base, which could negatively impact Kustom Entertainment’s operating results;
• the risk that Kustom Entertainment is unable to secure or protect its intellectual property;
• the risk that Kustom Entertainment may need to raise additional capital to execute its business plan, which many not be available on acceptable terms or at all;
• the risk that Kustom Entertainment may never achieve or sustain profitability
• the inability of the parties to successfully or timely consummate the proposed Business Combination, including the risk that required regulatory approvals are not obtained, are delayed or are subject to unanticipated conditions that could adversely affect the Combined Company or the expected benefits of the proposed Business Combination or that the approval of the stockholders of Clover Leaf or Kustom Entertainment is not obtained;
• failure to realize the anticipated benefits of the proposed Business Combination;
• costs related to the Business Combination and the failure to realize anticipated benefits of the Business Combination or to realize estimated pro forma results and underlying assumptions, including with respect to estimated stockholder redemptions;
• risks related to future market adoption of Kustom Entertainment’s offerings;
• risks related to Kustom Entertainment’s marketing and growth strategies;
• the effects of competition on Kustom Entertainment’s business;
• the amount of redemption requests made by Clover Leaf’s public stockholders;
• the ability of Clover Leaf or the Combined Company to issue equity or equity-linked securities in connection with the proposed Business Combination or in the future;
• Kustom Entertainment and Clover Leaf’s inability to complete the proposed Business Combination as contemplated by the Merger Agreement;
• matters discovered by the parties as they complete their respective due diligence investigation of the other;
• the inability to recognize the anticipated benefits of the proposed Business Combination, which may be affected by, among other things, the amount of cash available following any redemptions by Clover Leaf stockholders;
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• the ability of the Combined Company to meet the initial listing standards of the New York Stock Exchange upon consummation of the Business Combination;
• costs related to the proposed Business Combination;
• expectations with respect to future operating and financial performance and growth, including when Kustom Entertainment will generate positive cash flow from operations;
• Kustom Entertainment’s ability to raise funding on reasonable terms as necessary to develop its products in the timeframe contemplated by its business plan;
• Kustom Entertainment’s ability to execute its anticipated business plans and strategy;
• the failure to satisfy the conditions to the consummation of the Business Combination, including the approval of the Business Combination and definitive agreements for the Business Combination by the stockholders of Clover Leaf;
• the occurrence of any event, change or other circumstance that could give rise to the termination of the Business Combination;
• the receipt of an unsolicited offer from another party for an alternative transaction that could interfere with the Business Combination;
• the outcome of any legal proceedings that may be instituted against Kustom Entertainment or Clover Leaf following the announcement of the Business Combination;
• the outcome of any legal proceedings that may be instituted against Kustom Entertainment or Clover Leaf related to the Business Combination, and those factors discussed in Clover Leaf’s IPO Prospectus under the heading “Risk Factors,” and other documents of Clover Leaf filed, or to be filed, with the SEC; and
• other risks and uncertainties described in this proxy statement/prospectus, including those under the section entitled “Risk Factors.”
If any of these risks materialize or any of Clover Leaf’s or Kustom Entertainment’s assumptions prove incorrect, actual results could differ materially from the results implied by these forward-looking statements. There may be additional risks that neither Clover Leaf nor Kustom Entertainment presently know or that Clover Leaf and Kustom Entertainment currently believe are immaterial that could also cause actual results to differ materially from those contained in the forward-looking statements. In addition, forward-looking statements reflect Clover Leaf’s and Kustom Entertainment’s expectations, plans or forecasts of future events and views as of the date of this proxy statement/prospectus. Clover Leaf and Kustom Entertainment anticipate that subsequent events and developments may cause Clover Leaf’s and Kustom Entertainment’s assessments to change. However, while we may elect to update these forward-looking statements at some point in the future, Clover Leaf and Kustom Entertainment specifically disclaim any obligation to do so. These forward-looking statements should not be relied upon as representing Clover Leaf’s and Kustom Entertainment’s assessments as of any date subsequent to the date of this proxy statement/prospectus. Accordingly, undue reliance should not be placed upon the forward-looking statements. Actual results, performance or achievements may, and are likely to, differ materially, and potentially adversely, from any projections and forward-looking statements and the assumptions on which those forward-looking statements were based. There can be no assurance that the data contained herein is reflective of future performance to any degree. You are cautioned not to place undue reliance on forward-looking statements as a predictor of future performance as projected financial information and other information are based on estimates and assumptions that are inherently subject to various significant risks, uncertainties and other factors, many of which are beyond Clover Leaf’s and Kustom Entertainment’s control. Forward-looking statements are not guarantees of performance. All forward-looking statements attributable to Clover Leaf or Kustom Entertainment or a person acting on their behalf are expressly qualified in their entirety by the foregoing cautionary statements.
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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING
The following questions and answers below only highlight selected information from this document and only briefly address some commonly asked questions about the proposals to be presented at the Special Meeting, including with respect to the proposed Business Combination. The following questions and answers do not include all the information that is important to Clover Leaf stockholders. We urge you to read this entire proxy statement/prospectus, including the Annexes and other documents referred to herein, carefully and in their entirety to fully understand the proposed Business Combination and the voting procedures for the Special Meeting. See also the section of this proxy statement/prospectus titled “Where You Can Find More Information.”
Q: Why am I receiving this proxy statement/prospectus?
A: Clover Leaf stockholders are being asked to consider and vote upon a Proposal to approve and adopt the Business Combination contemplated by the Merger Agreement, among other Proposals. Upon the completion of the transactions contemplated by the Merger Agreement, Kustom Entertainment will become a wholly-owned subsidiary of Clover Leaf. A copy of the Merger Agreement is attached to this proxy statement/prospectus as Annex A.
This proxy statement/prospectus and its annexes contain important information about the proposed Business Combination and the other matters to be acted upon at the Special Meeting. You should read this proxy statement/prospectus and its annexes and the other documents referred to herein carefully and in their entirety.
THE VOTE OF CLOVER LEAF STOCKHOLDERS IS IMPORTANT. CLOVER LEAF STOCKHOLDERS ARE URGED TO SUBMIT THEIR PROXIES AS SOON AS POSSIBLE AFTER CAREFULLY REVIEWING THIS PROXY STATEMENT/PROSPECTUS AND ITS ANNEXES AND CAREFULLY CONSIDERING EACH OF THE PROPOSALS BEING PRESENTED AT THE SPECIAL MEETING.
Q: What proposals are stockholders of Clover Leaf being asked to vote upon?
A: Stockholders of Clover Leaf are being asked to vote upon the following Proposals:
(1) The NTA Proposal (Proposal 1) — To approve and adopt, subject to the approval of the Business Combination Proposal, the following amendments to the Current Charter, which shall be effective, if adopted and implemented by Clover Leaf, prior to the consummation of the proposed Business Combination, to remove from the Current Charter requirements limiting Clover Leaf’s ability to redeem shares of Clover Leaf Class A Common Stock and consummate an initial business combination if the amount of such redemptions would cause Clover Leaf to have less than $5,000,001 in net tangible assets:
(a) Section 9.2(a) of the Current Charter shall be amended to read in its entirety as follows: “Prior to the consummation of the initial Business Combination, the Corporation shall provide all holders of Offering Shares with the opportunity to have their Offering Shares redeemed (irrespective of whether they voted in favor or against the Business Combination) pursuant to, and subject to the limitations of, Sections 9.2(b) and 9.2(c) hereof (such rights of such holders to have their Offering Shares redeemed pursuant to such Sections, the “Redemption Rights”) for cash equal to the applicable redemption price per share determined in accordance with Section 9.2(b) hereof (the “Redemption Price”). Notwithstanding anything to the contrary contained in this Amended and Restated Certificate, there shall be no Redemption Rights or liquidating distributions with respect to any warrant issued pursuant to the Offering.”
(b) Section 9.2(e) of the Current Charter shall be amended to read in its entirety as follows: “If the Corporation offers to redeem the Offering Shares in conjunction with a stockholder vote on an initial Business Combination, the Corporation shall consummate the proposed initial Business Combination only if such initial Business Combination is approved by the affirmative vote of the holders of a majority of the shares of the Common Stock that are voted at a stockholder meeting held to consider such initial Business Combination (or such other vote as the applicable law or stock exchange rules then in effect may require).”
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(c) Section 9.7 of the Current Charter shall be amended to remove the following language: “provided, however, that any such amendment will be voided, and this Article IX will remain unchanged, if any stockholders who wish to redeem are unable to redeem due to the Redemption Limitation.”
(2) The Business Combination Proposal (Proposal 2) — To approve and adopt the Merger Agreement and the transactions contemplated thereby pursuant to which, at the Effective Time of the Merger:
(a) Merger Sub will merge with and into Kustom Entertainment, with Kustom Entertainment being the surviving company following the Merger and continuing in existence as a wholly owned subsidiary of Clover Leaf;
(b) Each share of Kustom Entertainment Common Stock will be cancelled and converted into the right to receive a number of shares of Class A Common Stock, par value $0.0001 per share, of the Combined Company equal to the Merger Consideration divided by a per share value of $11.14;
We refer to this Proposal as the “Business Combination Proposal.” A copy of the Merger Agreement is attached to the proxy statement/prospectus as Annex A.
In addition to the approval of the Proposals at the Special Meeting, unless waived by the parties to the Merger Agreement, in accordance with the Merger Agreement and applicable law, the closing of the Business Combination is subject to a number of conditions set forth in the Merger Agreement including, among other things, receipt of the requisite stockholder approvals contemplated by this proxy statement/prospectus. For more information about the closing conditions to the Business Combination, see the section of this proxy statement/prospectus titled “Business Combination Proposal — Conditions to the Closing.”
The Merger Agreement may be terminated at any time prior to the Closing of the Business Combination upon agreement of Kustom Entertainment and Clover Leaf, or by Kustom Entertainment or Clover Leaf acting alone in specified circumstances as described in the Merger Agreement. For more information about the termination rights under the Merger Agreement, see the section titled “Business Combination Proposal — Termination.”
Pursuant to the Current Charter, in connection with the Business Combination, Clover Leaf’s Public Stockholders may elect to redeem, effective upon the Closing of the Business Combination, shares of Clover Leaf Class A Common Stock then held by them for cash equal to the aggregate amount then on deposit in the Trust Account as of two (2) business days prior to the consummation of Clover Leaf’s Business Combination, including interest earned on the funds held in the Trust Account and not previously released to Clover Leaf in connection with Permitted Withdrawals, divided by the number of then outstanding public shares, subject to the limitations described herein. As of [•], 2023, based on funds in the Trust Account of approximately $[•] as of such date, the pro rata portion of the funds available in the Trust Account for the redemption of public shares of Clover Leaf Class A Common Stock was approximately $[•] per share. Clover Leaf Public Stockholders are not required to affirmatively vote for or against the Business Combination in order to redeem their shares of Clover Leaf Class A Common Stock for cash. This means that public stockholders who hold shares of Clover Leaf Class A Common Stock on or before [•], 2023 (two (2) business days before the Special Meeting) will be eligible to elect to have their shares of Clover Leaf Class A Common Stock redeemed for cash in connection with the Special Meeting, whether or not they are holders as of the Record Date, and whether or not such shares are voted at the Special Meeting.
A public stockholder, together with any of such stockholder’s affiliates or any other person with whom it is acting in concert or as a “group” (as defined under Section 13 of the Exchange Act), will be restricted from redeeming in the aggregate such stockholder’s shares or, if part of such a group, the group’s shares, with respect to 15% or more of the shares of Clover Leaf Common Stock included in the units of Clover Leaf sold in the IPO (including overallotment securities sold to Clover Leaf’s underwriters in connection with the IPO). Holders of Clover Leaf’s outstanding public rights and Units do not have redemption rights with respect to such securities in connection with the Business Combination. Holders of outstanding Clover Leaf Units must separate the underlying shares of Clover Leaf Class A Common Stock and Public Rights prior to exercising redemption rights with respect to the public Clover Leaf Class A Common Stock.
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See the section titled “The Special Meeting — Redemption Rights.”
The Business Combination will be consummated only if the Required Proposals are approved at the Special Meeting, which Required Proposals include the Business Combination Proposal, the Charter Proposal, the Incentive Plan Proposal, and the Nasdaq Proposal. The Required Proposals are conditioned on the approval of the Business Combination Proposal. The Advisory Charter Proposals are conditioned on the Required Proposals. The NTA Proposal is conditioned upon the approval of the Business Combination Proposal. Therefore, if the Business Combination Proposal is not approved, then the NTA Proposal will have no effect, even if approved by Clover Leaf stockholders. The Adjournment Proposal is not conditioned on the approval of any other Proposal set forth in this proxy statement/prospectus.
The Business Combination involves numerous risks. For more information about these risks, see the section titled “Risk Factors.”
(3) The Charter Proposal (Proposal 3) — Assuming the Business Combination Proposal (Proposal 2) is approved and adopted, to approve and adopt the Proposed Charter, in the form attached to this proxy statement/prospectus as Annex B (the “Proposed Charter”), which will amend and restate the Current Charter (as amended by the NTA Proposal, if approved) in its entirety and be effective when duly filed with the Secretary of State of the State of Delaware in connection with the Closing.
(4) – (7) Advisory Charter Proposals (Proposals 4 – 6) — To consider and vote upon, on a non-binding basis, certain governance provisions in the Proposed Charter, presented separately in accordance with SEC requirements. A summary of these provisions is set forth in the “Advisory Charter Proposals (Proposals 4 – 6)” section of this proxy statement/prospectus and a complete copy of these provisions is attached to the proxy statement/prospectus as Annex B. You are encouraged to read them in their entirety.
(8) The Incentive Plan Proposal (Proposal 7) — To approve the 2023 Stock Incentive Plan (the “Incentive Plan”) the form of which is attached to this proxy statement/prospectus as Annex D. The Clover Leaf Board has adopted the Incentive Plan, subject to the approval of the Clover Leaf stockholders and contingent upon the Closing. If approved, the Incentive Plan will be effective upon the Closing, to be available to the Combined Company after the Closing. The Incentive Plan Proposal is described in more detail in this proxy statement/prospectus under the heading “The Incentive Plan Proposal (Proposal 7).” You are encouraged to read the Incentive Plan in its entirety.
(9) The Nasdaq Proposal (Proposal 8) — To consider and vote upon, for purposes of complying with the applicable listing rules of the Nasdaq, the approval of the issuance of the shares of Class A Common Stock to be issued in connection with the Business Combination.
(10) The Adjournment Proposal (Proposal 9) — To consider and vote upon a Proposal to adjourn the Special Meeting to a later date or dates, if necessary or appropriate as determined by the Clover Leaf Board.
Q: What interests do Clover Leaf’s Sponsor and current officers, directors and financial advisors have in the Business Combination?
A: In considering the recommendation of Clover Leaf’s Board to vote in favor of the Business Combination, holders of Clover Leaf Class A Common Stock underlying the Units sold in the IPO, including any overallotment securities acquired by Clover Leaf’s underwriters (“Public Stockholders”) should be aware that, aside from their interests as stockholders, Clover Leaf’s Sponsor, directors and officers have interests in the Business Combination that are different from, or in addition to, those of Clover Leaf’s other stockholders generally, including the aggregate amount at risk to Clover Leaf’s Sponsor of $5,743,590, which is the amount that the Sponsor paid for its Clover Leaf Sponsor Shares and Private Placement Units. Clover Leaf’s directors were aware of and considered these interests, among other matters, in evaluating the Business Combination, and in recommending to the Public Stockholders that they approve the Business Combination. Further, the interests of members of the Sponsor and current officers or directors of Clover Leaf may be different from or in addition
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to (and which may conflict with) your interests and may be incentivized to complete a less favorable business combination rather than liquidating Clover Leaf. Public Stockholders should take these interests into account in deciding whether to approve the Business Combination. These interests include, among other things, the fact that:
• [•] will be Clover Leaf’s designee to the Combined Company Board upon the effectiveness of the Merger. As a director, in the future [•] may receive any cash fees, stock options or stock awards that the Combined Company Board determines to pay to its directors;
• unless Clover Leaf consummates an initial business combination, it is possible that Clover Leaf’s officers, directors and the Sponsor may not receive reimbursement for out-of-pocket expenses incurred by them, to the extent that such expenses exceed the amount of available funds not deposited in the Trust Account (as of September 14, 2023, Clover Leaf’s officers and directors have incurred approximately $3,296,246 of out-of-pocket expenses exceeding funds available to Clover Leaf for reimbursement thereof, and Clover Leaf’s officers, directors and the Sponsor may not receive reimbursement therefor if the proposed Business Combination is not consummated).
• as a condition to the IPO, pursuant to the Insider Letter, the Clover Leaf Sponsor Shares became subject to a lock-up whereby, subject to certain limited exceptions, the Insiders’ Clover Leaf Sponsor Shares are not transferable or salable until the earlier of (A) six months after the completion of our initial business combination or (B) subsequent to our initial business combination, if (x) the closing price of the Clover Leaf Class A Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing after our initial business combination, or (y) Clover Leaf completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of Clover Leaf’s stockholders having the right to exchange their shares of Clover Leaf Common Stock for cash, securities or other property. In this regard, while the Clover Leaf Sponsor Shares are not the same as the Clover Leaf Class A Common Stock, are subject to certain restrictions that are not applicable to the Clover Leaf Class A Common Stock, and may become worthless if Clover Leaf does not complete a business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders);
• the Sponsor purchased an aggregate of 571,859 Sponsor Private Placement Units, each unit consisting of one share of Clover Leaf Class A Common Stock and one right to receive one-eighth of one share of Clover Leaf Class A Common Stock, which Private Placement Units were purchased at an aggregate purchase price of $5,718,590, or $10.00 per unit, in the Private Placement consummated simultaneously with the IPO, which have no redemption rights and will be worthless if a business combination is not consummated. Based on the closing trading price of the Public Units on September 29, 2023 which was $11.44, the Sponsor Private Placement Units would have an aggregate value of approximately $6,542,067 as of September 29, 2023;
• as a condition to the IPO, pursuant to the Insider Letter, the Insiders have agreed that the Sponsor Private Placement Units, and all of their underlying securities, will not be sold or transferred by it until 30 days after Clover Leaf has completed a business combination;
• the Sponsor can earn a positive rate of return on its investment even if other Clover Leaf stockholders experience a negative rate of return in the Combined Company. The Sponsor paid $25,000 to purchase 3,457,807 shares of Clover Leaf Class B Common Stock. These securities will have a significantly higher value at the time of the Business Combination, if it is consummated. Based on the closing trading price of the Class A Common Stock on [•], 2023, which was $[•], the Clover Leaf Sponsor Shares would have an aggregate value of approximately $[•] as of the same date. If Clover Leaf does not consummate the Business Combination or another initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), and Clover Leaf is therefore required to be liquidated, the Clover Leaf Sponsor Shares would be worthless, as the Sponsor is not entitled to participate in any redemption or liquidation of the Trust Account. Based on the difference in the effective purchase price of $0.007 per share that the members of the Sponsor paid for the Clover Leaf Sponsor Shares, as compared to the purchase price of $10.00 per Unit sold in the IPO, members of the Sponsor may earn a positive rate of return even if the share price of the Combined Company after the Closing falls below the price initially paid for the Units in the IPO and the Clover Leaf Public Stockholders experience a negative rate of return following the Closing of the Business Combination;
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• each Insider has agreed not to redeem any of its Clover Leaf Sponsor Shares in connection with a stockholder vote to approve a proposed initial business combination;
• if Clover Leaf does not complete an initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), the proceeds from the sale of the Private Placement Units will be included in the liquidating distribution to Clover Leaf’s public stockholders and the Sponsor Private Placement Units will expire worthless;
• the fact that the Sponsor holds promissory notes issued by Clover Leaf in connection with the 2022 Extension and the 2023 Extension (the “Extension Notes”). In connection with the 2023 Extension, Clover Leaf will cause up to $360,000 to be deposited into the trust account in installments of $60,000 per month, for each calendar month or portion thereof (commencing on July 22, 2023 and on the 22nd of each subsequent month) until January 22, 2024, that Clover Leaf needs to complete an initial business combination. As of September 5, 2023, an aggregate of $120,000 had been deposited into trust to support the Extension, and as of September 5, 2023, an aggregate principal amount of $2,886,246 was outstanding under the Extension Notes. In the event an initial business combination is consummated, the Extension Notes may be repaid out of the proceeds of the Trust Account released to the post-combination company, and $2,226,246 of the Extension Notes may be converted into Clover Leaf Units. Otherwise, the Extension Notes would be repaid only out of funds held outside the Trust Account. In the event that a business combination does not close, Clover Leaf may use a portion of proceeds held outside the Trust Account to repay the Extension Notes, but no proceeds held in the Trust Account would be used to repay the Extension Notes;
• The Sponsor, officers and directors (or their affiliates) may make loans from time to time to Clover Leaf in order to provide working capital or finance transaction costs in connection with an initial business combination. Up to $1,500,000 of such working capital loans may be convertible into private placement-equivalent units at a price of $10.00 per unit, at the option of the lender. Such units would be identical to the Private Placement Units. In the event an initial business combination is consummated, the working capital loans may be repaid out of the proceeds of the Trust Account released to the post-combination company. In the event that the initial business combination does not close, Clover Leaf may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds from the Trust Account would be used for such repayment;
• if the Trust Account is liquidated, including in the event Clover Leaf is unable to complete an initial business combination within the required time period, the Sponsor has agreed that it will be liable to Clover Leaf, if and to the extent any claims by a third party for services rendered or products sold to Clover Leaf, or a prospective target business with which Clover Leaf has entered into a written letter of intent, confidentiality or similar agreement or Merger Agreement, reduce the amount of funds in the Trust Account to below the lesser of (i) $10.15 per public share and (ii) the actual amount per public share held in the Trust Account as of the date of the liquidation of the Trust Account, if less than $10.15 per share due to reductions in the value of the trust assets, less Permitted Withdrawals, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to the monies held in the Trust Account (whether or not such waiver is enforceable), nor will it apply to any claims under Clover Leaf’s indemnity of the underwriters of the IPO against certain liabilities, including liabilities under the Securities Act; and
• the fact that the Sponsor and Clover Leaf’s officers and directors may benefit from the completion of a business combination and may be incentivized to complete an acquisition of a less favorable target company or on terms less favorable to stockholders rather than liquidate.
In addition to the interests of the Clover Leaf Insiders in the Business Combination, Clover Leaf stockholders should be aware that the IPO Underwriter, Maxim may have financial interests that are different from, or in addition to, the interests of Clover Leaf stockholders, including:
• the fact that the IPO Underwriter is entitled to deferred underwriting fees in the amount of $0.35 per Unit, or $4,840,930.50, pursuant to the Underwriting Agreement and such fees (a portion of which the IPO Underwriter and Clover Leaf have agreed may be allocated following Closing of the proposed Business Combination with Kustom Entertainment to satisfy of a portion of the fees payable to Maxim pursuant to the Maxim Engagement Letter) are payable only if Clover Leaf completes an initial business combination;
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• the fact that the IPO Underwriter purchased 103,734 Representative Units, each unit consisting of one share of Clover Leaf Class A Common Stock and one right to receive one-eighth of one share of Clover Leaf Class A Common Stock, which Representative Units were purchased at an aggregate purchase price of $1,037,340, or $10.00 per unit, in the Private Placement consummated simultaneously with the IPO, which have no redemption rights and will be worthless if a business combination is not consummated. Based on the closing trading price of the Public Units on [•], 2023 which was $[•], the Representative Units would have an aggregate value of approximately $[•] as of [•], 2023; and
• the fact that Clover Leaf issued to the IPO Underwriter and/or its designees 138,312 Representative Shares upon consummation of the IPO and the subsequent partial exercise of the underwriter’s over-allotment option. These Representative Shares were valued at a price of $10.00 which was the sale price of the units sold in the IPO. The IPO Underwriter agreed not to transfer, assign or sell any such shares until the completion of Clover Leaf’s initial business combination. In addition, the IPO Underwriter agreed (i) to waive its redemption rights with respect to such shares in connection with the completion of Clover Leaf’s initial business combination and (ii) to waive its rights to liquidating distributions from the Trust Account with respect to such shares if Clover Leaf fails to complete an initial business combination. Based on the closing trading price of the Clover Leaf Class A Common Stock on [•], 2023 which was $[•], the Representative Shares would have an aggregate value of approximately $[•] as of [•], 2023.
These interests may have influenced Clover Leaf’s Board in making their recommendation that you vote in favor of the approval of the Business Combination. The members of the Clover Leaf Board were aware of and considered these interests, among other matters, when they approved the Business Combination and recommended that Clover Leaf stockholders approve the proposals required to effect the Business Combination. The Clover Leaf Board determined that the overall benefits expected to be received by Clover Leaf and its stockholders in the Business Combination outweighed any potential risk created by the conflicts stemming from these interests. In addition, the Clover Leaf Board determined that potentially disparate interests would be mitigated because (i) most of these disparate interests would exist with respect to a business combination by Clover Leaf with any other target business or businesses, (ii) these interests could be adequately disclosed to stockholders in this proxy statement/prospectus, and that stockholders could take them into consideration when deciding whether to vote in favor of the proposals set forth herein and (iii) the Sponsor will hold equity interests in the Combined Company with value that, after the Closing, will be based on the future performance of Combined Company’s stock.
Q: Did the Clover Leaf Board obtain a third-party valuation or fairness opinion in determining whether or not to proceed with the Business Combination?
A: Yes, the Clover Leaf Board obtained a fairness opinion in connection with its determination as whether to proceed with the business combination. For a description of the opinion issued by Newbridge to the Clover Leaf Board, please see “Proposal 2: The Business Combination Proposal — Engagement of Financial Advisor to Clover Leaf.”
Q: Why is the NTA Proposal being proposed?
A: The adoption of the proposed amendments to remove the net asset test limitation from the Current Charter is being proposed in order to facilitate the consummation of the Business Combination, by permitting redemptions by public stockholders even if such redemptions result in Clover Leaf having net tangible assets that are less than $5,000,001. The purpose of the net asset test limitation was initially to ensure that the Clover Leaf Class A Common Stock is not deemed to be a “penny stock” pursuant to Rule 3a51-1 under the Exchange Act. Because the Clover Leaf Class A Common Stock and the Combined Company’s Common Stock would not be deemed to be a “penny stock,” because Clover Leaf otherwise is exempt from the provisions of Rule 419 promulgated under the Exchange Act, as such securities are or will be listed on a national securities exchange upon the Closing, Clover Leaf is presenting the NTA Proposal to facilitate the consummation of the Business Combination. For more information, see “The NTA Proposal (Proposal No. 1) — Reasons for the Amendments.”
Q: Are any of the proposals conditioned on one another?
A: Yes. Each of the Business Combination Proposal, the Charter Proposal, the Incentive Plan Proposal, and the Nasdaq Proposal is conditioned on one another, and are referred to collectively herein as the “Required Proposals.” The remaining Proposals, consisting of the NTA Proposal, the Advisory Charter Proposals
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and the Adjournment Proposal are not Required Proposals. Unless the Business Combination Proposal is approved, the other Required Proposals will not be presented to the stockholders of Clover Leaf at the Special Meeting, because they are conditioned on the approval of the Business Combination Proposal. The Business Combination Proposal and the Advisory Charter Proposals are likewise conditioned on the approval of these Required Proposals. The NTA Proposal is conditioned upon the approval of the Business Combination Proposal. Therefore, if the Business Combination Proposal is not approved, then the NTA Proposal will have no effect, even if approved by Clover Leaf stockholders. In addition, unless the NTA Proposal is approved, the consummation of the Business Combination is conditioned upon, among other things, the net tangible assets condition required in the Current Charter of having $5,000,001 immediately prior to or upon consummation of the Business Combination. The approval of the Business Combination Proposal and the other Required Proposals are preconditions to the consummation of the Business Combination. The Adjournment Proposal is not conditioned on the approval of any other proposal set forth in this proxy statement/prospectus.
It is important for you to note that if the Required Proposals (consisting of the Business Combination Proposal, the Charter Proposal, the Incentive Plan Proposal, and the Nasdaq Proposal) do not receive the requisite vote for approval, Clover Leaf will not consummate the Business Combination. If Clover Leaf does not consummate the Business Combination and fails to complete an initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), Clover Leaf will be required, in accordance with the Current Charter, to dissolve and liquidate its Trust Account by returning the then-remaining funds in such account (less Permitted Withdrawals) to its public stockholders. If Clover Leaf’s initial business combination is not consummated by January 22, 2024, then Clover Leaf’s existence will terminate, and Clover Leaf will distribute amounts in the Trust Account as provided in Clover Leaf’s Current Charter.
Q: When and where will the Special Meeting take place?
A: The Special Meeting will be held on [•], 2023 at [•] a.m. Eastern Time, via live audio webcast or such other date, time and place to which such meeting may be adjourned or postponed, to consider and vote upon the proposals.
Q: What will happen in the Business Combination?
A: At the Effective Time, Merger Sub will merge with and into Kustom Entertainment, with Kustom Entertainment surviving such Merger, as a result of which Digital Ally (except those who properly exercise appraisal or dissenters rights under applicable law) will receive newly issued shares of Class A Common Stock, as applicable. For details and more information please see the sections entitled “Business Combination Proposal (Proposal 2) — the Merger Agreement — Consideration to Digital Ally in the Merger.” Upon consummation of the Business Combination, Kustom Entertainment will become a wholly-owned subsidiary of Clover Leaf. After the Closing of the Business Combination, the cash held in the Trust Account will be released from the Trust Account and used to pay each of Clover Leaf’s and Kustom Entertainment’s Transaction Expenses due as of the Closing, and for Permitted Withdrawals and general corporate purposes. A copy of the Merger Agreement is attached to this proxy statement/prospectus as Annex A.
Q: What equity stake will current Public Stockholders, the Sponsor and Digital Ally hold in the Combined Company immediately after the Closing?
A: Clover Leaf stockholders that elect not to redeem their Public Shares will experience significant dilution as a result of the Business Combination. Clover Leaf Public Stockholders currently own approximately [•]% of Clover Leaf’s outstanding common stock. If no Clover Leaf stockholders redeem their Public Shares in connection with the Business Combination and the other assumptions described under the section with the heading “Frequently Used Terms — Share Calculations and Ownership Percentages” are accurate, upon consummation of the Business Combination, (i) Clover Leaf’s Public Stockholders are expected to own approximately 15.6% of the Combined Company’s total outstanding shares of Combined Company Common Stock, (ii) the Sponsor is expected to own approximately 22.8% of the outstanding Combined Company Common Stock, (iii) Digital Ally Stockholders are expected to own [•]% of the outstanding Combined Company Common Stock and (iv) Digital Ally is expected to own approximately [•]% of the Combined Company Common Stock after the contemplated Digital Ally Distribution, which is distributed concurrently with the Closing.
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If any of the Public Stockholders exercise their redemption rights, the percentage of Public Shares held by the Public Stockholders will decrease and the percentages of the Combined Company’s total outstanding shares held by the Sponsor and by Digital Ally will increase, in each case relative to the percentage held if none of the Public Shares are redeemed. Upon the issuance of Combined Company Common Stock in connection with the Business Combination, the percentage ownership of the Combined Company by non-redeeming Public Stockholders will be diluted. The percentage of the total number of outstanding shares of Combined Company Common Stock that will be owned by Clover Leaf Public Stockholders as a group will vary based on the number of Public Shares redeemed in connection with the Business Combination. Public Stockholders that do not redeem their Public Shares in connection with the Business Combination will experience further dilution upon vesting and settlement or exercise, as applicable, of equity-based awards or purchase rights which may be issued or granted by the Combined Company after the Closing pursuant to the Incentive Plan.
As further described below, the relative ownership percentages and voting power held by Public Stockholders after the proposed Business Combination is consummated will decrease and be diluted, on a relative basis, as a result of future issuances of Combined Company shares or other equity-linked instruments. While certain potential sources of dilution are described following the table set forth below, there may be other sources of dilution to Public Stockholders, as further described above. The following information incorporates the assumptions described under the section with the heading “Frequently Used Terms — Share Calculations and Ownership Percentages”.
If there are additional sources of dilution or if actual facts are different in any other manner from the assumptions incorporated in estimated ownership and voting information presented above, the percentage ownership retained by the Clover Leaf stockholders, Digital Ally and Digital Ally Stockholders in the Combined Company, and associated voting power, will be different.
The following table illustrates varying ownership levels of the Combined Company immediately following the Business Combination, incorporating the assumptions described above and in the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements”, as further described below:
|
No Additional |
Maximum |
|||||||||
|
Pro Forma Ownership |
Number of |
Percent |
Number of |
Percent |
||||||
|
Kustom Entertainment stockholders |
11,220,826 |
57.4 |
% |
11,220,826 |
59.7 |
% |
||||
|
Clover Leaf public stockholders(2) |
3,048,031 |
15.6 |
% |
2,283,009 |
12.2 |
% |
||||
|
Sponsor’s Founders Shares(1) |
4,459,688 |
22.8 |
% |
4,459,688 |
23.7 |
% |
||||
|
Underwriter Shares(3) |
824,519 |
4.2 |
% |
824,519 |
4.4 |
% |
||||
|
Total shares outstanding |
19,553,064 |
|
18,788,042 |
|
||||||
____________
(1) Includes 864,452 Class B Founders Shares in reserve for Earnout shares and 571,859 Private Rights converted to 71,482 shares of common stock upon consummation of the Business Combination.
(2) Includes 14,375,000 Public Rights automatically converted to 1,796,875 shares of common stock upon consummation of the Business Combination.
(3) Includes 103,734 Private Rights automatically converted to 12,967 shares of common stock upon consummation of the Business Combination.
Q: Will Kustom Entertainment’s Stockholders or any other person be entitled to any earnout in connection with the Business Combination?
A: In addition to Digital Ally’s rights to receive Class A Common Stock, as applicable, in the Transactions, pursuant to the Sponsor Forfeiture Letter, the Sponsor agreed to forfeit up to an aggregate of 345,780 shares of Clover Leaf Class A Common Stock and transfer to Stanton E. Ross up to an aggregate of 518,672 Clover Leaf Sponsor Shares (the “Earnout Shares”) (such shares of Clover Leaf Class A Common Stock having been converted from shares of Clover Leaf Class B Common Stock), subject to the earnout provisions contained in the Sponsor Forfeiture Letter pertaining to the revenue of the Kustom Entertainment for the fiscal years of 2023 and 2024, contingent and effective upon the Closing. If the revenue of the business for either of the fiscal years 2023 and 2024 of Kustom Entertainment (the “Earn-Out Period”) achieves certain benchmarks in the applicable fiscal year, 172,890 of the Sponsor’s Earnout Shares shall no longer be subject to forfeiture and the Sponsor shall transfer to Stanton E. Ross 259,336 Earnout Shares (the “Earn-Out Payment”); provided, however, that
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in the event the benchmark revenue is not achieved on or before the end of the applicable fiscal year, then the Earn-Out Payment for such fiscal year shall be zero, and the Sponsor shall, effective immediately, surrender for cancellation and retirement by the Combined Company such amount of Earnout Shares. The Sponsor agreed to forfeit up to an additional 864,452 shares of Clover Leaf Class B Common Stock (or shares of Clover Leaf Class A Common Stock, if such shares of Clover Leaf Class B Common Stock have been converted to shares of Clover Leaf Class A Common Stock prior to the Closing) (the “Adjustment Shares”), with the percentage of Adjustment Shares to be forfeited to be equal to the percentage of the Clover Leaf Common Stock redeemed by the Clover Leaf Public Stockholders in connection with the Redemption.
Q: What conditions must be satisfied to complete the Business Combination?
A: In addition to the Required Proposals, there are a number of closing conditions in the Merger Agreement, including the approval of the Business Combination by Digital Ally. For a summary of the conditions that must be satisfied or waived prior to the Closing of the Business Combination, see the section titled “The Business Combination Proposal (Proposal 2) — The Merger Agreement” and “Summary of the Proxy Statement/Prospectus The Proposals — The Business Combination Proposal (Proposal 2) — Conditions to Closing.”
Q: Why is Clover Leaf providing stockholders with the opportunity to vote on the Business Combination?
A: Under the Current Charter, Clover Leaf must provide all holders of its Public Shares with the opportunity to have their Public Shares redeemed upon the consummation of Clover Leaf’s initial business combination either in conjunction with a tender offer or in conjunction with a stockholder vote. For business and other reasons, Clover Leaf has elected to provide its stockholders with the opportunity to have their Public Shares redeemed in connection with a stockholder vote rather than a tender offer. Therefore, Clover Leaf is seeking to obtain the approval of its stockholders of the Business Combination Proposal in order to allow its public stockholders to effectuate redemptions of their Public Shares in connection with the Closing of the Business Combination.
Q: How many votes do I have at the Special Meeting?
A: Clover Leaf stockholders are entitled to one vote at the Special Meeting for each share of Clover Leaf Common. Subject to the discussion set forth in this proxy statement/prospectus, holders of Clover Leaf Class A Common Stock and Clover Leaf Class B Common Stock will vote together as a single class on all Proposals, other than the Charter Proposal (on which both (i) the holders of the Clover Leaf Class A Common Stock will vote separately as a single class and the holders of the Clover Leaf Class B Common Stock will vote separately as a single class and (ii) the holders of the Clover Leaf Class A Common Stock and Clover Leaf Class B Common Stock will vote together as a single class). As of the close of business on the Record Date, there was one outstanding share of Clover Leaf Class B Common Stock and 5,522,867 outstanding shares of Clover Leaf Class A Common Stock.
Q: What vote is required to approve the Proposals presented at the Special Meeting?
A: The approval of the NTA Proposal requires the affirmative vote of holders of fifty percent (50%) of the issued and outstanding shares of Clover Leaf Common Stock as of the Record Date, voting as a single class, and the approval of the Charter Proposal requires the affirmative vote of holders of (i) at least a majority of the issued and outstanding shares of Clover Leaf Common Stock as of the Record Date, voting as a single class, (ii) at least a majority of the issued and outstanding shares of Clover Leaf Class A Common Stock as of the Record Date, voting as a separate class and (iii) at least a majority of the issued and outstanding shares of Clover Leaf Class B Common Stock as of the Record Date, voting as a separate class. Accordingly, a Clover Leaf stockholder’s failure to vote by proxy or to vote in person at the Special Meeting, or an abstention (if a valid quorum is established for the meeting), will have the same effect as a vote “AGAINST” the NTA Proposal and the Charter Proposal. Approval of the Charter Proposal is a condition to the approval of the Business Combination.
The approval of the Business Combination Proposal requires the affirmative vote of holders of a majority of the shares of the Clover Leaf Common Stock that are voted at the Clover Leaf Meeting, voting together as a single class. Accordingly, a Clover Leaf stockholder’s failure to vote by proxy or to vote virtually in person at the Special Meeting on any of the Proposals (including by abstaining on each of the Proposals) will have no effect on the outcome of the Business Combination Proposal. However, if a Clover Leaf stockholder votes any shares by proxy or virtually in person at the Special Meeting on any of the other Proposals, the failure to vote such shares on the Business Combination Proposal (including by abstaining on the Business Combination Proposal) will have the same effect as a vote “AGAINST” the Business Combination Proposal.
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Assuming a quorum is present, the approval of the each of the Advisory Charter Proposals, the Nasdaq Proposal, the Incentive Plan Proposal, and the Adjournment Proposal each require a majority of the votes cast by the holders of the shares of Clover Leaf Common Stock represented in person online or by proxy and entitled to vote thereon at the Special Meeting, voting together as a single class. A Clover Leaf stockholder’s failure to vote by proxy or to vote in person online at the Special Meeting will not be counted towards the number of shares of Clover Leaf Common Stock required to validly establish a quorum, and if a valid quorum is otherwise established, it will have no effect on the outcome of the vote on the Nasdaq Proposal, the Incentive Plan Proposal, or the Adjournment Proposal. Assuming a quorum is present, an abstention on the Advisory Charter Proposals, the Nasdaq Proposal, or the Incentive Plan Proposal will have no effect on the outcome of the vote on such Proposal. An abstention will be deemed present and count towards the establishment of a quorum.
If the Business Combination Proposal is not approved, the other Required Proposals will not be presented to the Clover Leaf stockholders for a vote, although the Adjournment Proposal may be presented. The NTA Proposal is conditioned upon the approval of the Business Combination Proposal. Therefore, if the Business Combination Proposal is not approved, then the NTA Proposal will have no effect, even if approved by Clover Leaf stockholders. The approval of the Business Combination Proposal and the other Required Proposals are preconditions to the consummation of the Business Combination.
In accordance with the Insider Letter entered into concurrently with the IPO, all of the shares of Clover Leaf Common Stock owned by the Insiders, equal to 68.3% of the issued and outstanding shares of Clover Leaf Common Stock, will be voted in favor of each of the Proposals. Accordingly, Clover Leaf will receive sufficient votes to approve the Business Combination and the Required Proposals regardless of how any other Clover Leaf Public Stockholder votes its shares.
Q: What constitutes a quorum at the Special Meeting?
A: A quorum will be present at the Special Meeting if a majority of the shares of Clover Leaf Common Stock issued and outstanding and entitled to vote at the Special Meeting is represented in person online or by proxy at the Special Meeting, except that the presence, in person online or by proxy, of the holders of both (i) a majority of the outstanding shares of Clover Leaf Class A Common Stock entitled to vote at the Special Meeting, and (ii) a majority of the outstanding shares of Clover Leaf Class B Common Stock entitled to vote at the Special Meeting is also required for a quorum to be present with respect to the Charter Proposal. In the absence of a quorum, the chairman of the meeting has the power to adjourn the Special Meeting. As of the Record Date, [•] shares of Clover Leaf Common Stock would be required to achieve a quorum.
Q: May the Sponsor or Clover Leaf’s directors, officers, advisors or their affiliates purchase shares in connection with the Business Combination?
A: In connection with the stockholder vote to approve the proposed Business Combination, the Sponsor, or Clover Leaf’s directors, officers or advisors or their respective affiliates may privately negotiate transactions to purchase shares from stockholders who would have otherwise elected to have their shares redeemed in conjunction with a proxy solicitation pursuant to the proxy rules for a per-share pro rata portion of the Trust Account. None of Clover Leaf’s Sponsor or the other members of the Sponsor, directors, officers or advisors or their respective affiliates will make any such purchases when they are in possession of any material non-public information not disclosed to the seller or during a restricted period under Regulation M under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such a purchase would include a contractual acknowledgement that such stockholder, although still the record holder of Clover Leaf’s shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption rights, and could include a contractual provision that directs such stockholder to vote such shares in a manner directed by the purchaser. In the event that the Sponsor or any other member of the Sponsor or Clover Leaf’s directors, officers or advisors or their respective affiliates purchase shares in privately negotiated transactions from public stockholders who have already elected to exercise their redemption rights, such selling stockholders would be required to revoke their prior elections to redeem their shares. Any such privately negotiated purchases may be transacted at purchase prices that are below or in excess of the per-share pro rata portion of the Trust Account.
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Q: How will the Sponsor and the directors and officers of Clover Leaf vote?
A: The Insiders each entered into the Insider Letter, pursuant to which they have agreed to vote their Clover Leaf Sponsor Shares and any Public Shares purchased during or after Clover Leaf’s IPO (including in open market and privately negotiated transactions) in favor of the Business Combination, including each of the Proposals. Accordingly, because of the Insider Letter, it is more likely that the necessary stockholder approval for the Proposals will be received.
Q: What interests do Kustom Entertainment’s current officers and directors have in the Business Combination?
A: Please see the sections entitled “Risk Factors” and “The Business Combination Proposal (Proposal 2) — Interests of Kustom Entertainment’s Directors and Officers in the Business Combination” and “Management After the Business Combination — Executive Officers and Directors After the Business Combination” and “Executive Compensation of Kustom Entertainment — Executive Compensation After the Business Combination” and “Director Compensation — Director Compensation After the Business Combination” and “The Charter Proposal (Proposal 3)” of this proxy statement/prospectus for a further discussion of these interests.
Q: What happens if I sell my shares of Clover Leaf Class A Common Stock before the Special Meeting?
A: The Record Date is earlier than the date of the Special Meeting. If you transfer your shares of Clover Leaf Class A Common Stock after the Record Date, but before the Special Meeting, unless the transferee obtains a proxy from you to vote those shares, you will retain your right to vote at the Special Meeting. However, you will not be able to seek redemption of your shares because you will no longer be able to deliver them for cancellation upon consummation of the Business Combination in accordance with the provisions described herein. If you transfer your shares of Clover Leaf Class A Common Stock prior to the Record Date, you will have no right to vote those shares at the Special Meeting.
Q: What happens if a substantial number of the public stockholders vote in favor of the Business Combination and exercise their redemption right?
A: Clover Leaf stockholders who vote in favor of the Business Combination may nevertheless also exercise their redemption rights. Accordingly, the Business Combination may be consummated even though the funds available from the Trust Account and the number of public stockholders are reduced as a result of redemptions by public stockholders. Nonetheless, unless the NTA Proposal is approved, the consummation of the Business Combination is conditioned upon, among other things, the net tangible assets condition required in the Current Charter of Clover Leaf having $5,000,001 in net tangible assets immediately prior to or upon consummation of the Business Combination. In addition, with fewer Public Shares and public stockholders, the trading market for the Combined Company’s stock may be less liquid than the market for Clover Leaf Common Stock was prior to consummation of the Business Combination and Combined Company may not be able to meet the listing standards of the Nasdaq. In addition, with less funds available from the Trust Account, the working capital infusion from the Trust Account into Kustom Entertainment’s business will be reduced. As a result, the proceeds will be greater in the event that no public stockholders exercise redemption rights with respect to their public shares for a pro rata portion of the Trust Account as opposed to the scenario in which Clover Leaf’s public stockholders exercise the maximum allowed redemption rights.
Q: What happens if I vote against any of the Required Proposals (consisting of the Business Combination Proposal, the Charter Proposal, the Incentive Plan Proposal, and the Nasdaq Proposal)?
A: If any of the Required Proposals are not approved, the Business Combination is not consummated and Clover Leaf does not otherwise consummate an alternative business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), pursuant to the Current Charter, Clover Leaf will be required to dissolve and liquidate its Trust Account by returning the then-remaining funds in such account to the public stockholders, unless Clover Leaf seeks and obtains the consent of its stockholders to amend the Current Charter to extend the date by which it must consummate its initial business combination (an “Extension”), in which event, Clover Leaf’s public stockholders will be entitled to redemption rights in accordance with the Current Charter. If Clover Leaf’s initial business combination is not consummated by January 22, 2024 and no additional Extension is obtained, then Clover Leaf’s existence will terminate, and Clover Leaf will distribute amounts in the Trust Account as provided in Clover Leaf’s Current Charter.
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Q: Do I have redemption rights in connection with the Business Combination?
A: Pursuant to the Current Charter, holders of Public Shares may elect to have their shares redeemed for cash at the applicable redemption price per share calculated in accordance with the Current Charter. As of [•], 2023, based on funds in the Trust Account of approximately $[•] as of such date, the pro rata portion of the funds available in the Trust Account for the redemption of public shares of Clover Leaf Class A Common Stock was approximately $[•] per share. If a holder exercises its redemption rights, then such holder will be exchanging its shares of Clover Leaf Class A Common Stock for cash and will only have equity interests in the Combined Company pursuant to the exercise of its Public Rights, to the extent it still holds Public Rights. Such a holder will be entitled to receive cash for its Public Shares only if it properly demands redemption and delivers its shares (either physically or electronically) to Clover Leaf’s transfer agent prior to the Special Meeting. See the section titled “The Special Meeting — Redemption Rights” for the procedures to be followed if you wish to elect to have Clover Leaf redeem your shares for cash.
Q: Will my vote affect my ability to exercise redemption rights?
A: No. You may exercise your redemption rights whether or not you attend or vote your shares of Clover Leaf Common Stock at the Special Meeting, and regardless of how you vote your shares. As a result, the Merger Agreement and the Required Proposals can be approved by stockholders who will elect to have their shares redeemed and who will no longer remain stockholders, leaving stockholders who choose not to elect to have their shares redeemed holding shares in a company with a potentially less liquid trading market, fewer stockholders, potentially less cash and the potential inability of the Combined Company to meet the listing standards of Nasdaq.
Q: How do I exercise my redemption rights?
A: In order to exercise your redemption rights, you must, prior to 5:00 p.m., Eastern time, on [•], 2023 (two (2) business days before the date of the Special Meeting), tender your shares physically or electronically using The Depository Trust Company’s DWAC system and submit a request in writing, including the legal name, phone number and address of the beneficial owner of the shares for which redemption is requested, that Clover Leaf redeem your Public Shares for cash to Continental Stock Transfer & Trust Company, Clover Leaf’s transfer agent, at the following address:
Continental Stock Transfer & Trust Company
One State Street Plaza, 30th Floor
New York, New York 10004
Attention: SPAC Redemption Team
E-mail: spacredemptions@continentalstock.com
Please also affirmatively certify in your request to Continental Stock Transfer & Trust Company for redemption if you “ARE” or “ARE NOT” acting in concert or as a “group” (as defined in Section 13d-3 of the Exchange Act) with any other stockholder with respect to shares of Clover Leaf Common Stock. A holder of the Public Shares, together with any affiliate of his or any other person with whom he is acting in concert or as a “group” (as defined in Section 13d-3 of the Exchange Act) will be restricted from seeking redemption rights with respect to an aggregate of 15% or more of the Public Shares, which we refer to as the “15% threshold.” Accordingly, all Public Shares in excess of the 15% threshold beneficially owned by a public stockholder or group will not be redeemed for cash.
Stockholders seeking to exercise their redemption rights and opting to deliver physical certificates should allot sufficient time to obtain physical certificates from the transfer agent and time to effect delivery. It is Clover Leaf’s understanding that stockholders should generally allot at least two weeks to obtain physical certificates from the transfer agent. However, Clover Leaf does not have any control over this process and it may take longer than two weeks. Stockholders who hold their shares in “street name” will have to coordinate with their bank, broker or other nominee to have the shares certificated or delivered electronically.
Any demand for redemption, once made, may be withdrawn at any time until the deadline for exercising redemption requests and thereafter, with Clover Leaf’s consent, until the consummation of the Business Combination, or such other date as determined by the Clover Leaf Board. If you delivered your shares for redemption to Clover Leaf’s transfer agent and decide within the required timeframe not to exercise your redemption rights, you may
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request that Clover Leaf’s transfer agent return the shares (physically or electronically). You may make such request by contacting Clover Leaf’s transfer agent at the phone number or address listed under the question “Who can help answer my questions?” below.
Q: What are the U.S. federal income tax consequences of exercising my redemption rights?
A: The U.S. federal income tax consequences to holders of Clover Leaf Class A Common Stock who elect to exercise their rights to receive cash from the Clover Leaf Trust Account will depend on the holder’s particular facts and circumstances and, specifically, on whether the redemption qualifies as a sale or exchange of such Clover Leaf Class A Common Stock under Section 302 of the Code. If the redemption does not qualify as a sale or exchange of such shares, it will be treated as a corporate distribution on such shares. A redemption of shares of Clover Leaf Class A Common Stock generally will be treated as a sale or exchange of such shares (rather than as a corporate distribution) if the redemption (i) is “substantially disproportionate” with respect to the holder, (ii) results in a “complete termination” of the holder’s interest in us, or (iii) is “not essentially equivalent to a dividend” with respect to such holder; these tests are explained more fully below in the section entitled “The Business Combination Proposal (Proposal 2) — U.S. Federal Income Tax Considerations.”
If the redemption is treated as a sale or exchange of shares of Clover Leaf Class A Common Stock, U.S. holders (as defined below under the section entitled “The Business Combination Proposal (Proposal 2) — U.S. Federal Income Tax Considerations”) generally will be required to recognize gain or loss upon the redemption in an amount equal to the difference, if any, between the amount of cash received and the tax basis of the shares of Clover Leaf Class A Common Stock redeemed. Such gain or loss should be treated as capital gain or loss if such shares were held as a capital asset on the date of the redemption. Non-U.S. holders (as defined below under the section entitled “The Business Combination Proposal (Proposal 2) — U.S. Federal Income Tax Considerations”) generally will not be subject to U.S. federal income tax if the redemption is treated as a sale or exchange of shares of Clover Leaf Class A Common Stock, subject to certain important exceptions as described below under the sections entitled “The Business Combination Proposal (Proposal 2) — U.S. Federal Income Tax Considerations — Non. U.S. Holders — Gain on Sale, Taxable Exchange or Other Taxable Disposition of Clover Leaf Class A Common Stock” and “The Business Combination Proposal (Proposal 2) — U.S. Federal Income Tax Considerations — Non. U.S. Holders — Taxation of Distributions”.
If the redemption is treated as a distribution on shares of Clover Leaf Class A Common Stock, such distribution generally will constitute a dividend for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits. For the treatment of any remaining excess, see “The Business Combination Proposal (Proposal 2) — U.S. Federal Income Tax Considerations — U.S. Holders — Taxation of Distributions.” Non-U.S. holders generally are subject to a 30% withholding tax on dividend payments (subject to reduction by an applicable income tax treaty). Because it will not be clear whether redemption proceeds will be treated as a dividend for various reasons, we or the applicable withholding agent may withhold tax on the entire amount of any redemption proceeds paid to a Non-U.S. holder at the 30% rate (subject to reduction by an applicable income tax treaty).
TAX MATTERS ARE COMPLICATED, AND THE TAX CONSEQUENCES OF EXERCISING YOUR REDEMPTION RIGHTS WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE EXERCISE OF REDEMPTION RIGHTS TO YOU IN YOUR PARTICULAR CIRCUMSTANCES.
Q: If I am a Unit holder, can I exercise redemption rights with respect to my Units?
A: No. Holders of outstanding Units must separate the underlying Public Shares and Public Rights prior to exercising redemption rights with respect to the Public Shares.
If you hold Units registered in your own name, you must deliver the certificate for such Units to Continental Stock Transfer & Trust Company, our transfer agent, with written instructions to separate such Units into Public Shares, and Public Rights. This must be completed far enough in advance to permit the mailing of the stock certificates for the Public Shares back to you so that you may then exercise your redemption rights upon the separation of the Public Shares from the Units. See “How do I exercise my redemption rights?” above. The address of Continental Stock Transfer & Trust Company is listed under the question “Who can help answer my questions?” below.
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If a broker, dealer, commercial bank, trust company or other nominee holds your units, you must instruct such nominee to separate your Units. Your nominee must send written instructions by facsimile to Continental Stock Transfer & Trust Company, our transfer agent. Such written instructions must include the number of Units to be split and the nominee holding such Units. Your nominee must also initiate electronically, using The Depository Trust Company’s DWAC system, a withdrawal of the relevant units and a deposit of an equal number of Public Shares and Public Rights. This must be completed far enough in advance to permit your nominee to exercise your redemption rights upon the separation of the Public Shares from the Units. While this is typically done electronically the same business day, you should allow at least one full business day to accomplish the separation. If you fail to cause your Public Shares to be separated in a timely manner, you will likely not be able to exercise your redemption rights.
Q: Do I have appraisal rights in connection with the proposed Business Combination?
A: Clover Leaf stockholders do not have appraisal rights under the DGCL in connection with the Business Combination.
Q: What happens to the funds held in the Trust Account upon consummation of the Business Combination?
A: After completion of the Business Combination, if consummated, the funds held in the Trust Account will be used to pay holders of the Public Shares who properly exercise their redemption rights and, after paying the Redemptions, a portion is expected to be used to pay transaction expenses incurred by Clover Leaf and Kustom Entertainment (estimated, as of June 30, 2023, for purposes of the inclusion of such estimate in the information contained in the section of this proxy statement/prospectus titled “Unaudited Pro Forma Condensed Combined Financial Information,’’ to be (i) $2,325,000 (excluding deferred underwriting commissions), which estimate is subject to adjustment and may be different than the actual aggregate transaction expenses incurred and unpaid by Clover Leaf and Kustom Entertainment as of and through the Closing Date, plus (ii) deferred underwriting commissions of $[•] to the IPO Underwriter (a portion of which amount the IPO Underwriter and Clover Leaf have agreed may be allocated following Closing to satisfy of a portion of the fees payable to Maxim pursuant to the Maxim Engagement Letter) and (iii) for working capital and general corporate purposes of Kustom Entertainment (with the exact purposes or uses of any proceeds to Kustom Entertainment from the Business Combination to be determined by Kustom Entertainment depending on various factors which include, but are not limited to, the actual amount of any proceeds to Kustom Entertainment from the Business Combination, and together with other sources of capital or financing that may be available to the Combined Company at a given time, together with Kustom Entertainment’s business plans and capital requirements, as such plans and requirements change and develop over time).
Q: What happens if the Business Combination is not consummated?
A: There are certain circumstances under which the Merger Agreement may be terminated. See the section titled “The Business Combination Proposal (Proposal 2) — The Merger Agreement” for information regarding the parties’ specific termination rights.
If, as a result of the termination of the Merger Agreement or otherwise, Clover Leaf is unable to complete the Business Combination or another initial business combination transaction by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), the Current Charter provides that Clover Leaf will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the Public Shares, at a per-share price, payable in cash, equal to (A) the aggregate amount then on deposit in the Trust Account including interest earned on the funds held in the Trust Account and not previously released to us in connection with Permitted Withdrawals, divided by (B) the number of then outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidating distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of Clover Leaf’s remaining stockholders and Clover Leaf Board, dissolve and liquidate, subject in each case to Clover Leaf’s obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law.
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Clover Leaf expects that the amount of any distribution its public stockholders will be entitled to receive upon its dissolution will be approximately the same as the amount they would have received if they had redeemed their shares in connection with the Business Combination, subject in each case to Clover Leaf’s obligations under the DGCL to provide for claims of creditors and other requirements of applicable law. The Insiders have waived any right to any liquidation distribution from the Trust Account with respect to Clover Leaf Sponsor Shares.
In the event of liquidation, there will be no liquidating distributions with respect to Clover Leaf’s outstanding Rights. Accordingly, the Rights will expire worthless, in that scenario.
Q: When is the Business Combination expected to be completed?
A: The Closing is expected to take place (i) as promptly as practicable, but in no event later than the second business day following the satisfaction or waiver of the conditions described below under the section titled “The Business Combination Proposal (Proposal 2) — Conditions to the Closing” or (ii) on such other date as agreed to by the parties to the Merger Agreement in writing, in each case, subject to the satisfaction or waiver of the Closing conditions. The Merger Agreement may be terminated by Clover Leaf and/or Kustom Entertainment if the Closing has not occurred by January 22, 2024, or before January 22, 2024 if such date is mutually determined by Clover Leaf and Kustom Entertainment (the “Outside Date”).
For a description of the conditions to the completion of the Business Combination, see the section titled “The Business Combination Proposal (Proposal 2).”
Q: What do I need to do now?
A: You are urged to read carefully and consider the information contained in this proxy statement/prospectus, including the annexes, and to consider how the Business Combination will affect you as a stockholder. You should then submit a proxy to vote as soon as possible in accordance with the instructions provided in this proxy statement/prospectus and on the enclosed proxy card or, if you hold your shares through a brokerage firm, bank or other nominee, submit your voting instructions on the voting instruction form provided by the broker, bank or nominee.
Q: How do I vote?
A: If you are a stockholder of record of Clover Leaf as of [•], 2023, the Record Date, you may submit your proxy before the Special Meeting in any of the following ways, if available:
• use the toll-free number shown on your proxy card;
• visit the website shown on your proxy card to vote via the internet; or
• complete, sign, date and return the enclosed proxy card in the enclosed postage-paid envelope.
Stockholders who choose to participate in the Special Meeting can vote their shares electronically during the meeting via live audio webcast by visiting [•]. You will need the control number that is printed on your proxy card to enter the Special Meeting. Clover Leaf recommends that you log in at least 15 minutes before the meeting to ensure you are logged in when the Special Meeting starts.
If your shares are held in “street name” through a broker, bank or other nominee, your broker, bank or other nominee will send you separate instructions describing the procedure for voting your shares. “Street name” stockholders who wish to vote at the Special Meeting will need to obtain a proxy form from their broker, bank or other nominee.
Q: What will happen if I abstain from voting or fail to vote at the Special Meeting?
A: At the Special Meeting, Clover Leaf will count a properly executed proxy marked “ABSTAIN” with respect to a particular proposal as present for purposes of determining whether a quorum is present. Abstentions will have the same effect as a vote “AGAINST” the NTA Proposal and the Charter Proposal. If a Clover Leaf stockholder abstains on the Business Combination Proposal, but votes on one or more of the other Proposals brought before the Special Meeting, such abstention will have the same effect as a vote “AGAINST” the Business Combination Proposal. However, if a Clover Leaf stockholder abstains on the Business Combination Proposal with respect to any shares, and abstains (or otherwise refrains from voting) with respect to such shares on each of the other
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Proposals, such abstention on the Business Combination Proposal will have no effect on the outcome of the Business Combination Proposal. Assuming a quorum is present, abstentions will have no effect on the other Proposals.
Each of the Advisory Charter Proposal, Incentive Plan Proposal, and Business Combination Proposal is non-discretionary and, as a result, Clover Leaf does not expect there to be any broker non-votes for these proposals at the Special Meeting. If you are a beneficial owner of shares held though a bank, broker or other nominee and fail to provide voting instructions with respect to the shares or obtain a proxy to vote the shares at the Special Meeting from the record holder, such shares will not be counted as present for the purposes of establishing a quorum and, assuming a quorum is present, your failure to do so will have no effect on the outcome of any of such Proposals (other than the NTA Proposal and the Charter Proposal, for which such failure will have the same effect as a vote “AGAINST” these Proposals). Clover Leaf expects that the Adjournment Proposal will be treated as a routine matter, which means that your broker or other nominee will have discretionary authority to vote your shares held in street name on this matter. Accordingly, if you do not instruct your broker or nominee to vote your shares, the broker or other nominee may either (a) vote your shares on routine matters, or (b) leave your shares unvoted altogether. If the proposals are treated as routine matters as expected, broker non-votes should not occur with respect to these matters in connection with the Special Meeting.
Q: What will happen if I sign and return my proxy card without indicating how I wish to vote?
A: Signed and dated proxies received by Clover Leaf without an indication of how the stockholder intends to vote on a proposal will be voted “FOR” each proposal presented to the stockholders. The proxy holders may use their discretion to vote on any other matters which properly come before the Special Meeting.
Q: If I am not going to attend the Special Meeting virtually in person, should I return my proxy card instead?
A: Yes. Whether or not you plan to attend the Special Meeting, please read this proxy statement/prospectus carefully, and vote your shares by completing, signing, dating and returning the enclosed proxy card in the postage-paid envelope provided.
Q: If my shares are held in “street name,” will my broker, bank or nominee automatically vote my shares for me?
A: No. Under the rules of various national and regional securities exchanges, your broker, bank or nominee cannot vote your shares with respect to non-routine matters unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank or nominee. Each of the Advisory Charter Proposal, Incentive Plan Proposal, and Business Combination Proposal is non-discretionary. Clover Leaf believes the Proposals presented to the stockholders will be considered non-routine and therefore your broker, bank or nominee cannot vote your shares without your instruction on any of the Proposals presented at the Special Meeting. Your bank, broker or other nominee can vote your shares only if you provide instructions on how to vote. You should instruct your broker to vote your shares in accordance with directions you provide. However, Clover Leaf expects that the Adjournment Proposal will be treated as a routine proposal. Accordingly, your broker, bank or nominee may vote your shares with respect to such proposal without receiving voting instructions.
Q: May I change my vote after I have mailed my signed proxy card?
A: Yes. If you are a holder of record of Clover Leaf Common Stock as of the close of business on the Record Date, and submit a proxy by mail or otherwise, you can change your vote or revoke your proxy before it is voted at the Special Meeting by sending a later-dated, signed proxy card to Clover Leaf’s secretary at the address listed below so that it is received by Clover Leaf’s secretary prior to the Special Meeting or attend the Special Meeting in person online and vote (although attending the Special Meeting will not, by itself, revoke a proxy). You also may revoke your proxy by sending a notice of revocation to Clover Leaf’s secretary, which must be received by Clover Leaf’s secretary prior to the Special Meeting. If you are a beneficial owner of Clover Leaf Common Stock as of the close of business on the Record Date, you must follow the instructions of your broker, bank or other nominee to revoke or change your voting instructions.
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Q: What should I do if I receive more than one set of voting materials?
A: You may receive more than one set of voting materials, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive in order to cast your vote with respect to all of your shares.
Q: Who will solicit and pay the cost of soliciting proxies?
A: Clover Leaf will pay the cost of soliciting proxies for the Special Meeting. Clover Leaf has engaged [•], which we refer to as “[•],” to assist in the solicitation of proxies for the Special Meeting. Clover Leaf has agreed to pay [•] a fee of $[•], plus disbursements of its expenses in connection with the services relating to the Special Meeting. Clover Leaf will reimburse [•] for reasonable out-of-pocket expenses and will indemnify [•] and its affiliates against certain claims, liabilities, losses, damages and expenses. Clover Leaf will also reimburse banks, brokers and other custodians, nominees and fiduciaries representing beneficial owners of shares of Clover Leaf Common Stock for their expenses in forwarding soliciting materials to beneficial owners of the Clover Leaf Common Stock and in obtaining voting instructions from those owners. Clover Leaf’s directors, officers and employees may also solicit proxies by telephone, by facsimile, by mail, on the internet or in person online. They will not be paid any additional amounts for soliciting proxies.
Q: Who can help answer my questions?
A: If you have questions about the proposals or if you need additional copies of this proxy statement/prospectus or the enclosed proxy card you should contact our proxy solicitor at:
[•]
To obtain timely delivery, Clover Leaf stockholders must request the materials no later than [•], 2023.
You may also obtain additional information about Clover Leaf from documents filed with the SEC by following the instructions in the section titled “Where You Can Find More Information.”
If you intend to seek redemption of your Public Shares, you will need to send a letter demanding redemption and deliver your stock (either physically or electronically) to Clover Leaf’s transfer agent prior to the Special Meeting in accordance with the procedures detailed under the question “How do I exercise my redemption rights?” If you have questions regarding the certification of your position or delivery of your stock, please contact:
Continental Stock Transfer & Trust Company
One State Street Plaza, 30th Floor
New York, New York 10004
Attention: SPAC Redemption Team
E-mail: spacredemptions@continentalstock.com
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SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
This summary, together with the section titled “Questions and Answers about the Proposals,” highlights certain information contained in this proxy statement/prospectus and may not contain all of the information that is important to you. To better understand the Business Combination and the Proposals to be considered at the Special Meeting, you should read this entire proxy statement/prospectus carefully, including the annexes. See also the section titled “Where You Can Find More Information” of this proxy statement/prospectus.
Unless otherwise indicated or the context otherwise requires, references in this summary to “Company” or “Clover Leaf” refer to Clover Leaf Capital Corp. and references to “Kustom Entertainment” refer to Kustom Entertainment, Inc. prior to the Business Combination. Reference to the “Combined Company” refer to Clover Leaf (which will be renamed Kustom Entertainment, Inc. after the Business Combination, and which will include Kustom Entertainment and any other director or indirect subsidiaries of Kustom Entertainment, to the extent applicable) after giving effect to the Business Combination.
Unless otherwise specified, all share calculations assume no exercise of redemption rights by Clover Leaf’s public stockholders.
Parties to the Business Combination
Clover Leaf Capital Corp.
Clover Leaf is a special purpose acquisition company 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. Clover Leaf Common Stock, Units and Public Rights are currently listed on Nasdaq under the symbols “CLOE,” “CLOEU” and “CLOER,” respectively. The mailing address of Clover Leaf’s principal executive office is 1450 Brickell Avenue, Suite 1420 Miami, FL 33131 and its telephone number is (305) 577-0031.
Purchaser Representative
Yntegra Capital Investments, LLC, a Delaware limited liability company and Clover Leaf’s sponsor, is serving as the “Purchaser Representative” under the Merger Agreement, and in such capacity will represent the interests of Clover Leaf’s stockholders after the Closing (other than Digital Ally immediately prior to the Effective Time and their successors and assigns) with respect to certain matters under the Merger Agreement.
Merger Sub
Merger Sub is a wholly-owned subsidiary of Clover Leaf, incorporated in Delaware on February 16, 2023 solely for the purpose of consummating the Business Combination. Merger Sub owns no material assets and does not operate any business.
Kustom Entertainment, Inc.
Kustom Entertainment, Inc. is a Nevada corporation with a focus and mission to own and produce events, festivals, and entertainment alongside its evolving primary and secondary ticketing technologies. The mailing address of Kustom Entertainment’s principal executive office is 14001 Marshall Drive Lenexa, KS 66215. For more information about Kustom Entertainment, see the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Kustom Entertainment” and “Information Related to Kustom Entertainment.”
Proposals to be Voted on by Clover Leaf Stockholders
The NTA Proposal (Proposal 1)
As discussed elsewhere in this proxy statement/prospectus, assuming the Business Combination Proposal is approved, Clover Leaf is asking its stockholders to approve the NTA Proposal to effect the NTA Amendments, which shall be effective, if approved and adopted and implemented by Clover Leaf, prior to the consummation of the
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proposed Business Combination, to remove the limitation on share redemptions which would preclude Clover Leaf from consummating the Business Combination if stockholder redemptions would cause Clover Leaf’s net tangible assets (as determined in accordance with Rule 3a51-1(g)(1) of the Exchange Act) to be less than $5,000,001.
We encourage stockholders to carefully consider the information set forth below under “Proposal No. 1 — The NTA Proposal.”
The Business Combination Proposal (Proposal 2)
Clover Leaf, Merger Sub, the Purchaser Representative, Kustom Entertainment and Digital Ally have agreed to the Business Combination under the terms of the Merger Agreement, dated as of June 1, 2023. This agreement, as it may be amended or supplemented from time to time, is referred to in this proxy statement/prospectus as the “Merger Agreement.” Pursuant to the terms and subject to the conditions of the Merger Agreement, at the Effective Time, among other things:
(a) Merger Sub will merge with and into Kustom Entertainment, with Kustom Entertainment being the surviving company following the Merger and continuing in existence as a wholly owned subsidiary of Clover Leaf;
(b) Each share of Kustom Entertainment Common Stock, other than shares held by Digital Ally, will be cancelled and converted into the right to receive a number of shares of Class A Common Stock, par value $0.0001 per share, of the Combined Company (“Class A Common Stock”) equal to the Merger Consideration divided by a per share value of $11.14.
Lock-Up Agreement
Simultaneously with the execution and delivery of the Merger Agreement, Digital Ally entered into a Lock-Up Agreement with Clover Leaf and the Purchaser Representative (the “Lock-Up Agreement”). Pursuant to the Lock-Up Agreement, Digital Ally agreed not to, during the period commencing from the Closing and ending on the six (6) month anniversary of the Closing (subject to early release if the closing price of Clover Leaf’s common stock equals or exceeds $12.00 per share for any 20 out of 30 trading days commencing after the Closing and also subject to early release if Clover Leaf consummates a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of Clover Leaf Stockholders having the right to exchange their equity holdings in Clover Leaf for cash, securities or other property): (x) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any restricted securities, (y) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the restricted securities, or (z) publicly disclose the intention to do any of the foregoing, whether any such transaction described in clauses (x), (y) or (z) above is to be settled by delivery of restricted securities or other securities, in cash or otherwise (in each case, subject to certain limited permitted transfers where the recipient takes the shares subject to the restrictions in the Lock-Up Agreement). Eighty-five percent (85%) of the shares of Clover Leaf Class A Common Stock to be received by Digital Ally as Merger Consideration will be subject to the terms of the Lock-Up Agreement.
Sponsor Forfeiture Letter
Simultaneously with the execution and delivery of the Merger Agreement, Sponsor, Clover Leaf and the Chief Executive Officer of Kustom Entertainment, entered into a letter agreement (the “Sponsor Forfeiture Letter”) pursuant to which the Sponsor agreed to forfeit up to 345,780 shares of Clover Leaf Class A Common Stock and transfer to the Chief Executive Officer of the Company up to 518,672 Clover Leaf Sponsor Shares (the “Earnout Shares”) (such shares of Clover Leaf Class A Common Stock having been converted from shares of Clover Leaf Class B Common Stock), subject to the earnout provisions contained therein pertaining to the revenue of the Company for the fiscal years of 2023 and 2024, contingent and effective upon the Closing. If the revenue of the business for either of the fiscal years 2023 and 2024 of Clover Leaf (the “Earn-Out Period”) achieves certain benchmarks in the applicable fiscal year, 172,890 of the Sponsor’s Earnout Shares shall no longer be subject to forfeiture and the Sponsor shall transfer to the Chief Executive Officer of Kustom Entertainment 259,336 Earnout Shares (the “Earn-Out Payment”); provided, however, that in the event the benchmark revenue is not achieved on or before the end of the applicable fiscal year, then the Earn-Out Payment for such fiscal year shall be zero, and the Sponsor shall, effective immediately, surrender for cancellation and retirement by Clover Leaf such amount of Earnout Shares. The
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Sponsor agreed to forfeit up to an additional 864,452 shares of Clover Leaf Class B Common Stock (or shares of Clover Leaf Class A Common Stock, if such shares of Clover Leaf Class B Common Stock have been converted to shares of Clover Leaf Class A Common Stock prior to the Closing) (the “Adjustment Shares”), with the percentage of Adjustment Shares to be forfeited to be equal to the percentage of the Clover Leaf Common Stock redeemed by the public stockholders of Clover Leaf in connection with the Redemption.
Organizational Structure
The diagram below depicts a simplified version of the current organizational structure of Kustom Entertainment.
[•]
The diagram below depicts a simplified version of the Combined Company’s organizational structure immediately following the completion of the Business Combination (including expected economic ownership and voting power percentages, and assuming no redemptions by Clover Leaf’s public stockholders).
[•]
The Charter Proposal (Proposal 3)
Clover Leaf stockholders will be asked to approve and adopt, subject to and conditional on (but with immediate effect therefrom) approval of each of the Business Combination Proposal, the Charter Proposal, the Incentive Plan Proposal, and the Nasdaq Proposal and the consummation of the Business Combination, an amendment and restatement of the Current Charter, as set out in the Proposed Charter appended to this proxy statement/prospectus as Annex B. The Proposed Charter, which will be effective as of the Closing, will, among other things:
(a) Change the name of Clover Leaf to “Kustom Entertainment, Inc.”;
(b) Increase the authorized shares of capital stock of the Combined Company to [•] shares of capital stock, consisting of (i) [•] shares of Class A Common Stock and (ii) [•] shares of preferred stock;
(c) Provide that holders of Class A Common Stock will be entitled to one vote per share of Class A Common Stock;
(d) Approve the removal of certain blank check provisions that will no longer be necessary or will be inoperative upon consummation of the Business Combination.
A summary of these provisions is set forth in the “Charter Proposal (Proposal 3)” section of this proxy statement/prospectus and a copy of these provisions is attached hereto as Annex B. You are encouraged to read them in their entirety.
Advisory Charter Proposals (Proposals 4 — 6)
Assuming the Business Combination Proposal and other Required Proposals are approved, Clover Leaf stockholders are also being asked to approve, on a non-binding advisory basis, the Advisory Charter Proposals in connection with the amendment and restatement of the Current Charter as set forth in the Proposed Charter under the DGCL. In accordance with SEC guidance, this Proposal is being presented separately and will be voted upon on a non-binding advisory basis and is being presented as four separate sub-proposals.
A summary of these provisions is set forth in the “Advisory Charter Proposals (Proposals 4 — 6)” section of this proxy statement/prospectus and a copy of these provisions is attached hereto as Annex B. You are encouraged to read them in their entirety.
The Incentive Plan Proposal (Proposal 7)
Clover Leaf is asking its stockholders to vote upon a Proposal to approve the Incentive Plan, including the authorization of the initial share reserve under the Incentive Plan. The Clover Leaf Board has adopted the Incentive Plan, subject to its approval by the Clover Leaf stockholders and contingent upon the Closing. If the Clover Leaf stockholders approve the Incentive Plan, it will become effective upon the Closing of the Business Combination.
The number of shares of Class A Common Stock available for issuance under the Incentive Plan shall be [•].
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A summary of the Incentive Plan is set forth in the “The Incentive Plan Proposal (Proposal 7)” section of this proxy statement/prospectus and the form of the Incentive Plan is attached to this proxy statement/prospectus as Annex D. You are encouraged to read the Incentive Plan in its entirety.
The Nasdaq Proposal (Proposal 8)
Assuming the Business Combination Proposal and other Required Proposals are approved, Clover Leaf is proposing that its stockholders consider and approve a proposal, for purposes of complying with the applicable listing rules of the Nasdaq, authorizing the issuance of the shares of Class A Common Stock to be issued.
The Adjournment Proposal (Proposal 9)
Clover Leaf is proposing that its stockholders approve the adjournment of the Special Meeting to a later date or time, if necessary or appropriate as determined by the Clover Leaf Board, at the determination of the Clover Leaf Board.
The Special Meeting
Date, Time and Place of the Special Meeting
The Special Meeting will be held virtually at [•] a.m. Eastern time on [•], 2023 or at such other date and time to which such meeting may be adjourned or postponed, to consider and vote upon the Proposals.
Registering for the Special Meeting
As a registered Clover Leaf stockholder, you received a proxy card from Continental Stock Transfer & Trust Company. The form contains instructions on how to attend the virtual meeting including the URL address, along with your control number. You will need your control number for access. If you do not have your control number, contact Continental Stock Transfer & Trust Company at the phone number or e-mail address below. Continental Stock Transfer & Trust Company’s support contact information is as follows: 917-262-2373, or email proxy@continentalstock.com.
You can pre-register to attend the virtual meeting starting [•], 2023 at [•] a.m. Eastern Time. Enter the URL address [•] into your browser and enter your control number, name, and email address. At the start of the meeting you will need to re-log in using your control number and will also be prompted to enter your control number if you vote during the meeting.
A Clover Leaf stockholder that holds such stockholder’s shares in “street name,” which means such stockholder’s shares are held of record by a broker, bank or other nominee, may need to contact Continental Stock Transfer & Trust Company to receive a control number. If you plan to vote shares you hold in “street name” at the meeting, you will need to have a legal proxy from your bank or broker, or if you would like to join and not vote, Continental Stock Transfer & Trust Company will issue you a guest control number with proof of ownership. Either way, you must contact Continental Stock Transfer & Trust Company for specific instructions on how to receive the control number. They can be contacted at the number or email address above. Please allow up to 72 hours prior to the meeting for processing your control number.
If you do not have internet capabilities, you can listen only to the meeting by dialing [•] within the U.S. and Canada (toll-free), or [•] outside the U.S. and Canada (standard rates apply) when prompted enter the pin number [•]. This is listen-only and is being provided as a courtesy, and you will not be able to vote, be deemed present at the meeting or enter or ask questions during the meeting via telephone.
Purpose of the Special Meeting
At the Special Meeting, Clover Leaf is asking its stockholders to consider and vote upon:
• The NTA Proposal.
• The Business Combination Proposal. A copy of the Merger Agreement is attached to this proxy statement/prospectus as Annex A.
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• The Charter Proposal. The form of Proposed Charter to become effective upon consummation of the Business Combination is attached to this proxy statement/prospectus as Annex B.
• The Advisory Charter Proposals.
• The Incentive Plan Proposal. The form of the Incentive Plan to be used by the Combined Company from and after the Closing is attached to this proxy statement/prospectus as Annex D.
• The Nasdaq Proposal.
• The Adjournment Proposal, if presented at the Special Meeting.
Voting Power and Record Date
You will be entitled to vote or direct votes to be cast at the Special Meeting if you own shares of Clover Leaf Common Stock at the close of business on [•], 2023, which is the Record Date. You are entitled to one vote for each share of Clover Leaf Common Stock that you owned as of the close of business on the Record Date. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker, bank or other nominee to ensure that votes related to the shares you beneficially own are properly counted. On the Record Date, there were [•] shares of Clover Leaf Common Stock outstanding, of which [•] are Public Shares and 3,457,807 are Clover Leaf Sponsor Shares and the one remaining Class B share that the Sponsor owns.
Vote of the Sponsor, Directors and Officers
In connection with the IPO, Clover Leaf entered into an agreement with the Insiders pursuant to which they agreed to vote any shares of Clover Leaf Common Stock owned by them in favor of the Business Combination Proposal and for all other Proposals presented at the Special Meeting. This agreement applies to each Insider as it relates to the Clover Leaf Sponsor Shares owned by them and the requirement to vote such shares in favor of the Business Combination Proposal and for all other Proposals presented to Clover Leaf stockholders in this proxy statement/prospectus. Nevertheless, we will need approval of holders of a majority of the outstanding shares of Clover Leaf Class A Common Stock as of the Record Date, as well as the holders of at least a majority of the Clover Leaf Class B Common Stock, in each case voting as a separate class, to be voted in favor of the Charter Proposal in order to have the Business Combination approved.
Clover Leaf’s Insiders have waived any redemption rights, including with respect to shares of Clover Leaf Class A Common Stock issued or purchased in the IPO or in the aftermarket, in connection with Business Combination. No consideration was provided in exchange for the Insiders’ waiver of their redemption rights. The Clover Leaf Sponsor Shares held by the Insiders have no redemption rights upon Clover Leaf’s liquidation and will be worthless if no business combination is effected by Clover Leaf by January 22, 2024 (as such deadline may be extended by amendment to Clover Leaf’s organizational documents). If Clover Leaf’s initial business combination is not consummated by January 22, 2024, then Clover Leaf’s existence will terminate, and Clover Leaf will distribute amounts in the Trust Account as provided in Clover Leaf’s Current Charter.
Quorum and Required Vote for Stockholder Proposals
A quorum of Clover Leaf stockholders is necessary to hold a valid meeting. A quorum will be present at the Special Meeting if a majority of the shares of Clover Leaf Common Stock issued and outstanding and entitled to vote at the Special Meeting is represented in person online or by proxy at the Clover Leaf Special
Meeting, except that the presence, in person online or by proxy, of the holders of both (i) a majority of the outstanding shares of Clover Leaf Class A Common Stock entitled to vote at the Special Meeting, and (ii) a majority of the outstanding shares of Clover Leaf Class B Common Stock entitled to vote at the Special Meeting is also required for a quorum to be present with respect to the Charter Proposal. Abstentions will count as present for the purposes of establishing a quorum. Broker non-votes will not be counted for purposes of establishing a quorum.
The approval of the NTA Proposal requires the affirmative vote of holders of fifty percent (50%) of the issued and outstanding shares of Clover Leaf Common Stock as of the Record Date, voting as a single class, and the approval of the Charter Proposal requires the affirmative vote of holders of (i) at least a majority of the issued and
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outstanding shares of Clover Leaf Common Stock as of the Record Date, voting together as a single class, (ii) at least a majority of the issued and outstanding shares of Clover Leaf Class A Common Stock as of the Record Date, voting as a separate class and (iii) at least a majority of the issued and outstanding shares of Clover Leaf Class B Common Stock as of the Record Date, voting as a separate class. Accordingly, a Clover Leaf stockholder’s failure to vote by proxy or to vote in person online at the Special Meeting or an abstention will have the same effect as a vote “AGAINST” the NTA Proposal and the Charter Proposal.
The approval of the Business Combination Proposal requires the affirmative vote of holders of a majority of the shares of the Common Stock that are voted at the Clover Leaf Meeting, voting together as a single class. Accordingly, a Clover Leaf stockholder’s failure to vote by proxy or to vote virtually in person at the Special Meeting on any of the Proposals (including by abstaining on each of the Proposals) have no effect on the outcome of the Business Combination Proposal. However, if a Clover Leaf stockholder votes any shares by proxy or virtually in person at the Special Meeting on any of the other Proposals, the failure to vote such shares on the Business Combination Proposal (including by abstaining on the Business Combination Proposal) will have the same effect as a vote “AGAINST” the Business Combination Proposal.
Assuming a quorum is present, the approval of the each of the Advisory Charter Proposals, the Nasdaq Proposal, the Incentive Plan Proposal, and the Adjournment Proposal each require a majority of the votes cast by the holders of the shares of Clover Leaf Common Stock represented in person online or by proxy and entitled to vote thereon at the Special Meeting, voting together as a single class. A Clover Leaf stockholder’s failure to vote by proxy or to vote in person online at the Special Meeting will not be counted towards the number of shares of Clover Leaf Common Stock required to validly establish a quorum, and if a valid quorum is otherwise established, it will have no effect on the outcome of the vote on the Nasdaq Proposal, the Incentive Plan Proposal, or the Adjournment Proposal. Assuming a quorum is present, an abstention on the Advisory Charter Proposals, the Nasdaq Proposal, or the Incentive Plan Proposal will have no effect on the outcome of the vote on such Proposal. An abstention will be deemed present and count towards the establishment of a quorum.
The Required Proposals and the NTA Proposal are each conditioned on the approval of the Business Combination Proposal and the Business Combination Proposal is conditioned on the approval of the other Required Proposals (which do not include the NTA Proposal, the Advisory Charter Proposals or the Adjournment Proposal). Unless the Business Combination Proposal is approved, the remaining Required Proposals will not be presented to the stockholders of Clover Leaf at the Special Meeting. The NTA Proposal is conditioned upon the approval of the Business Combination Proposal. Therefore, if the Business Combination Proposal is not approved, then the NTA Proposal will have no effect, even if approved by Clover Leaf stockholders. The Adjournment Proposal is not conditioned on any other proposal. It is important for you to note that in the event the Required Proposals (consisting of the Business Combination Proposal, the Charter Proposal, the Incentive Plan Proposal, and the Nasdaq Proposal) do not receive the requisite vote for approval, then Clover Leaf will not consummate the Business Combination. If Clover Leaf does not consummate the Business Combination and fails to complete an initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), it will be required to dissolve and liquidate its Trust Account by returning the then-remaining funds in such account to its public stockholders.
In accordance with the Insider Letter entered into concurrently with the IPO, all of the shares of Clover Leaf Common Stock owned by the Insiders, equal to 68.3% of the issued and outstanding shares of Clover Leaf Common Stock, will be voted in favor of each of the Proposals. Accordingly, assuming that a quorum is achieved at the Special Meeting and the Insiders votes their shares at the Special Meeting in accordance with the requirements of the Insider Letter, the Business Combination and other Proposals can be approved at the Special Meeting even if some or all of Clover Leaf’s public stockholders do not approve the Business Combination or the other Proposals.
For more information about these proposals, see the sections of this proxy statement/prospectus entitled “The Special Meeting — Quorum and Required Vote for Proposals.”
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Proxy Solicitation
Proxies may be solicited by telephone, by facsimile, by mail, on the Internet or in person. We have engaged [•] to assist in the solicitation of proxies. If a stockholder grants a proxy, it may still vote its shares in person online (which will have the effect of revoking any prior proxy given before the Special Meeting). A stockholder may also change its vote by submitting a later-dated proxy or written revocation, as described in the section titled “The Special Meeting — Revoking Your Proxy.”
Redemption Rights
Pursuant to the Current Charter, any holders of Public Shares may demand that such shares be redeemed in exchange for a pro rata share of the aggregate amount on deposit in the Trust Account, less Permitted Withdrawals, calculated as of two (2) business days prior to the consummation of the Business Combination. If demand is properly made in accordance with the procedures reflected in this proxy statement/prospectus and the Business Combination is consummated, these shares, immediately prior to the Business Combination, will cease to be outstanding and will represent only the right to receive a pro rata share of the aggregate amount on deposit in the Trust Account (calculated as of two (2) business days prior to the consummation of the Business Combination, including interest earned on the funds held in the Trust Account and not previously released to with the Company as Permitted Withdrawals). For illustrative purposes, based on funds in the Trust Account of approximately $[•] on [•], 2023, the estimated per share redemption price would have been approximately $[•]. A public stockholder, together with any of such stockholder’s affiliates or any other person with whom it is acting in concert or as a “group” (as defined under Section 13 of Exchange Act) will be restricted from redeeming in the aggregate such stockholder’s shares or, if part of such a group, the group’s shares, with respect to 15% or more of the shares of Clover Leaf Common Stock included in the units of Clover Leaf sold in the IPO (including overallotment securities sold to Clover Leaf’s underwriters after the IPO).
In order to exercise your redemption rights, you must:
• prior to 5:00 p.m. Eastern time on [•], 2023 (two (2) business days before the Special Meeting), tender your shares physically or electronically using The Depository Trust Company’s DWAC system and submit a request in writing that we redeem your public shares for cash to Continental Stock Transfer & Trust Company, Clover Leaf’s transfer agent, at the following address:
Continental Stock Transfer & Trust Company
One State Street Plaza, 30th Floor
New York, New York 10004
Attention: SPAC Redemption Team
E-mail: spacredemptions@continentalstock.com
• In your request to Continental Stock Transfer & Trust Company for redemption, you must also affirmatively certify if you “ARE” or “ARE NOT” acting in concert or as a “group” (as defined in Section 13d-3 of the Exchange Act) with any other stockholder with respect to shares of Clover Leaf Common Stock; and
• deliver your Public Shares either physically or electronically through DTC to Clover Leaf’s transfer agent at least two (2) business days before the Special Meeting. Stockholders seeking to exercise their redemption rights and opting to deliver physical certificates should allot sufficient time to obtain physical certificates from the transfer agent and time to effect delivery. It is Clover Leaf’s understanding that stockholders should generally allot at least two weeks to obtain physical certificates from the transfer agent. However, Clover Leaf does not have any control over this process and it may take longer than two weeks. Stockholders who hold their shares in “street name” will have to coordinate with their bank, broker or other nominee to have the shares certificated or delivered electronically. If you do not submit a written request and deliver your public shares as described above, your shares will not be redeemed.
Any demand for redemption, once made, may be withdrawn at any time until the deadline for exercising redemption requests (and submitting shares to the transfer agent) and thereafter, with Clover Leaf’s consent, until the consummation of to the Business Combination, or such other date as determined by the Clover Leaf Board. If you delivered your shares for redemption to Clover Leaf’s transfer agent and decide within the required timeframe not to exercise your redemption rights, you may request that Clover Leaf’s transfer agent return the shares (physically or electronically). You may make such a request by contacting Clover Leaf’s transfer agent at the phone number or address listed above.
7
Prior to exercising redemption rights, stockholders should verify the market price of Clover Leaf Common Stock as they may receive higher proceeds from the sale of their shares of Clover Leaf Common Stock in the public market than from exercising their redemption rights if the market price per share is higher than the redemption price. We cannot assure you that you will be able to sell your shares of Clover Leaf Common Stock in the open market, even if the market price per share is higher than the redemption price stated above, as there may not be sufficient liquidity in Clover Leaf Common Stock when you wish to sell your shares.
If you exercise your redemption rights, your shares of Clover Leaf Common Stock will cease to be outstanding immediately prior to the Business Combination and will only represent the right to receive a pro rata share of the aggregate amount on deposit in the Trust Account, calculated as of two business days prior to the consummation of the Business Combination. You will no longer own those shares and will have no right to participate in, or have any interest in, the future growth of the Combined Company, if any. You will be entitled to receive cash for these shares only if you properly and timely demand redemption.
If the Business Combination is not consummated and Clover Leaf otherwise does not consummate an initial business combination by January 22, 2024 (as such deadline may be extended by amendment to Clover Leaf’s organizational documents), Clover Leaf will be required to dissolve and liquidate its Trust Account by returning the then-remaining funds in such account to the public stockholders and the Rights will expire worthless.
Appraisal Rights
Clover Leaf stockholders do not have appraisal rights in connection with the Business Combination or the other proposals under the DGCL.
Interests of Clover Leaf’s Sponsor, Directors, Officers and Advisors in the Business Combination
When you consider the recommendation of the Clover Leaf Board to vote in favor of approval of the Proposals, you should keep in mind that Clover Leaf’s directors and officers have interests in the Business Combination that may be different from or in addition to (and which may conflict with) your interests as a stockholder and may be incentivized to complete a business combination that is less favorable to stockholders rather than liquidating Clover Leaf. These interests include, among other things, the fact that:
• [•] will be Clover Leaf’s designee to the Combined Company Board upon the effectiveness of the Merger. As a director, in the future [•] may receive any cash fees, stock options or stock awards that the Combined Company Board determines to pay to its directors;
• unless Clover Leaf consummates an initial business combination, it is possible that Clover Leaf’s officers, directors and the Sponsor may not receive reimbursement for out-of-pocket expenses incurred by them, to the extent that such expenses exceed the amount of available funds not deposited in the Trust Account (as of September 14, 2023, Clover Leaf’s officers and directors have incurred approximately $3,296,246 of out-of-pocket expenses exceeding funds available to Clover Leaf for reimbursement thereof, and Clover Leaf’s officers, directors and the Sponsor may not receive reimbursement therefor if the proposed Business Combination is not consummated).
• as a condition to the IPO, pursuant to the Insider Letter, the Clover Leaf Sponsor Shares became subject to a lock-up whereby, subject to certain limited exceptions, the Insiders’ Clover Leaf Sponsor Shares are not transferable or salable until the earlier of (A) six months after the completion of our initial business combination or (B) subsequent to our initial business combination, if (x) the closing price of the Clover Leaf Class A Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing after our initial business combination, or (y) Clover Leaf completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of Clover Leaf’s stockholders having the right to exchange their shares of Clover Leaf Common Stock for cash, securities or other property. In this regard, while the Clover Leaf Sponsor Shares are not the same as the Clover Leaf Class A Common Stock, are subject to certain restrictions that are not applicable to the Clover Leaf Class A Common Stock, and may become worthless if Clover Leaf does not complete a business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders);
8
• the Sponsor purchased an aggregate of 571,859 Sponsor Private Placement Units, each unit consisting of one share of Clover Leaf Class A Common Stock and one right to receive one-eighth of one share of Clover Leaf Class A Common Stock, which Private Placement Units were purchased at an aggregate purchase price of $5,718,590, or $10.00 per unit, in the Private Placement consummated simultaneously with the IPO, which have no redemption rights and will be worthless if a business combination is not consummated. Based on the closing trading price of the Public Units on September 29, 2023 which was $11.44, the Sponsor Private Placement Units would have an aggregate value of approximately $6,542,067 as of September 29, 2023;
• as a condition to the IPO, pursuant to the Insider Letter, the Insiders have agreed that the Sponsor Private Placement Units, and all of their underlying securities, will not be sold or transferred by it until 30 days after Clover Leaf has completed a business combination;
• the Sponsor can earn a positive rate of return on its investment even if other Clover Leaf stockholders experience a negative rate of return in the Combined Company. The Sponsor paid $25,000 to purchase 3,457,807 shares of Clover Leaf Class B Common Stock. These securities will have a significantly higher value at the time of the Business Combination, if it is consummated. Based on the closing trading price of the Class A Common Stock on [•], 2023, which was $[•], the Clover Leaf Sponsor Shares would have an aggregate value of approximately $[•] as of the same date. If Clover Leaf does not consummate the Business Combination or another initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), and Clover Leaf is therefore required to be liquidated, the Clover Leaf Sponsor Shares would be worthless, as the Sponsor is not entitled to participate in any redemption or liquidation of the Trust Account. Based on the difference in the effective purchase price of $0.007 per share that the members of the Sponsor paid for the Clover Leaf Sponsor Shares, as compared to the purchase price of $10.00 per Unit sold in the IPO, members of the Sponsor may earn a positive rate of return even if the share price of the Combined Company after the Closing falls below the price initially paid for the Units in the IPO and the Clover Leaf Public Stockholders experience a negative rate of return following the Closing of the Business Combination;
• each Insider has agreed not to redeem any of its Clover Leaf Sponsor Shares in connection with a stockholder vote to approve a proposed initial business combination;
• if Clover Leaf does not complete an initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), the proceeds from the sale of the Private Placement Units will be included in the liquidating distribution to Clover Leaf’s public stockholders and the Sponsor Private Placement Units will expire worthless;
• the fact that the Sponsor holds promissory notes issued by Clover Leaf in connection with the 2022 Extension and the 2023 Extension (the “Extension Notes”). In connection with the 2023 Extension, Clover Leaf will cause up to $360,000 to be deposited into the trust account in installments of $60,000 per month, for each calendar month or portion thereof (commencing on July 22, 2023 and on the 22nd of each subsequent month) until January 22, 2024, that Clover Leaf needs to complete an initial business combination. As of September 5, 2023, an aggregate of $120,000 had been deposited into trust to support the Extension, and as of September 5, 2023, an aggregate principal amount of $2,886,246 was outstanding under the Extension Notes.. In the event an initial business combination is consummated, the Extension Notes may be repaid out of the proceeds of the Trust Account released to the post-combination company, and $1,383,123 of the Extension Notes may be converted into Clover Leaf Units. Otherwise, the Extension Notes would be repaid only out of funds held outside the Trust Account. In the event that a business combination does not close, Clover Leaf may use a portion of proceeds held outside the Trust Account to repay the Extension Notes, but no proceeds held in the Trust Account would be used to repay the Extension Notes;
• The Sponsor, officers and directors (or their affiliates) may make loans from time to time to Clover Leaf in order to provide working capital or finance transaction costs in connection with an initial business combination. Up to $1,500,000 of such working capital loans may be convertible into private placement-equivalent units at a price of $10.00 per unit, at the option of the lender. Such units would be identical to the Private Placement Units. In the event an initial business combination is consummated, the working capital loans may be repaid out of the proceeds of the Trust Account released to the
9
post-combination company. In the event that the initial business combination does not close, Clover Leaf may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds from the Trust Account would be used for such repayment;
• if the Trust Account is liquidated, including in the event Clover Leaf is unable to complete an initial business combination within the required time period, the Sponsor has agreed that it will be liable to Clover Leaf, if and to the extent any claims by a third party for services rendered or products sold to Clover Leaf, or a prospective target business with which Clover Leaf has entered into a written letter of intent, confidentiality or similar agreement or Merger Agreement, reduce the amount of funds in the Trust Account to below the lesser of (i) $10.15 per public share and (ii) the actual amount per public share held in the Trust Account as of the date of the liquidation of the Trust Account, if less than $10.15 per share due to reductions in the value of the trust assets, less Permitted Withdrawals, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to the monies held in the Trust Account (whether or not such waiver is enforceable), nor will it apply to any claims under Clover Leaf’s indemnity of the underwriters of the IPO against certain liabilities, including liabilities under the Securities Act; and
• the fact that the Sponsor and Clover Leaf’s officers and directors may benefit from the completion of a business combination and may be incentivized to complete an acquisition of a less favorable target company or on terms less favorable to stockholders rather than liquidate.
In addition to the interests of the Clover Leaf Insiders in the Business Combination, Clover Leaf stockholders should be aware that the IPO Underwriter, Maxim may have financial interests that are different from, or in addition to, the interests of Clover Leaf stockholders, including:
• the fact that the IPO Underwriter is entitled to deferred underwriting fees in the amount of $0.35 per Unit, or $4,840,930.50, pursuant to the Underwriting Agreement and such fees (a portion of which the IPO Underwriter and Clover Leaf have agreed may be allocated following Closing of the proposed Business Combination with Kustom Entertainment to satisfy of a portion of the fees payable to Maxim pursuant to the Maxim Engagement Letter) are payable only if Clover Leaf completes an initial business combination;
• the fact that the IPO Underwriter purchased 103,734 Representative Units, each unit consisting of one share of Clover Leaf Class A Common Stock and one right to receive one-eighth of one share of Clover Leaf Class A Common Stock, which Representative Units were purchased at an aggregate purchase price of $1,037,340, or $10.00 per unit, in the Private Placement consummated simultaneously with the IPO, which have no redemption rights and will be worthless if a business combination is not consummated. Based on the closing trading price of the Public Units on [•], 2023 which was $[•], the Representative Units would have an aggregate value of approximately $[•] as of [•], 2023; and
• the fact that Clover Leaf issued to the IPO Underwriter and/or its designees 138,312 Representative Shares upon consummation of the IPO and the subsequent partial exercise of the underwriter’s over-allotment option. These Representative Shares were valued at a price of $10.00 which was the sale price of the units sold in the IPO. The IPO Underwriter agreed not to transfer, assign or sell any such shares until the completion of Clover Leaf’s initial business combination. In addition, the IPO Underwriter agreed (i) to waive its redemption rights with respect to such shares in connection with the completion of Clover Leaf’s initial business combination and (ii) to waive its rights to liquidating distributions from the Trust Account with respect to such shares if Clover Leaf fails to complete an initial business combination. Based on the closing trading price of the Clover Leaf Class A Common Stock on [•], 2023 which was $[•], the Representative Shares would have an aggregate value of approximately $[•] as of [•], 2023.
These interests may have influenced Clover Leaf’s Board in making their recommendation that you vote in favor of the approval of the Business Combination. The members of the Clover Leaf Board were aware of and considered these interests, among other matters, when they approved the Business Combination and recommended that Clover Leaf stockholders approve the proposals required to effect the Business Combination. The Clover Leaf Board determined that the overall benefits expected to be received by Clover Leaf and its stockholders in the Business Combination outweighed any potential risk created by the conflicts stemming from these interests. In addition, the Clover Leaf Board determined that potentially disparate interests would be mitigated because (i) most of these disparate interests would exist with respect to a business combination by Clover Leaf with any other target business or
10
businesses, (ii) these interests could be adequately disclosed to stockholders in this proxy statement/prospectus, and that stockholders could take them into consideration when deciding whether to vote in favor of the proposals set forth herein and (iii) the Sponsor will hold equity interests in the Combined Company with value that, after the Closing, will be based on the future performance of Combined Company’s stock.
Recommendation to Clover Leaf Stockholders
After careful consideration, the Clover Leaf Board determined unanimously that each of the Proposals is fair to and in the best interests of Clover Leaf and its stockholders. The Clover Leaf Board has approved and declared advisable and unanimously recommends that you vote or give instructions to vote “FOR” each of these Proposals.
For a description of various factors considered by the Clover Leaf Board in reaching its decision to recommend in favor of voting for each of the Proposals to be presented at the Special Meeting, see the section herein titled “Clover Leaf Board’s Reasons for the Approval of the Business Combination”.
Conditions to the Closing of the Business Combination
The obligations of Clover Leaf and Kustom Entertainment to complete the Closing are subject to various conditions, including the following mutual conditions of the parties unless waived:
• receipt of the Clover Leaf Stockholder Approval;
• receipt of Digital Ally’s written consent approving the Transactions;
• expiration of any applicable waiting period under any antitrust laws;
• receipt of requisite consents from governmental authorities to consummate the Transactions, and receipt of specified requisite consents from other third parties to consummate the Transactions;
• the absence of any law or order that would prohibit the consummation of the Merger or other transactions contemplated by the Merger Agreement;
• immediately prior to or upon the Closing, after giving effect to the completion of the Redemption, Clover Leaf having net tangible assets of at least $5,000,001 unless Clover Leaf otherwise is exempt from the provisions of Rule 419 promulgated under the Securities Act;
• the members of the Post-Closing Board shall have been elected or appointed as of the Closing; and
• the effectiveness of the Proxy Statement, and, if applicable, the registration statement shall have been declared effective by the SEC.
Unless waived by Clover Leaf, the obligations of Clover Leaf and Merger Sub to consummate the Merger are subject to the satisfaction of the following additional conditions, in addition to customary certificates and other closing deliverables:
• the representations and warranties of the Company being true and correct as of the date of the Merger Agreement and as of the Closing (subject to Material Adverse Effect);
• the Company having performed in all material respects its obligations and complied in all material respects with its covenants and agreements under the Merger Agreement required to be performed or complied with on or prior to the date of the Closing;
• absence of any Material Adverse Effect with respect to the Company, taken as a whole, since the date of the Merger Agreement which is continuing and uncured;
• the Lock-Up Agreement (as described below) and a Non-Competition Agreement entered into by Digital Ally in favor of Clover Leaf and Kustom Entertainment, as well as certain new employment agreements with the Company executives, shall be in full force and effect in accordance with their terms as of the Closing; and
• the Company shall own all of the issued and outstanding capital stock of TicketSmarter, Inc.
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Unless waived by the Company, the obligations of the Company to consummate the Merger are subject to the satisfaction of the following additional conditions:
• the representations and warranties of Clover Leaf and Merger Sub being true and correct as of the date of the Merger Agreement and as of the Closing (subject to Material Adverse Effect);
• Clover Leaf and Merger Sub each having performed in all material respects its obligations and complied in all material respects with its covenants and agreements under the Merger Agreement required to be performed or complied with on or prior to the date of the Closing;
• absence of any Material Adverse Effect with respect to Clover Leaf or Merger Sub, taken as a whole, since the date of the Merger Agreement which is continuing and uncured;
• Clover Leaf shall be in compliance in all material respects with the reporting requirements applicable to it under the Exchange Act immediately prior to the Closing; and
• the Clover Leaf common stock shall not have been suspended from trading as a result of a delisting from Nasdaq and shall have been approved for listing on Nasdaq, subject only to official notice of issuance thereof.
U.S. Federal Income Tax Consequences
The material U.S. federal income tax considerations that may be relevant to you in respect of the Business Combination are discussed in more detail in the section titled “The Business Combination Proposal (Proposal 2) — U.S. Federal Income Tax Considerations” beginning on page 122, which contains a detailed discussion of the U.S. federal income tax consequences of the adoption of the Proposed Charter in connection with the Business Combination and the redemption of Clover Leaf Class A Common Stock for cash if you so elect if the Business Combination is completed. You should also consult your tax advisor for a complete analysis of the effect of the Business Combination on your federal, state and local and/or foreign taxes.
Risk Factors
In evaluating the Business Combination and the proposals set forth in this proxy statement/prospectus, you should carefully read this proxy statement/prospectus, including the annexes, and especially consider the factors discussed in the section titled “Risk Factors” beginning on page 20 of this proxy statement/prospectus. Among these important risks are the following:
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SUMMARY RISK FACTORS
In evaluating the Proposals to be presented at the Special Meeting, you should carefully read this proxy statement/prospectus and especially consider the factors discussed in the section entitled “Risk Factors.”
Some of the risks related to Kustom Entertainment’s business are summarized below. References in the summary below to “we,” “us,” “our” and “the Company” refer to Kustom Entertainment.
• We have a limited operating history and we cannot offer any assurance as to our future financial results, and you should not rely on the historical financial data included in this proxy statement/prospectus as an indicator of our future financial performance.
• Our business is dependent on the continued occurrence of large-scale sporting events, concerts and theater shows and any decrease in the number of such events may result in decreased demand for our services.
• Our business depends on relationships with buyers, sellers and distribution partners, and any adverse changes in these relationships could adversely affect our business, financial condition and results of operations.
• Changes in Internet search engine algorithms and dynamics, or search engine disintermediation, or changes in marketplace rules could have a negative impact on traffic for our sites and ultimately, our business and results of operations.
• We face intense competition in the ticketing industry, and we may not be able to maintain or increase our current revenue, which could adversely affect our business, financial condition and results of operations.
• Our business is dependent on the willingness of artists, teams and promoters to continue to support the secondary ticket market and any decrease in such support may result in decreased demand for our services.
• If we do not continue to maintain and improve our platform or develop successful new solutions and enhancements or improve existing ones, our business will suffer.
• The reputation and brand of our marketplace is important to our success, and if we are not able to maintain and enhance our brand, our business, financial condition and results of operation may be adversely affected.
• Our success depends, in significant part, on concert, sporting and theater events and economic and other factors adversely affecting such events could have a material adverse effect on our business, financial condition and results of operations.
• Our operations are seasonal and our results of operations vary from quarter to quarter and year over year, so our financial performance in certain financial quarters or years may not be indicative of, or comparable to, our financial performance in subsequent financial quarters or years.
• We rely on the experience and expertise of our senior management team, key technical employees and other highly skilled personnel and the failure to retain, motivate or integrate any of these individuals could have an adverse effect on our business, financial condition or results of operations.
• We face intense competition in our market, especially from larger, well-established companies, and we may lack sufficient financial or other resources to maintain or improve our competitive position.
• Our markets are subject to technological change and our success depends on our ability to develop and introduce new products.
• Periods of rapid growth and expansion could place a significant strain on our resources, including our employee base, which could negatively impact our operating results.
• If we do not effectively manage changes in our business, these changes could place a significant strain on our management and operations.
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SELECTED HISTORICAL FINANCIAL DATA OF CLOVER LEAF
The following tables present Clover Leaf’s selected historical financial information derived from Clover Leaf’s unaudited financial statements included elsewhere in this proxy statement/prospectus for the six months ended June 30, 2023 and 2022 and Clover Leaf’s audited financial statements as of and for the years ended December 31, 2022 and as December 31, 2021.
The financial data set forth below should be read in conjunction with, and is qualified by reference to, “Clover Leaf’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes thereto included elsewhere in this proxy statement/prospectus. Clover Leaf’s financial statements are prepared and presented in accordance with U.S. GAAP.
|
For the |
For the |
Year Ended |
For the |
|||||||||||||
|
Income Statement Data: |
|
|
|
|
|
|
|
|
||||||||
|
Loss from operations |
$ |
(900,007 |
) |
$ |
(652,958 |
) |
$ |
(1,291,228 |
) |
$ |
(851,777 |
) |
||||
|
Net (loss) income |
$ |
(567,378 |
) |
$ |
(43,706 |
) |
$ |
60,237 |
|
$ |
(834,087 |
) |
||||
|
Weighted average Class A common stock outstanding |
|
2,441,063 |
|
|
14,645,135 |
|
|
12,204,321 |
|
|
7,700,506 |
|
||||
|
Basic and diluted net (loss) income per Class A common stock |
$ |
(0.10 |
) |
$ |
(0.00 |
) |
$ |
0.00 |
|
$ |
(0.08 |
) |
||||
|
Weighted average Class B common stock outstanding |
|
3,457,807 |
|
|
3,457,807 |
|
|
3,457,807 |
|
|
3,189,105 |
|
||||
|
Basic and diluted net (loss) income per Class B common stock outstanding |
$ |
(0.10 |
) |
$ |
(0.00 |
) |
$ |
0.00 |
|
$ |
(0.08 |
) |
||||
|
June 30, |
December 31, |
December 31, |
||||||||||
|
Balance Sheet Data: |
|
|
|
|
|
|
||||||
|
Investments held in the Trust Account |
$ |
18,698,001 |
|
$ |
18,276,649 |
|
$ |
140,404,628 |
|
|||
|
Total assets |
$ |
18,830,942 |
|
$ |
18,684,974 |
|
$ |
141,366,538 |
|
|||
|
Total liabilities |
$ |
8,845,123 |
|
$ |
8,131,777 |
|
$ |
5,286,398 |
|
|||
|
Class A common stock subject to possible redemption |
$ |
18,582,427 |
|
$ |
18,283,387 |
|
$ |
140,386,985 |
|
|||
|
Total shareholders’ deficit |
$ |
(8,596,608 |
) |
$ |
(7,730,190 |
) |
$ |
(4,306,845 |
) |
|||
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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the Business Combination occurred on the dates indicated. The unaudited pro forma condensed combined financial statements also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. The unaudited pro forma condensed combined financial statements are presented for illustrative purposes only.
The historical financial statements of Kustom Entertainment have been prepared in accordance with U.S. GAAP and in its functional and presentation currency of the United States dollar (“USD”). The historical financial statements of Clover Leaf have been prepared in accordance with U.S. GAAP in its functional and presentation currency of USD.
The unaudited pro forma condensed combined financial information has been prepared using the assumptions below with respect to the potential redemption into cash of Clover Leaf Class A common stock:
• Assuming No Additional Redemptions: This presentation assumes that, after the redemptions of 12,204,072 shares of Class A common stock of Clover Leaf in October 2022 (the “October Redemptions”) and the redemptions of 376,002 shares of Class A common stock of Clover Leaf in July 2023 (the “July Redemptions”), no additional public shareholders of Clover Leaf exercise redemption rights with respect to their Public Shares upon consummation of the Business Combination.
• Assuming Maximum Redemptions: This presentation assumes that, after the October Redemptions and July Redemptions, Clover Leaf public shareholders holding 765,022 shares of Clover Leaf Class A common stock will exercise their redemption rights for $8.6 million upon consummation of the Business Combination at a redemption price of approximately $11.26 per share. The maximum redemption amount reflects the maximum number of the Clover Leaf Public Shares that can be redeemed without violating the conditions of the Business Combination Agreement and the assumption that the NTA proposal is passed by the Clover Leaf shareholders and that Clover Leaf’s Existing Organizational Documents are amended such that they will not be required to maintain a minimum net tangible asset value of at least $5,000,001 prior to or upon consummation of the Business Combination after giving effect to the payments to redeeming shareholders. This scenario includes all adjustments contained in the “no additional redemptions” scenario and presents additional adjustments to reflect the effect of the maximum redemptions.
The following table sets out share ownership of Kustom Entertainment on a pro forma basis assuming the No Additional Redemption Scenario and the Maximum Redemption Scenario:
|
No |
Maximum |
|||
|
Kustom Entertainment stockholders |
11,220,826 |
11,220,826 |
||
|
Clover Leaf public stockholders(2) |
3,048,031 |
2,283,009 |
||
|
Sponsor’s Founders Shares(1) |
4,459,688 |
4,459,688 |
||
|
Underwriter Shares(3) |
824,519 |
824,519 |
||
|
Total |
19,553,064 |
18,788,042 |
____________
(1) Includes 864,452 Class B Founders Shares in reserve for Earnout shares and 571,859 Private Rights converted to 71,482 shares of common stock upon consummation of the Business Combination.
(2) Includes 14,375,000 Public Rights automatically converted to 1,796,875 shares of common stock upon consummation of the Business Combination.
(3) Includes 103,734 Private Rights automatically converted to 12,967 shares of common stock upon consummation of the Business Combination.
15
The following table sets out summary data derived from the unaudited pro forma condensed combined statement of financial position and the unaudited pro forma condensed combined statement of operations. The summary unaudited pro forma condensed combined balance sheet as of June 30, 2023, gives effect to the Business Combination as if it had occurred on June 30, 2023. The summary unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2023 and for the year ended December 31, 2022, gives effect to the Business Combination as if it had occurred on January 1, 2022.
|
Pro Forma Combined |
||||||||
|
No |
Maximum |
|||||||
|
Summary Unaudited Pro Forma Condensed Combined Statement of Operations Data for the Year Ended December 31, 2022 |
|
|
|
|
||||
|
Net loss |
$ |
(9,241,813 |
) |
$ |
(9,241,813 |
) |
||
|
Net loss per share – basic and diluted |
$ |
(0.47 |
) |
$ |
(0.49 |
) |
||
|
Weighted average shares outstanding – basic and diluted |
|
19,553,064 |
|
|
18,788,042 |
|
||
|
Summary Unaudited Pro Forma Condensed Combined Statement of Operations Data for the Six Months Ended June 30, 2023 |
|
|
|
|
||||
|
Net loss |
$ |
(3,579,376 |
) |
$ |
(3,579,376 |
) |
||
|
Net loss per share – basic and diluted |
$ |
(0.18 |
) |
$ |
(0.19 |
) |
||
|
Weighted average shares outstanding – basic and diluted |
|
19,553,064 |
|
|
18,788,042 |
|
||
|
Summary Unaudited Pro Forma Condensed Combined Balance Sheet Data as of June 30, 2023 |
|
|
|
|
||||
|
Total assets |
$ |
20,084,993 |
|
$ |
11,467,728 |
|
||
|
Total liabilities |
$ |
8,233,940 |
|
$ |
8,233,940 |
|
||
|
Total equity |
$ |
11,851,053 |
|
$ |
3,233,788 |
|
||
16
SELECTED HISTORICAL FINANCIAL INFORMATION OF KUSTOM ENTERTAINMENT
The following tables summarize selected historical financial information of Kustom Entertainment. Selected historical financial information from the consolidated statements of operations, consolidated balance sheets, and consolidated statements of cash flows as of and for the six-month periods ended June 30, 2023 and 2022 was derived from Kustom Entertainment’s unaudited condensed consolidated financial statements included elsewhere in this proxy statement/prospectus. Selected historical financial information from the statements of operations, balance sheets, and statements of cash flows as of and for the year ended December 31, 2022 and for the periods from September 1, 2021 through December 31, 2021 and from January 1, 2021 through August 31, 2021 was derived from Kustom Entertainment’s audited financial statements included elsewhere in this proxy statement/prospectus.
Kustom Entertainment’s historical results are not necessarily indicative of the results that may be expected in the future. The following selected historical financial information should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Kustom Entertainment” and Kustom Entertainment’s financial statements and accompanying notes included elsewhere in this proxy statement/prospectus. The selected historical financial information included in this section is not intended to replace Kustom Entertainment’s financial statements and accompanying notes. As explained elsewhere in this proxy statement/prospectus, the selected historical financial information contained in this section relates to Kustom Entertainment, prior to and without giving pro forma effect to the impact of the Business Combination and, as a result, the results reflected in this section may not be indicative of the results of Kustom Entertainment going forward. For further information regarding the estimated pro forma effect of the Business Combination, see the section titled “Unaudited Pro Forma Condensed Combined Financial Information” included elsewhere in this proxy statement/prospectus.
|
For the |
For the |
Year Ended |
For the |
For the |
||||||||||||||
|
Income Statement Data: |
|
|
|
|
|
|
|
|
||||||||||
|
(Loss) income from operations |
$ |
(2,517,795 |
) |
$ |
(3,766,540 |
) |
$ |
(7,369,241 |
) |
$ |
235,432 |
$ |
546,211 |
|||||
|
Net (loss) income |
$ |
(2,590,644 |
) |
$ |
(3,770,141 |
) |
$ |
(7,401,115 |
) |
$ |
175,432 |
$ |
647,944 |
|||||
|
Weighted average common stock outstanding |
|
1,000 |
|
|
1,000 |
|
|
1,000 |
|
|
1,000 |
|
— |
|||||
|
Basic and diluted net (loss) income per share of common stock |
$ |
(2,590.64 |
) |
$ |
(3,770.14 |
) |
$ |
(7,401.12 |
) |
$ |
175.43 |
|
— |
|||||
|
June 30, |
December 31, |
December 31, |
|||||||
|
Balance Sheet Data: |
|
|
|
||||||
|
Total assets |
$ |
11,224,680 |
$ |
14,801,504 |
$ |
15,677,301 |
|||
|
Total liabilities |
$ |
7,800,962 |
$ |
9,711,585 |
$ |
4,395,994 |
|||
|
Total shareholders’ equity |
$ |
3,423,718 |
$ |
5,089,919 |
$ |
11,281,307 |
|||
17
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Defined terms included below shall have the same meaning as terms defined and included elsewhere in this proxy statement/prospectus.
The following summary unaudited pro forma condensed combined financial information (the “Summary Pro Forma Information”) gives effect to the transactions contemplated by the Business Combination and related transactions. The Business Combination will be accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, although Clover Leaf will acquire all of the outstanding equity interests of Kustom Entertainment in the Business Combination, Clover Leaf will be treated as the “acquired” company for financial reporting purposes. Accordingly, the Business Combination will be reflected as the equivalent of Kustom Entertainment issuing shares for the net assets of Clover Leaf, followed by a recapitalization whereby no goodwill or other intangible assets are recorded. Operations prior to the Business Combination will be those of Kustom Entertainment. The summary unaudited pro forma condensed combined balance sheet data as of June 30, 2023 gives effect to the Business Combination and related transactions as if they had occurred on June 30, 2023. The summary unaudited pro forma condensed combined statements of operations data for the six months ended June 30, 2023 and for the year ended December 31, 2022 give effect to the Business Combination and related transactions as if they had occurred on January 1, 2022, the beginning of the earliest period presented.
The Summary Pro Forma Information has been derived from, and should be read in conjunction with, the more detailed unaudited pro forma condensed combined financial information included in the section titled “Unaudited Pro Forma Condensed Combined Financial Information” in this proxy statement/prospectus and the accompanying notes thereto. The unaudited pro forma condensed combined financial information is based upon, and should be read in conjunction with, the historical financial statements and related notes of Clover Leaf and Kustom Entertainment for the applicable periods included in this proxy statement/prospectus. The Summary Pro Forma Information has been presented for informational purposes only and is not necessarily indicative of what the post-Business Combination company’s financial position or results of operations actually would have been had the Business Combination and related transactions been completed as of the dates indicated. In addition, the Summary Pro Forma Information does not purport to project the future financial position or operating results of the post-Business Combination company following the reverse recapitalization.
The unaudited pro forma combined financial information has been prepared using the assumptions below with respect to the potential redemption for cash of Clover Leaf Public Shares:
• Assuming No Additional Redemptions: This presentation assumes that, after the redemptions of 12,204,072 shares of Class A common stock of Clover Leaf in October 2022 (the “October Redemptions”) and the redemptions of 376,002 shares of Class A common stock of Clover Leaf in July 2023 (the “July Redemptions”), no additional public shareholders of Clover Leaf exercise redemption rights with respect to their Public Shares upon consummation of the Business Combination.
• Assuming Maximum Redemptions: This presentation assumes that, after the October Redemptions and July Redemptions, Clover Leaf public shareholders holding 765,022 shares of Clover Leaf Class A common stock will exercise their redemption rights for $8.6 million upon consummation of the Business Combination at a redemption price of approximately $11.26 per share. The maximum redemption amount reflects the maximum number of the Clover Leaf Public Shares that can be redeemed without violating the conditions of the Business Combination Agreement and the assumption that the NTA proposal is passed by the Clover Leaf shareholders and that Clover Leaf’s Existing Organizational Documents are amended such that they will not be required to maintain a minimum net tangible asset value of at least $5,000,001 prior to or upon consummation of the Business Combination after giving effect to the payments to redeeming shareholders. This scenario includes all adjustments contained in the “no additional redemptions” scenario and presents additional adjustments to reflect the effect of the maximum redemptions.
18
MARKET PRICE AND DIVIDEND INFORMATION
CLOVER LEAF
Holders
As of the Record Date, there were [•] holder of record of Units, [•] holder of record of shares of Clover Leaf Class A Common Stock and [•] holders of record of the Private Placement Units
Ticker Symbol and Market Price
Clover Leaf Units, Clover Leaf Class A Common Stock and the Public Rights are currently listed on the Nasdaq under the symbols “CLOEU,” “CLOE” and “CLOER,” respectively. The closing price of the Clover Leaf Units, Clover Leaf Class A Common Stock and the Public Rights on May 31 2023, the last trading day before announcement of the execution of the Merger Agreement, was $11.01, $11.17 and $0.1048 respectively. As of [•], 2023, the Record Date, the closing price for the Clover Leaf Units, Clover Leaf Class A Common Stock and the Public Rights was $[•], $[•] and $[•], respectively.
Dividend Policy
Clover Leaf has not paid any cash dividends on its common stock to date and does not intend to pay cash dividends prior to the completion of its initial business combination. It is not contemplated that the Combined Company will pay cash dividends for the foreseeable future.
Kustom Entertainment
Currently, there is no public market for Kustom Entertainment Common Stock or other Kustom Entertainment securities.
Dividend Policy of the Combined Company Following the Business Combination
The payment of cash dividends in the future will be dependent upon the Combined Company’s revenue and earnings, if any, capital requirements and general financial condition subsequent to completion of the Business Combination. The payment of any cash dividends subsequent to the Business Combination will be within the discretion of the Combined Company Board.
19
RISK FACTORS
You should carefully consider all the following risk factors, together with all of the other information included or incorporated by reference in this proxy statement/prospectus, including the financial information, before deciding whether or how to vote or instruct your vote to be cast to approve the Proposals described in this proxy statement/prospectus.
The value of your investment following consummation of the Business Combination will be subject to significant risks affecting, among other things, the Combined Company’s business, financial condition or results of operations. If any of the events described below occur, the Combined Company’s post-Business Combination business and financial results could be adversely affected in material respects. This could result in a decline, which may be significant, in the trading price of the Combined Company’s securities and you therefore may lose all or part of your investment. The risk factors described below are not necessarily exhaustive and you are encouraged to perform your own investigation with respect to the businesses of Clover Leaf and Kustom Entertainment. Any reference in this “Risk Factors” section to the “surviving entity” shall mean the Combined Company.
Risks Related to the Business Combination and Clover Leaf
The ability of Clover Leaf stockholders to exercise redemption rights with respect to a large number of Public Shares or other factors may not allow Clover Leaf to complete the Business Combination or optimize its capital structure.
If the NTA Proposal is not approved by the Clover Leaf stockholders, Clover Leaf may need to seek to restructure the transaction to reserve a greater portion of the cash in the Trust Account or arrange for third-party financing. Third-party financing may not be available to Clover Leaf. Furthermore, raising additional third-party financing may involve dilutive equity issuances or the incurrence of indebtedness at higher than desirable levels.
If the Business Combination is unsuccessful, you would not receive your pro rata portion of the Trust Account until Clover Leaf liquidates the Trust Account or consummates an alternative initial business combination or upon the occurrence of an Extension or certain other corporation actions as set forth in the Current Charter. If you are in need of immediate liquidity, you could attempt to sell your stock in the open market; however, at such time Clover Leaf’s stock may trade at a discount to the pro rata amount per share in the Trust Account or there may be limited market demand at such time. In either situation, you may suffer a material loss on your investment or lose the benefit of funds expected in connection with Clover Leaf’s redemption until Clover Leaf liquidates, consummates an alternative initial business combination, effectuates an Extension or takes certain other actions set forth in the Current Charter or you are able to sell your stock in the open market.
You may be unable to ascertain the merits or risks of Kustom Entertainment’s operations.
If the Business Combination is consummated, the Combined Company will be affected by numerous risks inherent in the lines of business that Kustom Entertainment expects to pursue. Although Clover Leaf’s management has endeavored to evaluate the risks inherent in the proposed Business Combination with Kustom Entertainment, Clover Leaf cannot assure you that it can adequately ascertain or assess all of the significant risk factors. Furthermore, some of these risks may be outside of Clover Leaf’s control. Clover Leaf also cannot assure you that an investment in Clover Leaf’s securities will not ultimately prove to be less favorable to investors in Clover Leaf than a direct investment, if an opportunity were available, in Kustom Entertainment. In addition, if Clover Leaf stockholders do not believe that the prospects for the Business Combination are promising, a greater number of stockholders may exercise their redemption rights, which may make it difficult for Clover Leaf to consummate the Business Combination.
There is no assurance that Clover Leaf’s diligence will reveal all material risks that may be present with regard to Kustom Entertainment. Subsequent to the completion of the Business Combination, the Combined Company may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on its financial condition and its share price, which could cause you to lose some or all of your investment.
Clover Leaf cannot assure you that the due diligence Clover Leaf has conducted on Kustom Entertainment will reveal all material issues that may be present with regard to Kustom Entertainment, or that it would be possible to uncover all material issues through a customary amount of due diligence or that risks outside of Clover Leaf’s control
20
will not later arise. Kustom Entertainment is aware that Clover Leaf must complete an initial business combination by January 22, 2024. Consequently, Kustom Entertainment may have obtained leverage over Clover Leaf, knowing that if Clover Leaf does not complete the Business Combination, Clover Leaf may be unlikely to be able to complete an initial business combination with any other target business prior to such deadline.
Even if Clover Leaf’s due diligence successfully identified certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Even though these charges may be non-cash items and would not have an immediate impact on Clover Leaf’s liquidity, the fact that Clover Leaf reports charges of this nature could contribute to negative market perceptions about Clover Leaf or Clover Leaf’s securities. In addition, charges of this nature may cause Clover Leaf to violate leverage or other covenants to which it may be subject as a result of obtaining debt financing following the Closing. Accordingly, any stockholders of Clover Leaf who choose to remain stockholders of the Combined Company following the Business Combination could suffer a reduction in the value of their shares. Such stockholders are unlikely to have a remedy for such reduction in value unless they are able to successfully claim that the reduction was due to the breach by Clover Leaf’s officers or directors of a duty of care or other fiduciary duty owed by them to Clover Leaf, or if they are able to successfully bring a private claim under securities laws that the proxy statement/prospectus relating to the Business Combination contained an actionable material misstatement or material omission.
There are risks to Clover Leaf’s stockholders who are not affiliates of the Sponsor of becoming stockholders of the Combined Company through the Business Combination rather than acquiring securities of Kustom Entertainment directly in an underwritten public offering, including no independent due diligence review by an underwriter.
There is no independent third-party underwriter involved in the Business Combination or the issuance of Clover Leaf’s securities in connection therewith. Underwritten public offerings of securities conducted by a licensed broker-dealer are subjected to a due diligence review by the underwriter or dealer manager to satisfy statutory duties under the Securities Act, the rules of Financial Industry Regulatory Authority, Inc. (“FINRA”) and the national securities exchange where such securities are listed. Additionally, underwriters or dealer-managers conducting such public offerings are subject to liability for any material misstatements or omissions in a registration statement filed in connection with the public offering.
If Kustom Entertainment became a public company through an underwritten public offering, the underwriters would be subject to liability under Section 11 of the Securities Act for material misstatements and omissions in the initial public offering registration statement. In general, an underwriter is able to avoid liability under Section 11 if it can prove that, it “had, after reasonable investigation, reasonable ground to believe and did believe, at the time the registration statement became effective, that the statements therein (other than the audited financial statements) were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” Because Kustom Entertainment will become a public company through a business combination with Clover Leaf, a special purpose acquisition company, investors in Clover Leaf may not have the same remedies available to them under U.S. federal securities laws in connection with the Business Combination as they otherwise might have had if Kustom Entertainment were to have gone public in a traditional firm commitment underwritten initial public offering.
In addition, the amount of due diligence conducted by Clover Leaf and its advisors in connection with the Business Combination may not be as high as would have been undertaken by an underwriter in connection with an initial public offering of Kustom Entertainment. Accordingly, it is possible that defects in Kustom Entertainment’s business or problems with Kustom Entertainment’s management that would have been discovered if Kustom Entertainment conducted an underwritten public offering will not be discovered in connection with the Business Combination, which could adversely affect the market price of the Combined Company Common Stock.
Unlike an underwritten initial public offering, the initial trading of the Combined Company’s securities will not benefit from the book-building process undertaken by underwriters that helps to inform efficient price discovery with respect to opening trades of newly listed shares and underwriter support to help stabilize, maintain or affect the public price of the new issue immediately after listing. The lack of such a process in connection with the listing of the Combined Company’s securities on Nasdaq could result in diminished investor demand, inefficiencies in pricing and a more volatile public price for the Combined Company’s securities during the period immediately following the listing.
21
The unaudited pro forma financial information included in the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements” may not be representative of the Combined Company’s results if the Business Combination is consummated and, accordingly, you will have limited financial information on which to evaluate the financial performance of the Combined Company and your investment decision.
Clover Leaf and Kustom Entertainment currently operate as separate companies. Clover Leaf has had no prior history as an operating company and its operations have not previously been managed on a combined basis. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the financial position or results of operations that would have actually occurred had the Business Combination been completed at or as of the dates indicated, nor is it indicative of the future operating results or financial position of the Combined Company. The pro forma statement of operations does not reflect future nonrecurring charges resulting from the Business Combination. The unaudited pro forma financial information does not reflect future events that may occur after the Business Combination and does not consider potential impacts of current market conditions on revenues or expenses. The pro forma financial information included in the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements” has been derived from Clover Leaf’s and Kustom Entertainment’s historical financial statements and certain adjustments and assumptions have been made regarding the Combined Company after giving effect to the Business Combination. Differences between preliminary estimates in the pro forma financial information and the final acquisition accounting will occur and could have an adverse impact on the pro forma financial information and the Combined Company’s financial position and future results of operations.
In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate and other factors may affect the Combined Company’s financial condition or results of operations following the Closing. Any potential decline in the Combined Company’s financial condition or results of operations may cause significant variations in the stock price of the Combined Company.
Clover Leaf may issue preferred stock or additional shares of common stock to complete the Business Combination, which would dilute the interest of Clover Leaf stockholders and likely present other risks.
The Current Charter authorizes the issuance of up to 100,000,000 shares of Clover Leaf Class A Common Stock, 10,000,000 shares of Clover Leaf Class B Common Stock, and 1,000,000 shares of Clover Leaf Preferred Stock. There are currently 82,710,964 authorized but unissued shares of Clover Leaf Class A Common Stock available for issuance, which amount does not take into account shares reserved for issuance upon conversion of outstanding Public Rights. There are currently 6,542,193 authorized but unissued shares of Clover Leaf Class B Common Stock available for issuance. There are currently no shares of Clover Leaf Preferred Stock issued and outstanding.
Clover Leaf may issue preferred stock or a substantial number of additional shares of common stock to complete the initial Business Combination or under an employee incentive plan after completion of the Business Combination. However, the Current Charter provides, among other things, that prior to Clover Leaf’s initial business combination, Clover Leaf may not issue additional shares of capital stock that would entitle the holders thereof to (i) receive funds from the Trust Account or (ii) vote on any initial business combination. These provisions of the Current Charter, like all other provisions thereof, may be amended with a stockholder vote. Clover Leaf’s executive officers and directors have agreed, pursuant to a written agreement with Clover Leaf, that they will not propose any amendment to the Current Charter that would affect the substance or timing of Clover Leaf’s obligation to redeem 100% of its Public Shares if Clover Leaf does not complete the initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), unless Clover Leaf provides its public stockholders with the opportunity to redeem their shares of Clover Leaf Class A Common Stock upon approval of any such amendment at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest (net of the amount of interest which may be withdrawn to pay taxes), divided by the number of then outstanding public shares. The issuance of additional shares of common or preferred stock:
• may significantly dilute the equity interest of existing investors;
• may subordinate the rights of holders of common stock if preferred stock is issued with Public Rights senior to those afforded the Clover Leaf Common Stock;
22
• could cause a change of control if a substantial number of common stock is issued, which may affect, among other things, Clover Leaf’s ability to use its net operating loss carry forwards, if any, and could result in the resignation or removal of Clover Leaf’s present officers and directors; and
• may adversely affect prevailing market prices for Clover Leaf’s Units, Public Shares, and/or Public Rights.
The fairness opinion obtained by the Clover Leaf Board will not reflect changes, circumstances, developments or events that may have occurred or may occur after the date of the opinion.
Newbridge has provided a fairness opinion to the Clover Leaf Board stating that, as of the date of such opinion, and based upon and subject to the procedures followed, assumptions made, qualifications and limitations on review undertaken, and other matters considered by Newbridge in preparing such opinion, the aggregate consideration to be paid by Clover Leaf to Digital Ally is fair, from a financial point of view, to Clover Leaf and Clover Leaf’s unaffiliated public stockholders
The Clover Leaf Board has not obtained an updated fairness opinion as of the date of this proxy statement/prospectus from Newbridge, and the Clover Leaf Board does not expect to receive an updated fairness opinion prior to the completion of the Business Combination. The opinion does not reflect changes, circumstances, developments or events that may have occurred or may occur after the date of the opinion, including changes in the operations and prospects of Clover Leaf or Kustom Entertainment, regulatory or legal changes, general market and economic conditions and other factors that may be beyond the control of Clover Leaf and Kustom Entertainment and on which the fairness opinion was based, and that may alter the value of Clover Leaf and Kustom Entertainment or the prices of the Class A Shares prior to consummation of the Business Combination. The value of the Class A Shares has fluctuated since, and could be materially different from its value as of, the date of Newbridge’s opinion, and Newbridge’s opinion does not address the prices at which the Class A Shares, Class B Shares, or other securities or financial instruments of or relating to Clover Leaf may trade. The opinion does not speak as of the time the Business Combination will be completed or as of any date other than the date of such opinion. Clover Leaf does not anticipate asking Newbridge to update Newbridge’s opinion, and Newbridge does not have an obligation or responsibility to update, revise or reaffirm its opinion based on circumstances, developments or events that may have occurred or may occur after the date of the opinion. The written opinion of Newbridge is attached as Annex E to this proxy statement/prospectus and is incorporated by reference herein.
Clover Leaf is dependent upon its executive officers and directors and their departure could adversely affect Clover Leaf’s ability to operate and to consummate the initial business combination. Additionally, Clover Leaf’s executive officers and directors also allocate their time to other businesses, thereby causing potential conflicts of interest that could have a negative impact on Clover Leaf’s ability to complete the initial business combination.
Clover Leaf’s operations and its ability to consummate the Business Combination are dependent upon a relatively small group of individuals and, in particular, its executive officers and directors. Clover Leaf believes that its success depends on the continued service of its executive officers and directors, at least until the completion of the Business Combination. Clover Leaf does not have an employment agreement with, or key-man insurance on the life of, any of its directors or executive officers. The unexpected loss of the services of one or more of Clover Leaf’s directors or executive officers could have a detrimental effect on Clover Leaf and the ability to consummate the Business Combination. In addition, Clover Leaf’s executive officers and directors are not required to commit any specified amount of time to its affairs and, accordingly, will have conflicts of interest in allocating management time among various business activities, including monitoring the due diligence and undertaking the other actions required in order to consummate the Business Combination. Each of Clover Leaf’s executive officers is engaged in several other business endeavors for which they may be entitled to substantial compensation, and Clover Leaf’s directors also serve as officers and board members for other entities. If Clover Leaf’s executive officers’ and directors’ other business affairs require them to devote substantial amounts of time to such affairs in excess of their current commitment levels, it could limit their ability to devote time to Clover Leaf’s affairs, which may have a negative impact on Clover Leaf’s ability to consummate the Business Combination.
23
The Combined Company’s ability to be successful following the Business Combination will depend upon the efforts of the Combined Company Board and key personnel, and the loss of such persons could negatively impact the operations and profitability of the Combined Company’s post-Business Combination business.
The Combined Company’s ability to be successful following the Business Combination will be dependent upon the efforts of the Combined Company Board and key personnel. Clover Leaf cannot assure you that the Combined Company Board and key personnel will be effective or successful or remain with the Combined Company. In addition to the other challenges they will face, such individuals may be unfamiliar with the requirements of operating a public company, which could cause the Combined Company’s management to have to expend time and resources helping them become familiar with such requirements.
It is estimated that, pursuant to the Merger Agreement, Clover Leaf’s public stockholders will own approximately 15.6% of the equity interests or assets of the Combined Company (assuming no redemptions) and Clover Leaf’s management, other than [•], who is expected to serve on the Combined Company Board, will not be engaged in the management of the Combined Company’s business. Accordingly, the future performance of the Combined Company will depend upon the quality of the post-Business Combination board of directors, management and key personnel of the Combined Company.
Because Clover Leaf’s initial stockholders, executive officers and directors will lose their entire investment in Clover Leaf if the Business Combination or an alternative business combination is not completed by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), and because Clover Leaf’s Sponsor, executive officers and directors will not be eligible to be reimbursed for their out-of-pocket expenses if the Business Combination is not completed, a conflict of interest may have arisen in determining whether Kustom Entertainment was appropriate for Clover Leaf’s initial business combination.
The Sponsor purchased 3,457,807 shares of Clover Leaf Class B Common Stock from Clover Leaf for an aggregate price of $25,000, 3,457,806 of which were subsequently converted to shares of Clover Leaf Class A Common Stock (collectively, the “Sponsor Shares”). The Sponsor Shares will have a significantly higher value at the time of the Business Combination, if it is consummated, and, based on the closing price of the Class A Common Stock on September 29, 2023, which was $11.46, would have an aggregate value of $63.6 million as of the same date. If Clover Leaf does not consummate the Business Combination or another initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), and Clover Leaf is therefore required to be liquidated, these shares would be worthless, as the Sponsor is not entitled to participate in any redemption or liquidation of the Trust Account. Additionally, unless Clover Leaf consummates an initial business combination, it is possible that Clover Leaf’s officers, directors and the Sponsor may not receive reimbursement for out-of-pocket expenses incurred by them, to the extent that such expenses exceed the amount of available funds not deposited in the Trust Account (as of September 14, 2023, Clover Leaf’s officers and directors have incurred approximately $3,296,246 of out-of-pocket expenses exceeding funds available to Clover Leaf for reimbursement thereof, and Clover Leaf’s officers, directors and the Sponsor may not receive reimbursement therefor if the proposed Business Combination is not consummated).
The personal and financial interests of Clover Leaf’s executive officers and directors may have influenced their motivation in identifying and selecting a target business combination, completing an initial business combination and influencing the operation of the business following the initial business combination. At the closing of Clover Leaf’s initial business combination, its Sponsor, executive officers and directors, or any of their respective affiliates, will be reimbursed for any out-of-pocket expenses incurred in connection with activities on Clover Leaf’s behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. In the event the Business Combination or an alternative business combination is completed, there is no cap or ceiling on the reimbursement of out-of-pocket expenses incurred in connection with activities on Clover Leaf’s behalf. However, Clover Leaf’s Sponsor, executive officers and directors, or any of their respective affiliates will not be eligible for any such reimbursement if the Business Combination or an alternative business combination is not completed. Such financial interests of Clover Leaf’s Sponsor, executive officers and directors may have influenced their motivation in approving the Business Combination and may influence their motivation for completing the Business Combination.
24
The Sponsor paid nominal consideration for the Clover Leaf Sponsor Shares it holds. As a result, the Sponsor may make a substantial profit if the Business Combination is consummated, even if the shares held by the Sponsor lose substantial value and even if the Business Combination arguably may not be in the best interests of Clover Leaf’s public stockholders.
The Sponsor has invested in Clover Leaf an aggregate of $6,780,930, comprised of the $25,000 purchase price for the Clover Leaf Sponsor Shares and the $6,755,930 purchase price for the Private Placement Units. Assuming a trading price of $10.00 per share of the Combined Company upon consummation of the Business Combination, the 3,457,807 Clover Leaf Sponsor Shares would have an aggregate implied value of $34,578,070 at that time. Even if the trading price of the Combined Company Common Stock were as low as approximately $1.96 per share and the Private Placement Units were worthless, the value of the Clover Leaf Sponsor Shares would be equal to the Sponsor’s initial investment in Clover Leaf. If the Business Combination is not completed, however, and if Clover Leaf is forced to liquidate, the Sponsor will lose its entire investment in Clover Leaf. As a result, the Sponsor is likely to be able to recoup its investment in Clover Leaf and make a substantial profit on that investment, even if the Public Shares have lost significant value.
Accordingly, the Clover Leaf management team, which owns interests in the Sponsor, may have an economic incentive that differs from that of the public stockholders to pursue and consummate the Business Combination rather than to liquidate and to return all of the cash in the trust to the public stockholders. For the foregoing reasons, you should consider the Clover Leaf management team’s financial incentive to complete the Business Combination when evaluating whether to redeem your shares prior to or in connection with the Business Combination.
Clover Leaf’s directors and officers may have interests in the Business Combination that differ from the interests of Clover Leaf’s stockholders.
Executive officers of Clover Leaf negotiated the terms of the Merger Agreement with their counterparts at Kustom Entertainment, and the Clover Leaf Board determined that the Merger Agreement and the transactions contemplated thereby are advisable and fair to, and in the best interests of, Clover Leaf and its stockholders, and approved the Merger Agreement and the transactions contemplated thereby. In considering these facts and the other information contained in this proxy statement/prospectus, you should be aware that Clover Leaf’s executive officers and directors may have financial interests in the Business Combination that may be different from, or in addition to, the interests of Clover Leaf’s stockholders, including, but not limited to, the continued service as an officer or director of the Combined Company, severance benefits, equity grants, continued indemnification and the potential ability to sell an increased number of shares of common stock of the Combined Company.
The Clover Leaf Board was aware of and considered these interests, among other matters, in reaching the determination that the Merger Agreement and the transactions contemplated thereby were advisable and fair to, and in the best interests of, Clover Leaf and its stockholders. For a detailed discussion of the special interests that Clover Leaf’s directors and executive officers may have in the Business Combination, see the section of this proxy statement/prospectus entitled “The Business Combination Proposal (Proposal 2) — Interests of Clover Leaf’s Sponsor, Directors and Officers and Advisors in the Business Combination.”
You should consider the financial incentives that Clover Leaf’s officers and directors may have to approve and complete the Business Combination when evaluating whether vote for the Business Combination Proposal, as well as when considering whether to redeem your Public Shares prior to or in connection with the Business Combination.
Clover Leaf stockholders and Kustom Entertainment’s stockholders may not realize a benefit from the Business Combination commensurate with the ownership dilution they will experience in connection with the Business Combination.
If the Combined Company is unable to realize the full strategic and financial benefits currently anticipated from the Business Combination, Clover Leaf stockholders and Kustom Entertainment’s stockholders will have experienced substantial dilution of their ownership interests in their respective companies without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the Combined Company is able to realize only part of the strategic and financial benefits currently anticipated from the Business Combination.
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During the pendency of the Business Combination, Clover Leaf and Kustom Entertainment may not be able to enter into a business combination with another party because of restrictions in the Merger Agreement, which could adversely affect their respective businesses. Furthermore, certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.
Covenants in the Merger Agreement impede the ability of Clover Leaf and Kustom Entertainment to make acquisitions or complete other transactions that are not in the ordinary course of business pending completion of the Business Combination. As a result, if the Business Combination is not completed, the parties may be at a disadvantage to their competitors during that period. In addition, while the Merger Agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination outside the ordinary course of business, with any third party. Any such transactions could be favorable to such party’s stockholders.
If the conditions to the Merger are not met, the Business Combination may not occur.
Even if the Business Combination is approved by the stockholders of Clover Leaf (including each of the Required Approvals) and Kustom Entertainment, specified conditions must be satisfied or waived to complete the Business Combination. These conditions are described in detail in the Merger Agreement and in addition to stockholder consent, include among other requirements,
• receipt of the Clover Leaf Stockholder Approval;
• receipt of Digital Ally’s written consent approving the Transactions;
• expiration of any applicable waiting period under any antitrust laws;
• receipt of requisite consents from governmental authorities to consummate the Transactions, and receipt of specified requisite consents from other third parties to consummate the Transactions;
• the absence of any law or order that would prohibit the consummation of the Merger or other transactions contemplated by the Merger Agreement;
• immediately prior to or upon the Closing, after giving effect to the completion of the Redemption, Clover Leaf having net tangible assets of at least $5,000,001 unless Clover Leaf otherwise is exempt from the provisions of Rule 419 promulgated under the Securities Act;
• the members of the Post-Closing Board having been elected or appointed as of the Closing; and
• the effectiveness of the Proxy Statement, and, if applicable, the registration statement having been declared effective by the SEC.
See “Business Combination Proposal (Proposal 2) — Conditions to the Closing” below for a more complete summary. Clover Leaf and Kustom Entertainment cannot assure you that all of the conditions will be satisfied. If the conditions are not satisfied or waived, the Business Combination may not occur, or may be delayed and such delay may cause Clover Leaf and Kustom Entertainment to each lose some or all of the intended benefits of the Business Combination. If the Business Combination does not occur, Clover Leaf may not be able to find another potential candidate for its initial business combination prior to Clover Leaf’s deadline (currently January 22, 2024), and Clover Leaf will be required to liquidate.
The SEC issued proposed rules relating to certain activities of SPACs. Certain of the procedures that we, a potential initial business combination target, or others may determine to undertake in connection with such proposals may increase our costs and the time needed to complete our initial business combination and may constrain the circumstances under which we could complete an initial business combination. The need for compliance with the SPAC Rule Proposals (as defined below) may cause us to liquidate the funds in the Trust Account or liquidate Clover Leaf at an earlier time than we might otherwise choose.
On March 30, 2022, the SEC issued proposed rules (the “SPAC Rule Proposals”) relating, among other things, to disclosures in SEC filings in connection with initial business combination transactions between SPACs such as us and private operating companies; the financial statement requirements applicable to transactions involving shell
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companies; the use of projections by SPACs in SEC filings in connection with proposed initial business combination transactions; the potential liability of certain participants in proposed initial business combination transactions; and the extent to which SPACs could become subject to regulation under the Investment Company Act of 1940 (the “Investment Company Act”), including a proposed rule that would provide SPACs a safe harbor from treatment as an investment company if they satisfy certain conditions that limit a SPAC’s duration, asset composition, business purpose and activities. The SPAC Rule Proposals have not yet been adopted and may be adopted in the proposed form or in a different form that could impose additional regulatory requirements on SPACs. Certain of the procedures that we, a potential initial business combination target, or others may determine to undertake in connection with the SPAC Rule Proposals, or pursuant to the SEC’s views expressed in the SPAC Rule Proposals, may increase the costs and time of negotiating and completing an initial business combination, and may constrain the circumstances under which we could complete an initial business combination. The need for compliance with the SPAC Rule Proposals may cause us to liquidate the funds in the Trust Account or liquidate Clover Leaf at an earlier time than we might otherwise choose. Were we to liquidate, our Public Rights would expire worthless, and our securityholders would lose the investment opportunity associated with an investment in the combined company, including any potential price appreciation of our securities.
If we are deemed to be an investment company for purposes of the Investment Company Act, we would be required to institute burdensome compliance requirements and our activities would be severely restricted. As a result, in such circumstances, unless we are able to modify our activities so that we would not be deemed an investment company, we may abandon our efforts to complete an initial business combination and instead liquidate the Company.
There is currently some uncertainty concerning the applicability of the Investment Company Act to a SPAC, including a company like ours. As a result, it is possible that a claim could be made that we have been operating as an unregistered investment company.
If we are deemed to be an investment company under the Investment Company Act, our activities would be severely restricted. In addition, we would be subject to burdensome compliance requirements. We do not believe that our principal activities will subject us to regulation as an investment company under the Investment Company Act. However, if we are deemed to be an investment company and subject to compliance with and regulation under the Investment Company Act, we would be subject to additional regulatory burdens and expenses for which we have not allotted funds. As a result, unless we are able to modify our activities so that we would not be deemed an investment company, we may abandon our efforts to complete an initial business combination and instead liquidate the Company. Were we to liquidate, our rights would expire worthless, and our securityholders would lose the investment opportunity associated with an investment in the combined company, including potential price appreciation of our securities.
To mitigate the risk that we might be deemed to be an investment company for purposes of the Investment Company Act, we have instructed the trustee to liquidate the investments held in the Trust Account and instead to hold the funds in the Trust Account in an interest-bearing demand deposit account at a bank until the earlier of the consummation of our initial Business Combination or our liquidation. As a result, following the liquidation of investments in the Trust Account, we may receive less interest on the funds held in the Trust Account than the interest we would have received pursuant to our original Trust Account investments, which would reduce the dollar amount our public stockholders would receive upon any redemption or our liquidation.
The funds in the Trust Account have, since our IPO, been held only in U.S. government treasury obligations with a maturity of 185 days or less or in money market funds investing solely in U.S. government treasury obligations and meeting certain conditions under Rule 2a-7 under the Investment Company Act. To mitigate the risk of us being deemed to be an unregistered investment company (including under the subjective test of Section 3(a)(1)(A) of the Investment Company Act) and thus subject to regulation under the Investment Company Act, we have instructed Continental Stock Transfer & Trust Company, the trustee with respect to the Trust Account, to liquidate the U.S. government treasury obligations or money market funds held in the Trust Account and hold all funds in the Trust Account in an interest-bearing demand deposit account at a bank until the earlier of the consummation of our initial business combination or liquidation. Following such liquidation, we may receive less interest on the funds held in the Trust Account than the interest we would have received pursuant to our original Trust Account investments; however, interest previously earned on the funds held in the Trust Account still may be released to us to pay our taxes, if any, and certain other expenses as permitted. Consequently, any decision to liquidate the investments held in the Trust Account and thereafter to hold all funds in the Trust Account in an interest-bearing demand deposit account
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at a national bank could reduce the dollar amount our public stockholders would receive upon any redemption or our liquidation. Were we to liquidate, our rights would expire worthless, and our securityholders would lose the investment opportunity associated with an investment in the combined company, including any potential price appreciation of our securities.
In the event that we are deemed to be an investment company, despite any change in investments in the Trust Account, we may be required to liquidate the Company, and the longer the period before the investment change, the greater the risk of being considered an investment company.
Delaware law and the Combined Company’s certificate of incorporation and bylaws will contain certain provisions, including anti-takeover provisions, that limit the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may consider favorable.
The Proposed Charter and the Proposed Bylaws that will be in effect upon consummation of the Business Combination, and the DGCL, contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by the Combined Company Board and therefore depress the trading price of the Combined Company’s common stock. These provisions could also make it difficult for stockholders to take certain actions, including electing directors who are not nominated by the current members of the Kustom Entertainment Board or taking other corporate actions, including effecting changes in the management of the Combined Company. Among other things, the Proposed Charter and the Proposed Bylaws include provisions regarding:
• the ability of the Combined Company Board to issue shares of preferred stock, including “blank check” preferred stock and to determine the price and other terms of those shares, including preferences and voting powers and other rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
• the limitation of the liability of, and the indemnification of, the Combined Company’s directors and officers;
• the exclusive right of the directors serving on the Combined Company Board to fill a newly created directorship created by the expansion of the Combined Company Board or a vacancy created by the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies and newly created directorships on the Combined Company Board;
• the requirement that a special meeting of stockholders may be called only by the Combined Company Board, the chairperson of the Combined Company Board, or the Combined Company’s chief executive officer, which could delay the ability of stockholders to force consideration of a proposal or to take action, including the removal of directors;
• provisions that, subject to the rights of holders of any outstanding series of Preferred Stock, prohibit stockholders of the Corporation from taking any action by consent in lieu of a meeting of stockholders;
• controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings;
• the ability of the Combined Company Board to amend the bylaws, which may allow the Combined Company Board to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend the bylaws to facilitate an unsolicited takeover attempt;
• advance notice procedures with which stockholders must comply to nominate candidates to the Combined Company Board or to propose matters to be acted upon at a stockholders’ meeting, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in the Combined Company Board and also may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Combined Company; and
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in the Combined Company Board or management.
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Any provision of the Proposed Charter, the Proposed Bylaws or Delaware law that has the effect of delaying or preventing a change of control could limit the opportunity for stockholders to receive a premium for their shares of the Combined Company’s capital stock and could also affect the price that some investors are willing to pay for the Combined Company’s common stock.
The Proposed Charter will designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between the Combined Company and its stockholders, and also provide that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, each of which could limit the ability of the Combined Company’s stockholders to choose the judicial forum for disputes with the Combined Company or its directors, officers, or employee or stockholders.
The Proposed Charter, which will become effective upon the Closing, will provide that, unless the Combined Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) and any appellate court therefrom shall be the sole and exclusive forum for the following claims or causes of action under the Delaware statutory or common law: (i) any derivative claim or cause of action brought on behalf of the Combined Company; (ii) any claim or cause of action for breach of a fiduciary duty owed by any current or former director, officer or other employee of the Combined Company to the Combined Company or the Combined Company’s stockholders; (iii) any claim or cause of action against the Combined Company or any current or former director, officer or other employee of the Combined Company, arising out of or pursuant to any provision of the DGCL, the Proposed Charter or the Proposed Bylaws (as each may be amended from time to time); (iv) any claim or cause of action seeking to interpret, apply, enforce or determine the validity of the Proposed Charter or the Proposed Bylaws (as each may be amended from time to time, including any right, obligation or remedy thereunder); (v) any claim or cause of action as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware; and (vi) any claim or cause of action against the Combined Company or any current or former director, officer or other employee of the Combined Company governed by the internal-affairs doctrine or otherwise related to the Combined Company’s internal affairs, in all cases to the fullest extent permitted by law and subject to the court having personal jurisdiction over the indispensable parties named as defendants. These subsections (i) to (vi) shall not apply to claims or causes of action brought to enforce a duty or liability created by the Securities Act, the Exchange Act, or any other claim for which the federal courts have exclusive or concurrent jurisdiction.
Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. We note, however, that there is uncertainty as to whether a court would enforce this provision and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Section 22 of the Securities Act creates concurrent jurisdiction for state and federal courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder.
Any person or entity purchasing or otherwise acquiring any interest in any of the Combined Company’s shares of capital stock shall be deemed to have notice of and consented to this provision. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, other employees or stockholders, or could result in increased costs for a stockholder to bring a claim, particularly if they do not reside in or near Delaware, both of which may discourage such lawsuits against us and our directors, officers, employees and stockholders. Alternatively, if a court were to find these provisions inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, the Combined Company may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect the Combined Company’s business and financial condition.
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The Sponsor and Kustom Entertainment, and their respective directors, officers, advisors and affiliates, may elect to purchase shares of Clover Leaf Class A Common Stock or the Public Rights from Clover Leaf public shareholders, which may influence a vote on a proposed initial business combination and reduce the “public float” of the Clover Leaf Class A Common Stock.
At any time prior to the Special Meeting, during a period when they are not then aware of any material nonpublic information regarding Clover Leaf or Clover Leaf’s securities, the Sponsor and Kustom Entertainment, and their respective directors, officers, advisors and affiliates may purchase shares of Clover Leaf Class A Common Stock and/or Public Rights from investors, or they may enter into transactions with such investors and others to provide them with incentives to acquire shares of Clover Leaf Class A Common Stock or vote their shares in favor of the Business Combination Proposal, or to withdraw any request for redemption. In such transactions, the purchase price for the shares of Clover Leaf Class A Common Stock will not exceed the Redemption Price. In addition, the persons described above will waive redemption rights, if any, with respect to the shares of Clover Leaf Class A Common Stock they acquire in such transactions. However, any shares of Clover Leaf Class A Common Stock acquired by the persons described above would not vote on the Business Combination Proposal.
The purpose of such share purchases and other transactions would be to increase the likelihood that the conditions to the consummation of the Business Combination are satisfied. This may result in the completion of our Business Combination that may not otherwise have been possible. While the exact nature of any such incentives has not been determined as of the date of this proxy statement/prospectus, they might include, without limitation, arrangements to protect such investors or holders against potential loss in value of their shares, including the granting of put options.
Entering into any such incentive arrangements may have a depressive effect on the shares of Clover Leaf Class A Common Stock. For example, as a result of these arrangements, an investor or holder may have the ability to effectively purchase shares at a price lower than market and may therefore be more likely to sell the shares he owns, either prior to or immediately after the Special Meeting.
As of the date of this proxy statement/prospectus, no agreements to such effect have been entered into with any such investor or holder. If such arrangements or agreements are entered into, Clover Leaf will file a Current Report on Form 8-K prior to the Special Meeting to disclose any arrangements entered into or significant purchases made by any of the aforementioned persons. Any such report will include (i) the amount of shares of Clover Leaf Class A Common Stock purchased and the purchase price; (ii) the purpose of such purchases; (iii) the impact of such purchases on the likelihood that the Business Combination transaction will be approved; (iv) the identities or characteristics of security holders who sold shares if not purchased in the open market or the nature of the sellers; and (v) the number of shares of Clover Leaf Class A Common Stock for which Clover Leaf has received redemption requests.
In addition, if such purchases are made, the public “float” of Clover Leaf Class A Common Stock or the Public Rights and the number of beneficial holders of Clover Leaf’s securities may be reduced, possibly making it difficult to obtain or maintain the quotation, listing or trading of the Clover Leaf securities on a national securities exchange.
Clover Leaf Stockholders who redeem their Clover Leaf Class A Common Stock may continue to hold any Public Rights that they own, which will result in dilution to non-redeeming Clover Leaf Stockholders upon conversion of such Public Rights.
Clover Leaf Stockholders who redeem their Clover Leaf Class A Common Stock may continue to hold any Public Rights that they own at such time, which will result in additional dilution to non-redeeming holders upon conversion of such Public Rights at the closing of the Business Combination. Assuming (a) all redeeming Clover Leaf Stockholders that acquired Clover Leaf Units in the Clover Leaf IPO continue to hold the Public Rights that were included in such Clover Leaf Units, and (b) maximum redemption of Clover Leaf Class A Common Stock held by the redeeming Clover Leaf Stockholders, 13,831,230 Public Rights would be retained by redeeming Clover Leaf Stockholders. As a result, the redeeming Clover Leaf Stockholders would hold Public Rights with an aggregate market value of approximately $1.4 million, assuming a closing price of $0.10 as reported by Nasdaq on September 28, 2023, while non-redeeming Clover Leaf Stockholders would suffer dilution in their percentage ownership of the Combined Company upon conversion of the Public Rights held by redeeming Clover Leaf Stockholders.
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Changes in laws or regulations, or a failure to comply with any laws and regulations, may adversely affect Clover Leaf’s business, including its ability to complete the Business Combination, and results of operations.
Clover Leaf is subject to laws and regulations enacted by national, regional and local governments. In particular, Clover Leaf is required to comply with certain SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time and those changes could have a material adverse effect on Clover Leaf’s business, investments and results of operations. In addition, a failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on Clover Leaf’s business, including its ability to complete the Business Combination, and results of operations.
We may not be able to complete an initial business combination with certain potential target companies if a proposed transaction with the target company may be subject to review or approval by regulatory authorities pursuant to certain U.S. or foreign laws or regulations.
Certain acquisitions or business combinations may be subject to review or approval by regulatory authorities pursuant to certain U.S. or foreign laws or regulations. In the event that such regulatory approval or clearance is not obtained, or the review process is extended beyond the period of time that would permit an initial business combination to be consummated with us, we may not be able to consummate a business combination with such target. In addition, regulatory considerations may decrease the pool of potential target companies we may be willing or able to consider.
Among other things, the U.S. Federal Communications Act prohibits foreign individuals, governments, and corporations from owning more than a specified percentage of the capital stock of a broadcast, common carrier, or aeronautical radio station licensee. In addition, U.S. law currently restricts foreign ownership of U.S. airlines. In the United States, certain mergers that may affect competition may require certain filings and review by the Department of Justice and the Federal Trade Commission, and investments or acquisitions that may affect national security are subject to review by the Committee on Foreign Investment in the United States (“CFIUS”). CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States by foreign persons in order to determine the effect of such transactions on the national security of the United States.
Outside the United States, laws or regulations may affect our ability to consummate a business combination with potential target companies incorporated or having business operations in jurisdictions where national security considerations, involvement in regulated industries (including telecommunications), or in businesses where a country’s culture or heritage may be implicated. Yntegra Capital Management, LLC is the sole managing member of the Sponsor and a U.S. entity. Felipe MacLean, a U.S. citizen is the sole manager of Yntegra Capital Management, LLC, the Sponsor’s managing member. Other members of the Sponsor include certain officers and directors of the Company. To the best of the Company’s knowledge, approximately 47% of the total allocated membership interests in the Sponsor are owned by U.S. persons on a look-through basis and approximately 53% of interests in the Sponsor owned by non-U.S. persons on a look-through basis. Of the approximately 53% of interests in the Sponsor owned by non-U.S. persons, approximately 27% are owned by persons in Sweden, approximately 9% are owned by persons in Bolivia and 3% are owned by a person in Venezuela. Accordingly, the Sponsor is controlled by a non-U.S. person, and CFIUS may consider us to be a “foreign person.”
The Sponsor is expected to own approximately 22.8% of the combined entity following the Business Combination, assuming no redemptions.
Although we do not believe Kustom Entertainment is a U.S. business that may affect national security, CFIUS may take a different view and decide to block or delay the Business Combination, impose conditions to mitigate national security concerns with respect to the Business Combination, order us to divest all or a portion of a U.S. business of the combined company if we had proceeded without first obtaining CFIUS clearance, or impose penalties if CFIUS believes that the mandatory notification requirement applied. Additionally, the laws and regulations of other U.S. government entities may impose review or approval procedures on account of any foreign ownership by the Sponsor.
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The foreign ownership limitations, and the potential impact of CFIUS, may prevent us from consummating the Business Combination with Kustom Entertainment. If we were to seek an initial business combination other than the Business Combination, the pool of potential targets with which it could complete an initial business combination may be limited as a result of any such regulatory restriction, and we may be adversely affected in terms of competing with other SPACs that do not have similar ownership issues. Moreover, the process of any government review, whether by CFIUS or otherwise, could be lengthy. Because we have only a limited time to complete an initial business combination, our failure to obtain any required approvals within the requisite time period may require us to liquidate. If we liquidate, our public stockholders may only receive $11.50 per share (plus any applicable interest accrued and prior to any Contributions if the Extension Amendment Proposal is implemented). This will also cause you to lose any potential investment opportunity in Kustom Entertainment or any other acquisition target and the chance of realizing future gains on your investment through any price appreciation in the combined company, and our rights will expire worthless.
Risks Related to Ownership of Combined Company Common Stock
An active market for the Combined Company’s securities may not develop, which would adversely affect the liquidity and price of the Combined Company’s securities.
The price of the Combined Company’s securities may vary significantly due to factors specific to the Combined Company as well as to general market or economic conditions. Furthermore, an active trading market for the Combined Company’s securities may never develop or, if developed, it may not be sustained. You may be unable to sell your securities unless a market can be established and sustained.
We recently received Nasdaq notices for failing to comply with listing requirements and there is no assurance we will regain compliance or maintain our Nasdaq listing. If we cannot regain compliance, our securities will be subject to delisting and the liquidity and the trading price of our securities could be adversely affected.
On April 19, 2023, the Company received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) notifying the Company that the Company longer meets the minimum 500,000 publicly held shares requirement for The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(4) (the “Public Shares Requirement”). The notification received has no immediate effect on the Company’s Nasdaq listing. On June 5, 2023, the Company submitted a plan to regain compliance with the Public Shares Requirement. On June 16, 2023, the Company received a notice from Nasdaq indicating that it has determined to grant the Company an extension of time to regain compliance with the Public Shares Requirement. The terms of the extension were that on or before July 31, 2023, the Company must file with the SEC and Nasdaq a public document containing its current total shares outstanding and a beneficial ownership table in accordance with SEC proxy rules.
The Company filed a Current Report on Form 8-K with this information on July 31, 2023. On August 3, 2023, the Company received a letter from the Staff confirming that the Company has regained compliance with the market value of listed securities concern. For these reasons, the Staff has determined to continue the listing of the Company’s securities on The Nasdaq Stock Market and has closed the matter set forth in the foregoing paragraph.
On April 21, 2023, the Company received a deficiency letter from the Staff of Nasdaq notifying the Company that, for the preceding 30 consecutive business days, the Company’s Market Value of Listed Securities (“MVLS”) was below the $35 million minimum requirement for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(b)(2) (the “MVLS Requirement”).
The notification received has no immediate effect on the Company’s Nasdaq listing. In accordance with Nasdaq rules, the Company has been provided an initial period of 180 calendar days, or until October 18, 2023 (the “Compliance Date”), to regain compliance with the MVLS Requirement. If, at any time before the Compliance Date, the Company’s MVLS closes at $35 million or more for a minimum of 10 consecutive business days, the Staff will provide the Company written confirmation of compliance with the MVLS Requirement. The Company intends to monitor the market value of the Company’s listed securities and may, if appropriate, consider available options to regain compliance with the MVLS Requirement.
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If Nasdaq delists our securities from trading on its exchange and we are not able to list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences, including:
• a limited availability of market quotations for our securities;
• reduced liquidity for our securities;
• a determination that our Class A common stock is considered a “penny stock,” which will require brokers trading in our Class A common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
• a limited amount of news and analyst coverage;
• a decreased ability to issue additional securities or obtain additional financing in the future; and
• being subject to regulation in each state in which we offer our securities, including in connection with our business combination.
The market price of the Combined Company’s common stock may decline as a result of the Business Combination.
The market price of the Combined Company’s common stock may decline as a result of the Business Combination for a number of reasons including if:
• investors react negatively to the prospects of the Combined Company’s business and the prospects of the Business Combination;
• the effect of the Business Combination on the Combined Company’s business and prospects is not consistent with the expectations of financial or industry analysts; or
• the Combined Company does not achieve the perceived benefits of the Business Combination as rapidly or to the extent anticipated by financial or industry analysts.
The Combined Company’s stock price may change significantly following the Business Combination and you could lose all or part of your investment as a result.
The trading price of the Combined Company Common Stock is likely to be volatile. The stock market recently has experienced extreme volatility. This volatility often has been unrelated or disproportionate to the operating performance of particular companies. You may not be able to resell your shares of the Combined Company Common Stock at an attractive price due to a number of factors such as those listed in “— Risks Related to Kustom Entertainment” and the following:
• results of operations that vary from the expectations of securities analysts and investors;
• results of operations that vary from those of the Combined Company’s competitors;
• changes in expectations as to the Combined Company’s future financial performance, including financial estimates and investment recommendations by securities analysts and investors;
• declines in the market prices of stocks generally;
• strategic actions by the Combined Company or its competitors;
• announcements by the Combined Company or its competitors of significant contracts, acquisitions, joint ventures, other strategic relationships or capital commitments;
• any significant change in the Combined Company’s management;
• changes in general economic or market conditions or trends in the Combined Company’s industry or markets;
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• changes in business or regulatory conditions, including new laws or regulations or new interpretations of existing laws or regulations applicable to the Combined Company’s business;
• future sales of the Combined Company Common Stock or other securities;
• investor perceptions of the investment opportunity associated with the Combined Company Common Stock relative to other investment alternatives;
• the public’s response to press releases or other public announcements by the Combined Company or third parties, including the Combined Company’s filings with the SEC;
• litigation involving the Combined Company, the Combined Company’s industry, or both, or investigations by regulators into the Combined Company Board, the Combined Company’s operations or those of the Combined Company’s competitors;
• guidance, if any, that the Combined Company provides to the public, any changes in this guidance or the Combined Company’s failure to meet this guidance;
• the development and sustainability of an active trading market for the Combined Company Common Stock;
• actions by institutional or activist stockholders;
• changes in accounting standards, policies, guidelines, interpretations or principles; and
• other events or factors, including those resulting from pandemics, natural disasters, war, acts of terrorism or responses to these events.
These broad market and industry fluctuations may adversely affect the market price of the Combined Company Common Stock, regardless of the Combined Company’s actual operating performance. In addition, price volatility may be greater if the public float and trading volume of the Combined Company Common Stock is low.
In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If the Combined Company was involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from the Combined Company’s business regardless of the outcome of such litigation.
Because there are no current plans to pay cash dividends on the Combined Company Common Stock for the foreseeable future, you may not receive any return on investment unless you sell your Combined Company Common Stock at a price greater than what you paid for it.
The Combined Company intends to retain future earnings, if any, for future operations, expansion and debt repayment and there are no current plans to pay any cash dividends for the foreseeable future. The declaration, amount and payment of any future dividends on shares of the Combined Company Common Stock will be at the sole discretion of the Combined Company Board. The Combined Company Board may take into account general and economic conditions, the Combined Company’s financial condition and results of operations, the Combined Company’s available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, implications of the payment of dividends by the Combined Company to its stockholders or by its subsidiaries to it and such other factors as the Combined Company Board may deem relevant. As a result, you may not receive any return on an investment in the Combined Company Common Stock unless you sell your Combined Company Common Stock for a price greater than that which you paid for it.
The Combined Company stockholders may experience dilution in the future.
The percentage of shares of the Combined Company Common Stock owned by current stockholders may be diluted in the future because of equity issuances for acquisitions, capital market transactions or otherwise, including, without limitation, equity awards that the Combined Company may grant to its directors, officers and employees. Such issuances may have a dilutive effect on the Combined Company’s earnings per share, which could adversely affect the market price of the Combined Company Common Stock.
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If securities or industry analysts do not publish research or reports about the Combined Company’s business, if they change their recommendations regarding the Combined Company Common Stock or if the Combined Company’s operating results do not meet their expectations, the Combined Company Common Stock price and trading volume could decline.
The trading market for the Combined Company Common Stock will depend in part on the research and reports that securities or industry analysts publish about the Combined Company or its businesses. If no securities or industry analysts commence coverage of the Combined Company, the trading price for the Combined Company Common Stock could be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover the Combined Company downgrade its securities or publish unfavorable research about its businesses, or if the Combined Company’s operating results do not meet analyst expectations, the trading price of the Combined Company Common Stock would likely decline. If one or more of these analysts cease coverage of the Combined Company or fail to publish reports on the Combined Company regularly, demand for the Combined Company Common Stock could decrease, which might cause the Combined Company Common Stock price and trading volume to decline.
Clover Leaf will issue shares of Common Stock as consideration for the Business Combination, which will result in immediate dilution to Clover Leaf stockholders, and may issue additional shares of Class A Common Stock or other equity or convertible debt securities without approval of the holders of its stockholders, which would dilute existing ownership interests and may depress the market price of shares of Class A Common Stock.
It is anticipated that, following the Business Combination (1) Clover Leaf’s Public Stockholders are expected to own approximately 15.6% of the outstanding Common Stock, (2) the Kustom Entertainment Stockholders are expected to collectively own approximately 22.8% of the outstanding Common Stock, and (3) the Sponsor is expected to own approximately 57.5% of the outstanding Common Stock. These percentages assume, among other assumptions (as described under the heading “Share Calculations and Ownership Percentages”), that none of the Public Shares are redeemed; if the actual facts differ from these assumptions, these percentages will differ.
Holders of Public Shares prior to Closing that elect to redeem their Public Shares may continue to hold any Public Rights that they owned prior to redemption, the conversion of which would result in additional dilution to non-redeeming Clover Leaf stockholders; conversion of outstanding Private Placement Rights would also result in additional dilution to non-redeeming Clover Leaf stockholders. Additionally, although no such transactions are currently anticipated, Clover Leaf may, prior to the Closing, offer or sell additional securities in connection with a PIPE or other financing transaction, the issuance of which would dilute ownership interests to Public Stockholders that do not redeem Public Shares in connection with the Business Combination.
Additionally, the terms of the Merger Agreement contemplate the adoption, effective at Closing, subject to approval by the Clover Leaf stockholders at the Clover Leaf Special Meeting, of the Incentive Plan, pursuant to which the Combined Company may make grants or issue equity or equity-linked securities after the Closing in accordance with the terms of such plans from reserves of shares Combined Company Class A Common Stock to be established for such purpose.
The potential issuance of shares, or the vesting and settlement or conversion of equity-linked securities issued or granted under the Incentive Plan would also result in additional dilution to non-redeeming Clover Leaf stockholders. The dilutive effects of the conversion of outstanding Private Placement Rights and Public Rights at various redemptions levels is illustrated in the table set forth below.
In addition to the foregoing potential sources of dilution to non-redeeming Public Stockholders, after the Closing, Kustom Entertainment or the Combined Company may require capital investment to support Kustom Entertainment’s business, and the Combined Company may issue additional shares of Combined Company Class A shares or other equity or convertible debt securities of equal or senior rank in the future without approval of the holders of Combined Company stockholders in certain circumstances, all of which may result in additional dilution to non-redeeming Public Stockholders.
The percentage of the outstanding shares of Combined Company Common Stock that will be owned by Public Stockholders after the Closing will vary based, among other things, on the number of Public Shares redeemed in connection with the Business Combination and the issuance by Clover Leaf or the Combined Company of additional equity or equity-based securities prior to, at or after the Closing. Certain dilutive effects on non-redeeming Clover
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Leaf stockholders across various redemption scenarios are shown in the table set forth below, though, as described herein, there may be other sources of dilution that impact ownership and voting control of Public Stockholders after the Business Combination is consummated.
The following table illustrates varying beneficial ownership levels in the Combined Company immediately following the Business Combination, incorporating the assumptions described below and in the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements”, as well as possible sources and extents of dilution for non-redeeming Public Stockholders, assuming no redemptions by Public Stockholders, 25% redemption by Public Stockholders, 50% redemption by Public Stockholders, 75% redemption by Public Stockholders and the Maximum Redemptions Scenario assumptions with regard to redemptions by Public Stockholders, as further described below:
|
No Additional Redemptions |
% |
25% Redemptions |
% |
50% Redemptions |
% |
75% Redemptions |
% |
Maximum Redemptions |
% |
||||||||||||||||
|
Clover Leaf Public Shareholders |
3,048,031 |
15.6 |
% |
2,856,776 |
14.8 |
% |
2,665,520 |
14.0 |
% |
2,474,265 |
13.0 |
% |
2,283,009 |
12.2 |
% |
||||||||||
|
Clover Leaf Sponsor’s Founder Shares |
3,457,807 |
17.6 |
% |
3,457,807 |
17.9 |
% |
3,457,807 |
18.0 |
% |
3,457,807 |
18.2 |
% |
3,457,807 |
18.4 |
% |
||||||||||
|
Sponsor Private Placement Shares |
1,001,881 |
5.1 |
% |
1,001,881 |
5.2 |
% |
1,001,881 |
5.2 |
% |
1,001,881 |
5.3 |
% |
1,001,881 |
5.3 |
% |
||||||||||
|
Underwriter Shares |
824,519 |
4.2 |
% |
824,519 |
4.3 |
% |
824,519 |
4.3 |
% |
824,519 |
4.3 |
% |
824,519 |
4.4 |
% |
||||||||||
|
Kustom Entertainment Shareholders |
11,220,826 |
57.5 |
% |
11,220,826 |
57.8 |
% |
11,220,826 |
58.5 |
% |
11,220,826 |
59.2 |
% |
11,220,826 |
59.7 |
% |
||||||||||
|
Total |
19,553,064 |
100.0 |
% |
19,361,809 |
100.0 |
% |
19,170,553 |
100.0 |
% |
18,979,298 |
100.0 |
% |
18,788,042 |
100.0 |
% |
||||||||||
Future sales, or the perception of future sales, by the Combined Company or its stockholders in the public market following the Business Combination could cause the market price for the Combined Company Common Stock to decline.
The sale of shares of the Combined Company Common Stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of the Combined Company Common Stock. These sales, or the possibility that these sales may occur, also might make it more difficult for the Combined Company to sell equity securities in the future at a time and at a price that it deems appropriate.
Upon consummation of the Business Combination, it is currently expected that the Combined Company will have a total of 19,553,064 shares of Combined Company Common Stock outstanding (i) assuming that there are no redemptions of any shares by Clover Leaf’s public stockholders in connection with the Business Combination, and (ii) without giving effect to any awards that may be issued under the Incentive Plan in the future. All shares currently held by Clover Leaf Public Stockholders and all of the shares issued in the Business Combination to existing Kustom Entertainment securityholders will be freely tradable without additional registration under the Securities Act, and without restriction by persons other than the Combined Company’s “affiliates” (as defined under Rule 144 under the Securities Act, (“Rule 144”)), including the Combined Company’s directors, executive officers and other affiliates.
Simultaneously with the execution and delivery of the Merger Agreement, certain stockholders of Kustom Entertainment, who are expected to collectively own approximately 57.5% of the shares of the Combined Company Common Stock outstanding following the Business Combination (based on the above assumptions and Kustom Entertainment’s current stockholdings), agreed with Clover Leaf pursuant to the Lock-Up Agreements, subject to certain exceptions, not to dispose of or hedge any of their shares of the Combined Company Common Stock or securities convertible into or exchangeable for shares of the Combined Company Common Stock during the period from the date of the Closing and ending six months after such date. See “The Business Combination Proposal (Proposal 2) — Certain Related Agreements — Lock-up Agreements.”
In addition, the shares of the Combined Company Common Stock reserved for future issuance under the Incentive Plan will become eligible for sale in the public market once those shares are issued, subject to any applicable vesting requirements, lock-up agreements and other restrictions imposed by law. A total number of shares representing [•]% of the outstanding shares of the Combined Company Common Stock immediately following consummation of the Business Combination are expected to be reserved for future issuance under the Incentive Plan. The Combined Company is expected to file one or more registration statements on Form S-8 under the Securities Act to register shares
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of the Combined Company Common Stock or securities convertible into or exchangeable for shares of the Combined Company Common Stock issued pursuant to the Incentive Plan. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market.
In the future, the Combined Company may also issue its securities in connection with investments or acquisitions. The amount of shares of the Combined Company Common Stock issued in connection with an investment or acquisition could constitute a material portion of the then-outstanding shares of the Combined Company Common Stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to the Combined Company stockholders.
Clover Leaf currently is, and the Combined Company will be, an “emerging growth company” and a “smaller reporting company” within the meaning of the Securities Act, and if the Combined Company takes advantage of certain exemptions from disclosure requirements available to emerging growth companies and smaller reporting companies, this could make our securities less attractive to investors and may make it more difficult to compare our performance with other public companies.
Clover Leaf is currently and, following the consummation of the Merger, the Combined Company will be, an “emerging growth company” and “smaller reporting company” within the meaning of the Securities Act, as modified by the JOBS Act. The Combined Company may continue to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies or smaller reporting companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result, the Combined Company stockholders may not have access to certain information they may deem important. We cannot predict whether investors will find securities issued by the Combined Company less attractive because the Combined Company will rely on these exemptions. If some investors find those securities less attractive as a result of its reliance on these exemptions, the trading prices of the Combined Company’s securities may be lower than they otherwise would be, there may be a less active trading market for the Combined Company’s securities and the trading prices of the Combined Company’s securities may be more volatile.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. Clover Leaf has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Combined Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Combined Company’s financial statements with another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
The Combined Company will remain an emerging growth company until the earliest of: (i) the last day of the fiscal year following the fifth anniversary of the closing of the IPO, (ii) the last day of the fiscal year in which the Combined Company has total annual gross revenue of at least $1.235 billion; (iii) the last day of the fiscal year in which the Combined Company is deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of the Combined Company Common Stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year; or (iv) the date on which the Combined Company has issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
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Risks Related to the Redemption
There is no guarantee that a Clover Leaf public stockholder’s decision whether to redeem its shares of Clover Leaf common stock for a pro rata portion of the Trust Account will put such stockholder in a better future economic position.
We cannot assure you as to the price at which a public stockholder may be able to sell the shares of the Combined Company Common Stock in the future following the completion of the Business Combination. Certain events following the consummation of any business combination, including the Merger, may cause an increase in the Combined Company stock price, and may result in a lower value realized now than a Clover Leaf stockholder might realize in the future had the stockholder not elected to redeem such stockholder’s public shares. Similarly, if a Clover Leaf public stockholder does not redeem such stockholder’s shares, such stockholder will bear the risk of ownership of the Combined Company Common Stock after the consummation of the Business Combination, and there can be no assurance that a stockholder can sell such stockholder’s shares of the Combined Company Common Stock in the future for a greater amount than the redemption price set forth in this proxy statement/prospectus. A Clover Leaf public stockholder should consult such stockholder’s own tax or financial advisor for assistance on how this may affect its individual situation.
If Clover Leaf Public Stockholders fail to comply with the redemption requirements specified in this proxy statement/prospectus, they will not be entitled to redeem their public shares for a pro rata portion of the funds held in the Trust Account.
Clover Leaf intends to comply with the U.S. federal proxy rules in conducting redemptions in connection with the Business Combination. However, despite Clover Leaf’s compliance with these rules, if a Clover Leaf stockholder fails to receive Clover Leaf’s proxy materials, such stockholder may not become aware of the opportunity to redeem its shares of Clover Leaf common stock. In addition, this proxy statement/prospectus provides the various procedures that must be complied with in order to validly tender or redeem public shares. In the event that a public stockholder fails to comply with these or any other procedures, its public shares may not be redeemed.
In order to exercise their redemption rights, public stockholders are required to deliver their public shares, either physically or electronically using The Depository Trust Company’s DWAC System, to Clover Leaf’s transfer agent prior to the vote at the Clover Leaf Special Meeting. If a public stockholder properly seeks redemption as described in this proxy statement/prospectus and the Business Combination is consummated, Clover Leaf will redeem these public shares for a pro rata portion of the funds deposited in the Trust Account and the public stockholder will no longer own such public shares following the Merger. See the section entitled “Clover Leaf Special Meeting of Stockholders — Redemption Rights” for additional information on how to exercise your redemption rights.
If you or a “group” of Clover Leaf stockholders of which you are a part is deemed to hold an aggregate of more than 15% of the public shares, you (or, if a member of such a group, or all of the members of such group in the aggregate) will lose the ability to redeem all such public shares in excess of 15% of the public shares.
A public stockholder, together with any of such stockholder’s affiliates or any other person with whom it is acting in concert or as a “group” (as defined in Section 13(d)(3) of the Exchange Act), will be restricted from redeeming in the aggregate such stockholder’s public shares or, if part of such a group, the group’s public shares, in excess of 15% of the public shares, without the prior consent of Clover Leaf. However, Clover Leaf stockholders’ ability to vote all of their public shares (including such excess shares) for or against the Business Combination Proposal is not restricted by this limitation on redemptions. Your inability to redeem any such excess public shares could result in you suffering a material loss on your investment in Clover Leaf if you sell such excess public shares in open market transactions. Clover Leaf cannot assure you that the value of such excess public shares will appreciate over time following the Business Combination or that the market price of the public shares will exceed the per share redemption price.
Under the Inflation Reduction Act of 2022, Clover Leaf may have liability for the 1% stock buyback tax to the extent holders of Clover Leaf Class A Common Stock exercise their Redemption Rights.
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal 1% excise tax (the “Excise Tax”) on certain repurchases of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly traded foreign
38
corporations occurring on or after January 1, 2023. The Excise Tax is imposed on the repurchasing corporation itself, not its stockholders from which shares are repurchased. The amount of the Excise Tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase. However, for purposes of calculating the Excise Tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year. In addition, certain exceptions apply to the Excise Tax. The U.S. Department of the Treasury (the “Treasury”) has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the Excise Tax. Any share redemption or other share repurchase that occurs after December 31, 2022, in connection with the Business Combination, extension vote or otherwise, may be subject to the Excise Tax. Whether and to what extent we would be subject to the Excise Tax in connection with the Business Combination, extension vote or otherwise will depend on a number of factors, including (i) the fair market value of the redemptions and repurchases in connection with the Business Combination, extension or otherwise, (ii) the nature and amount of any equity issuances in connection with the Business Combination (or otherwise issued not in connection with the Business Combination but issued within the same taxable year of the Business Combination) and (iii) the content of regulations and other guidance from the Treasury. In addition, because the Excise Tax would be payable by us and not by the redeeming holder, the mechanics of any required payment of the Excise Tax have not been determined. Depending on the number of holders of Clover Leaf Class A Common Stock who exercise their Redemption Rights, the imposition of the Excise Tax could be applicable to Clover Leaf and adversely affect the cash we have available for our operations following the Business Combination.
Risks Related to Kustom Entertainment
Unless the context otherwise requires, references in this section to “we,” “us” or “our” refer to Kustom Entertainment.
The global COVID-19 pandemic has had, and is likely to continue to have, a material negative impact on our business and operating results. The ultimate magnitude of this impact will depend on a variety of factors, including the duration of the pandemic, the availability and acceptance of vaccines and other mitigation efforts, restrictions or new operational requirements in place or that result as our operations recommence on a jurisdiction by jurisdiction basis, the state of both the U.S. and global economies as a result of the pandemic, and the public’s willingness to attend events with large numbers of people, all of which are unknowable at this time.
The global spread and impact of the COVID-19 pandemic is complex, unpredictable, and continuously evolving and has resulted in significant disruption and additional risks to our business, the entertainment industry, and the global economy. The COVID-19 pandemic has led governments and other authorities around the world to impose measures intended to control its spread, including restrictions on large gatherings of people, travel bans, border closings and restrictions, business closures, quarantines, shelter-in-place orders, and social distancing measures. As a result, in mid-March 2020, as the unprecedented impact of the global COVID-19 pandemic became clearer, concert promoters, venue operators, sports leagues and theaters around the globe shut down. Our business depends on concert, sporting and theater events in order to generate most of our revenue from ticket sales in the secondary ticket market.
We face ancillary risks and uncertainties arising from the global COVID-19 pandemic in addition to the shutdown or limitation of concert, sporting and theater events. COVID-19 may also precipitate or aggravate other risk factors described herein, which have had, and may continue to have, a material negative impact on our business and operating results. Many of these risks and uncertainties may extend beyond the duration of the current shutdowns due to the uncertainty around how the live music, sporting and theater industries will change as a result of the pandemic.
The risks and uncertainties described herein should be read in conjunction with those set forth below. Such additional or attendant risks and uncertainties include, among other things:
• the impact of any lingering economic downturn or recession resulting from the pandemic, including without limitation any reduction in discretionary spending or confidence for both buyers and sellers, that would result in a decline in ticket sales and attendance;
• a reduction in the profitability of our operations due to governmental restrictions or safety precautions and protocols voluntarily undertaken, such as the potential that venues may not be able to be filled to capacity due to spacing and social distancing limitations, which could limit the number of tickets sold;
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• the impact on our workforce, which may include the loss of key personnel as employees find other employment and lowered employee morale or inability to replace hourly/seasonal workforce, all of which may negatively impact our ability to capitalize on opportunities and conduct our operations in the future;
• potential decreased willingness or ability for artists to tour due to varying restrictions across jurisdictions, including the possibility that national or sub-national borders are closed to travel, which could reduce the demand for our services;
• potential changes to consumer preferences for consumption of live music, sporting or theater events due to fear of, or restrictions on, large gatherings;
• loss of ticketing sales due to the economic impacts of the pandemic whereby certain venue operators are no longer in operation, reducing the number of events our marketplace can serve;
• the inability to pursue expansion opportunities or acquisitions due to capital constraints;
• the future availability or increased cost of insurance coverage; and
• the incurrence of additional expenses related to compliance, precautions and management of our company during and after the pandemic.
The global COVID-19 pandemic and its impacts may continue to endure for an unknown period of time. In addition, as has already occurred in various locations, the potential exists for additional waves of the pandemic after the current wave of infections subsides. In addition, new COVID-19 variants may emerge, which could lead to additional restrictions being put into place for a greater duration of time. The longer the duration of the global COVID-19 pandemic, and the greater the ancillary and lingering effects, the greater the negative impact on us and our results of operations will be. While vaccination programs have begun around the world, the ultimate impact of such programs on the pandemic and its duration, including the ability to effectively and widely manufacture and distribute vaccines and the acceptance of the vaccine by the general population, remain unknown. Moreover, even after restrictions on gatherings are lifted and vaccines are more widely distributed and available, the public’s willingness to attend large events may remain depressed for a significant length of time, and we cannot predict if and when demand to attend such events will return to pre-COVID-19 levels.
Additionally, the impact of the global COVID-19 pandemic on the financial markets could adversely impact our ability to raise funds.
We have a limited operating history and we cannot offer any assurance as to our future financial results, and you should not rely on the historical financial data included in this proxy statement/prospectus as an indicator of our future financial performance.
We have a limited operating history upon which to base any assumption as to the likelihood that we will be successful in implementing our business plan, and we may not be able to generate significant revenues or achieve profitability. You should consider our business and prospects in light of the risks and difficulties we face with our limited operating history and should not rely on our past results as an indication of our future performance. There is no assurance that the growth rate we have experienced to date will continue. Even if we generate future revenues sufficient to expand operations, increased infrastructure costs and cost of goods sold and marketing expenses could impair or prevent us from generating profitable returns. We recognize that if we are unable to generate significant revenues from our business development, we will not be able to earn profits or potentially continue operations. If we are unsuccessful in addressing these risks, our business will most likely fail.
Because we are an emerging growth company, we expect to incur significant additional operating losses.
We are an emerging growth company (as defined in the JOBS Act). The amount of future losses and when, if ever, we will achieve profitability are uncertain. Our current products and services have not generated significant commercial revenue for us and there can be no guarantee that we can generate sufficient revenues from the commercial sale of our products in the near future to fund our ongoing capital needs.
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Our business is dependent on the continued occurrence of large-scale sporting events, concerts and theater shows and any decrease in the number of such events may result in decreased demand for our services.
Ticket sales are sensitive to fluctuations in the number of entertainment, sporting and theater events and activities offered by promoters, teams and facilities, and adverse trends in the entertainment, sporting and leisure event industries could adversely affect our business, financial condition and results of operations. We rely on third parties to create and perform at live music, sporting and theater events, and any unwillingness to tour, lack of availability of popular artists or decrease in the number of games or performances held could limit our ability to generate revenue. Accordingly, our success depends, in part, upon the ability of these third parties to correctly anticipate public demand for particular events, as well as the availability of popular artists, entertainers and teams, and any decrease in availability or failure to anticipate public demand could result in reduced demand for our services, which would adversely affect our business, financial condition and results of operations.
Our business depends on relationships with buyers, sellers and distribution partners, and any adverse changes in these relationships could adversely affect our business, financial condition and results of operations.
Our business is dependent on maintaining our deep and longstanding relationships with the parties that use our platform to buy and sell tickets, including individual customers, ticket sellers, and distribution partners that sell tickets to consumers using our ticket inventory, payment platform and customer service. We cannot provide assurance that we will be able to maintain existing relationships, or enter into or maintain new relationships, on acceptable terms, if at all, and the failure to do so could have a material adverse effect on our business, financial condition and results of operations. Another important component of our success is our ability to maintain existing and build new relationships with parties in the ticketing ecosystem. Any adverse change in these relationships, including the inability of these parties to fulfill their obligations to our business for any reason, could adversely affect our business, financial condition and results of operations.
Changes in Internet search engine algorithms and dynamics, or search engine disintermediation, or changes in marketplace rules could have a negative impact on traffic for our sites and ultimately, our business and results of operations.
We rely heavily on Internet search engines, such as Google, to generate traffic to our website, through a combination of organic and paid searches. Search engines frequently update and change the logic that determines the placement and display of results of a user’s search, such that the purchased or algorithmic placement of links to our website can be negatively affected. In addition, a search engine could, for competitive or other purposes, alter its search algorithms or results causing our website to be placed lower in organic search query results. If a major search engine changes its algorithms in a manner that negatively affects the search engine ranking of our website or those of our partners, our business, results of operations and financial condition would be harmed. Furthermore, our failure to successfully manage our search engine optimization could result in a substantial decrease in traffic to our website, as well as increased costs if we were to replace free traffic with paid traffic, which may harm our business, results of operations and financial condition.
We also rely on application marketplaces, such as Apple’s App Store and Google’s Play, to enable downloads of our applications. Such marketplaces have in the past made, and may in the future make, changes that make access to our products more difficult. For example, our applications may receive unfavorable treatment compared to the promotion and placement of competing applications, such as the order in which they appear within marketplaces. Further, Apple and Google App Stores are an important distribution channel. If they choose to charge commissions on our products and we fail to negotiate compatible terms, it may harm our business, results of operations and financial condition. Similarly, if problems arise in our relationships with providers of application marketplaces, traffic to our site and our user growth could be harmed.
We face intense competition in the ticketing industry, and we may not be able to maintain or increase our current revenue, which could adversely affect our business, financial condition and results of operations.
Our business faces significant competition from other national, regional and local primary and secondary ticketing service providers to secure new and retain existing sellers, buyers and distribution partners on a continuous basis. We also face competition in the resale of tickets from other resale marketplaces and other ticket resellers. The advent of new technology, particularly as it relates to online ticketing, has amplified this competition. The intense
41
competition that we face in the ticketing industry could cause the volume of our ticketing business to decline, and we may not be able to maintain or increase our current revenue due to such decline, which could adversely affect our business, financial condition and results of operations.
Other variables related to the competitive environment that could adversely affect our financial performance by, among other things, leading to decreases in overall revenue, event attendance, ticket prices and fees or profit margins include:
• competitors’ offerings that may include more favorable terms or pricing;
• technological changes and innovations that we are unable to adopt or are late in adopting that offer more attractive alternatives than we currently offer, which may lead to a loss of ticket sales or lower ticket fees;
• other entertainment options or ticket inventory selection and variety that we do not offer; and
• increased pricing in the primary ticket marketplace, which could result in reduced profits for secondary ticket sellers and reduced demand for our services.
Our business is dependent on the willingness of artists, teams and promoters to continue to support the secondary ticket market and any decrease in such support may result in decreased demand for our services.
Our business is dependent on the secondary ticket market for events put on by artists, teams and promoters. We rely upon the willingness of such artists, teams and promoters to support the secondary ticket market and any decrease in support of the resale market, such as by enacting restrictions regarding resale policies or partnering with other resale marketplaces on an exclusive basis, could result in reduced demand for our services, which would adversely affect our business, financial condition and results of operations.
If we do not continue to maintain and improve our platform or develop successful new solutions and enhancements or improve existing ones, our business will suffer.
Our ability to attract and retain sellers, buyers and distribution partners depends in large part on our ability to provide a user-friendly and effective platform, develop and improve our platform and introduce compelling new solutions and enhancements. Our industry is characterized by rapidly changing technology, new service and product introductions and changing demands of sellers, buyers and distribution partners. We spend substantial time and resources understanding such parties’ needs and responding to them. Building new solutions is costly and complex, and the timetable for commercial release is difficult to predict and may vary from our historical experience. In addition, after development, sellers, buyers and distribution partners may not be satisfied with our enhancements or perceive that the enhancements do not adequately meet their needs. The success of a new solution or enhancement to our platform can depend on several factors, including timely completion and delivery, competitive pricing, adequate quality testing, integration with our platform, user awareness and overall market acceptance and adoption. If we do not continue to maintain and improve our platform or develop successful new solutions and enhancements or improve existing ones, our business, results of operations and financial condition could be harmed.
The reputation and brand of our marketplace is important to our success, and if we are not able to maintain and enhance our brand, our business, financial condition and results of operation may be adversely affected.
We believe that maintaining and enhancing our reputation and brand as a differentiated ticketing marketplace serving sellers, buyers and distribution partners is critical retaining our relationship with our existing sellers, buyers and distribution partners and to our ability to attract new sellers, buyers and distribution partners. The successful promotion of our brand attributes will depend on a number of factors that we control and some factors outside of our control.
The promotion of our brand requires us to make substantial expenditures and management investment, which will increase as our market becomes more competitive and as we seek to expand our marketplace. To the extent these activities yield increased revenue, this revenue may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand and successfully differentiate our marketplace from competitive products and services, our business may not grow, we may not be able to compete effectively and we could lose sellers, buyers or distribution partners or fail to attract potential new sellers, buyers and distribution partners, all of which would adversely affect our business, results of operations and financial condition.
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If we are unable to maintain a reputable platform that provides valuable solutions and desirable events, then our ability to attract and retain sellers, buyers and distribution partners could be impaired and our reputation, brand and business could be harmed.
Our success depends, in significant part, on concert, sporting and theater events and economic and other factors adversely affecting such events could have a material adverse effect on our business, financial condition and results of operations.
A decline in attendance at, or reduction in the number of, live concert, sporting and theater events may have an adverse effect on our revenue and operating income. In addition, during periods of economic slowdown and recession, many consumers have historically reduced their discretionary spending and advertisers have reduced their advertising expenditures. The impact of economic slowdowns, including the current economic environment due to COVID-19, on our business is difficult to predict, but may result in reductions in ticket sales and our ability to generate revenue. The risks associated with our business may become more acute in periods of a slowing economy or recession, which may be accompanied by a decrease in attendance at live concert, sporting and theater events. Many of the factors affecting the number and availability of live concert, sporting and theater events are beyond our control. For instance, certain sports leagues have experienced labor disputes leading to threatened or actual player lockouts. Any such lockouts that result in shortened or canceled seasons could adversely impact our business both due to the loss of games and ticketing opportunities as well as the possibility of decreased attendance following such a lockout due to adverse fan reaction.
Our business depends on discretionary consumer and corporate spending. Many factors related to corporate spending and discretionary consumer spending, including economic conditions affecting disposable consumer income such as unemployment levels, fuel prices, interest rates, changes in tax rates and tax laws that impact companies or individuals, and inflation can significantly impact our operating results. Business conditions, as well as various industry conditions, including corporate spending, can also significantly impact our operating results as these factors can affect premium seat sales. Negative factors such as challenging economic conditions and public concerns over terrorism and security incidents, particularly when combined, can also impact corporate and consumer spending. In addition, the impact of the economic downturn resulting from the COVID-19 pandemic, including a reduction in discretionary spending and confidence for consumers has resulted in a decline in ticket sales and attendance, which has impacted our operating results and growth. There can be no assurance that consumer and corporate spending will not continue to be adversely impacted by current economic conditions, or by any future deterioration in economic conditions, which could have a material adverse effect on our business, financial condition and results of operations.
We may be adversely affected by the occurrence of extraordinary events, such as terrorist attacks, disease epidemics or pandemics, severe weather events and natural disasters.
The occurrence and threat of extraordinary events, such as terrorist attacks, intentional or unintentional mass-casualty incidents, public health concerns such as contagious disease epidemics or pandemics, natural disasters or similar severe weather events, may deter artists from touring, teams from holding games and/or substantially decrease the use of and demand for our services, which may decrease our revenue or expose us to substantial liability. Terrorism and security incidents in the past, military actions in foreign locations, periodic elevated terrorism alerts and fears from publicized contagious disease epidemics and pandemics have raised numerous challenging operating factors, including public concerns regarding air travel, military actions and additional national or local catastrophic incidents, causing a nationwide disruption of commercial and leisure activities. In the event of actual or threatened terrorism events, some artists may refuse to travel or book tours, which could adversely affect our business. Attendance at events may decline due to fears over terrorism, which could adversely impact our operating results.
Additionally, our business may be adversely affected by disease epidemics or pandemics, severe weather events and natural disasters. The occurrence of these events may deter buyers from attending and purchasing tickets to live concerts, sporting or theater events, which could negatively impact our business and financial performance. Moreover, performers, venues, teams or promoters may decide to cancel concert, sporting and theater events due to social distancing requirements, such as those imposed in response to the COVID-19 pandemic, or due to severe weather events or natural disasters. Cancellations of such events can adversely affect our financial performance, as we are obligated to issue refunds or credits for tickets purchased for those events that are not rescheduled.
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Our operations are seasonal and our results of operations vary from quarter to quarter and year over year, so our financial performance in certain financial quarters or years may not be indicative of, or comparable to, our financial performance in subsequent financial quarters or years.
We believe our financial results and cash needs will vary greatly from quarter to quarter and year to year depending on, among other things, the timing of tours, tour cancellations, event ticket sales, seasonal and other fluctuations in our operating results, the timing of guaranteed payments, financing activities, acquisitions and investments and receivables management. Because our results may vary significantly from quarter to quarter and year to year, our financial results for one quarter or year cannot necessarily be compared to another quarter or year and may not be indicative of our future financial performance in subsequent quarters or years. Typically, we experience our lowest financial performance in the first and second quarters of the calendar year due to the timing of large-scale events and concert on-sales. In addition, the timing of tours of top grossing acts can impact comparability of quarterly results year over year and potentially annual results. Similarly, the number of games in playoff series and the teams involved can vary year over year and impact our results. The seasonality of our business could create cash flow management risks if we do not adequately anticipate and plan for periods of decreased activity, which could negatively impact our ability to execute on our strategy, which in turn could harm our results of operations.
We rely on the experience and expertise of our senior management team, key technical employees and other highly skilled personnel and the failure to retain, motivate or integrate any of these individuals could have an adverse effect on our business, financial condition or results of operations.
Our success depends upon the continued service of our senior management team and key technical employees, as well as our ability to continue to attract and retain additional highly qualified personnel. Our future success depends on our continuing ability to identify, hire, develop, motivate, retain and integrate highly skilled personnel for all areas of our organization. Each of our executive officers, key technical personnel and other employees could terminate his or her relationship with us at any time. The loss of any member of our senior management team or key personnel might significantly delay or prevent the achievement of our business objectives and could harm our business and our relationships. Competition in our industry for qualified employees is intense. In addition, our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees.
The processing, storage, use and disclosure of personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing applications of privacy regulations.
We receive, transmit and store a large volume of personal data and other user data. Numerous federal, state and international laws address privacy, data protection and the collection, storing, sharing, use, disclosure and protection of personal data and other user data. In the United States, numerous states already have, and are looking to expand, data protection legislation requiring companies like ours to consider solutions to meet differing needs and expectations of buyers and sellers. For example, California enacted the California Consumer Privacy Act (“CCPA”), which took effect on January 1, 2020. The CCPA establishes a new privacy framework for covered businesses such as ours, and may require us to modify our data processing practices and policies and incur compliance related costs and expenses. The CCPA provides new and enhanced data privacy rights to California residents, including the right to access and delete their personal information, and receive detailed information about how their personal information is used and shared. The CCPA also created restrictions on “sales” of personal information that allow California residents to opt-out of certain sharing of their personal information and prohibits covered businesses from discriminating against consumers (e.g., charging more for services) for exercising any of their CCPA rights. The CCPA provides for potentially severe statutory penalties, and a private right of action for data breaches resulting from a failure to implement reasonable security procedures and practices. In addition, in November 2020, California voters approved the California Privacy Rights Act (“CPRA”) ballot initiative which introduced significant amendments to the CCPA and established and funded a dedicated California privacy regulator, the California Privacy Protection Agency (“CPPA”). The amendments introduced by the CPRA go into effect on January 1, 2023, and new implementing regulations are expected to be introduced by the CPPA. Some observers have noted that the CCPA and CPRA could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could increase our potential liability and adversely affect our business. Further, on March 2, 2021, the Governor of Virginia signed into law the Virginia Consumer Data Protection Act, or the VCDPA. The VCDPA creates consumer rights, similar to the CCPA, but also imposes security and assessment requirements for businesses. In addition, on July 7, 2021, Colorado enacted the Colorado Privacy Act, or the COCPA, becoming the third comprehensive consumer privacy law to be passed in the United States (after the
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CCPA and VCDPA). The COCPA closely resembles the VCDPA, and will be enforced by the respective states’ attorney general and district attorneys, although the two differ in many ways and once they become enforceable in 2023, we must comply with each if our operations fall within the scope of these newly enacted comprehensive mandates. Similar laws have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the United States. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging.
We are also subject to the Payment Card Industry (“PCI”) Data Security Standard, which is a standard designed to protect credit card account data as mandated by payment card industry entities. We rely on vendors to handle PCI matters and to ensure PCI compliance. Despite our compliance efforts, we may become subject to claims that we have violated the PCI Data Security Standard based on past, present, and future business practices. Our actual or perceived failure to comply with the PCI Data Security Standard can subject us to fines, termination of banking relationships, and increased transaction fees.
The interpretation and application of many privacy and data protection laws are, and will likely remain, uncertain, and it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or product features. If so, in addition to the possibility of fines, lawsuits and other claims and penalties, we could be required to fundamentally change our business activities and practices or modify our products, which could harm our business. In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Any inability to adequately address privacy, data protection and data security concerns or comply with applicable privacy, data protection or data security laws, regulations, policies and other obligations could result in additional cost and liability to us, damage our reputation, inhibit sales and harm our business.
Our failure, and/or the failure by the various third-party service providers and partners with which we do business, to comply with applicable privacy policies or federal, state or similar international laws and regulations or any other obligations relating to privacy, data protection or information security, or any compromise of security that results in the unauthorized release of personal data or other user data, or the perception that any such failure or compromise has occurred, could negatively harm our brand and reputation, result in a loss of sellers, buyers or distribution partners, discourage potential sellers or buyers from trying our platform and/or result in fines and/or proceedings by governmental agencies and/or users, any of which could have a material adverse effect on our business, results of operations and financial condition.
Unfavorable outcomes in legal proceedings in which we may be involved may adversely affect our business and operating results.
Our results may be affected by the outcome of pending and future litigation. Unfavorable rulings in our legal proceedings may have a negative impact on us that may be greater or smaller depending on the nature of the rulings. In addition, we are currently, and from time to time in the future may be, subject to various other claims, investigations, legal and administrative cases and proceedings (whether civil or criminal) or lawsuits by governmental agencies or private parties. If the results of these investigations, proceedings or suits are unfavorable to us or if we are unable to successfully defend against third-party lawsuits, we may be required to pay monetary damages or may be subject to fines, penalties, injunctions or other censure that could have a material adverse effect on our business, financial condition and results of operations. Even if we adequately address the issues raised by an investigation or proceeding or successfully defend a third-party lawsuit or counterclaim, we may have to devote significant financial and management resources to address these issues, which could harm our business, financial condition and results of operations.
Unfavorable legislative outcomes may adversely affect our industry, our business and our operating results.
In addition to concerns related to network and data security, the collection, transfer, use, disclosure, security and retention of personal or sensitive information and other user data are governed by existing and evolving federal, state and international laws, as described above. We have expended significant capital and other resources to keep abreast of the evolving privacy landscape. However, due to the changes in the data privacy regulatory environment, we may incur additional costs and challenges to our business that restrict or limit our ability to collect, transfer, use, disclose, secure,
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or retain personal or sensitive information. These changes in data privacy laws may require us to modify our current or future products, services, programs, practices or policies, which may in turn impact the products and services available to our customers.
Additionally, some states regulate the secondary ticket market, such as by setting maximum resale prices, and any further regulation or unfavorable legislative outcomes imposing additional restrictions on ticket resales may adversely affect our industry, our business and our operating results.
The success of our operations depends, in part, on the integrity of our systems and infrastructure, as well as affiliate and third-party computer systems, computer networks and other communication systems. System interruption and the lack of integration and redundancy in these systems and infrastructure may have an adverse impact on our business, financial condition and results of operations.
System interruption and the lack of integration and redundancy in the information systems and infrastructure, both of our own ticketing systems and other computer systems and of affiliate and third-party software, computer networks and other communications systems service providers on which we rely, may adversely affect our ability to operate websites, process and fulfill transactions, respond to customer inquiries and generally maintain cost-efficient operations. Similarly, due to our reliance on a network of technology systems, many of which are outside of our control, changes to interfaces upon which we rely or a reluctance of our counterparties to continue supporting our systems could lead to technology interruptions. Such interruptions could occur by virtue of natural disaster, malicious actions such as hacking or acts of terrorism or war, or human error. In addition, the loss of some or all of certain key personnel could require us to expend additional resources to continue to maintain our software and systems and could subject us to systems interruptions. The large infrastructure plant that is required to operate our systems requires an ongoing investment of time, money and effort to maintain or refresh hardware and software and to ensure it remains at a level capable of servicing the demand and volume of business that we receive. Failure to do so may result in system instability, degradation in performance, or unfixable security vulnerabilities that could adversely impact both the business and the consumers utilizing our services.
While we have backup systems for certain aspects of our operations, disaster recovery planning by its nature cannot be sufficient for all eventualities. In addition, we may not have adequate insurance coverage to compensate for losses from a major interruption. If any of these adverse events were to occur, it could adversely affect our business, financial condition and results of operations.
Cyber security risks, data loss or other breaches of our network security could materially harm our business and results of operations, and the processing, storage, use and disclosure of personal or sensitive information could give rise to liabilities and additional costs as a result of governmental regulation, litigation and conflicting legal requirements relating to personal privacy rights.
Due to the nature of our business, we process, store, use, transfer and disclose certain personal or sensitive information about our customers and employees. Penetration of our network or other misappropriation or misuse of personal or sensitive information and data, including credit card information and other personal information, could cause interruptions in our operations and subject us to increased costs, litigation, inquiries and actions from governmental authorities, and financial or other liabilities. In addition, security breaches, incidents or the inability to protect information could lead to increased incidents of ticketing fraud and counterfeit tickets. Security breaches and incidents could also significantly damage our reputation with sellers, buyers, distribution partners and other third parties, and could result in significant costs related to remediation efforts, such as credit or identity theft monitoring. Such incidents may occur in the future, resulting in unauthorized, unlawful, or inappropriate access to, inability to access, disclosure of, or loss of the sensitive, proprietary and confidential information that we handle.
Further, ransomware attacks, including those from organized criminal threat actors, nation-states, and nation-state supported actors, are becoming increasingly prevalent and severe, and can lead to significant interruptions in our operations, loss of data and income, reputational loss, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting payments.
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Although we have developed systems and processes that are designed to protect customer and employee information and to prevent security breaches or incidents (which could result in data loss or other harm or loss), such measures cannot provide absolute security or certainty. It is possible that advances in computer and hacker capabilities, new variants of malware, the development of new penetration methods and tools, inadvertent violations of company policies or procedures or other developments could result in a compromise of customer or employee information or a breach of the technology and security processes that are used to protect customer and employee information. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems may change frequently and as a result, may be difficult for our business to detect for long periods of time. In addition, despite our best efforts, we may be unaware of or unable to anticipate these techniques or implement adequate preventative measures. We have expended significant capital and other resources to protect against and remedy such potential security breaches, incidents and their consequences and will continue to do so in the future.
We also face risks associated with security breaches and incidents affecting third parties with which we are affiliated or with which we otherwise conduct business. In particular, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture and/or may pose a security risk that could unexpectedly compromise information security. Sellers, buyers and distribution partners are generally concerned with the security and privacy of the internet, and any publicized security problems affecting our businesses and/or third parties may discourage sellers, buyers or distribution partners from doing business with us, which could have an adverse effect on our business, financial condition and results of operations.
Laws in all states and U.S. territories require businesses to notify affected individuals, governmental entities, and/or credit reporting agencies of certain security incidents affecting personal information. Such laws are inconsistent, and compliance in the event of a widespread security incident is complex and costly and may be difficult to implement. Our existing general liability and cyber liability insurance policies may not cover, or may cover only a portion of, any potential claims related to security breaches to which we are exposed or may not be adequate to indemnify us for all or any portion of liabilities that may be imposed. We also cannot be certain that our existing insurance coverage will continue to be available on acceptable terms or in amounts sufficient to cover the potentially significant losses that may result from a security incident or breach or that the insurer will not deny coverage of any future claim.
If we fail to adequately protect or enforce our intellectual property rights, our competitive position and our business could be materially adversely affected.
We believe that our proprietary technologies and information, including our software, informational databases, and other components that make our products and services are critical to our success, and we seek to protect our technologies, products and services through a combination of intellectual property rights, including trademarks, domain names, copyrights and trade secrets, as well as through contractual restrictions with employees, customers, suppliers, affiliates and others. Despite our efforts, it may be possible for a third party to copy or otherwise obtain and use our intellectual property without authorization which, if discovered, might require legal action to correct. In addition, third parties may independently and lawfully develop products or services substantially similar to ours. We do not currently hold patents over our technology. We seek to protect our trade secrets and proprietary know-how and technology methods through confidentiality agreements and other access control measures. Failure of such strategies to protect our technology or our inability to protect patents in the future to the extent we obtain them could have a materially adverse impact on our business, financial condition and results of operations.
We have been granted trademark registrations with the United States Patent and Trademark Office and/or various foreign authorities for certain of our brands. Our existing or future trademarks may be adjudicated invalid by a court or may not afford us adequate protection against competitors.
We cannot be certain that the measures we implement will prevent infringement, misappropriation or other violations of our intellectual property rights, particularly in foreign countries where the laws may not protect our proprietary rights as fully as they do in the United States. Our failure to protect our intellectual property rights in a meaningful manner or challenges to our related contractual rights could result in erosion of our brand names or other intellectual property and could adversely affect our business, financial condition and results of operations. Litigation may be necessary in the future to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect our business, financial condition and results of operations.
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We may face potential liability and expense for legal claims alleging that the operation of our business infringes intellectual property rights of third parties, who may assert claims against us for unauthorized use of such rights.
We cannot be certain that the operation of our business does not, or will not, infringe or otherwise violate the intellectual property rights of third parties. From time to time, we have been and may in the future be, subject to legal proceedings and claims alleging that we infringe or otherwise violate the intellectual property rights of third parties. These claims, whether or not successful, could divert management time and attention away from our business and harm our reputation and financial condition. In addition, the outcome of litigation is uncertain, and third parties asserting claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief against us, which could require us to rebrand, redesign, or reengineer our platform, products or services, and/or effectively block our ability to distribute, market or sell our products and services.
Our payments system depends on third-party providers and is subject to risks that may harm our business.
We rely on third-party providers to support our payment system, as our buyers primarily use credit cards to purchase tickets on our marketplace. Nearly all our revenue is associated with payments processed through a single provider, which relies on banks and payment card networks to process transactions. If this provider or any of its vendors do not operate well with our platform, our payments systems and our business could be adversely affected. If this provider does not perform adequately, determines certain types of transactions are prohibitive for any reason, if this provider’s technology does not interoperate well with our platform, or if our relationships with this provider, the bank or the payment card networks on which it relies were to terminate unexpectedly, buyers may find our platform more difficult to use. Such an outcome could harm the ability of sellers to use our platform, which could cause them to use our platform less and harm our business.
Our payment processing partner requires us to comply with payment card network operating rules, which are set and interpreted by the payment card networks. The payment card networks could adopt new operating rules or interpret or re-interpret existing rules in ways that might prohibit us from providing certain services to some buyers or sellers, be costly to implement or difficult to follow. We are required to reimburse our payment processor for fines assessed by payment card networks if we, or buyers or sellers using our platform, violate these rules, such as our processing of various types of transactions that may be interpreted as a violation of certain payment card network operating rules. Changes to these rules and requirements, or any change in our designation by payment card networks, could require a change in our business operations and could result in limitations on or loss of our ability to accept payment cards, any of which could negatively impact our business.
Additionally, while we deploy sophisticated technology to detect fraudulent purchase activity, we may incur losses if we fail to prevent the use of fraudulent credit card information on transactions in the future. Fraud schemes are becoming increasingly sophisticated and common, and our ability to detect and combat fraudulent schemes may be negatively impacted by the adoption of new payment methods and new technology platforms. If we or this provider fail to identify fraudulent activity or are unable to effectively combat the use of fraudulent credit cards on our platform or if we otherwise experience increased levels of disputed credit card payments, our results of operations and financial positions could be materially adversely affected.
Finally, payment card networks and our payment processing partner could increase the fees they charge us for their services, which would increase our operating costs and reduce our margins. Any such increase in fees could also harm our business, results of operations and financial condition.
We face intense competition in our market, especially from larger, well-established companies, and we may lack sufficient financial or other resources to maintain or improve our competitive position.
A number of other companies engage in the business of providing ticketing services and even marketing and production. The market for these products is intensely competitive, and we expect competition to increase in the future from established competitors and new market entrants. Our current competitors include both emerging or developmental stage companies, such as ourselves, as well as larger companies. Many of our existing competitors have, and some of our potential competitors could have, substantial competitive advantages such as:
• greater name recognition and longer operating histories;
• larger sales and marketing budgets and resources;
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• broader distribution and established relationships with distribution partners and end-customers;
• greater customer support resources;
• greater resources to make acquisitions;
• larger and more mature intellectual property portfolios; and
• substantially greater financial, technical and other resources.
In addition, some of our larger competitors have substantially broader product offerings and leverage their relationships based on other products or incorporate functionality into existing products to gain business in a manner that discourages users from purchasing our products, including through selling at zero or negative margins, product bundling, or closed technology platforms. Conditions in our market could change rapidly and significantly as a result of technological advancements, partnering by our competitors or continuing market consolidation. New start-up companies that innovate and large competitors that are making significant investments in research and development may invent similar or superior products and technologies that compete with our products and technology. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their resources.
Our markets are subject to technological change and our success depends on our ability to develop and introduce new products.
Each of the markets for our products is characterized by:
• changing technologies;
• changing customer needs;
• frequent new product introductions and enhancements;
• increased integration with other functions; and
• product obsolescence.
Our success will be dependent in part on the design and development of new products. To develop new products and designs for our target markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to expand our technical and design expertise. The product development process is time-consuming and costly, and there can be no assurance that product development will be successfully completed, that necessary regulatory clearances or approvals will be granted on a timely basis, or at all, or that the potential products will achieve market acceptance. Our failure to develop, obtain necessary regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on our business, financial condition and results of operations.
The requirements of being a public company may strain our resources and divert management’s attention.
As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act), the Dodd-Frank Wall Street Reform and Consumer Protection Act and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual and current reports with the SEC with respect to our business and operating results.
As a result of disclosure of information in this proxy statement/prospectus and in filings required of a public company, our business and financial condition is more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert resources of our management and harm our business and operating results.
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Periods of rapid growth and expansion could place a significant strain on our resources, including our employee base, which could negatively impact our operating results.
We may experience periods of rapid growth and expansion, which may place significant strain and demands on our management, our operational and financial resources, customer operations, research and development, marketing and sales, administrative, and other resources. To manage our possible future growth effectively, we will be required to continue to improve our management, operational and financial systems. Future growth would also require us to successfully hire, train, motivate and manage our employees. In addition, our continued growth and the evolution of our business plan will require significant additional management, technical and administrative resources. If we are unable to manage our growth successfully, we may not be able to effectively manage the growth and evolution of our current business and our operating results could suffer.
If we do not effectively manage changes in our business, these changes could place a significant strain on our management and operations.
Our ability to grow successfully requires an effective planning and management process. The expansion and growth of our business could place a significant strain on our management systems, infrastructure and other resources. To manage our growth successfully, we must continue to improve and expand our systems and infrastructure in a timely and efficient manner. Our controls, systems, procedures and resources may not be adequate to support a changing and growing company. If our management fails to respond effectively to changes and growth in our business, including acquisitions, this could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We are an emerging growth company within the meaning of the JOBS Act, and if we decide to take advantage of certain exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are not applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five (5) years although we could lose that status sooner if our annual gross revenues exceed $1.07 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if, among other criteria, the market value of our common stock held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.
Under the JOBS Act, emerging growth companies may also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to utilize such extended transition period for complying with new or revised accounting standards.
We may not be able to access the equity or credit markets.
We face the risk that we may not be able to access various capital sources, including investors, lenders, or suppliers. Failure to access the equity or credit markets from any of these sources could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Rising interest rates could adversely impact our business.
Changes in interest rates could have an adverse impact on our business by increasing our cost of capital. For example:
• rising interest rates would increase our cost of capital; and
• rising interest rates may negatively impact our ability to secure financing on favorable terms and may impact our ability to provide cost-effective financing to our end-customers or end-users, where applicable.
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Rising interest rates could generally harm our business and financial condition.
There is no existing market for our common stock, and a trading market that will provide you with adequate liquidity may not develop for our common stock. If and when a larger trading market for our common stock develops, the market price of our common stock is still likely to be highly volatile and subject to wide fluctuations.
There is currently no public market for our common stock and an active trading market for our common stock may not develop as a result of the Digital Ally Distribution or be sustained in the future. The lack of an active trading market may make it more difficult for you to sell your shares of common stock and could lead to our stock price being depressed or more volatile.
We cannot predict the prices at which our common stock may trade after the Digital Ally Distribution. The market price of our common stock may be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including, but not limited to:
• our business profile and market capitalization may not fit the investment objectives of Digital Ally stockholders, and as a result, Digital Ally stockholders may sell our shares after the Digital Ally Distribution;
• a shift in our investor base;
• success or failure of our business strategies;
• failure to achieve our growth and performance objectives;
• variations in our revenues and operating expenses;
• actual or anticipated changes in the estimates of our operating results or changes in stock market analyst recommendations regarding our common stock, other comparable companies or our industry generally;
• our ability to obtain financing as needed;
• changes in laws and regulations affecting our business;
• changes in accounting standards, policies, guidance, interpretations or principles;
• announcements of innovations or new products or services by us or our competitors;
• market conditions in our industry, the industries of our customers and the economy as a whole;
• actual or expected changes in our growth rates or our competitors’ growth rates;
• changes in the market valuations of other comparable companies;
• overall market fluctuations; and
• developments in the financial markets and worldwide or regional economies.
In addition, if the market for entertainment stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or operating results. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. Each of these factors, among others, could harm the value of our common stock. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, operating results and financial condition.
For many reasons, including the risks identified in this proxy statement/prospectus, the market price of our common stock following the Merger may be more volatile than the market price of Digital Ally common stock before the Merger. These factors may result in short-term or long-term negative pressure on the value of our common stock. Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.
51
The concentration of stock ownership by our executive officers and directors may enable such stockholders to exert significant influence over matters requiring stockholder approval.
Our executive officers and directors will beneficially own approximately [•]% of our common stock following the Merger. As a result, our executive officers and directors may have significant influence to:
• elect or defeat the election of our directors;
• amend or prevent amendment of our certificate of incorporation or bylaws;
• effect or prevent a merger, sale of assets or other corporate transaction; and
• affect the outcome of any other matter submitted to the stockholders for vote.
The interests of our executive officers and directors may not always coincide with the interests of other stockholders, and these stockholders may act in a manner that advances their interests and not necessarily those of other stockholders. In addition, any sale of a significant amount of our common stock held by our directors and executive officers, or the possibility of such sales, could adversely affect the market price of our common stock. Management’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing any gains from our common stock.
The market price for our common stock is likely to be particularly volatile given our status as a corporation that prior to the Merger was a subsidiary of a relatively unknown company with a small and thinly traded public float and lack of profits. This could lead to wide fluctuations in the price of our common stock.
The market for Digital Ally’s common stock is characterized by significant price volatility when compared to the securities of larger, more established companies that trade on a national securities exchange and have large public floats, and as we are appreciably smaller than Digital Ally in terms of assets, revenues and earnings, and lack any trading history we expect that following the Merger the price of our common stock will be more volatile than the securities of larger, more established companies for the indefinite future. The volatility in the price of our common stock may be attributable to a number of factors. First, as noted above, Digital Ally’s common stock is, compared to the securities of such larger, more established companies, sporadically and thinly traded and we have no basis to conclude that following the Merger our common stock will trade more frequently and heavily. The price of our common stock could, for example, decline precipitously in the event that a large number of shares of our common stock were sold on the market without commensurate demand. Second, we are a speculative or “risky” investment due to our lack of profits to date. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares of common stock on the market more quickly and at greater discounts than would be the case with the securities of a larger, more established company that trades on a national securities exchange and has a large public float. Many of these factors are beyond our control and may decrease the market price of our common stock regardless of our operating performance.
Our stockholders may experience significant dilution.
The issuance of material amounts of common stock by us in the future would cause our existing stockholders to experience significant dilution in their investment in us. We will need to raise additional capital in the future to execute our business plan, and if we obtain additional financing involving the issuance of equity securities or securities convertible into or exercisable for equity securities, our existing stockholders’ investment would be diluted. Any such dilution could cause the market price of our common stock to decline, which could impair our ability to raise additional financing.
We do not anticipate paying dividends in the foreseeable future.
The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our Board of Directors may consider relevant. If we do not pay dividends, our common stock may be less appealing because a return on a stockholder’s investment would only occur if our stock price appreciates.
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We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We could issue “blank check” preferred stock without stockholder approval with the effect of diluting then current stockholder interests and impairing their voting rights, and provisions in our charter documents could discourage a takeover that stockholders may consider favorable.
Our certificate of incorporation authorizes the issuance of up to 1,000,000 shares of “blank check” preferred stock with designations, rights and preferences as may be determined from time to time by our Board of Directors. Pursuant to our certificate of incorporation, our Board of Directors is empowered, without stockholder approval, to issue a series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of, or impair the voting power of, our common stockholders. The issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control of the Company. For example, it would be possible for our Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of the Company.
Financial Industry Regulatory Authority (“FINRA”) sales practice requirements may limit a stockholder’s ability to buy and sell our common stock.
FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for certain customers. Since Kustom Entertainment common stock is a speculative investment due to our lack of profits to date, FINRA requirements will likely make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may have the effect of reducing the level of trading activity in our common stock. As a result, fewer broker-dealers may be willing to make a market in our common stock, reducing a stockholder’s ability to resell shares of our common stock.
Sales of a significant number of shares of our common stock in the public markets or significant short sales of our common stock, or the perception that such sales could occur, could depress the market price of our common stock and impair our ability to raise capital.
Sales of a substantial number of shares of our common stock or other equity-related securities in the public markets could depress the market price of our common stock. If there are significant short sales of our common stock, the price decline that could result from this activity may cause the share price to decline more so, which, in turn, may cause long holders of the common stock to sell their shares, thereby contributing to sales of common stock in the market. Such sales also may impair our ability to raise capital through the sale of additional equity securities in the future at a time and price that our management deems acceptable, if at all.
In the future, we may seek to raise additional funds, finance acquisitions or develop strategic relationships by issuing securities that would dilute the ownership of our common stock. Depending on the terms available to us, if these activities result in significant dilution, it may negatively impact the trading price of our common stock.
We have financed our operations, and we expect to continue to finance our operations, acquisitions, if any, and the development of strategic relationships by issuing equity and/or convertible securities, which could significantly reduce the percentage ownership of our existing stockholders. Further, any additional financing that we secure may require the granting of rights, preferences or privileges senior to, or pari passu with, those of our common stock. Any issuances by us of equity securities may be at or below the prevailing market price of our common stock and in any event may have a dilutive impact on your ownership interest, which could cause the market price of our common stock to decline. We may also raise additional funds through the incurrence of debt or the issuance or sale of other securities or instruments senior to our shares of common stock. The holders of any securities or instruments we may issue may have rights superior to the rights of our holders of common stock. If we experience dilution from the issuance of additional securities and we grant superior rights to new securities over holders of common stock, it may negatively impact the trading price of our common stock.
53
Our charter documents and Nevada law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our Common Stock.
Provisions of Nevada anti-takeover law (NRS 78.378 et seq.) could have the effect of delaying or preventing a third-party from acquiring us, even if the acquisition arguably could benefit our stockholders. Various provisions of our by-laws may delay, defer or prevent a tender offer or takeover attempt of us that a stockholder might consider in his or her best interest. Our by-laws may be adopted, amended or repealed by the affirmative vote of the holders of at least a majority of our outstanding shares of capital stock entitled to vote for the election of directors, and except as provided by Nevada law, our Board of Directors shall have the power to adopt, amend or repeal the bylaws by a vote of not less than a majority of our directors. The interests of these stockholders and directors may not be consistent with your interests, and they may make changes to the by-laws that are not in line with your concerns.
Subject to applicable NASDAQ rules regarding the issuance of 20% or more of our common stock, our authorized but unissued shares of common stock are available for our Board or Directors to issue without stockholder approval. We may use these additional shares for a variety of corporate purposes, however, faced with an attempt to obtain control of us by means of a proxy context, tender offer, merger or other transaction our Board of Directors acting alone and without approval of our stockholders can issue large amounts of capital stock as part of a defense to a take-over challenge.
The existence of the foregoing provisions and other potential anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our common stock adversely, our common stock price and trading volume could decline.
The trading market for our shares of common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our common stock adversely, or provide more favorable relative recommendations about our competitors, our share price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our common stock price or trading volume to decline.
Our independent registered public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern.
Our independent registered public accounting firm has included in its report for the year ended December 31, 2022 an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business. Our ability to continue as a going concern is contingent upon, among other factors, our ability to raise additional capital through sales of our securities, and incurrence of debt. Additionally, future capital requirements will depend on many factors, including the rate of revenue growth, the selling price of our products and services, the expansion of sales and marketing activities, and the continuing market acceptance of our offerings. These factors raise substantial doubt about our ability to continue as a going concern. There is no assurance that additional financing will be available at terms acceptable to us or at all. If we cannot continue as a viable entity, this could materially adversely affect the value of our securities.
54
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Defined terms included below shall have the same meaning as terms defined and included elsewhere in this proxy statement/prospectus.
Introduction
The following unaudited pro forma condensed combined financial information presents the combination of financial information of Clover Leaf and Kustom Entertainment, adjusted to give effect to the Business Combination.
The following unaudited pro forma condensed combined balance sheet as of June 30, 2023, combines the historical unaudited balance sheet of Kustom Entertainment as of June 30, 20232, with the historical unaudited balance sheet of Clover Leaf as of June 30, 2023, giving pro forma effect to the Business Combination as if it had occurred as of June 30, 2023.
The following unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2023, combines the historical unaudited statement of operations of Kustom Entertainment for the six months ended June 30, 2023, and the historical unaudited statement of operations of Clover Leaf for the six months ended June 30, 2023 on a pro forma, basis as if the Business Combination had occurred on January 1, 2022.
The following unaudited pro forma condensed combined statement of operations for the year ended December 31, 2022, combines the historical audited statement of operations of Kustom Entertainment for the year ended December 31, 2022, and the historical audited statement of operations of Clover Leaf for the year ended December 31, 2022 on a pro forma, basis as if the Business Combination had occurred on January 1, 2022.
The unaudited pro forma condensed combined balance sheet as of June 30, 2023, has been derived from:
• the historical unaudited financial statements of Clover Leaf as of June 30, 2023, and the related notes thereto included elsewhere in this proxy statement/prospectus; and
• The historical unaudited financial statements of Kustom Entertainment as of June 30, 2023, and the related notes thereto included elsewhere in this proxy statement/prospectus.
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2022, has been derived from:
• the historical audited financial statements of Clover Leaf for the year ended December 31, 2022, and the related notes thereto included elsewhere in this proxy statement/prospectus; and
• The historical audited financial statements of Kustom Entertainment for the year ended December 31, 2022, and the related notes thereto included elsewhere in this proxy statement/prospectus.
The unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2023, has been derived from:
• the historical unaudited financial statements of Clover Leaf for the six months ended June 30, 2023, and the related notes thereto included elsewhere in this proxy statement/prospectus; and
• The historical unaudited financial statements of Kustom Entertainment for the six months ended June 30, 2023, and the related notes thereto included elsewhere in this proxy statement/prospectus.
The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as in effect on the date of this proxy statement/prospectus which incorporates Transaction Accounting Adjustments. Kustom Entertainment and Clover Leaf have elected not to present any estimates related to potential synergies and other transaction effects that are reasonably expected to occur or have already occurred and will only be presenting Transaction Accounting Adjustments in the unaudited pro forma condensed combined financial information.
55
This information should be read together with the financial statements and related notes, as applicable, of each of Kustom Entertainment and Clover Leaf included in this proxy statement/prospectus and Kustom Entertainment’s and Clover Leaf’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this proxy statement/prospectus.
Description of the Transactions
Business Combination
On June 1, 2023, Clover Leaf entered into the Business Combination Agreement with CL Merger Sub, Inc, a Nevada corporation and a wholly-owned subsidiary of Clover Leaf (“Merger Sub”), Yntegra Capital Investments, LLC, a Delaware limited liability company, in the capacity as the representative from and after the Effective Time (as defined in the Merger Agreement) for the stockholders of Clover Leaf (other than the Company Stockholder (as defined below) as of immediately prior to the Effective Time and its successors and assignees) in accordance with the terms and conditions of the Merger Agreement (the “Sponsor” or the “Purchaser Representative”), Kustom Entertainment, Inc., a Nevada corporation (“Kustom Entertainment”); and Digital Ally, Inc., a Nevada corporation and the sole stockholder of Kustom Entertainment. The transactions contemplated by the Business Combination Agreement, including the issuance of Clover Leaf securities are referred to as the “Business Combination” or the “Transaction.”
Pursuant to the Business Combination Agreement, at the Closing as consideration for the Merger the Kustom Entertainment Shareholder shall be entitled to receive from Clover Leaf a number of shares of Clover Leaf Class A Common Stock with an aggregate value equal to (i) One Hundred Twenty Five Million Dollars, ($125,000,000), minus the Closing Indebtedness (the resulting amount, the “Merger Consideration”), with the Kustom Entertainment Shareholder receiving a number of shares of Clover Leaf Class A Common Stock equal to (i) the Merger Consideration, divided by (ii) the Per Share Price (the “Merger Consideration Shares”).
Simultaneously with the execution of the Agreement, Clover Leaf, the Sponsor and the other parties thereto have entered into a letter agreement (the “Sponsor Forfeiture Letter”) pursuant to which the Sponsor has agreed to forfeit and/or transfer up to 864,452 shares of Clover Leaf Class B Common Stock (or shares of Clover Leaf Class A Common Stock, if such shares of Clover Leaf Class B Common Stock have been converted to shares of Clover Leaf Class A Common Stock prior to the Closing) held by the Sponsor, subject to the earnout provisions contained therein, contingent and effective upon the Closing, and up to an additional 864,452 shares of Clover Leaf Class B Common Stock (or shares of Clover Leaf Class A Common Stock, if such shares of Clover Leaf Class B Common Stock have been converted to shares of Clover Leaf Class A Common Stock prior to the Closing), contingent upon the number of shares of Clover Leaf Class A Common Stock redeemed in the Redemption.
Concurrently with the consummation of the transactions contemplated by the Agreement, certain promissory notes issued by Clover Leaf to Sponsor in connection with Clover Leaf’s extension of the deadline by which it must complete its business combination, including the promissory note in the principal amount of $1,383,123 issued to the Sponsor on July 18, 2022, the promissory note in the principal amount of $1,383,123 issued to the Sponsor on October 19, 2022 and any other promissory notes issued to the Sponsor, which amount shall not exceed $3,500,000 in the aggregate, in connection with a future extension of the deadline by which Clover Leaf must complete its business combination (the “Promissory Notes”), shall be converted into Clover Leaf Private Units, of which the total Clover Leaf Private Units so issued shall be equal to: (x) the portion of the principal amount of the promissory notes being converted divided by (y) the conversion price of ten dollars ($10.00), rounded up to the nearest whole number of units (the “Note Conversion”).
Earnout
Simultaneously with the execution of the Agreement, Clover Leaf, the Sponsor and the other parties thereto have entered into a letter agreement (the “Sponsor Forfeiture Letter”) pursuant to which the Sponsor has agreed to forfeit and/or transfer up to 864,452 shares of Clover Leaf Class B Common Stock (or shares of Clover Leaf Class A Common Stock, if such shares of Clover Leaf Class B Common Stock have been converted to shares of Clover Leaf Class A Common Stock prior to the Closing) held by the Sponsor, subject to the earnout provisions contained therein, contingent and effective upon the Closing, and up to an additional 864,452 shares of Clover Leaf Class B Common
56
Stock (or shares of Clover Leaf Class A Common Stock, if such shares of Clover Leaf Class B Common Stock have been converted to shares of Clover Leaf Class A Common Stock prior to the Closing), contingent upon the number of shares of Clover Leaf Class A Common Stock redeemed in the Redemption.
The Sponsor and Stanton E. Ross shall be entitled to a potential payment upon the following terms and conditions:
If the revenue of the Business for either of the fiscal years 2023 and 2024 of Clover Leaf ( the “Earnout Period”) achieve the Benchmark Revenues (as defined below) in the applicable fiscal year, 172,890 of the Sponsor’s Earnout Shares shall no longer be subject to forfeiture and the Sponsor shall transfer to Stanton E. Ross 259,336 Earnout Shares (the “Earn-Out Payment”); provided, however, that in the event the Benchmark Revenue is not achieved on or before the end of the applicable fiscal year, the Earn-Out Payment for such fiscal year shall be zero, and the Sponsor shall effective immediately, surrender for cancellation and retirement such amount of Earnout Shares, including voting and dividend rights. For avoidance of doubt, the Earnout Shares shall remain subject to that certain Letter Agreement, dated July 19, 2021, by and among Clover Leaf, its officers and directors, and the Sponsor. In the event Clover Leaf enters into a transaction during the Earn-Out Period that entitles the holder of Earnout Shares to cash or securities (including any dividends thereon), the party entitled to such Earnout Shares at the end of the Earn-Out Period shall be entitled to such cash or securities. “Benchmark Revenue shall be $24,000,000 for fiscal year 2023 and $32,500,000 for fiscal 2024.
For a description of the Business Combination and certain agreements executed in connection therewith, see “Summary of the Proxy Statement/Prospectus — The Business Combination” and “Certain Agreements Related to the Business Combination.”
Special Meeting Redemptions
In connection with the vote to approve to extend the date by which Clover Leaf must consummate its initial business combination from October 22, 2022 to July 22, 2023, held by Clover Leaf on October 19, 2022, Clover Leaf’s public stockholders elected to redeem 12,204,072 shares of Class A common stock at a redemption price of approximately $10.29 per share (the “October Redemptions”), for an aggregate redemption amount of approximately $125.6 million. On July 19, 2023, Clover Leaf held a special meeting at which stockholders approved an amendment to the Company’s amended and restated certificate of incorporation to extend the date by which the Company must consummate its initial business combination from July 22, 2023 to January 22, 2024. In connection with the meeting, stockholders holding 376,002 shares of Clover Leaf Class A common stock exercised their right to redeem such shares at a redemption price of approximately $11.20 per share (the “July Redemptions”), for an aggregate redemption amount of approximately $4.2 million.
Accounting for the Business Combination
The Business Combination will be accounted for as a reverse recapitalization, in accordance with U.S. GAAP. Under this method of accounting, Clover Leaf will be treated as the “acquired” company for financial reporting purposes, and Kustom Entertainment will be the accounting “acquirer” This determination was primarily based on the assumption that:
• Kustom Entertainment’s current shareholders will hold a majority of the voting power of Clover Leaf post Business Combination;
• Effective upon the Business Combination, the post-combination Board will consist of five (5) directors, including four (4) directors designated by Kustom Entertainment and one (1) director mutually agreed upon by Clover Leaf and Kustom Entertainment;
• Kustom Entertainment’s operations will substantially comprise the ongoing operations of Clover Leaf;
• Kustom Entertainment’s senior management will comprise the senior management of Clover Leaf.
Another determining factor was that Clover Leaf does not meet the definition of a “business” pursuant to ASC 805-10-55, and thus, for accounting purposes, the Business Combination will be accounted for as a reverse recapitalization, within the scope of ASC 805. The net assets of Clover Leaf will be stated at historical cost, with no
57
goodwill or other intangible assets recorded. Any excess of the fair value of shares issued to Clover Leaf over the fair value of Clover Leaf’s identifiable net assets acquired represents compensation for the service of a stock exchange listing for its shares and is expensed as incurred.
Basis of Pro Forma Presentation
Clover Leaf has elected to provide the unaudited pro forma condensed combined financial information under two different redemption scenarios of Clover Leaf public shares into cash as more fully described below:
• Scenario 1 — Assuming No Additional Redemptions: This presentation assumes that, after the redemptions of 12,204,072 shares of Class A common stock of Clover Leaf in October 2022 (the “October Redemptions”), and the redemptions of 376,002 shares of Class A common stock in July 2023 (the “July Redemptions”), no additional public stockholders of Clover Leaf exercise redemption rights with respect to their Public Shares upon consummation of the Business Combination.
• Scenario 2 — Assuming Maximum Redemptions: This presentation assumes that, after the October Redemptions and July Redemptions, Clover Leaf public shareholders holding 765,022 shares of Clover Leaf Class A common stock will exercise their redemption rights for $8.6 million upon consummation of the Business Combination at a redemption price of approximately $11.26 per share. The maximum redemption amount reflects the maximum number of the Clover Leaf Public Shares that can be redeemed without violating the conditions of the Business Combination Agreement and the assumption that the NTA proposal is passed by the Clover Leaf shareholders and that Clover Leaf’s Existing Organizational Documents are amended such that they will not be required to maintain a minimum net tangible asset value of at least $5,000,001 prior to or upon consummation of the Business Combination after giving effect to the payments to redeeming shareholders. This scenario includes all adjustments contained in the “no additional redemptions” scenario and presents additional adjustments to reflect the effect of the maximum redemptions.
The following table sets out share ownership of Kustom Entertainment on a pro forma basis assuming the No Additional Redemption Scenario and the Maximum Redemption Scenario:
|
No Additional |
Maximum |
|||||||||
|
Pro Forma Ownership |
Number of |
Percent |
Number of |
Percent |
||||||
|
Kustom Entertainment stockholders |
11,220,826 |
57.4 |
% |
11,220,826 |
59.7 |
% |
||||
|
Clover Leaf public stockholders(2) |
3,048,031 |
15.6 |
% |
2,283,009 |
12.2 |
% |
||||
|
Sponsor’s Founders Shares(1) |
4,459,688 |
22.8 |
% |
4,459,688 |
23.7 |
% |
||||
|
Underwriter Shares(3) |
824,519 |
4.2 |
% |
824,519 |
4.4 |
% |
||||
|
Total shares outstanding |
19,553,064 |
|
18,788,042 |
|
||||||
____________
(1) Includes 864,452 Class B Founders Shares in reserve for Earnout shares and 571,859 Private Rights converted to 71,482 shares of common stock upon consummation of the Business Combination.
(2) Includes 14,375,000 Public Rights automatically converted to 1,796,875 shares of common stock upon consummation of the Business Combination.
(3) Includes 103,734 Private Rights automatically converted to 12,967 shares of common stock upon consummation of the Business Combination.
The following unaudited pro forma condensed combined statement of financial position as of June 30, 2023, and the unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2023 and for the year ended December 31, 2022, are based on the historical financial statements of Clover Leaf and Kustom Entertainment. The unaudited pro forma adjustments are based on information currently available, assumptions, and estimates underlying the pro forma adjustments and are described in the accompanying notes. Actual results may differ materially from the assumptions used to present the accompanying unaudited pro forma condensed combined financial statements.
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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2023(1)
|
Kustom |
Clover Leaf |
Scenario 1: No Additional |
Scenario 2: Maximum |
|||||||||||||||||||||
|
Transaction |
Pro Forma |
Transaction |
Pro Forma |
|||||||||||||||||||||
|
ASSETS |
|
|
|
|
|
|
|
|
||||||||||||||||
|
Current assets |
|
|
|
|
|
|
|
|
||||||||||||||||
|
Cash and cash equivalents |
$ |
128,544 |
$ |
83,227 |
$ |
14,093,106 |
|
B |
$ |
8,939,143 |
$ |
(8,617,265 |
) |
G |
$ |
321,878 |
||||||||
|
|
|
|
(3,630,698 |
) |
C |
|
|
|
|
|||||||||||||||
|
|
|
|
(2,250,000 |
) |
D |
|
|
|
|
|||||||||||||||
|
|
|
|
(120,000 |
) |
I |
|
|
|
|
|||||||||||||||
|
|
|
|
120,000 |
|
J |
|
|
|
|
|||||||||||||||
|
|
|
|
514,964 |
|
N |
|
|
|
|
|||||||||||||||
|
Accounts receivable – Trade |
|
502,799 |
|
|
|
|
502,799 |
|
|
|
502,799 |
|||||||||||||
|
Note receivable, net |
|
150,154 |
|
|
|
|
150,154 |
|
|
|
150,154 |
|||||||||||||
|
Inventories |
|
716,930 |
|
— |
|
— |
|
|
716,930 |
|
— |
|
|
716,930 |
||||||||||
|
Prepaid expenses and other assets |
|
1,565,011 |
|
49,714 |
|
— |
|
|
1,614,725 |
|
— |
|
|
1,614,725 |
||||||||||
|
Total current assets |
|
3,063,438 |
|
132,941 |
|
8,727,372 |
|
|
11,923,751 |
|
(8,617,265 |
) |
|
3,306,486 |
||||||||||
|
Non-current assets |
|
|
|
|
|
|
|
|
||||||||||||||||
|
Property, plant, and equipment, |
|
1,184,245 |
|
— |
|
— |
|
|
1,184,245 |
|
— |
|
|
1,184,245 |
||||||||||
|
Other assets |
|
128,687 |
|
— |
|
— |
|
|
128,687 |
|
— |
|
|
128,687 |
||||||||||
|
Operating lease right of use assets, net |
|
21,017 |
|
— |
|
— |
|
|
21,017 |
|
— |
|
|
21,017 |
||||||||||
|
Intangible assets, net |
|
6,827,293 |
|
|
|
|
6,827,293 |
|
|
|
6,827,293 |
|||||||||||||
|
Cash and marketable securities held in Trust Account |
|
— |
|
18,698,001 |
|
(4,209,931 |
) |
A |
|
— |
|
— |
|
|
— |
|||||||||
|
|
|
|
120,000 |
|
I |
|
|
|
|
|||||||||||||||
|
|
|
|
(514,964 |
) |
N |
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
(14,093,106 |
) |
B |
|
|
|
|
|
|
|
||||||||||
|
Total non-current assets |
|
8,161,242 |
|
18,698,001 |
|
(18,698,001 |
) |
|
8,161,242 |
|
— |
|
|
8,161,242 |
||||||||||
|
Total assets |
$ |
11,224,680 |
$ |
18,830,942 |
$ |
(9,970,629 |
) |
$ |
20,084,993 |
$ |
(8,617,265 |
) |
$ |
11,467,728 |
||||||||||
|
LIABILITIES |
|
|
|
|
|
|
|
|
||||||||||||||||
|
Current liabilities |
|
|
|
|
|
|
|
|
||||||||||||||||
|
Accounts payable and accrued expenses |
|
5,401,776 |
|
691,955 |
|
(504,199 |
) |
D |
|
5,589,532 |
|
— |
|
|
5,589,532 |
|||||||||
|
Related party payable |
|
1,798,902 |
|
|
|
|
1,798,902 |
|
|
|
1,798,902 |
|||||||||||||
|
Deferred revenue |
|
403,650 |
|
— |
|
— |
|
|
403,650 |
|
— |
|
|
403,650 |
||||||||||
|
Subordinated notes payable current, net |
|
175,617 |
|
|
|
|
175,617 |
|
|
|
175,617 |
|||||||||||||
|
Operating lease obligation, current |
|
21,017 |
|
|
|
|
21,017 |
|
|
|
21,017 |
|||||||||||||
|
Promissory note to related party |
|
|
3,067,015 |
|
120,000 |
|
J |
|
— |
|
|
|
— |
|||||||||||
|
|
|
|
(3,187,015 |
) |
K |
|
|
|
|
|||||||||||||||
|
Income tax payable |
|
— |
|
245,222 |
|
— |
|
|
245,222 |
|
— |
|
|
245,222 |
||||||||||
|
Total current liabilities |
|
7,800,962 |
|
4,004,192 |
|
(3,571,214 |
) |
|
8,233,940 |
|
— |
|
|
8,233,940 |
||||||||||
59
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2023(1) — (continued)
|
Kustom |
Clover Leaf |
Scenario 1: No Additional |
Scenario 2: Maximum |
|||||||||||||||||||||||||
|
Transaction |
Pro Forma |
Transaction |
Pro Forma |
|||||||||||||||||||||||||
|
Non-current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Notes payable, net of current portion – related party |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
||||||||||
|
Notes payable, net of current portion |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|||||||||||||
|
Lease liabilities |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|||||||||||||
|
Other liabilities |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|||||||||||||
|
Deferred underwriting commissions |
|
— |
|
|
4,840,931 |
|
|
(4,840,931 |
) |
C |
|
— |
|
|
— |
|
|
— |
|
|||||||||
|
Warrant liabilities |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
||||||||||
|
Total non-current liabilities |
|
— |
|
|
4,840,931 |
|
|
(4,840,931 |
) |
|
— |
|
|
— |
|
|
— |
|
||||||||||
|
Total liabilities |
|
7,800,962 |
|
|
8,845,123 |
|
|
(8,412,145 |
) |
|
8,233,940 |
|
|
— |
|
|
8,233,940 |
|
||||||||||
|
Class A common stock subject to possible redemption |
|
— |
|
|
18,582,427 |
|
|
(4,209,931 |
) |
A |
|
— |
|
|
— |
|
|
— |
|
|||||||||
|
|
|
|
|
|
(14,372,496 |
) |
G |
|
|
|
|
|
|
|||||||||||||||
|
EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Kustom Entertainment |
|
1 |
|
|
— |
|
|
(1 |
) |
E |
|
— |
|
|
— |
|
|
— |
|
|||||||||
|
Clover Leaf preferred stock |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|||||||||||
|
Clover Leaf Class A common stock |
|
— |
|
|
81 |
|
|
1,122 |
|
E |
|
1,955 |
|
|
(76 |
) |
G |
|
1,879 |
|
||||||||
|
|
|
|
|
|
125 |
|
G |
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
346 |
|
H |
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
36 |
|
K |
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
188 |
|
L |
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
57 |
|
M |
|
|
|
|
|
|
|||||||||||||||
|
Clover Leaf Class B common stock |
|
— |
|
|
346 |
|
|
(346 |
) |
H |
|
— |
|
|
— |
|
|
— |
|
|||||||||
|
Additional paid-in capital |
|
13,240,044 |
|
|
— |
|
|
(1,100,000 |
) |
D |
|
21,665,425 |
|
|
(8,617,189 |
) |
G |
|
13,048,236 |
|
||||||||
|
|
|
|
|
|
(1,121 |
) |
E |
|
|
|
— |
|
|
|
||||||||||||||
|
|
|
|
|
|
(9,242,836 |
) |
F |
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
14,372,371 |
|
G |
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
1,210,233 |
|
C |
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
3,186,979 |
|
K |
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
(188 |
) |
L |
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
(57 |
) |
M |
|
|
|
|
|
|
|||||||||||||||
|
Accumulated deficit |
|
(9,816,327 |
) |
|
(8,597,035 |
) |
|
(645,801 |
) |
D |
|
(9,816,327 |
) |
|
— |
|
|
(9,816,327 |
) |
|||||||||
|
|
|
|
|
|
|
|
9,242,836 |
|
F |
|
|
|
|
|
|
|
|
|
||||||||||
|
Total equity |
|
3,423,718 |
|
|
(8,596,608 |
) |
|
17,023,943 |
|
|
11,851,053 |
|
|
(8,617,265 |
) |
|
3,233,788 |
|
||||||||||
|
Total equity and liabilities |
$ |
11,224,680 |
|
$ |
18,830,942 |
|
$ |
(9,970,629 |
) |
$ |
20,084,993 |
|
$ |
(8,617,265 |
) |
$ |
11,467,728 |
|
||||||||||
____________
(1) The unaudited pro forma condensed combined balance sheet as of June 30, 2023, combines the historical unaudited balance sheet of Kustom Entertainment as of June 30, 2023, with the historical unaudited balance sheet of Clover Leaf as of June 30, 2023.
60
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2023(2)
|
Kustom |
Clover Leaf |
Scenario 1: No |
Scenario 2: Maximum |
||||||||||||||||||||||
|
Transaction |
Pro Forma |
Transaction |
Pro Forma |
||||||||||||||||||||||
|
Sales revenue |
$ |
8,671,507 |
|
$ |
— |
|
$ |
— |
|
$ |
8,671,507 |
|
$ |
— |
$ |
8,671,507 |
|
||||||||
|
Cost of sales |
|
(7,281,386 |
) |
|
— |
|
|
— |
|
|
(7,281,386 |
) |
|
— |
|
(7,281,386 |
) |
||||||||
|
Gross profit |
|
1,390,121 |
|
|
— |
|
|
— |
|
|
1,390,121 |
|
|
— |
|
1,390,121 |
|
||||||||
|
Selling, advertising and promotional expense |
|
(1,493,465 |
) |
|
— |
|
|
— |
|
|
(1,493,465 |
) |
|
— |
|
(1,493,465 |
) |
||||||||
|
General and administrative expense |
|
(2,414,451 |
) |
|
— |
|
|
— |
|
|
(2,414,451 |
) |
|
— |
|
(2,414,451 |
) |
||||||||
|
Formation and |
|
— |
|
|
(900,007 |
) |
|
— |
|
|
(900,007 |
) |
|
— |
|
(900,007 |
) |
||||||||
|
Interest earned on cash held in bank |
|
— |
|
|
74 |
|
|
— |
|
|
74 |
|
|
— |
|
74 |
|
||||||||
|
Interest earned on marketable securities held in Trust Account |
|
— |
|
|
421,354 |
|
|
(421,354 |
) |
AA |
|
— |
|
|
— |
|
— |
|
|||||||
|
Total operating |
|
(3,907,916 |
) |
|
(478,579 |
) |
|
(421,354 |
) |
|
(4,807,849 |
) |
|
— |
|
(4,807,849 |
) |
||||||||
|
Operating loss |
|
(2,517,795 |
) |
|
(478,579 |
) |
|
(421,354 |
) |
|
(3,417,728 |
) |
|
— |
|
(3,417,728 |
) |
||||||||
|
Other income (expense) Interest expense |
|
(72,849 |
) |
|
— |
|
|
|
|
(72,849 |
) |
|
— |
|
(72,849 |
) |
|||||||||
|
Income tax expense |
|
— |
|
|
(88,799 |
) |
|
— |
|
|
(88,799 |
) |
|
— |
|
(88,799 |
) |
||||||||
|
Net loss |
$ |
(2,590,644 |
) |
$ |
(567,378 |
) |
$ |
(421,354 |
) |
$ |
(3,579,376 |
) |
$ |
— |
$ |
(3,579,376 |
) |
||||||||
|
Weight average shares outstanding, basic and diluted |
$ |
(2,590.64 |
) |
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Basic and diluted net loss per share, redeemable Class A common stock |
|
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|||||||||||||
|
Basic and diluted net loss per share, Class B common stock |
|
|
$ |
(0.08 |
) |
|
|
|
|
|
|
|
|||||||||||||
|
Pro forma weighted average number of shares outstanding – basic and diluted |
|
|
|
|
|
|
|
19,553,064 |
(2) |
|
|
18,809,625 |
(2) |
||||||||||||
|
Pro forma earnings per share – basic and diluted |
|
|
|
|
|
|
$ |
(0.18 |
) |
|
$ |
(0.19 |
) |
||||||||||||
____________
(1) Please refer to Note 7 — “Net Earnings (Loss) per Share” for details.
(2) The unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2023, combines the historical unaudited statement of operations of Kustom Entertainment for the six months ended June 30, 2023, with the historical unaudited statement of operations of Clover Leaf for the six months ended June 30, 2023.
61
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2022(2)
|
Kustom |
Clover Leaf |
Scenario 1: No Additional |
Scenario 2: Maximum |
||||||||||||||||||||||
|
Transaction |
Pro Forma |
Transaction |
Pro Forma |
||||||||||||||||||||||
|
Revenue |
$ |
20,871,500 |
|
$ |
— |
|
$ |
— |
|
$ |
20,871,500 |
|
$ |
— |
$ |
20,871,500 |
|
||||||||
|
Cost of sales |
|
(20,602,759 |
) |
|
— |
|
|
— |
|
|
(20,602,758 |
) |
|
— |
|
(20,602,758 |
) |
||||||||
|
Gross profit |
|
268,741 |
|
|
— |
|
|
— |
|
|
268,742 |
|
|
— |
|
268,742 |
|
||||||||
|
Selling, advertising and promotional expense |
|
(4,024,748 |
) |
|
— |
|
|
— |
|
|
(4,024,748 |
) |
|
— |
|
(4,024,748 |
) |
||||||||
|
General and administrative expense |
|
(3,613,234 |
) |
|
— |
|
|
— |
|
|
(3,613,234 |
) |
|
— |
|
(3,613,234 |
) |
||||||||
|
Formation and |
|
— |
|
|
(1,291,228 |
) |
|
— |
|
|
(1,291,228 |
) |
|
— |
|
(1,291,228 |
) |
||||||||
|
Transaction Costs |
|
— |
|
|
— |
|
|
(645,801 |
) |
BB |
|
(645,801 |
) |
|
— |
|
(645,801 |
) |
|||||||
|
Total operating |
|
(7,637,982 |
) |
|
(1,291,228 |
) |
|
(645,801 |
) |
|
(9,575,011 |
) |
|
— |
|
(9,575,011 |
) |
||||||||
|
Operating loss |
|
(7,369,241 |
) |
|
(1,291,228 |
) |
|
(645,801 |
) |
|
(9,306,269 |
) |
|
— |
|
(9,306,269 |
) |
||||||||
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
Interest expense |
|
(91,874 |
) |
|
|
|
— |
|
|
(91,874 |
) |
|
— |
|
(91,874 |
) |
|||||||||
|
Recovery of previously incurred costs |
|
— |
|
|
341,684 |
|
|
— |
|
|
341,684 |
|
|
— |
|
341,684 |
|
||||||||
|
Interest earned on cash held in bank |
|
— |
|
|
69 |
|
|
— |
|
|
69 |
|
|
— |
|
69 |
|
||||||||
|
Change in fair value of warrant liabilities |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
— |
|
||||||||
|
Interest income on marketable securities held in Trust Account |
|
— |
|
|
1,195,135 |
|
|
(1,195,135 |
) |
AA |
|
— |
|
|
— |
|
— |
|
|||||||
|
Total other non-operating income (expenses) |
|
(91,874 |
) |
|
1,536,888 |
|
|
(1,195,135 |
) |
|
249,879 |
|
|
— |
|
249,879 |
|
||||||||
|
Income (loss) before provision for income taxes |
|
(7,461,115 |
) |
|
245,660 |
|
|
(1,840,936 |
) |
|
(9,056,390 |
) |
|
— |
|
(9,056,390 |
) |
||||||||
|
Provision for income taxes |
|
60,000 |
|
|
(185,423 |
) |
|
— |
|
|
(185,423 |
) |
|
— |
|
(185,423 |
) |
||||||||
|
Net income (loss) |
$ |
(7,401,115 |
) |
$ |
60,237 |
|
$ |
(1,840,936 |
) |
$ |
(9,241,813 |
) |
$ |
— |
$ |
(9,241,813 |
) |
||||||||
|
Basic and diluted net loss per share |
$ |
(7,401.12 |
) |
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Basic net income per share, Class A common stock subject to possible redemption |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|||||||||||||
|
Basic net income per share, Class B common stock |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|||||||||||||
|
Pro forma weighted average number of shares outstanding – basic and diluted |
|
|
|
|
|
|
|
|
|
|
19,553,064 |
(2) |
|
|
|
18,788,042 |
(2) |
||||||||
|
Pro forma loss per share – basic and diluted |
|
|
|
|
|
|
$ |
(0.47 |
) |
|
$ |
(0.49 |
) |
||||||||||||
____________
(1) Please refer to Note 7 — “Net Earnings (Loss) per Share” for details.
(2) The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2022, combines the historical audited statement of operations of Kustom Entertainment for the year ended December 31, 2022, with the historical audited statement of operations of Clover Leaf for the year ended December 31, 2022.
62
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1 — Description of the Proposed Transactions
On June 1, 2023, Clover Leaf entered into the Business Combination Agreement with CL Merger Sub, Inc, a Nevada corporation and a wholly-owned subsidiary of Clover Leaf (“Merger Sub”), Yntegra Capital Investments, LLC, a Delaware limited liability company, in the capacity as the representative from and after the Effective Time (as defined in the Merger Agreement) for the stockholders of Clover Leaf (other than the Company Stockholder (as defined below) as of immediately prior to the Effective Time and its successors and assignees) in accordance with the terms and conditions of the Merger Agreement (the “Sponsor” or the “Purchaser Representative”), Kustom Entertainment, Inc., a Nevada corporation (“Kustom Entertainment”); and Digital Ally, Inc., a Nevada corporation and the sole stockholder of Kustom Entertainment. The transactions contemplated by the Business Combination Agreement, including the issuance of Clover Leaf securities are referred to as the “Business Combination” or the “Transaction.”
Pursuant to the Business Combination Agreement, at the Closing as consideration for the Merger the Kustom Entertainment Shareholder shall be entitled to receive from Clover Leaf a number of shares of Clover Leaf Class A Common Stock with an aggregate value equal to (i) One Hundred Twenty Five Million Dollars, ($125,000,000), minus the Closing Indebtedness (the resulting amount, the “Merger Consideration”), with the Kustom Entertainment Shareholder receiving a number of shares of Clover Leaf Class A Common Stock equal to (i) the Merger Consideration, divided by (ii) the Per Share Price (the “Merger Consideration Shares”).
Simultaneously with the execution of the Agreement, Clover Leaf, the Sponsor and the other parties thereto have entered into a letter agreement (the “Sponsor Forfeiture Letter”) pursuant to which the Sponsor has agreed to forfeit and/or transfer up to 864,452 shares of Clover Leaf Class B Common Stock (or shares of Clover Leaf Class A Common Stock, if such shares of Clover Leaf Class B Common Stock have been converted to shares of Clover Leaf Class A Common Stock prior to the Closing) held by the Sponsor, subject to the earnout provisions contained therein, contingent and effective upon the Closing, and up to an additional 864,452 shares of Clover Leaf Class B Common Stock (or shares of Clover Leaf Class A Common Stock, if such shares of Clover Leaf Class B Common Stock have been converted to shares of Clover Leaf Class A Common Stock prior to the Closing), contingent upon the number of shares of Clover Leaf Class A Common Stock redeemed in the Redemption.
Concurrently with the consummation of the transactions contemplated by the Agreement, certain promissory notes issued by Clover Leaf to Sponsor in connection with Clover Leaf’s extension of the deadline by which it must complete its business combination, including the promissory note in the principal amount of $1,383,123 issued to the Sponsor on July 18, 2022, the promissory note in the principal amount of $1,383,123 issued to the Sponsor on October 19, 2022 and any other promissory notes issued to the Sponsor, which amount shall not exceed $3,500,000 in the aggregate, in connection with a future extension of the deadline by which Clover Leaf must complete its business combination (the “Promissory Notes”), shall be converted into Clover Leaf Private Units, of which the total Clover Leaf Private Units so issued shall be equal to: (x) the portion of the principal amount of the promissory notes being converted divided by (y) the conversion price of ten dollars ($10.00), rounded up to the nearest whole number of units (the “Note Conversion”).
Earnout
Simultaneously with the execution of the Agreement, Clover Leaf, the Sponsor and the other parties thereto have entered into a letter agreement (the “Sponsor Forfeiture Letter”) pursuant to which the Sponsor has agreed to forfeit and/or transfer up to 864,452 shares of Clover Leaf Class B Common Stock (or shares of Clover Leaf Class A Common Stock, if such shares of Clover Leaf Class B Common Stock have been converted to shares of Clover Leaf Class A Common Stock prior to the Closing) held by the Sponsor, subject to the earnout provisions contained therein, contingent and effective upon the Closing, and up to an additional 864,452 shares of Clover Leaf Class B Common Stock (or shares of Clover Leaf Class A Common Stock, if such shares of Clover Leaf Class B Common Stock have been converted to shares of Clover Leaf Class A Common Stock prior to the Closing), contingent upon the number of shares of Clover Leaf Class A Common Stock redeemed in the Redemption.
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The Sponsor and Stanton E. Ross shall be entitled to a potential payment upon the following terms and conditions:
If the revenue of the Business for either of the fiscal years 2023 and 2024 of Clover Leaf ( the “Earnout Period”) achieve the Benchmark Revenues (as defined below) in the applicable fiscal year, 172,890 of the Sponsor’s Earnout Shares shall no longer be subject to forfeiture and the Sponsor shall transfer to Stanton E. Ross 259,336 Earnout Shares (the “Earn-Out Payment”); provided, however, that in the event the Benchmark Revenue is not achieved on or before the end of the applicable fiscal year, the Earn-Out Payment for such fiscal year shall be zero, and the Sponsor shall effective immediately, surrender for cancellation and retirement such amount of Earnout Shares, including voting and dividend rights. For avoidance of doubt, the Earnout Shares shall remain subject to that certain Letter Agreement, dated July 19, 2021, by and among Clover Leaf, its officers and directors, and the Sponsor. In the event Clover Leaf enters into a transaction during the Earn-Out Period that entitles the holder of Earnout Shares to cash or securities (including any dividends thereon), the party entitled to such Earnout Shares at the end of the Earn-Out Period shall be entitled to such cash or securities. “Benchmark Revenue shall be $24,000,000 for fiscal year 2023 and $32,500,000 for fiscal 2024.
For a description of the Business Combination and certain agreements executed in connection therewith, see “Summary of the Proxy Statement/Prospectus — The Business Combination” and “Certain Agreements Related to the Business Combination.”
Note 2 — Basis of Presentation and Accounting Policies
The unaudited pro forma condensed combined financial information is for illustrative purposes only. The financial results may have been different had the companies always been combined. You should not rely on the unaudited pro forma condensed combined financial information as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that Kustom Entertainment will experience. Kustom Entertainment and Clover Leaf did not have any historical relationship prior to the Business Combination. Accordingly, no pro forma adjustments were required to eliminate activities between the companies.
The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.” Release No. 33-10786 replaces the existing pro forma adjustment criteria with simplified Transaction Accounting Adjustments and presents the Management’s Adjustments. Clover Leaf has elected not to present Management’s Adjustments and will only be presenting Transaction Accounting Adjustments in the following unaudited pro forma condensed combined financial information.
Clover Leaf does not meet the definition of a “business” pursuant to ASC 805-10-55 as it is an empty listed shell holding only cash raised as part of its original equity issuance. As a result, the Business Combination does not qualify as a “business combination” within the meaning of ASC 805, Business Combinations; rather, the Business Combination will be accounted for as a reverse merger in accordance with U.S. GAAP. See Note 3 — Accounting for the Business Combination for more details.
The historical financial statements of Kustom Entertainment have been prepared in accordance with U.S. GAAP. The historical financial statements of Clover Leaf have been prepared in accordance with U.S. GAAP. The unaudited pro forma condensed combined financial information reflects U.S. GAAP, the basis of accounting used by Kustom Entertainment.
Clover Leaf has elected to provide the unaudited pro forma condensed combined financial information under two different redemption scenarios of Clover Leaf public shares into cash as more fully described below:
• Scenario 1 — Assuming No Additional Redemptions: This presentation assumes that, after the redemptions of 12,204,072 shares of Class A common stock of Clover Leaf in October 2022 (the “October Redemptions”), and the redemptions of 376,002 shares of Class A common stock in July 2023 (the “July Redemptions”), no additional public stockholders of Clover Leaf exercise redemption rights with respect to their Public Shares upon consummation of the Business Combination.
• Scenario 2 — Assuming Maximum Redemptions: This presentation assumes that, after the October Redemptions and July Redemptions, Clover Leaf public shareholders holding 765,022 shares of Clover Leaf Class A common stock will exercise their redemption rights for $8.6 million upon consummation of the Business Combination at a redemption price of approximately $11.26 per share. The maximum
64
redemption amount reflects the maximum number of the Clover Leaf Public Shares that can be redeemed without violating the conditions of the Business Combination Agreement and the assumption that the NTA proposal is passed by the Clover Leaf shareholders and that Clover Leaf’s Existing Organizational Documents are amended such that they will not be required to maintain a minimum net tangible asset value of at least $5,000,001 prior to or upon consummation of the Business Combination after giving effect to the payments to redeeming shareholders. This scenario includes all adjustments contained in the “no additional redemptions” scenario and presents additional adjustments to reflect the effect of the maximum redemptions.
The following summarizes the pro forma shares of Kustom Entertainment common stock issued and outstanding immediately after the Business Combination, presented under the two scenarios listed above:
|
No Additional |
Maximum |
|||||||||
|
Ownership percentage post-Business Combination |
Number of |
Percent |
Number of |
Percent |
||||||
|
Kustom Entertainment stockholders |
11,220,826 |
57.4 |
% |
11,220,826 |
59.7 |
% |
||||
|
Clover Leaf public stockholders(2) |
3,048,031 |
15.6 |
% |
2,283,003 |
12.2 |
% |
||||
|
Sponsor’s Founders Shares(1) |
4,459,688 |
22.8 |
% |
4,459,688 |
23.7 |
% |
||||
|
Underwriter Shares(3) |
824,519 |
4.2 |
% |
824,519 |
4.4 |
% |
||||
|
Total shares outstanding |
19,553,064 |
|
18,788,042 |
|
||||||
____________
(1) Includes 864,452 Class B Founders Shares in reserve for Earnout shares and 571,859 Private Rights converted to 71,482 shares of common stock upon consummation of the Business Combination.
(2) Includes 14,375,000 Public Rights automatically converted to 1,796,875 shares of common stock upon consummation of the Business Combination.
(3) Includes 103,734 Private Rights automatically converted to 12,967 shares of common stock upon consummation of the Business Combination.
The pro forma adjustments do not have an income tax effect as they are either (i) incurred by legal entities that are not subject to a corporate income tax, or (ii) permanently non-deductible or non-taxable based on the laws of the relevant jurisdiction.
Upon consummation of the Business Combination, management will perform a comprehensive review of the two entities’ accounting policies. As a result of the review, management may identify differences between the accounting policies of the two entities which, when conformed, could have a material impact on the financial statements of the post-combination company. Management did not identify any differences that would have a material impact on the unaudited pro forma condensed combined financial information. As a result, the unaudited pro forma condensed combined financial information does not assume any differences in accounting policies.
Note 3 — Accounting for the Business Combination
The Business Combination will be accounted for as a reverse recapitalization, in accordance with U.S. GAAP. Under this method of accounting, Clover Leaf will be treated as the “acquired” company for financial reporting purposes, and Kustom Entertainment will be the accounting “acquirer” This determination was primarily based on the assumption that:
• Kustom Entertainment’s current shareholders will hold a majority of the voting power of Clover Leaf post Business Combination;
• Effective upon the Business Combination, the post-combination Board will consist of five (5) directors, including four (4) directors designated by Kustom Entertainment and one (1) director mutually agreed upon by Clover Leaf and Kustom Entertainment;
• Kustom Entertainment’s operations will substantially comprise the ongoing operations of Clover Leaf;
• Kustom Entertainment’s senior management will comprise the senior management of Clover Leaf.
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Another determining factor was that Clover Leaf does not meet the definition of a “business” pursuant to ASC 805-10-55, and thus, for accounting purposes, the Business Combination will be accounted for as a reverse recapitalization, within the scope of ASC 805. The net assets of Clover Leaf will be stated at historical cost, with no goodwill or other intangible assets recorded. Any excess of the fair value of shares issued to Clover Leaf over the fair value of Clover Leaf’s identifiable net assets acquired represents compensation for the service of a stock exchange listing for its shares and is expensed as incurred.
Note 4 — Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2023
The pro forma adjustments to the unaudited pro forma condensed combined balance sheet as of June 30, 2023, are as follows:
A. Reflects the redemption of 376,002 shares of Class A common stock for a cash payment of $4.2 million (or $11.20 per share).
B. Reflects the liquidation and reclassification of $14.1 million of funds held in the Trust Account to cash that becomes available following the Business Combination.
C. Reflects the 25% partial waiver and settlement of deferred underwriting commission upon the closing of the Business Combination.
D. Represents preliminary estimated transaction costs expected to be incurred by Clover Leaf and Kustom Entertainment of approximately $2.3 million for legal, accounting, and due diligence fees incurred as part of the Business Combination.
For the Clover Leaf transaction costs of $1.2 million, $0.5 million have been accrued and $0.08 million have been paid as of the pro forma balance sheet date. The remaining amount of $0.6 million is reflected as an adjustment to accumulated losses.
For the Kustom Entertainment transaction costs of $1.1 million, no costs have been accrued or paid and $1.1 million is included as an adjustment to additional paid-in capital. This also reflects an adjustment of a debit and a credit to accumulated losses of $4.0 million for the conversion of the promissory notes to Clover Leaf Class A common million for shares issued for the advisory fee as of the pro forma balance sheet date.
E. Represents the exchange of outstanding Kustom Entertainment shares into shares of common stock at par value of $0.0001 per share upon the Business Combination.
F. Represents the elimination of Clover Leaf’s historical accumulated losses after recording the transaction costs to be incurred by Clover Leaf as described in (D) above.
G. In Scenario 1, reflects the no additional redemptions scenario. In Scenario 2, reflects the maximum redemption of 765,022 Clover Leaf shares for aggregate redemption payments of $8.6 million at a redemption price of approximately $11.26 per share. The maximum redemption amount reflects the maximum number of the Clover Leaf Public Shares that can be redeemed without violating the conditions of the Business Combination Agreement and the assumption that the NTA proposal is passed by the Clover Leaf shareholders and that Clover Leaf’s Existing Organizational Documents are amended such that they will not be required to maintain a minimum net tangible asset value of at least $5,000,001 prior to or upon consummation of the Business Combination after giving effect to the payments to redeeming shareholders. This scenario includes all adjustments contained in the “no additional redemptions” scenario and presents additional adjustments to reflect the effect of the maximum redemptions.
H. Reflects the conversion of the Clover Leaf Class B common stock into Class A common stock on a one-for-one basis.
I. Reflects the extension payments deposited into the Trust subsequent to June 30, 2023.
J. Reflects the draws on the promissory note subsequent to June 30, 2023, for the extension payment to the Trust account.
K. Reflects the conversion of the promissory notes to Clover Leaf Class A common stock, par value $0.0001.
66
L. Reflects the conversion of 15,050,593 rights into 1,881,324 shares of Class A common stock, par value $0.0001 at the consummation of the Business Combination.
M. Reflects the issuance of Class A common stock, par value $0.0001 for advisory services.
N. Reflects the interest withdrawn from the Trust account subsequent to June 30, 2023, to pay certain tax obligations.
Note 5 — Adjustments and Reclassifications to Unaudited Pro Forma Condensed Combined Statement of Operations for the Six Months Ended June 30, 2023
The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for six months ended June 30, 2023, are as follows:
AA. Reflects the elimination of interest income generated from the investments held in the Trust Account after giving effect to the Business Combination as if it had occurred on January 1, 2022.
Note 6 — Adjustments and Reclassifications to Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 2022
The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for year ended December 31, 2022, are as follows:
AA. Reflects the elimination of interest income generated from the investments held in the Trust Account after giving effect to the Business Combination as if it had occurred on January 1, 2022.
BB. Reflects the transaction costs of Clover Leaf and Kustom Entertainment.
Note 7 — Net Earnings per Share
Represents the earnings per share calculated using the historical weighted average shares outstanding, and the issuance of additional shares in connection with the Business Combination, assuming the shares were outstanding since January 1, 2022. As the Business Combination is being reflected as if it had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted earnings per share assumes that the shares issued in connection with the Business Combination have been outstanding for the entire period presented. If the number of public shares described under the “Assuming Maximum Redemptions” scenario described above are redeemed, this calculation is retroactively adjusted to eliminate such shares for the entire period.
The unaudited pro forma condensed combined financial information has been prepared assuming two alternative levels of redemption of Clover Leaf’s public shares:
|
For the Six Months Ended |
||||
|
Minimum |
Maximum |
|||
|
Weighted average shares outstanding – basic and diluted |
||||
|
Kustom Entertainment shareholders |
11,220,826 |
11,220,826 |
||
|
Clover Leaf public shareholders(2) |
3,048,031 |
2,283,009 |
||
|
Sponsor Founder shares(1) |
4,459,688 |
4,459,688 |
||
|
Underwriter shares(3) |
824,519 |
824,519 |
||
|
Total |
19,553,064 |
18,788,042 |
||
____________
(1) Includes 864,452 Class B Founders Shares in reserve for Earnout shares and 571,859 Private Rights converted to 71,482 shares of common stock upon consummation of the Business Combination.
(2) Includes 14,375,000 Public Rights automatically converted to 1,796,875 shares of common stock upon consummation of the Business Combination.
(3) Includes 103,734 Private Rights automatically converted to 12,967 shares of common stock upon consummation of the Business Combination.
67
|
Six Months |
||||||||
|
Assuming |
Assuming |
|||||||
|
Pro forma net loss |
$ |
(3,579,376 |
) |
$ |
(3,579,376 |
) |
||
|
Weighted average shares outstanding of common stock – basic and diluted |
|
19,553,064 |
|
|
18,788,042 |
|
||
|
Net loss per share – basic and diluted |
$ |
(0.18 |
) |
$ |
(0.19 |
) |
||
|
For the Year Ended |
||||
|
Minimum |
Maximum |
|||
|
Weighted average shares outstanding – basic and diluted |
||||
|
Kustom Entertainment shareholders |
11,220,826 |
11,220,826 |
||
|
Clover Leaf public shareholders(2) |
3,048,031 |
2,283,009 |
||
|
Sponsor Founder shares(1) |
4,459,688 |
4,459,688 |
||
|
Underwriter shares(3) |
824,519 |
824,519 |
||
|
Total |
19,553,064 |
18,788,042 |
||
____________
(1) Includes 864,452 Class B Founders Shares in reserve for Earnout shares and 571,859 Private Rights converted to 71,482 shares of common stock upon consummation of the Business Combination.
(2) Includes 14,375,000 Public Rights automatically converted to 1,796,875 shares of common stock upon consummation of the Business Combination.
(3) Includes 103,734 Private Rights automatically converted to 12,967 shares of common stock upon consummation of the Business Combination.
|
Year Ended |
||||||||
|
Assuming |
Assuming |
|||||||
|
Pro forma net loss |
$ |
(9,241,813 |
) |
$ |
(9,241,813 |
) |
||
|
Weighted average shares outstanding of common stock – basic and diluted |
|
19,553,064 |
|
|
18,788,042 |
|
||
|
Net loss per share – basic and diluted |
$ |
(0.47 |
) |
$ |
(0.49 |
) |
||
68
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE
FINANCIAL INFORMATION
Clover Leaf is providing the following comparative per share information to assist you in your analysis of the financial aspects of the Transactions.
|
Pro Forma Combined |
||||||||||||||||
|
Kustom |
Clover Leaf |
Assuming |
Assuming |
|||||||||||||
|
Six months ended June 30, 2023 |
|
|
|
|
|
|
|
|
||||||||
|
Net loss |
$ |
(2,590,644 |
) |
$ |
(567,378 |
) |
$ |
(3,579,376 |
) |
$ |
(3,579,376 |
) |
||||
|
Shareholders’ Equity (Deficit) |
$ |
3,423,718 |
|
$ |
(8,596,608 |
) |
$ |
11,851,053 |
|
$ |
3,233,788 |
|
||||
|
Shareholders’ Equity (Deficit) Per Share – basic and diluted |
$ |
— |
|
$ |
(1.46 |
) |
$ |
0.61 |
|
$ |
0.17 |
|
||||
|
Cash Dividends |
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
||||
|
Weighted average shares – basic and diluted |
|
1,000 |
|
|
5,898,870 |
|
|
19,553,064 |
|
|
18,788,042 |
|
||||
Shareholders’ equity per share = total equity/shares outstanding
69
INFORMATION ABOUT THE PARTIES TO THE BUSINESS COMBINATION
Clover Leaf Capital Corp.
Clover Leaf is a special purpose acquisition company 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. Clover Leaf Common Stock, Units and Public Rights are currently listed on Nasdaq under the symbols “CLOE,” “CLOEU” and “CLOER,” respectively. The mailing address of Clover Leaf’s principal executive office is 1450 Brickell Avenue, Suite 1420 Miami, FL 33131, and its telephone number is (305) 577-0031.
Purchaser Representative
Yntegra Capital Investments LLC, a Delaware limited liability company and Clover Leaf’s Sponsor, is serving as the Purchaser Representative under the Merger Agreement, and in such capacity will represent the interests of Clover Leaf’s stockholders after the Closing (other than Digital Ally immediately prior to the Effective Time and their successors and assigns) with respect to certain matters under the Merger Agreement.
Merger Sub
Merger Sub is a wholly-owned subsidiary of Clover Leaf, incorporated in Nevada on May 30, 2023 solely for the purpose of consummating the Business Combination. Merger Sub owns no material assets and does not operate any business.
Kustom Entertainment, Inc.
Kustom Entertainment, Inc. is a Nevada corporation with a focus and mission to own and produce events, festivals, and entertainment alongside its evolving primary and secondary ticketing technologies. The mailing address of Kustom Entertainment’s principal executive office is 14001 Marshall Drive Lenexa, KS 66215.
For more information about Kustom Entertainment, see the sections entitled “Information About Kustom Entertainment” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Kustom Entertainment.”
70
THE SPECIAL MEETING
General
Clover Leaf is furnishing this proxy statement/prospectus to its stockholders as part of the solicitation of proxies by the Clover Leaf Board for use at the Special Meeting to be held on [•], 2023 and at any adjournment or postponement thereof. This proxy statement/prospectus provides Clover Leaf stockholders with information they need to know to be able to vote or direct their vote to be cast at the Special Meeting.
This proxy statement/prospectus is being first mailed on or about [•], 2023 to all stockholders of record of Clover Leaf as of June 12, 2023, which is the Record Date. This proxy statement/prospectus provides you with information you need to know to be able to vote or instruct your vote to be cast at the Special Meeting.
Date, Time and Place
The Special Meeting will be held as a “virtual meeting” via live audio webcast on [•], 2023 at [•] a.m. Eastern Time.
Registering for the Special Meeting
As a registered Clover Leaf stockholder, you received a proxy card from Continental Stock Transfer & Trust Company. The form contains instructions on how to attend the virtual meeting including the URL address, along with your control number. You will need your control number for access. If you do not have your control number, contact Continental Stock Transfer & Trust Company at the phone number or e-mail address below. Continental Stock Transfer & Trust Company’s support contact information is as follows: 917-262-2373, or email proxy@continentalstock.com.
You can pre-register to attend the virtual meeting starting [•], 2023 at [•] a.m. Eastern Time. Enter the URL address into your browser [•], enter your control number, name and email address. At the start of the meeting you will need to re-log in using your control number and will also be prompted to enter your control number if you vote during the meeting.
A Clover Leaf stockholder that holds such stockholder’s shares in “street name,” which means such stockholder’s shares are held of record by a broker, bank or other nominee, may need to contact Continental Stock Transfer & Trust Company to receive a control number. If you beneficially own shares held in “street name” and plan to vote at the meeting you will need to have a legal proxy from your bank or broker or if you would like to join and not vote Continental Stock Transfer & Trust Company will issue you a guest control number with proof of ownership. Either way you must contact Continental for specific instructions on how to receive the control number. We can be contacted at the number or email address above. Please allow up to 72 hours prior to the meeting for processing your control number.
If you do not have internet capabilities, you can listen only to the meeting by dialing [•] within the U.S. and Canada (toll-free), or [•] outside the U.S. and Canada (standard rates apply) when prompted enter the pin number [•]. This is listen-only and you will not be able to vote or enter questions during the meeting and will not be deemed to be present at the meeting, if you are listening via telephone.
Purpose of the Special Meeting
At the Special Meeting, Clover Leaf is asking its stockholders to consider and vote upon:
• The NTA Proposal.
• The Business Combination Proposal. A copy of the Merger Agreement is attached to this proxy statement/prospectus as Annex A.
• The Charter Proposal. The form of Proposed Charter to become effective in connection with the consummation of the Business Combination is attached to this proxy statement/prospectus as Annex B.
71
• Advisory Charter Proposals. The form of the Proposed Charter containing the advisory charter amendments to become effective upon consummation of the Business Combination is attached to this proxy statement/prospectus as Annex B.
• The Incentive Plan Proposal. The form of the Incentive Plan to be used by the Combined Company from and after the Closing of the Business Combination is attached to this proxy statement/prospectus as Annex D.
• The Nasdaq Proposal.
• The Adjournment Proposal, if presented at the Special Meeting.
Voting Power and Record Date
You will be entitled to vote at the Special Meeting if you owned shares of Clover Leaf Common Stock at the close of business on [•], 2023, which is the Record Date. You are entitled to one vote for each share of Clover Leaf Common Stock that you held as of the close of business on the Record Date. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker, bank or other nominee to ensure that votes related to the shares you beneficially own are properly counted. On the Record Date, there were [•] shares of Clover Leaf Common Stock outstanding, of which [•] are Public Shares, and 3,457,807 are shares of Clover Leaf Common Stock held by the Sponsor.
Vote of the Sponsor, Directors and Officers
In connection with the IPO, Clover Leaf entered into agreements with the Insiders, including the Sponsor, pursuant to which each agreed to vote any shares of Clover Leaf Common Stock owned by them in favor of the Business Combination Proposal and for all other Proposals presented at the Special Meeting. These agreements apply to Clover Leaf’s Sponsor as it relates to the Clover Leaf Sponsor Shares and the requirement to vote such shares in favor of the Business Combination Proposal and for all other Proposals presented to Clover Leaf stockholders in this proxy statement/prospectus.
Clover Leaf’s Insiders have waived any redemption rights, including with respect to shares of Clover Leaf Class A Common Stock issued or purchased in the IPO or in the aftermarket, in connection with Business Combination. No consideration was provided in exchange for the Insiders’ waiver of their redemption rights. The Clover Leaf Sponsor Shares held by the Insiders have no redemption rights upon Clover Leaf’s liquidation and will be worthless if no business combination is effected by Clover Leaf by January 22, 2024 (as such deadline may be extended by amendment to Clover Leaf’s organizational documents).
Quorum and Required Vote for Proposals
A quorum of Clover Leaf stockholders is necessary to hold a valid meeting. A quorum will be present at the Special Meeting if a majority of the shares of Clover Leaf Common Stock issued and outstanding and entitled to vote at the Special Meeting is represented in person online or by proxy at the Special Meeting, except that the presence, in person online or by proxy, of the holders of both (i) a majority of the outstanding shares of Clover Leaf Class A Common Stock entitled to vote at the Special Meeting, and (ii) a majority of the outstanding shares of Clover Leaf Class B Common Stock entitled to vote at the Special Meeting is also required for a quorum to be present with respect to the Charter Proposal. Abstentions will count as present for the purposes of establishing a quorum. Broker non-votes will not be counted for purposes of establishing a quorum.
The approval of the NTA Proposal requires the affirmative vote of holders of fifty percent (50%) of the issued and outstanding shares of Clover Leaf Common Stock as of the Record Date, voting as a single class, and the approval of the Charter Proposal requires the affirmative vote of holders of (i) at least a majority of the issued and outstanding shares of Clover Leaf Common Stock as of the Record Date, voting as a single class, (ii) at least a majority of the issued and outstanding shares of Clover Leaf Class A Common Stock as of the Record Date, voting as a separate class and (iii) at least a majority of the issued and outstanding shares of Clover Leaf Class B Common Stock as of the Record Date, voting as a separate class.
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The approval of the Business Combination Proposal requires the affirmative vote of holders of a majority of the shares of the Common Stock that are voted at the Clover Leaf Meeting, voting together as a single class. Accordingly, a Clover Leaf stockholder’s failure to vote by proxy or to vote virtually in person at the Special Meeting on any of the Proposals (including by abstaining on each of the Proposals) will have no effect on the outcome of the Business Combination Proposal. However, if a Clover Leaf stockholder votes any shares by proxy or virtually in person at the Special Meeting on any of the other Proposals, the failure to vote such shares on the Business Combination Proposal (including by abstaining on the Business Combination Proposal) will have the same effect as a vote “AGAINST” the Business Combination Proposal.
Assuming a quorum is present, the approval of the each of the Advisory Charter Proposals, the Nasdaq Proposal, the Incentive Plan Proposal, and the Adjournment Proposal each require a majority of the votes cast by the holders of the shares of Clover Leaf Common Stock represented in person online or by proxy and entitled to vote thereon at the Special Meeting, voting together as a single class. A Clover Leaf stockholder’s failure to vote by proxy or to vote in person online at the Special Meeting will not be counted towards the number of shares of Clover Leaf Common Stock required to validly establish a quorum, and if a valid quorum is otherwise established, it will have no effect on the outcome of the vote on the Nasdaq Proposal, the Incentive Plan Proposal, or the Adjournment Proposal. Assuming a quorum is present, an abstention on the Advisory Charter Proposals, the Nasdaq Proposal, or the Incentive Plan Proposal will have no effect on the outcome of the vote on such Proposal. An abstention will be deemed present and count towards the establishment of a quorum.
The Required Proposals and the NTA Proposal are each conditioned on the approval of the Business Combination Proposal and the Business Combination Proposal is conditioned on the approval of the other Required Proposals (which do not include the NTA Proposal, the Advisory Charter Proposals or the Adjournment Proposal). Unless the Business Combination Proposal is approved, the remaining Required Proposals will not be presented to the stockholders of Clover Leaf at the Special Meeting. The NTA Proposal is conditioned upon the approval of the Business Combination Proposal. Therefore, if the Business Combination Proposal is not approved, then the NTA Proposal will have no effect, even if approved by Clover Leaf stockholders. The Adjournment Proposal is not conditioned on any other proposal.
It is important for you to note that in the event the Required Proposals (consisting of the Business Combination Proposal, the Charter Proposal, the Incentive Plan Proposal, and the Nasdaq Proposal) do not receive the requisite vote for approval, then Clover Leaf will not consummate the Business Combination. If Clover Leaf does not consummate the Business Combination and fails to complete an initial business combination by January 22, 2024 and does not seek to obtain the approval of its stockholders for an Extension, Clover Leaf will be required to dissolve and liquidate its Trust Account by returning the then-remaining funds in such account to the public stockholders.
Abstentions and Broker Non-Votes
Abstentions will have no effect on the outcome of the vote on the Business Combination Proposal, the Advisory Charter Proposals, the Incentive Plan Proposal, the Nasdaq Proposal and the Adjournment Proposal. The approval of the NTA Proposal requires the affirmative vote of holders of fifty percent (50%) of the issued and outstanding shares of Clover Leaf Common Stock as of the Record Date, voting as a single class, and the approval of the Charter Proposal requires the affirmative vote of holders of (i) at least a majority of the issued and outstanding shares of Clover Leaf Common Stock as of the Record Date, voting as a single class, (ii) at least a majority of the issued and outstanding shares of Clover Leaf Class A Common Stock as of the Record Date, voting as a separate class and (iii) at least a majority of the issued and outstanding shares of Clover Leaf Class B Common Stock as of the Record Date, voting as a separate class. Accordingly, a Clover Leaf stockholder’s failure to vote by proxy or to vote in person online at the Special Meeting or an abstention will have the same effect as a vote “AGAINST” the NTA Proposal and the Charter Proposal.
The approval of the Business Combination Proposal requires the affirmative vote of holders of a majority of the shares of the Common Stock that are voted at the Clover Leaf Meeting, voting together as a single class. Accordingly, a Clover Leaf stockholder’s failure to vote by proxy or to vote virtually in person at the Special Meeting on any of the Proposals (including by abstaining on each of the Proposals) will have no effect on the outcome of the Business Combination Proposal. However, if a Clover Leaf stockholder votes any shares by proxy or virtually in person at the
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Special Meeting on any of the other Proposals, the failure to vote such shares on the Business Combination Proposal (including by abstaining on the Business Combination Proposal) will have the same effect as a vote “AGAINST” the Business Combination Proposal.
Assuming a quorum is present, the approval of the each of the Advisory Charter Proposals, the Nasdaq Proposal, the Incentive Plan Proposal, and the Adjournment Proposal each require a majority of the votes cast by the holders of the shares of Clover Leaf Common Stock represented in person online or by proxy and entitled to vote thereon at the Special Meeting, voting together as a single class. A Clover Leaf stockholder’s failure to vote by proxy or to vote in person online at the Special Meeting will not be counted towards the number of shares of Clover Leaf Common Stock required to validly establish a quorum, and if a valid quorum is otherwise established, it will have no effect on the outcome of the vote on the Nasdaq Proposal, the Incentive Plan Proposal, or the Adjournment Proposal. Assuming a quorum is present, an abstention on the Advisory Charter Proposals, the Nasdaq Proposal, or the Incentive Plan Proposal will have no effect on the outcome of the vote on such Proposal. An abstention will be deemed present and count towards the establishment of a quorum.
Recommendation of the Clover Leaf Board
The Clover Leaf Board has determined that each of the proposals is fair to and in the best interests of Clover Leaf and its stockholders, and has unanimously approved such proposals. The Clover Leaf Board unanimously recommends that stockholders:
• vote “FOR” the NTA Proposal;
• vote “FOR” the Business Combination Proposal;
• vote “FOR” the Charter Proposal;
• vote “FOR” the Advisory Charter Proposals;
• vote “FOR” the Incentive Plan Proposal;
• vote “FOR” the Nasdaq Proposal; and
• vote “FOR” the Adjournment Proposal, if it is presented to the meeting.
When you consider the recommendation of Clover Leaf Board in favor of approval of the Proposals, you should keep in mind that the Sponsor, members of Clover Leaf Board and officers have interests in the Business Combination that may be different from or in addition to (or which may conflict with) your interests as a stockholder. These interests include, among other things, the fact that:
• [•] will be Clover Leaf’s designee to the Combined Company Board upon the effectiveness of the Merger. As a director, in the future [•] may receive any cash fees, stock options or stock awards that the Combined Company Board determines to pay to its directors;
• unless Clover Leaf consummates an initial business combination, it is possible that Clover Leaf’s officers, directors and the Sponsor may not receive reimbursement for out-of-pocket expenses incurred by them, to the extent that such expenses exceed the amount of available funds not deposited in the Trust Account (as of September 14, 2023, Clover Leaf’s officers and directors have incurred approximately $3,296,246 of out-of-pocket expenses exceeding funds available to Clover Leaf for reimbursement thereof, and Clover Leaf’s officers, directors and the Sponsor may not receive reimbursement therefor if the proposed Business Combination is not consummated).
• as a condition to the IPO, pursuant to the Insider Letter, the Clover Leaf Sponsor Shares became subject to a lock-up whereby, subject to certain limited exceptions, the Insiders’ Clover Leaf Sponsor Shares are not transferable or salable until the earlier of (A) six months after the completion of our initial business combination or (B) subsequent to our initial business combination, if (x) the closing price of the Clover Leaf Class A Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing after our initial business combination, or (y) Clover Leaf completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of Clover Leaf’s
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stockholders having the right to exchange their shares of Clover Leaf Common Stock for cash, securities or other property. In this regard, while the Clover Leaf Sponsor Shares are not the same as the Clover Leaf Class A Common Stock, are subject to certain restrictions that are not applicable to the Clover Leaf Class A Common Stock, and may become worthless if Clover Leaf does not complete a business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders);
• the Sponsor purchased an aggregate of 571,859 Sponsor Private Placement Units, each unit consisting of one share of Clover Leaf Class A Common Stock and one right to receive one-eighth of one share of Clover Leaf Class A Common Stock, which Private Placement Units were purchased at an aggregate purchase price of $5,718,590, or $10.00 per unit, in the Private Placement consummated simultaneously with the IPO, which have no redemption rights and will be worthless if a business combination is not consummated. Based on the closing trading price of the Public Units on September 29, 2023 which was $11.44, the Sponsor Private Placement Units would have an aggregate value of approximately $6,542,067 as of September 29, 2023;
• as a condition to the IPO, pursuant to the Insider Letter, the Insiders have agreed that the Sponsor Private Placement Units, and all of their underlying securities, will not be sold or transferred by it until 30 days after Clover Leaf has completed a business combination;
• the Sponsor can earn a positive rate of return on its investment even if other Clover Leaf stockholders experience a negative rate of return in the Combined Company. The Sponsor paid $25,000 to purchase 3,457,807 shares of Clover Leaf Class B Common Stock. These securities will have a significantly higher value at the time of the Business Combination, if it is consummated. Based on the closing trading price of the Class A Common Stock on [•], 2023, which was $[•], the Clover Leaf Sponsor Shares would have an aggregate value of approximately $[•] as of the same date. If Clover Leaf does not consummate the Business Combination or another initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), and Clover Leaf is therefore required to be liquidated, the Clover Leaf Sponsor Shares would be worthless, as the Sponsor is not entitled to participate in any redemption or liquidation of the Trust Account. Based on the difference in the effective purchase price of $0.007 per share that the members of the Sponsor paid for the Clover Leaf Sponsor Shares, as compared to the purchase price of $10.00 per Unit sold in the IPO, members of the Sponsor may earn a positive rate of return even if the share price of the Combined Company after the Closing falls below the price initially paid for the Units in the IPO and the Clover Leaf Public Stockholders experience a negative rate of return following the Closing of the Business Combination;
• each Insider has agreed not to redeem any of its Clover Leaf Sponsor Shares in connection with a stockholder vote to approve a proposed initial business combination;
• if Clover Leaf does not complete an initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), the proceeds from the sale of the Private Placement Units will be included in the liquidating distribution to Clover Leaf’s public stockholders and the Sponsor Private Placement Units will expire worthless;
• the fact that the Sponsor holds promissory notes issued by Clover Leaf in connection with the 2022 Extension and the 2023 Extension (the “Extension Notes”). In connection with the 2023 Extension, Clover Leaf will cause up to $360,000 to be deposited into the trust account in installments of $60,000 per month, for each calendar month or portion thereof (commencing on July 22, 2023 and on the 22nd of each subsequent month) until January 22, 2024, that Clover Leaf needs to complete an initial business combination. As of September 5, 2023, an aggregate of $120,000 had been deposited into trust to support the Extension, and as of September 5, 2023, an aggregate principal amount of $2,886,246 was outstanding under the Extension Notes.. In the event an initial business combination is consummated, the Extension Notes may be repaid out of the proceeds of the Trust Account released to the post-combination company, and $1,383,123 of the Extension Notes may be converted into Clover Leaf Units. Otherwise, the Extension Notes would be repaid only out of funds held outside the Trust Account. In the event that a business combination does not close, Clover Leaf may use a portion of proceeds held outside the Trust Account to repay the Extension Notes, but no proceeds held in the Trust Account would be used to repay the Extension Notes;
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• The Sponsor, officers and directors (or their affiliates) may make loans from time to time to Clover Leaf in order to provide working capital or finance transaction costs in connection with an initial business combination. Up to $1,500,000 of such working capital loans may be convertible into private placement-equivalent units at a price of $10.00 per unit, at the option of the lender. Such units would be identical to the Private Placement Units. In the event an initial business combination is consummated, the working capital loans may be repaid out of the proceeds of the Trust Account released to the post-combination company. In the event that the initial business combination does not close, Clover Leaf may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds from the Trust Account would be used for such repayment;
• if the Trust Account is liquidated, including in the event Clover Leaf is unable to complete an initial business combination within the required time period, the Sponsor has agreed that it will be liable to Clover Leaf, if and to the extent any claims by a third party for services rendered or products sold to Clover Leaf, or a prospective target business with which Clover Leaf has entered into a written letter of intent, confidentiality or similar agreement or Merger Agreement, reduce the amount of funds in the Trust Account to below the lesser of (i) $10.15 per public share and (ii) the actual amount per public share held in the Trust Account as of the date of the liquidation of the Trust Account, if less than $10.15 per share due to reductions in the value of the trust assets, less Permitted Withdrawals, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to the monies held in the Trust Account (whether or not such waiver is enforceable), nor will it apply to any claims under Clover Leaf’s indemnity of the underwriters of the IPO against certain liabilities, including liabilities under the Securities Act; and
• the fact that the Sponsor and Clover Leaf’s officers and directors may benefit from the completion of a business combination and may be incentivized to complete an acquisition of a less favorable target company or on terms less favorable to stockholders rather than liquidate.
In addition to the interests of the Clover Leaf Insiders in the Business Combination, Clover Leaf stockholders should be aware that the IPO Underwriter, Maxim may have financial interests that are different from, or in addition to, the interests of Clover Leaf stockholders, including:
• the fact that the IPO Underwriter is entitled to deferred underwriting fees in the amount of $0.35 per Unit, or $4,840,930.50, pursuant to the Underwriting Agreement and such fees (a portion of which the IPO Underwriter and Clover Leaf have agreed may be allocated following Closing of the proposed Business Combination with Kustom Entertainment to satisfy of a portion of the fees payable to Maxim pursuant to the Maxim Engagement Letter) are payable only if Clover Leaf completes an initial business combination;
• the fact that the IPO Underwriter purchased 103,734 Representative Units, each unit consisting of one share of Clover Leaf Class A Common Stock and one right to receive one-eighth of one share of Clover Leaf Class A Common Stock, which Representative Units were purchased at an aggregate purchase price of $1,037,340, or $10.00 per unit, in the Private Placement consummated simultaneously with the IPO, which have no redemption rights and will be worthless if a business combination is not consummated. Based on the closing trading price of the Public Units on [•], 2023 which was $[•], the Representative Units would have an aggregate value of approximately $[•] as of [•], 2023; and
• the fact that Clover Leaf issued to the IPO Underwriter and/or its designees 138,312 Representative Shares upon consummation of the IPO and the subsequent partial exercise of the underwriter’s over-allotment option. These Representative Shares were valued at a price of $10.00 which was the sale price of the units sold in the IPO. The IPO Underwriter agreed not to transfer, assign or sell any such shares until the completion of Clover Leaf’s initial business combination. In addition, the IPO Underwriter agreed (i) to waive its redemption rights with respect to such shares in connection with the completion of Clover Leaf’s initial business combination and (ii) to waive its rights to liquidating distributions from the Trust Account with respect to such shares if Clover Leaf fails to complete an initial business combination. Based on the closing trading price of the Clover Leaf Class A Common Stock on [•], 2023 which was $[•], the Representative Shares would have an aggregate value of approximately $[•] as of [•], 2023.
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These interests may have influenced Clover Leaf’s Board in making their recommendation that you vote in favor of the approval of the Business Combination. The members of the Clover Leaf Board were aware of and considered these interests, among other matters, when they approved the Business Combination and recommended that Clover Leaf stockholders approve the proposals required to effect the Business Combination. The Clover Leaf Board determined that the overall benefits expected to be received by Clover Leaf and its stockholders in the Business Combination outweighed any potential risk created by the conflicts stemming from these interests. In addition, the Clover Leaf Board determined that potentially disparate interests would be mitigated because (i) most of these disparate interests would exist with respect to a business combination by Clover Leaf with any other target business or businesses, (ii) these interests could be adequately disclosed to stockholders in this proxy statement/prospectus, and that stockholders could take them into consideration when deciding whether to vote in favor of the proposals set forth herein and (iii) the Sponsor will hold equity interests in the Combined Company with value that, after the Closing, will be based on the future performance of Combined Company’s stock.
Voting Your Shares
Each share of Clover Leaf Common Stock that you own in your name entitles you to one vote. If you are a record owner of your shares, there are three ways to vote your shares of Clover Leaf Common Stock at the Special Meeting:
1. Vote by internet.
• Before the meeting: Go online to www.cstproxyvote.com. Use the internet to transmit your proxy with your voting instructions and for electronic delivery information up until 11:59 p.m. Eastern Time the day before the meeting date. Have your proxy card in hand when you access the website and follow the instructions to obtain your records and to create an electronic voting instruction form. If you hold your shares in “street name,” which means your shares are held of record by a broker, bank or other nominee, you should follow the instructions provided by your broker, bank or nominee to ensure that votes related to the shares you beneficially own are properly counted. In this regard, you must provide the record holder of your shares with instructions on how to vote your shares or obtain a proxy from the record holder of your shares allowing you to submit a proxy via the internet with respect thereto.
• During the meeting: Go online to [•]. You will be able to attend the Special Meeting online and vote your shares electronically until voting is closed. If you hold your shares in “street name,” which means your shares are held of record by a broker, bank or other nominee, you should follow the instructions provided by your broker, bank or nominee to ensure that votes related to the shares you beneficially own are properly counted. In this regard, you must provide the record holder of your shares with instructions on how to vote your shares. However, if your shares are held in the name of your broker, bank or other nominee, you must get a proxy from the broker, bank or other nominee. That is the only way we can be sure that the broker, bank or nominee has not already voted your shares of Clover Leaf Common Stock.
2. Vote by mail. Mark, date, sign and mail promptly the enclosed proxy card (a postage-paid envelope is provided for mailing in the United States). By signing the proxy card and returning it in the enclosed prepaid and addressed envelope, you are authorizing the individuals named on the proxy card to vote your shares at the Special Meeting in the manner you indicate. You are encouraged to sign and return the proxy card even if you plan to attend the Special Meeting so that your shares will be voted if you are unable to attend the Special Meeting. If you receive more than one proxy card, it is an indication that your shares are held in multiple accounts. Please sign and return all proxy cards to ensure that all of your shares are voted. If you hold your shares in “street name” through a bank, broker or other nominee, you will need to follow the instructions provided to you by your bank, broker or other nominee to ensure that your shares are represented and voted at the Special Meeting. If you sign and return the proxy card but do not give instructions on how to vote your shares, your shares of Clover Leaf Common Stock will be voted as recommended by our Board. Our Board recommends voting “FOR” the Proposals. Proxies submitted by mail should be received by [•], 2023 in order to ensure that they are counted at the Special Meeting.
3. Vote by telephone. You may submit a proxy to vote your shares by calling and following the instructions on the proxy card. If you hold your shares in “street name,” which means your shares are held of record by a broker, bank or other nominee, you should follow the instructions provided by your broker, bank or
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nominee to ensure that votes related to the shares you beneficially own are properly counted. In this regard, you must provide the record holder of your shares with instructions on how to vote your shares or obtain a proxy from the record holder of your shares allowing you to submit a proxy via telephone with respect thereto. However, if your shares are held in the name of your broker, bank or other nominee, you must get a proxy from the broker, bank or other nominee. That is the only way we can be sure that the broker, bank or nominee has not already voted your shares of Clover Leaf Common Stock.
Revoking Your Proxy; Changing Your Vote
If you are a record owner of your shares and you give a proxy, you may change your vote or revoke your proxy at any time before it is exercised at the Special Meeting by doing any one of the following:
• submitting a valid, later-dated proxy card or proxy via the internet or by telephone before 11:59 p.m., Eastern Time, on the calendar day immediately preceding the Special Meeting, or by mail that is received prior to the Special Meeting;
• sending a written revocation of a proxy to Clover Leaf’s secretary at 1450 Brickell Avenue, Suite 1420 Miami, FL 33131, that bears a date later than the date of the proxy you want to revoke and is received prior to the date of the Special Meeting; or
• attending the Special Meeting (or, if the special meeting is adjourned or postponed, attending the applicable adjourned or postponed meeting) and voting in person online, which automatically will cancel any proxy previously given, or revoking your proxy in person online, but your attendance alone will not revoke any proxy previously given.
If your shares are held in “street name” or are in a margin or similar account, you should contact your broker for information on how to change or revoke your voting instructions.
Who Can Answer Your Questions About Voting Your Shares
If you are a stockholder and have any questions about how to vote or direct a vote in respect of your Clover Leaf Common Stock, you may contact [•], Clover Leaf’s proxy solicitor, at:
[•]
No Additional Matters May Be Presented at the Special Meeting.
The Special Meeting has been called only to consider the approval of the NTA Proposal, the Business Combination Proposal, the Charter Proposal, the Advisory Charter Proposals, the Incentive Plan Proposal, the Nasdaq Proposal and, if presented at the Special Meeting, the Adjournment Proposal. Under Clover Leaf’s bylaws, other than procedural matters incident to the conduct of the Special Meeting, no other matters may be considered at the Special Meeting if they are not included in this proxy statement/prospectus, which serves as the notice of the Special Meeting.
Redemption Rights
Pursuant to the Current Charter, any holders of Public Shares may demand that such shares be redeemed in exchange for a pro rata share of the aggregate amount on deposit in the Trust Account, less Permitted Withdrawals, calculated as of two (2) business days prior to the consummation of the Business Combination. If demand is properly made in accordance with the procedures reflected in this proxy statement/prospectus and the Business Combination is consummated, these shares, immediately prior to the Business Combination, will cease to be outstanding and will represent only the right to receive a pro rata share of the aggregate amount on deposit in the Trust Account (calculated as of two (2) business days prior to the consummation of the Business Combination, including interest earned on the funds held in the Trust Account and not previously released to Clover Leaf as Permitted Withdrawals). For illustrative purposes, based on funds in the Trust Account of approximately $[•] million on June 7, 2023, the estimated per share redemption price would have been approximately $[•]. A public stockholder, together with any of such stockholder’s affiliates or any other person with whom it is acting in concert or as a “group” (as defined under Section 13 of Exchange Act) will be restricted from redeeming in the aggregate such stockholder’s shares or, if part of such a group, the group’s shares, with respect to 15% or more of the shares of Clover Leaf Common Stock included in the units of Clover Leaf sold in the IPO (including overallotment securities sold to Clover Leaf’s underwriters after the IPO).
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In order to exercise your redemption rights, you must:
• prior to 5:00 p.m. Eastern time on [•], 2023 (two (2) business days before the Special Meeting), tender your shares physically or electronically using The Depository Trust Company’s DWAC system and submit a request in writing that we redeem your public shares for cash to Continental Stock Transfer & Trust Company, Clover Leaf’s transfer agent, at the following address:
Continental Stock Transfer & Trust Company
One State Street Plaza, 30th Floor
New York, New York 10004
Attention: SPAC Redemption Team
E-mail: spacredemptions@continentalstock.com
• In your request to Continental Stock Transfer & Trust Company for redemption, you must also affirmatively certify if you “ARE” or “ARE NOT” acting in concert or as a “group” (as defined in Section 13d-3 of the Exchange Act) with any other stockholder with respect to shares of Clover Leaf Common Stock; and
• deliver your Public Shares either physically or electronically through DTC to Clover Leaf’s transfer agent at least two (2) business days before the Special Meeting. Stockholders seeking to exercise their redemption rights and opting to deliver physical certificates should allot sufficient time to obtain physical certificates from the transfer agent and time to effect delivery. It is Clover Leaf’s understanding that stockholders should generally allot at least two weeks to obtain physical certificates from the transfer agent. However, Clover Leaf does not have any control over this process and it may take longer than two weeks. Stockholders who hold their shares in “street name” will have to coordinate with their bank, broker or other nominee to have the shares certificated or delivered electronically. If you do not submit a written request and deliver your public shares as described above, your shares will not be redeemed.
Any demand for redemption, once made, may be withdrawn at any time until the deadline for exercising redemption requests (and submitting shares to the transfer agent) and thereafter, with Clover Leaf’s consent, until the consummation of the Business Combination, or such other date as determined by the Clover Leaf Board. If you delivered your shares for redemption to Clover Leaf’s transfer agent and decide within the required timeframe not to exercise your redemption rights, you may request that Clover Leaf’s transfer agent return the shares (physically or electronically). You may make such request by contacting Clover Leaf’s transfer agent at the phone number or address listed above.
Prior to exercising redemption rights, stockholders should verify the market price of Clover Leaf Common Stock as they may receive higher proceeds from the sale of their shares of Clover Leaf Common Stock in the public market than from exercising their redemption rights if the market price per share is higher than the redemption price. We cannot assure you that you will be able to sell your shares of Clover Leaf Common Stock in the open market, even if the market price per share is higher than the redemption price stated above, as there may not be sufficient liquidity in Clover Leaf Common Stock when you wish to sell your shares.
If you exercise your redemption rights, your shares of Clover Leaf Common Stock will cease to be outstanding immediately prior to the Business Combination and will only represent the right to receive a pro rata share of the aggregate amount on deposit in the Trust Account, calculated as of two business days prior to the consummation of the Business Combination. You will no longer own those shares and will have no right to participate in, or have any interest in, the future growth of the Combined Company, if any. You will be entitled to receive cash for these shares only if you properly and timely demand redemption.
If the Business Combination is not consummated and Clover Leaf otherwise does not consummate an initial business combination by January 22, 2024 (as such deadline may be extended by amendment to Clover Leaf’s organizational documents), Clover Leaf will be required to dissolve and liquidate its Trust Account by returning the then-remaining funds in such account to the public stockholders and the Rights will expire worthless.
Appraisal Rights
Clover Leaf stockholders do not have appraisal rights in connection with the Business Combination or the other proposals.
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Proxy Solicitation
Clover Leaf is soliciting proxies on behalf of its board of directors. This solicitation is being made by mail but also may be made by telephone or in person. Clover Leaf and its directors, officers and employees may also solicit proxies in person. Clover Leaf will file with the SEC all scripts and other electronic communications as proxy soliciting materials. Clover Leaf will bear the cost of the solicitation.
Clover Leaf has hired [•] to assist in the proxy solicitation process. Clover Leaf will pay that firm a fee of $[•], plus disbursements of its expenses in connection with the services relating to the Special Meeting.
Clover Leaf will ask banks, brokers and other institutions, nominees and fiduciaries (“other nominees”) to forward the proxy materials to their principals and to obtain their authority to execute proxies and voting instructions. Clover Leaf will reimburse them for their reasonable expenses in connection with such efforts.
Potential Purchases of Public Shares
At any time prior to the Special Meeting, Clover Leaf’s Sponsor, directors or officers or Kustom Entertainment and/or their respective affiliates, during a period when they are not then aware of any material non-public information regarding Clover Leaf or Clover Leaf’s Securities, may purchase Units, shares of Clover Leaf Class A Common Stock, from investors, or they may enter into transactions with such investors and others to provide them with incentives to acquire Public Shares or vote their shares in favor of the Business Combination Proposal. The purpose of such share purchases and other transactions would be to increase the likelihood that the Proposals are approved at the Special Meeting or to provide additional equity financing. Any such share purchases and other transactions may thereby increase the likelihood of obtaining stockholder approval of the Business Combination. This may result in the completion of the Business Combination that may not otherwise have been possible. As of the date of this proxy statement/prospectus, none of Clover Leaf’s Sponsor, directors or officers has any plans to make any such purchases. Clover Leaf will file a Current Report on Form 8-K to disclose any arrangements entered into or significant purchases made by any of the aforementioned persons that would affect the vote on the Proposals. Any such report will include descriptions of any arrangements entered into or significant purchases by any of the aforementioned persons.
Entering into any such incentive arrangements may have a depressive effect on outstanding Clover Leaf Common Stock. For example, as a result of these arrangements, an investor or holder may have the ability to effectively purchase shares at a price lower than market and may therefore be more likely to sell the shares he owns, either prior to or immediately after the Special Meeting.
The existence of financial and personal interests of Clover Leaf’s directors and officers may result in conflicts of interest, including a conflict between what may be in the best interests of Clover Leaf and its stockholders and what may be best for a director’s personal interests when determining to recommend that stockholders vote for the Proposals. See the sections entitled “Risk Factors,” “The Business Combination Proposal (Proposal 2) — Interests of Clover Leaf’s Sponsor, Directors, Officers and Advisors in the Business Combination” and “Beneficial Ownership of Securities” for more information and other risks.
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THE NTA PROPOSAL (PROPOSAL 1)
General
As discussed elsewhere in this proxy statement/prospectus, Clover Leaf is asking its stockholders to approve the NTA Proposal. The NTA Proposal is conditioned upon the approval of the Business Combination Proposal. Therefore, if the Business Combination Proposal is not approved, then the NTA Proposal will have no effect, even if approved by Clover Leaf stockholders. If the NTA Proposal and the Business Combination Proposal are approved at the Special Meeting, the following amendments will be made to the Current Charter, which shall be effective, if adopted and implemented by Clover Leaf, prior to the consummation of the proposed Business Combination:
(a) Section 9.2(a) of the Current Charter shall be amended in its entirety to read as follows: “Prior to the consummation of the initial Business Combination, the Corporation shall provide all holders of Offering Shares with the opportunity to have their Offering Shares redeemed (irrespective of whether they voted in favor or against the Business Combination) pursuant to, and subject to the limitations of, Sections 9.2(b) and 9.2(c) (such rights of such holders to have their Offering Shares redeemed pursuant to such Sections, the “Redemption Rights”) for cash equal to the applicable redemption price per share determined in accordance with Section 9.2(b) hereof (the “Redemption Price”). Notwithstanding anything to the contrary contained in this Amended and Restated Certificate, there shall be no Redemption Rights or liquidating distributions with respect to any warrant issued pursuant to the Offering.”
(b) Section 9.2(e) of the Current Charter shall be amended in its entirety to read as follows: “If the Corporation offers to redeem the Offering Shares in conjunction with a stockholder vote on an initial Business Combination, the Corporation shall consummate the proposed initial Business Combination only if (i) such initial Business Combination is approved by the affirmative vote of the holders of a majority of the shares of the Common Stock that are voted at a stockholder meeting held to consider such initial Business Combination (or such other vote as the applicable law or stock exchange rules then in effect may require).”
(c) Section 9.7 of the Current Charter shall be amended to remove the following language: “provided, however, that any such amendment will be voided, and this Article IX will remain unchanged, if any stockholders who wish to redeem are unable to redeem due to the Redemption Limitation.”
Reasons for the Amendments
Clover Leaf stockholders are being asked to adopt the proposed amendments to the Current Charter prior to the Closing, which, in the judgment of the Clover Leaf Board, may facilitate the consummation of the Business Combination. The Current Charter limits Clover Leaf’s ability to consummate an initial business combination, or to redeem shares of Clover Leaf Class A Common Stock in connection with an initial business combination, if it would cause Clover Leaf to have less than $5,000,001 in net tangible assets. The purpose of such limitation was initially to ensure that the Clover Leaf Class A Common Stock is not deemed to be a “penny stock” pursuant to Rule 3a51-1 under the Exchange Act. Because the Clover Leaf Class A Common Stock and the Combined Company’s Common Stock would not be deemed to be a “penny stock” as such securities are listed on a national securities exchange, Clover Leaf is presenting the NTA Proposal to facilitate the consummation of the Business Combination. If the NTA Proposal is not approved and there are significant requests for redemption such that Clover Leaf’s net tangible assets would be less than $5,000,001 upon the consummation of the Business Combination, the Current Charter would prevent Clover Leaf from being able to consummate the Business Combination even if all other conditions to Closing are met. If the Business Combination is consummated, then the Current Charter, as amended by the NTA Amendments, will be further amended and restated in its entirety as set forth in the Proposed Charter in connection with the Closing of the Business Combination and all of the references in this proxy statement/prospectus to the “Current Charter” shall be deemed to mean the Current Charter as amended by amendments the contained in this NTA Proposal.
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Resolution
The full text of the resolution to be voted upon is as follows:
RESOLVED, that the following amendments to the Current Charter shall be adopted:
(a) Section 9.2(a) of the Current Charter shall be amended to read in its entirety as follows: “Prior to the consummation of the initial Business Combination, the Corporation shall provide all holders of Offering Shares with the opportunity to have their Offering Shares redeemed (irrespective of whether they voted in favor or against the Business Combination) pursuant to, and subject to the limitations of, Sections 9.2(b) and 9.2(c) (such rights of such holders to have their Offering Shares redeemed pursuant to such Sections, the “Redemption Rights”) for cash equal to the applicable redemption price per share determined in accordance with Section 9.2(b) hereof (the “Redemption Price”). Notwithstanding anything to the contrary contained in this Amended and Restated Certificate, there shall be no Redemption Rights or liquidating distributions with respect to any warrant issued pursuant to the Offering.”
(b) Section 9.2(e) of the Current Charter shall be amended to read in its entirety as follows: “If the Corporation offers to redeem the Offering Shares in conjunction with a stockholder vote on an initial Business Combination, the Corporation shall consummate the proposed initial Business Combination only if such initial Business Combination is approved by the affirmative vote of the holders of a majority of the shares of the Common Stock that are voted at a stockholder meeting held to consider such initial Business Combination (or such other vote as the applicable law or stock exchange rules then in effect may require).”
(c) Section 9.7 of the Current Charter shall be amended to remove the following language: “provided, however, that any such amendment will be voided, and this Article IX will remain unchanged, if any stockholders who wish to redeem are unable to redeem due to the Redemption Limitation.”
Vote Required for Approval
The approval of the NTA Proposal requires the affirmative vote of the holders fifty percent (50%) of the issued and outstanding shares of Clover Leaf Common Stock as of the Record Date, voting together as a single class.
Recommendation of the Clover Leaf Board
CLOVER LEAF’S BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
“FOR” THE NTA PROPOSAL.
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THE BUSINESS COMBINATION PROPOSAL (PROPOSAL 2)
General
Holders of Clover Leaf Common Stock are being asked to approve and adopt the Merger Agreement and the Business Combination. Clover Leaf stockholders should read carefully this proxy statement/prospectus in its entirety for more detailed information concerning the Merger Agreement, which is attached as Annex A to this proxy statement/prospectus. Please see the section titled “— The Merger Agreement” below, for additional information and a summary of certain terms of the Merger Agreement. You are urged to read carefully the Merger Agreement in its entirety before voting on this proposal.
Because Clover Leaf is holding a stockholder vote on the Business Combination, Clover Leaf may consummate the Business Combination only if it is approved by the affirmative vote of the holders of a majority of the shares of Clover Leaf Common Stock that are voted at the Special Meeting, voting together as a single class.
The Merger Agreement
This section describes the material provisions of the Merger Agreement but does not purport to describe all of the terms thereof. The following summary is qualified in its entirety by reference to the complete text of the Merger Agreement and the related agreements; a copy of the Merger Agreement is attached as Annex A hereto, which is incorporated herein by reference. Clover Leaf stockholders and other interested parties are urged to read such agreement in its entirety because it is the primary legal document that governs the Business Combination. Unless otherwise defined herein, the capitalized terms used in this section “Proposal 2: The Business Combination Proposal — The Merger Agreement” are defined in the Merger Agreement.
The Merger Agreement contains representations, warranties and covenants that the respective parties made to each other as of the date of the Merger Agreement or other specific dates, including, in some cases, as of the Closing of the Business Combination. The assertions embodied in those representations, warranties and covenants were made for purposes of the contract among the respective parties and are subject to important qualifications and limitations agreed to by the parties in connection with negotiating the Merger Agreement. The representations, warranties and covenants in the Merger Agreement are also modified in important part by the disclosure schedules attached thereto which are not filed publicly and which are subject to a contractual standard of materiality different from that generally applicable to stockholders. The disclosure schedules were used for the purpose of allocating risk among the parties rather than establishing matters as facts. Clover Leaf does not believe that the disclosure schedules contain information that is material to an investment decision.
On June 1, 2023, Clover Leaf Capital Corp., a Delaware corporation (together with its successors, “Clover Leaf”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CL Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of Clover Leaf (“Merger Sub”), Yntegra Capital Investments LLC, a Delaware limited liability company, in the capacity as the representative from and after the Effective Time (as defined in the Merger Agreement) for the stockholders of Clover Leaf (other than Digital Ally (as defined below) as of immediately prior to the Effective Time and its successors and assignees) in accordance with the terms and conditions of the Merger Agreement (the “Sponsor” or the “Purchaser Representative”), Kustom Entertainment, Inc., a Nevada corporation with a focus and mission to own and produce events, festivals, and entertainment alongside its evolving primary and secondary ticketing technologies (the “Kustom Entertainment”), and Digital Ally, Inc., a Nevada corporation and the sole stockholder of the Company (the “Digital Ally”).
Pursuant to the Merger Agreement, subject to the terms and conditions set forth therein upon the consummation of the transactions contemplated by the Merger Agreement (the “Closing”), Merger Sub will merge with and into Kustom Entertainment (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Transactions”), with Kustom Entertainment continuing as the surviving corporation in the Merger and a wholly-owned subsidiary of Clover Leaf. In the Merger, all of the issued and outstanding capital stock of Kustom Entertainment immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, in exchange for the right for Digital Ally to receive the Merger Consideration (as defined herein). Upon consummation of the Transactions, Clover Leaf will change its name to “Kustom Entertainment, Inc.”
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Merger Consideration
Pursuant to the terms of the Merger Agreement, the consideration to be delivered to the holders of Kustom Entertainment common stock in connection with the Merger (the “Merger Consideration”) will be an amount equal to (i) $125 million, minus (ii) the aggregate amount of all indebtedness of Kustom Entertainment determined in accordance with GAAP or other applicable accounting principles as of the Closing (“Closing Indebtedness”) with Digital Ally receiving a number of shares of Clover Leaf Class A Common Stock equal to (i) the Merger Consideration, divided by (ii) $11.14. The Merger Consideration to be paid to Digital Ally will be paid solely by the delivery of new shares of Clover Leaf Class A Common Stock, each valued at $11.14 per share. The Closing Indebtedness (and the resulting Merger Consideration) is based solely on estimates determined shortly prior to the Closing and is not subject to any post-Closing true-up or adjustment.
Representations and Warranties
The Merger Agreement contains a number of representations and warranties by each of Clover Leaf, Merger Sub, Kustom Entertainment and Digital Ally as of the date of the Merger Agreement and as of the date of the Closing. Many of the representations and warranties are qualified by materiality or Material Adverse Effect. “Material Adverse Effect” as used in the Merger Agreement means with respect to any specified person or entity, any fact, event, occurrence, change or effect that has had or would reasonably be expected to have, individually or in the aggregate, a material adverse effect on the business, assets, liabilities, results of operations, prospects or condition (financial or otherwise) of such person or entity and its subsidiaries, taken as a whole, or the ability of such person or entity or any of its subsidiaries on a timely basis to consummate the transactions contemplated by the Merger Agreement or the ancillary documents to which it is a party or bound or to perform its obligations thereunder, in each case subject to certain customary exceptions. Certain of the representations are subject to specified exceptions and qualifications contained in the Merger Agreement or in information provided pursuant to certain disclosure schedules to the Merger Agreement. The representations and warranties made by Clover Leaf, Merger Sub, Kustom Entertainment and Digital Ally are customary for transactions similar to the Transactions.
No Survival
No party’s representations, warranties or pre-Closing covenants will survive Closing and no party has any post-Closing indemnification obligations. The covenants and agreements of the parties shall not survive the Closing, except those covenants and agreements to be performed after the Closing which covenants and agreements shall survive until fully performed.
Covenants of the Parties
Each party agreed in the Merger Agreement to use its commercially reasonable efforts to effect the Closing. The Merger Agreement also contains certain customary covenants by each of the parties during the period between the signing of the Merger Agreement and the earlier of the Closing or the termination of the Merger Agreement in accordance with its terms (the “Interim Period”), including (1) the provision of access to their properties, books, other information and personnel; (2) the operation of their respective businesses in the ordinary course of business; (3) delivery of unaudited consolidated income statements and an unaudited consolidated balance sheet of Kustom Entertainment on a monthly basis; (4) Clover Leaf’s public filings are current and timely filed; (5) no insider trading when the parties are in possession of material nonpublic information; (6) notifications of certain breaches, consent requirements or other matters; (7) commercially reasonable efforts to consummate the Closing and obtain third party and regulatory approvals; (8) tax matters and transfer taxes; (9) further assurances that the parties shall further cooperate with each other to consummate the Transactions; (10) public announcements concerning the Merger Agreement and the Transactions; and (11) confidentiality. Each party also agreed during the Interim Period not to solicit or enter into any inquiry, proposal or offer, or any indication of interest in making an offer or proposal for an alternative competing transactions, to notify the others as promptly as practicable in writing of the receipt of any inquiries, proposals or offers, requests for information or requests relating to an alternative competing transaction or any requests for non-public information relating to such transaction, and to keep the others informed of the status of any such inquiries, proposals, offers or requests for information. If Kustom Entertainment’s board of directors determines, after consultation with its financial advisors and outside legal counsel, that an unsolicited Acquisition Proposal (as defined in the Merger Agreement) constitutes a Company Superior Proposal (as defined in the Merger Agreement) it may, subject to giving Clover Leaf an opportunity to propose revisions to the Merger Agreement which would cause such Company Superior
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Proposal to no longer constitute a Company Superior Proposal, cause the Kustom Entertainment to terminate the Merger Agreement in order to enter into a definitive agreement relating to such Company Superior Proposal and to pay Clover Leaf the Termination Fee (as defined below). There are also certain customary post-Closing covenants regarding (1) maintenance of books and records; (2) indemnification of directors and officers; and (3) use of trust account proceeds. Clover Leaf also agreed to seek and use its reasonable best efforts to obtain an extension of its deadline to consummate its initial business combination for an additional six months (the “Required Extension”).
The Merger Agreement and the consummation of the transactions contemplated thereby requires the approval of both Clover Leaf’s shareholders and Digital Ally. Digital Ally has approved the transactions. Clover Leaf agreed, as promptly as practicable after the date of the Merger Agreement, to prepare, with reasonable assistance from Kustom Entertainment, and file with the U.S. Securities and Exchange Commission (the “SEC”), a proxy statement (as amended, the “Proxy Statement”) in connection with the registration under the Securities Act of 1933, as amended (the “Securities Act”) containing a proxy statement for the purpose of Clover Leaf soliciting proxies from the shareholders of Clover Leaf to approve the Merger Agreement, the transactions contemplated thereby and related matters (the “Clover Leaf Stockholder Approval”) at a special meeting of Clover Leaf’s shareholders (the “Clover Leaf Stockholder Meeting”) and providing such shareholders an opportunity to, in accordance with Clover Leaf’s organizational documents and Clover Leaf’s initial public offering prospectus, have their shares of Clover Leaf common stock redeemed (the “Redemption”), and, if necessary, for the issuance of the Merger Consideration to be issued to Digital Ally. If requested by the Company, the proxy statement shall form a part of a joint registration statement of Clover Leaf relating to the registration under the Securities Act of the Merger Consideration shares.
The parties also agreed to take all necessary action, so that effective at the Closing, the entire board of directors of Clover Leaf (the “Post-Closing Board”) will consist of five individuals, a majority of whom shall be independent directors in accordance with Nasdaq requirements. Four of the members of the Post-Closing Board (at least one of whom shall be independent directors) will be designated by the Company prior to the Closing and one will be mutually agreed upon by the Company and Clover Leaf and will be independent. At or prior to the Closing, Clover Leaf will provide each of the director designees to the Post-Closing Board with a customary director indemnification agreement, in form and substance reasonably acceptable to such director. The parties also agreed to take all action necessary, so that the individuals serving as chief executive officer and chief financial officer, respectively, of Clover Leaf immediately after Closing will be the same individuals as that of the Company immediately prior to the Closing.
During the Interim Period, Clover Leaf may elect to seek to enter into and consummate subscription agreements with investors relating to a private equity investment in connection with the Transactions (including backstop arrangements) (the “PIPE Investment”) on terms agreeable to Clover Leaf and Kustom Entertainment, acting reasonably. The Company agreed to cooperate in connection with such PIPE Investment and use its commercially reasonable efforts to cause such PIPE Investment to occur, including having the Company’s senior management participate in any investor meetings and roadshows as reasonably requested by Clover Leaf. Clover Leaf will use commercially reasonable efforts to seek equity financing, whether through a private placement, forward purchase agreement, backstop arrangement or otherwise, that will provide PIPE Investments for a total of at least $10,000,000.
Conditions to Closing
The obligations of the parties to complete the Closing are subject to various conditions, including the following mutual conditions of the parties unless waived:
• receipt of the Clover Leaf Stockholder Approval;
• receipt of Digital Ally’s written consent approving the Transactions;
• expiration of any applicable waiting period under any antitrust laws;
• receipt of requisite consents from governmental authorities to consummate the Transactions, and receipt of specified requisite consents from other third parties to consummate the Transactions;
• the absence of any law or order that would prohibit the consummation of the Merger or other transactions contemplated by the Merger Agreement;
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• immediately prior to or upon the Closing, after giving effect to the completion of the Redemption, Clover Leaf having net tangible assets of at least $5,000,001 unless Clover Leaf otherwise is exempt from the provisions of Rule 419 promulgated under the Securities Act;
• the members of the Post-Closing Board shall have been elected or appointed as of the Closing; and
• the effectiveness of the Proxy Statement, and, if applicable, the registration statement shall have been declared effective by the SEC.
Unless waived by Clover Leaf, the obligations of Clover Leaf and Merger Sub to consummate the Merger are subject to the satisfaction of the following additional conditions, in addition to customary certificates and other closing deliverables:
• the representations and warranties of Kustom Entertainment being true and correct as of the date of the Merger Agreement and as of the Closing (subject to Material Adverse Effect);
• Kustom Entertainment having performed in all material respects its obligations and complied in all material respects with its covenants and agreements under the Merger Agreement required to be performed or complied with on or prior to the date of the Closing;
• absence of any Material Adverse Effect with respect to Kustom Entertainment, taken as a whole, since the date of the Merger Agreement which is continuing and uncured;
• the Lock-Up Agreement (as described below) and a Non-Competition Agreement entered into by Digital Ally in favor of Clover Leaf and Kustom Entertainment, as well as certain new employment agreements with Kustom Entertainment executives, shall be in full force and effect in accordance with their terms as of the Closing; and
• Kustom Entertainment shall own all of the issued and outstanding capital stock of TicketSmarter, Inc.
Unless waived by Kustom Entertainment, the obligations of Kustom Entertainment to consummate the Merger are subject to the satisfaction of the following additional conditions:
• the representations and warranties of Clover Leaf and Merger Sub being true and correct as of the date of the Merger Agreement and as of the Closing (subject to Material Adverse Effect);
• Clover Leaf and Merger Sub each having performed in all material respects its obligations and complied in all material respects with its covenants and agreements under the Merger Agreement required to be performed or complied with on or prior to the date of the Closing;
• absence of any Material Adverse Effect with respect to Clover Leaf or Merger Sub, taken as a whole, since the date of the Merger Agreement which is continuing and uncured;
• Clover Leaf shall be in compliance in all material respects with the reporting requirements applicable to it under the Exchange Act immediately prior to the Closing; and
• the Clover Leaf common stock shall not have been suspended from trading as a result of a delisting from Nasdaq and shall have been approved for listing on Nasdaq, subject only to official notice of issuance thereof.
Termination
The Merger Agreement may be terminated under certain customary and limited circumstances at any time prior to the Closing, including:
• by mutual written consent of Clover Leaf and Kustom Entertainment;
• by either Clover Leaf or Kustom Entertainment if any of the conditions to Closing have not been satisfied or waived by July 22, 2023 (the “Outside Date”), provided that the Outside Date will be automatically extended for an additional period equal to the shortest of (i) six (6) months, (ii) the period ending on the last date for Clover Leaf to consummate its business combination pursuant to an extension and (iii) such period as mutually determined by Clover Leaf and the Company;
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• by either Clover Leaf or Kustom Entertainment if a governmental authority of competent jurisdiction shall have issued an order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Merger Agreement, and such order or other action has become final and non-appealable;
• by either Clover Leaf or Kustom Entertainment of the other party’s uncured breach (subject to certain materiality qualifiers);
• by Clover Leaf if there has been an event after the signing of the Merger Agreement that has had a Material Adverse Effect on Kustom Entertainment and its subsidiaries taken as a whole that is continuing and uncured;
• by Kustom Entertainment if there has been an event after the signing of the Merger Agreement that has had a Material Adverse Effect on Clover Leaf and its subsidiaries taken as a whole that is continuing and uncured;
• by Clover Leaf if (i) Kustom Entertainment does not deliver audited financial statements to Clover Leaf by June 30, 2023 or (ii) Kustom Entertainment’s revenue in the fiscal year ending December 31, 2022 calculated in accordance with Kustom Entertainment’s audited financial statements is more than five percent (5%) lower than the revenue in such fiscal year calculated in accordance with the Kustom Entertainment’s unaudited financial statements;
• by either Clover Leaf or Kustom Entertainment if the Clover Leaf Stockholder Meeting is held and the Clover Leaf Stockholder Approval is not received; and
• by the Company if the written consent of Digital Ally is revoked in the event Kustom Entertainment accepts a Company Superior Proposal as described above.
If the Merger Agreement is terminated, all further obligations of the parties under the Merger Agreement will terminate and will be of no further force and effect (except that certain obligations related to public announcements, confidentiality, fees and expenses, termination, waiver of claims against the trust, and certain general provisions will continue in effect), and no party will have any further liability to any other party thereto except for (i) liability for any willful breach of the Merger Agreement prior to such termination and (ii) in the event that Kustom Entertainment terminates the Merger Agreement pursuant to Company Superior Proposal, Kustom Entertainment shall pay to Clover Leaf an amount equal to $1,750,000 plus all expenses incurred by Clover Leaf in connection with the Merger Agreement (the “Termination Fee”).
Trust Account Waiver
Kustom Entertainment and Digital Ally agreed on behalf of itself and its affiliates that neither it nor its affiliates will have any right, title, interest of any kind in or to any monies in Clover Leaf’s trust account held for its public stockholders (the “Trust Account”), and agreed not to, and waived any right to, make any claim against the Trust Account (including any distributions therefrom) other than in connection with the Closing.
Governing Law
The Merger Agreement is governed by New York law and, subject to the required arbitration provisions, the parties are subject to exclusive jurisdiction of federal and state courts located in New York County, State of New York (and any appellate courts thereof).
Certain Related Agreements
This section describes the material provisions of certain additional agreements entered into or to be entered into pursuant to the Merger Agreement (the “Related Agreements”) but does not purport to describe all of the terms thereof or include all of the additional agreements entered into or to be entered into pursuant to the Merger Agreement. The following summary is qualified in its entirety by reference to the complete text of each of the Related Agreements. Clover Leaf stockholders and other interested parties are urged to read such Related Agreements in their entirety.
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Lock-Up Agreement
Simultaneously with the execution and delivery of the Merger Agreement, Digital Ally entered into a Lock-Up Agreement with Clover Leaf and the Purchaser Representative (the “Lock-Up Agreement”). Pursuant to the Lock-Up Agreement, Digital Ally agreed not to, during the period commencing from the Closing and ending on the six (6) month anniversary of the Closing (subject to early release if the closing price of Clover Leaf’s common stock equals or exceeds $12.00 per share for any 20 out of 30 trading days commencing after the Closing and also subject to early release if Clover Leaf consummates a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of Clover Leaf Stockholders having the right to exchange their equity holdings in Clover Leaf for cash, securities or other property): (x) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any restricted securities, (y) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the restricted securities, or (z) publicly disclose the intention to do any of the foregoing, whether any such transaction described in clauses (x), (y) or (z) above is to be settled by delivery of restricted securities or other securities, in cash or otherwise (in each case, subject to certain limited permitted transfers where the recipient takes the shares subject to the restrictions in the Lock-Up Agreement). Eighty-five percent (85%) of the shares of Clover Leaf Class A Common Stock to be received by Digital Ally as Merger Consideration will be subject to the terms of the Lock-Up Agreement.
Sponsor Forfeiture Letter
Simultaneously with the execution and delivery of the Merger Agreement, Sponsor, Clover Leaf and the Chief Executive Officer of Kustom Entertainment, entered into a letter agreement (the “Sponsor Forfeiture Letter”) pursuant to which the Sponsor agreed to forfeit up to 345,780 shares of Clover Leaf Class A Common Stock and transfer to the Chief Executive Officer of the Company up to 518,672 Clover Leaf Sponsor Shares (the “Earnout Shares”) (such shares of Clover Leaf Class A Common Stock having been converted from shares of Clover Leaf Class B Common Stock), subject to the earnout provisions contained therein pertaining to the revenue of the Company for the fiscal years of 2023 and 2024, contingent and effective upon the Closing. If the revenue of the business for either of the fiscal years 2023 and 2024 of Clover Leaf (the “Earn-Out Period”) achieves certain benchmarks in the applicable fiscal year, 172,890 of the Sponsor’s Earnout Shares shall no longer be subject to forfeiture and the Sponsor shall transfer to the Chief Executive Officer of Kustom Entertainment 259,336 Earnout Shares (the “Earn-Out Payment”); provided, however, that in the event the benchmark revenue is not achieved on or before the end of the applicable fiscal year, then the Earn-Out Payment for such fiscal year shall be zero, and the Sponsor shall, effective immediately, surrender for cancellation and retirement by Clover Leaf such amount of Earnout Shares. The Sponsor agreed to forfeit up to an additional 864,452 shares of Clover Leaf Class B Common Stock (or shares of Clover Leaf Class A Common Stock, if such shares of Clover Leaf Class B Common Stock have been converted to shares of Clover Leaf Class A Common Stock prior to the Closing) (the “Adjustment Shares”), with the percentage of Adjustment Shares to be forfeited to be equal to the percentage of the Clover Leaf Common Stock redeemed by the public stockholders of Clover Leaf in connection with the Redemption.
Organizational Structure
Board of Directors and Management Following the Business Combination
The following persons are expected to be elected or appointed by the Clover Leaf Board to serve as executive officers and directors following the Business Combination. For biographical information concerning the executive officers and directors following the Business Combination, see “Management After the Business Combination — Executive Officers and Directors After the Business Combination.”
Each director will hold office until the next annual meeting of stockholders for the election of the class of directors in which such director serves and until his or her successor is duly elected and qualified, or until his or her death, resignation, removal or disqualification.
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The following table sets forth the name, age and position of each of the expected directors and executive officers of the Combined Company upon consummation of the Business Combination:
|
Name |
Age |
Position |
||
|
Executive Officers |
||||
|
Stanton E. Ross |
61 |
Chairman, President and Chief Executive Officer |
||
|
Peng Han |
[•] |
Chief Technology Officer |
||
|
Non-Employee Directors |
||||
|
Leroy C. Richie |
81 |
Lead Outside Director |
||
|
Daniel F. Hutchins |
66 |
Director |
||
Interests of Clover Leaf’s Sponsor, Directors, Officers and Advisors in the Business Combination
When you consider the recommendation of the Clover Leaf’s Board to vote in favor of approval of the Proposals, you should keep in mind that Clover Leaf’s directors and officers have interests in the Business Combination that may be different from or in addition to (and which may conflict with) your interests as a stockholder and may be incentivized to complete a business combination that is less favorable to stockholders rather than liquidating Clover Leaf. These interests include, among other things, the fact that:
• [•] will be Clover Leaf’s designee to the Combined Company Board upon the effectiveness of the Merger. As a director, in the future [•] may receive any cash fees, stock options or stock awards that the Combined Company Board determines to pay to its directors;
• unless Clover Leaf consummates an initial business combination, it is possible that Clover Leaf’s officers, directors and the Sponsor may not receive reimbursement for out-of-pocket expenses incurred by them, to the extent that such expenses exceed the amount of available funds not deposited in the Trust Account (as of September 14, 2023, Clover Leaf’s officers and directors have incurred approximately $3,296,246 of out-of-pocket expenses exceeding funds available to Clover Leaf for reimbursement thereof, and Clover Leaf’s officers, directors and the Sponsor may not receive reimbursement therefor if the proposed Business Combination is not consummated).
• as a condition to the IPO, pursuant to the Insider Letter, the Clover Leaf Sponsor Shares became subject to a lock-up whereby, subject to certain limited exceptions, the Insiders’ Clover Leaf Sponsor Shares are not transferable or salable until the earlier of (A) six months after the completion of our initial business combination or (B) subsequent to our initial business combination, if (x) the closing price of the Clover Leaf Class A Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing after our initial business combination, or (y) Clover Leaf completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of Clover Leaf’s stockholders having the right to exchange their shares of Clover Leaf Common Stock for cash, securities or other property. In this regard, while the Clover Leaf Sponsor Shares are not the same as the Clover Leaf Class A Common Stock, are subject to certain restrictions that are not applicable to the Clover Leaf Class A Common Stock, and may become worthless if Clover Leaf does not complete a business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders);
• the Sponsor purchased an aggregate of 571,859 Sponsor Private Placement Units, each unit consisting of one share of Clover Leaf Class A Common Stock and one right to receive one-eighth of one share of Clover Leaf Class A Common Stock, which Private Placement Units were purchased at an aggregate
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purchase price of $5,718,590, or $10.00 per unit, in the Private Placement consummated simultaneously with the IPO, which have no redemption rights and will be worthless if a business combination is not consummated. Based on the closing trading price of the Public Units on September 29, 2023 which was $11.44, the Sponsor Private Placement Units would have an aggregate value of approximately $6,542,067 as of September 29, 2023;
• as a condition to the IPO, pursuant to the Insider Letter, the Insiders have agreed that the Sponsor Private Placement Units, and all of their underlying securities, will not be sold or transferred by it until 30 days after Clover Leaf has completed a business combination;
• the Sponsor can earn a positive rate of return on its investment even if other Clover Leaf stockholders experience a negative rate of return in the Combined Company. The Sponsor paid $25,000 to purchase 3,457,807 shares of Clover Leaf Class B Common Stock. These securities will have a significantly higher value at the time of the Business Combination, if it is consummated. Based on the closing trading price of the Class A Common Stock on [•], 2023, which was $[•], the Clover Leaf Sponsor Shares would have an aggregate value of approximately $[•] as of the same date. If Clover Leaf does not consummate the Business Combination or another initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), and Clover Leaf is therefore required to be liquidated, the Clover Leaf Sponsor Shares would be worthless, as the Sponsor is not entitled to participate in any redemption or liquidation of the Trust Account. Based on the difference in the effective purchase price of $0.007 per share that the members of the Sponsor paid for the Clover Leaf Sponsor Shares, as compared to the purchase price of $10.00 per Unit sold in the IPO, members of the Sponsor may earn a positive rate of return even if the share price of the Combined Company after the Closing falls below the price initially paid for the Units in the IPO and the Clover Leaf Public Stockholders experience a negative rate of return following the Closing of the Business Combination;
• each Insider has agreed not to redeem any of its Clover Leaf Sponsor Shares in connection with a stockholder vote to approve a proposed initial business combination;
• if Clover Leaf does not complete an initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), the proceeds from the sale of the Private Placement Units will be included in the liquidating distribution to Clover Leaf’s public stockholders and the Sponsor Private Placement Units will expire worthless;
• the fact that the Sponsor holds promissory notes issued by Clover Leaf in connection with the 2022 Extension and the 2023 Extension (the “Extension Notes”). In connection with the 2023 Extension, Clover Leaf will cause up to $360,000 to be deposited into the trust account in installments of $60,000 per month, for each calendar month or portion thereof (commencing on July 22, 2023 and on the 22nd of each subsequent month) until January 22, 2024, that Clover Leaf needs to complete an initial business combination. As of September 5, 2023, an aggregate of $120,000 had been deposited into trust to support the Extension, and as of September 5, 2023, an aggregate principal amount of $2,886,246 was outstanding under the Extension Notes.. In the event an initial business combination is consummated, the Extension Notes may be repaid out of the proceeds of the Trust Account released to the post-combination company, and $1,383,123 of the Extension Notes may be converted into Clover Leaf Units. Otherwise, the Extension Notes would be repaid only out of funds held outside the Trust Account. In the event that a business combination does not close, Clover Leaf may use a portion of proceeds held outside the Trust Account to repay the Extension Notes, but no proceeds held in the Trust Account would be used to repay the Extension Notes;
• The Sponsor, officers and directors (or their affiliates) may make loans from time to time to Clover Leaf in order to provide working capital or finance transaction costs in connection with an initial business combination. Up to $1,500,000 of such working capital loans may be convertible into private placement-equivalent units at a price of $10.00 per unit, at the option of the lender. Such units would be identical to the Private Placement Units. In the event an initial business combination is consummated, the working capital loans may be repaid out of the proceeds of the Trust Account released to the post-combination company. In the event that the initial business combination does not close, Clover Leaf may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds from the Trust Account would be used for such repayment;
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• if the Trust Account is liquidated, including in the event Clover Leaf is unable to complete an initial business combination within the required time period, the Sponsor has agreed that it will be liable to Clover Leaf, if and to the extent any claims by a third party for services rendered or products sold to Clover Leaf, or a prospective target business with which Clover Leaf has entered into a written letter of intent, confidentiality or similar agreement or Merger Agreement, reduce the amount of funds in the Trust Account to below the lesser of (i) $10.15 per public share and (ii) the actual amount per public share held in the Trust Account as of the date of the liquidation of the Trust Account, if less than $10.15 per share due to reductions in the value of the trust assets, less Permitted Withdrawals, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to the monies held in the Trust Account (whether or not such waiver is enforceable), nor will it apply to any claims under Clover Leaf’s indemnity of the underwriters of the IPO against certain liabilities, including liabilities under the Securities Act; and
• the fact that the Sponsor and Clover Leaf’s officers and directors may benefit from the completion of a business combination and may be incentivized to complete an acquisition of a less favorable target company or on terms less favorable to stockholders rather than liquidate.
In addition to the interests of the Clover Leaf Insiders in the Business Combination, Clover Leaf stockholders should be aware that the IPO Underwriter, Maxim may have financial interests that are different from, or in addition to, the interests of Clover Leaf stockholders, including:
• the fact that the IPO Underwriter is entitled to deferred underwriting fees in the amount of $0.35 per Unit, or $4,840,930.50, pursuant to the Underwriting Agreement and such fees (a portion of which the IPO Underwriter and Clover Leaf have agreed may be allocated following Closing of the proposed Business Combination with Kustom Entertainment to satisfy of a portion of the fees payable to Maxim pursuant to the Maxim Engagement Letter) are payable only if Clover Leaf completes an initial business combination;
• the fact that the IPO Underwriter purchased 103,734 Representative Units, each unit consisting of one share of Clover Leaf Class A Common Stock and one right to receive one-eighth of one share of Clover Leaf Class A Common Stock, which Representative Units were purchased at an aggregate purchase price of $1,037,340, or $10.00 per unit, in the Private Placement consummated simultaneously with the IPO, which have no redemption rights and will be worthless if a business combination is not consummated. Based on the closing trading price of the Public Units on [•], 2023 which was $[•], the Representative Units would have an aggregate value of approximately $[•] as of [•], 2023; and
• the fact that Clover Leaf issued to the IPO Underwriter and/or its designees 138,312 Representative Shares upon consummation of the IPO and the subsequent partial exercise of the underwriter’s over-allotment option. These Representative Shares were valued at a price of $10.00 which was the sale price of the units sold in the IPO. The IPO Underwriter agreed not to transfer, assign or sell any such shares until the completion of Clover Leaf’s initial business combination. In addition, the IPO Underwriter agreed (i) to waive its redemption rights with respect to such shares in connection with the completion of Clover Leaf’s initial business combination and (ii) to waive its rights to liquidating distributions from the Trust Account with respect to such shares if Clover Leaf fails to complete an initial business combination. Based on the closing trading price of the Clover Leaf Class A Common Stock on [•], 2023 which was $[•], the Representative Shares would have an aggregate value of approximately $[•] as of [•], 2023.
These interests may have influenced Clover Leaf’s Board in making their recommendation that you vote in favor of the approval of the Business Combination. The members of the Clover Leaf Board were aware of and considered these interests, among other matters, when they approved the Business Combination and recommended that Clover Leaf stockholders approve the proposals required to effect the Business Combination. The Clover Leaf Board determined that the overall benefits expected to be received by Clover Leaf and its stockholders in the Business Combination outweighed any potential risk created by the conflicts stemming from these interests. In addition, the Clover Leaf Board determined that potentially disparate interests would be mitigated because (i) most of these disparate interests would exist with respect to a business combination by Clover Leaf with any other target business or businesses, (ii) these interests could be adequately disclosed to stockholders in this proxy statement/prospectus, and
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that stockholders could take them into consideration when deciding whether to vote in favor of the proposals set forth herein and (iii) the Sponsor will hold equity interests in the Combined Company with value that, after the Closing, will be based on the future performance of Combined Company’s stock.
Interests of Kustom Entertainment’s Directors and Officers
When you consider the recommendation of the Clover Leaf Board in favor of Business Combination Proposal, you should keep in mind that Kustom Entertainment’s directors and officers have interests in such proposal that are different from, or in addition to those of Clover Leaf Stockholders generally. These interests include, among other things, the interests listed below:
• Certain officers of Kustom Entertainment are expected to become officers of the Combined Company upon the consummation of the Business Combination. Specifically, the following individuals who are currently officers of Kustom Entertainment are expected to become officers of the Combined Company upon the consummation of the Business Combination, serving in the offices set forth opposite their names below:
|
Name |
Position |
|
|
Stanton E. Ross |
Chairman, President and Chief Executive Officer |
|
In addition, the following individuals who are currently members of the Kustom Entertainment Board are expected to become members of the Combined Company Board upon the consummation of the Business Combination: [•].
• Certain members of the Kustom Entertainment Board and the officers of Kustom Entertainment beneficially own, directly or indirectly, Kustom Entertainment Shares, and will be entitled to receive a portion of the consideration contemplated by the Merger Agreement upon the consummation of the Business Combination and, if and when payable, a portion of the Earnout Shares in their capacities as Digital Ally and/or Deemed Equity Holders. See the section entitled “Beneficial Ownership of Securities” for a further discussion of the equity interests of Kustom Entertainment’s directors and officers in the Business Combination.
Ownership of the Combined Company after the Business Combination
Upon consummation of the Business Combination (assuming, among other things, that no Public Stockholders exercise redemption rights in connection with the Closing and the other assumptions described under the section with the heading “Frequently Used Terms — Share Calculations and Ownership Percentages”), (i) Clover Leaf’s public stockholders are expected to own approximately 15.6% of the outstanding Combined Company Common Stock, (ii) the Sponsor is expected to own approximately 22.8% of the outstanding Combined Company Common Stock, (iii) Digital Ally Stockholders are expected to own [•]% of the outstanding Combined Company Common Stock and (iv) Digital Ally is expected to own approximately [•]% of the Combined Company Common Stock after the contemplated Digital Ally Distribution, which is distributed concurrently with the Closing.
These percentages assume, among other assumptions, that at, or in connection with, the Closing, (i) no Public Stockholders exercise their redemption rights in connection with the Business Combination, and (ii) an aggregate of shares of Combined Company Common Stock are issued to former stockholders of Kustom Entertainment in accordance with the Merger Agreement. If actual facts are different from these assumptions, the percentage ownership retained by the Clover Leaf stockholders and Digital Ally in the Combined Company, and associated voting power, will be different.
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Certificate of Incorporation; Bylaws
Pursuant to the Merger Agreement, upon the Closing, the Current Charter will be amended and restated in accordance with the Proposed Charter. See “The Charter Proposal (Proposal 3).” We currently also expect that upon the Closing, Clover Leaf’s bylaws will be amended and restated promptly to reflect necessary changes and to be consistent with the Proposed Charter; and make certain other changes that our board of directors deems appropriate for a public operating company.
Name and Headquarters of the Combined Company
The name of the Combined Company will be Kustom Entertainment, Inc. and Kustom Entertainment’s headquarters are currently located in Lenexa, Kansas.
Background of the Business Combination
Clover Leaf, a Delaware corporation structured as a blank check company, was incorporated on February 25, 2021, for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses.
Prior to entering into the Merger Agreement, Clover Leaf conducted a thorough search for a potential business combination transaction drawing upon, among other things, the extensive network and investment and operating experience of Clover Leaf’s management team and Board. The terms of the proposed business combination with Kustom Entertainment were the result of thorough negotiations between the representatives of Clover Leaf and Kustom Entertainment, as further described below.
Prior to the consummation of the IPO, neither Clover Leaf, nor anyone on its behalf, had any substantive discussions, formal or otherwise, with respect to a proposed transaction with Kustom Entertainment. The following is a brief description of the background of the negotiations between the parties, the Business Combination and related transactions.
From the date of Clover Leaf’s IPO through the date of the Merger Agreement, Clover Leaf’s management and Board evaluated and considered a number of potential target companies as candidates for a possible business combination transaction. Representatives of Clover Leaf contacted and were contacted by a number of individuals and entities with respect to potential business combination opportunities across the cannabis and industrial services sectors and mostly based in the United States.
Clover Leaf and its advisors compiled a list of high priority potential targets and updated and supplemented such list from time to time based on initial screening of company introductory documents, conversations with financial advisors, and meetings with company management teams. This list of potential opportunities was periodically updated by Clover Leaf management, and certain potential targets were presented to the Clover Leaf Board for review and discussion.
Since the date of the IPO through the date of its entering into a Merger Agreement with Kustom Entertainment, at the direction of the Clover Leaf Board, Clover Leaf’s management team:
• Identified over 34 potential acquisition target companies;
• Participated in in-person or telephonic discussions with representatives of more than 23 potential acquisition targets;
• Signed approximately 29 non-disclosure agreements and provided initial non-binding indications of interest or letters of intent (“LOIs”) to representatives of approximately four potential acquisition targets (other than Kustom Entertainment).
Clover Leaf reviewed the potential acquisition opportunities based on criteria that were the same or similar to the criteria that the Clover Leaf Board used in evaluating the potential Business Combination with Kustom Entertainment (as discussed below), which included, among other criteria, the cash requirements at Closing, the readiness and willingness of potential target companies to become public, the markets in which potential target companies operate and their competitive positions and “track records” within such markets, the experience of the potential target companies’
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management teams and the potential for revenue and earnings growth and free cash flow generation. Clover Leaf focused on sectors and companies that its management believed would benefit from being a publicly traded company on a stock exchange in the United States.
The following chronicle of events leading up to the execution of the Merger Agreement is not intended to be a complete list of all opportunities initially evaluated or explored or discussions held by Clover Leaf, but sets forth the significant discussions and steps that Clover Leaf took prior to execution of the Merger Agreement with Kustom Entertainment.
Description of Negotiation Process with Candidates Other Than Kustom Entertainment
Following the completion of the IPO through the date of its entering into a Merger Agreement with Kustom Entertainment, Clover Leaf engaged in extensive discussions with representatives of a number of target companies based in the United States with respect to potential business combination opportunities. Clover Leaf’s management initially focused on the search on targets operating in the cannabis sector, including providers of ancillary but non-plant touching businesses, specialty finance, and e-commerce.
In particular, during the period of August 2021 and January 2022, Clover Leaf engaged in extensive due diligence review and held multiple calls and management presentations with over 10 separate potential targets for a business combination mainly in the cannabis sector. However, all of such discussions were terminated on account of increasing challenges in the cannabis market due to lack of proper financial records and audited financial statements. Beginning in March 2022, Clover Leaf’s management began considering targets outside of the cannabis space, including companies in the industrial services, medical equipment and entertainment sectors.
Below is a summary of Clover Leaf’s negotiation process with the two potential acquisition targets (other than Kustom Entertainment) with which Clover Leaf had significant discussions.
Target A: Following execution of an NDA in July 2021, Clover Leaf carried out due diligence and engaged in discussions for a period of several months with Target A, a cannabis company. After extensive discussions and negotiations of potential transaction terms, and the signing of an LOI in November 2021, Clover Leaf ultimately discontinued discussions due to difficulties with the preparation of Target A’s financial statements.
Target B: Following execution of an NDA in January 2022, Clover Leaf carried out due diligence and engaged in discussions for a period of several months with Target B, a precision engineered metal components manufacturer. After extensive discussions and negotiations of potential transaction terms, and the signing of an LOI in May 2022, Target B decided not to pursue a business combination with Clover Leaf due to sector outlook, industry considerations and disagreements about the proposed valuation of Target B.
Description of Negotiation Process with Kustom Entertainment
On April 26, 2023, an NDA was signed with Digital Ally.
Clover Leaf negotiated and executed an LOI with Kustom Entertainment on May 4, 2023.On May 8, 2023, an advisory NDA was signed with Newbridge, and on May 9, 2023, Newbridge was engaged as an advisor to perform the Fairness Opinion on Digital Ally/Kustom Entertainment. On May 9, 2023, Ellenoff Grossman & Schole, LLP, counsel to Clover Leaf (“EGS”) was granted access to a virtual data room and sent an initial legal due diligence request list to Digital Ally.
On May 11, 2023, EGS sent the initial draft Merger Agreement to Sullivan & Worchester LLP, counsel to DGLY (“Sullivan”). Between May 11, 2023 and June 1, 2023, EGS and Sullivan exchanged drafts and negotiated the terms of the definitive transaction agreements, including the Merger Agreement. Regular meetings by phone call and video conference took place during this period, some of which included the parties’ respective legal counsel and financial advisors. The terms negotiated between the parties, among others, included the representations and warranties to be contained in the Merger Agreement, the interim covenants to be contained in the Merger Agreement, including regarding the solicitation of alternative transactions and a PIPE investment, the net tangible assets closing condition, and the terms of the earnout payments. Over this period, EGS provided updates to Clover Leaf regarding its due diligence findings.
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On May 25, 2023, EGS sent a revised draft of the Merger Agreement to Sullivan.
On May 29, 2023, EGS sent the initial drafts of the Sponsor Contingent Forfeiture Letter and Lockup Agreement and revised draft of the Merger Agreement to Sullivan.
On May 30, 2023, Clover Leaf, Digital Ally, Sullivan, and EGS held a conference call to discuss certain due diligence matters.
On May 31, 2023, the Clover Leaf Board met to consider the terms of the Merger Agreement and the transactions contemplated thereby. Representatives of the Kustom Entertainment management team and Newbridge attended this meeting of the Clover Leaf Board. Following presentations from the Kustom Entertainment team regarding the terms of the Merger Agreement, the transactions contemplated thereby and fiduciary duties of directors when considering whether to authorize a potential business combination transaction, the Clover Leaf Board unanimously approved the Merger Agreement and the Transactions contemplated thereby and recommended that the Clover Leaf stockholders consent to adopt and approve in all respects the Merger Agreement and the Transactions contemplated thereby.
On May 31, 2023, Newbridge delivered a final draft of its fairness opinion.
EGS continued to provide the Clover Leaf Board with periodic summaries of the updated material provisions of the transaction documents and due diligence findings.
On June 1, 2023, the parties executed the Merger Agreement and the applicable ancillary agreements, and Clover Leaf and Kustom Entertainment issued a press release announcing the transaction prior to the commencement of trading on Nasdaq on June 2, 2023.
The parties have continued and expect to continue regular discussions and weekly calls regarding the timing to consummate the Business Combination and necessary preparation in connection therewith.
Recommendation of the Board and Reasons for the Business Combination
The Clover Leaf Board considered a variety of factors in connection with its evaluation of the Business Combination. In light of the number and complexity of those factors, the Clover Leaf Board, as a whole, did not consider it practicable to, and did not attempt to, quantify or otherwise assign relative weights to the specific factors that it considered in reaching its determination and supporting its decision. Individual directors may have given different weight to different factors. The Clover Leaf Board viewed its decision as being a business judgment that was based on all of the information available and the factors presented to and considered by it. Certain information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under “Cautionary Note Regarding Forward-Looking Statements.”
The Clover Leaf Board, before reaching its unanimous decision to recommend the Business Combination to the Clover Leaf stockholders, consulted with Clover Leaf’s advisors and reviewed in detail information and analyses provided to the Clover Leaf Board by Clover Leaf management, as further described below. The due diligence and analyses conducted by Clover Leaf management and Clover Leaf’s advisors included:
• meetings and calls with the management team and advisors of Kustom Entertainment;
• review of material contracts and other material matters;
• financial, tax, legal, IT infrastructure, accounting, operational, business and other due diligence; and
• consultation with Kustom Entertainment management and its legal counsel.
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In addition, based on its review of information about Kustom Entertainment, its user base and business plans, and the results of Clover Leaf management’s financial analyses, as further described below, the factors considered by the Clover Leaf Board included, but were not limited to, the following:
• Multiple Venues for Growth. The ticketing industry is currently controlled by a small number of large incumbents. The Clover Leaf Board believes that there are a number of markets currently overlooked or underserved by these incumbents, and that Kustom Entertainment’s unique primary and secondary ticketing products may enable it to capitalize on these growth opportunities.
• Industry Relationships. Kustom Entertainment has developed relationships with key players in the ticketing and entertainment industries, including agencies, venues, athletes and artists.
• Increased Access to Capital. Access to the public markets will provide Kustom Entertainment with more efficient access to capital and potentially enable it to rapidly increase its product offerings.
• Established Technology Platform. Kustom Entertainment’s Ticket Smarter platform currently offers more than 40 million tickets to over 125,000 live events in North America.
• Strong Leadership. The Clover Leaf Board believes that Kustom Entertainment is led by an experienced management team with a depth of experience and a strong track record of success.
• Terms and Conditions of the Merger Agreement. The terms and conditions of the Merger Agreement and the Business Combination, were, in the opinion of the Clover Leaf Board, the product of arm’s-length negotiations between the parties.
• Continued Ownership by Kustom Entertainment Stockholders. The Clover Leaf Board considered that Kustom Entertainment Stockholders are converting all of their equity into the Combined Company in the proposed Business Combination and that the shares of certain significant Kustom Entertainment Stockholders will be subject to lock-up restrictions after the Closing.
• Kustom Entertainment Being an Attractive Target. The Clover Leaf Board considered the fact that, after a thorough review of other business combination opportunities reasonably available to Clover Leaf, the proposed Business Combination represents the most attractive opportunity based upon the process used to evaluate and assess other potential acquisition targets.
In the course of its deliberations, in addition to the various other risks associated with the business of Kustom Entertainment, as described in the section entitled “Risk Factors” and appearing elsewhere in this proxy statement/prospectus, the Clover Leaf Board also considered a variety of uncertainties, risks and other potentially negative reasons relevant to the Business Combination, including the following:
• Limited Operating History. Kustom Entertainment is an early-stage company with a limited operating history, making it difficult for investors to evaluate the opportunity.
• Business Plans May Not be Achieved. Kustom Entertainment’s business plans may not be successful, or may take longer or be more costly to implement than anticipated, which may affect its financial position and future results of operations.
• Competition. Kustom Entertainment competes with larger, more established and better-capitalized companies. Kustom Entertainment’s business will suffer if it cannot maintain or improve its competitive position.
• Macroeconomic Uncertainty. Macroeconomic uncertainty and the effects they could have on Kustom Entertainment’s revenues and financial performance.
• Litigation. The possibility of litigation challenging the Business Combination or that an adverse judgment granting permanent injunctive relief could indefinitely enjoin consummation of the Business Combination.
• Readiness to be a Public Company. As Kustom Entertainment has not previously been a public company and its current management team has not managed a public company before, Kustom Entertainment may not have all the different types of employees necessary for it to timely and accurately prepare financial
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statements and reports for filing with the SEC. There is a risk that Kustom Entertainment will not be able to hire the right people to timely fill in these gaps or that Kustom Entertainment’s compliance infrastructure may not be able to keep pace with the increased compliance risks presented by rapid growth.
• Valuation. The risk that the Clover Leaf Board may not have properly valued Kustom Entertainment’s business and did not obtain a third-party valuation or independent fairness opinion in connection with the Business Combination.
• Fees and Expenses. The fees and expenses associated with completing the Business Combination.
• Redemptions. The risk that holders of Clover Leaf Public Shares exercise their redemption rights, thereby depleting the amount of cash available in the Trust Account.
• Exchange Listing. The potential inability to maintain the listing of the Combined Company’s securities on a national exchange following the Closing.
• Liquidation. The risks and costs to Clover Leaf if the Business Combination with Kustom Entertainment is not completed, including the risk of diverting management focus and resources from other business combination opportunities, which could result in Clover Leaf being unable to effect a business combination within the completion window, which would require Clover Leaf to liquidate.
• Conflicts of Interest. The possibility that the Clover Leaf Board may have been influenced by conflicts between what may be in Clover Leaf’s best interests and what may be best for a director’s personal interests, including the possibility that if the Business Combination is not consummated, and Clover Leaf is forced to liquidate because it is unable to consummate another business combination within the timeframe permitted by the Current Charter, the Clover Leaf Sponsor Shares and Private Rights owned by Clover Leaf’s Insiders would be worthless. See the section entitled “The Business Combination Proposal — Interests of the Sponsor and Clover Leaf’s Officers and Directors in the Business Combination”.
• Other Risks Factors. Various other risk factors associated with the business of Kustom Entertainment, as described in the section entitled “Risk Factors” appearing elsewhere in this proxy statement/prospectus.
In evaluating the conflicts of interest referenced above, the Clover Leaf Board concluded that the potentially disparate interests would be mitigated because (i) certain of these interests were disclosed in the prospectus for Clover Leaf’s IPO and are disclosed in this proxy statement/prospectus, (ii) most of these disparate interests would exist with respect to a business combination by Clover Leaf with any other target business or businesses, and (iii) the Sponsor will hold equity interests in Combined Company with value that, after the Closing, will be based on the future performance of Combined Company’s stock.
In addition to considering the factors described above, the Clover Leaf Board also considered that the Sponsor and certain officers and directors of Clover Leaf may have interests in the Business Combination as individuals that are in addition to, and that may be different from, the interests of Clover Leaf Stockholders (see section entitled “The Business Combination Proposal — Interests of the Sponsor and Clover Leaf’s Officers and Directors in the Business Combination”). After considering the foregoing, the Clover Leaf Board concluded, in its business judgment, that the potential benefits to Clover Leaf and its stockholders relating to the Business Combination outweighed the potentially negative factors and risks relating to the Business Combination.
The Clover Leaf Board, in evaluating the Business Combination, consulted with Clover Leaf’s management and its financial and legal advisors. In reaching its unanimous resolution (i) that the Merger Agreement and the transactions contemplated thereby, including the Business Combination and the issuance of shares of Common Stock and securities convertible into Common Stock in connection therewith, are advisable and in the best interests of Clover Leaf and (ii) to recommend that the Clover Leaf shareholders adopt the Merger Agreement and approve the Business Combination and the other transactions contemplated by the Merger Agreement, the Clover Leaf Board considered a range of factors, including, but not limited to, the factors discussed below. In light of the number and wide variety of factors considered in connection with its evaluation of the Business Combination, the Clover Leaf Board did not consider it practicable to, and did not attempt to, quantify or otherwise assign relative weights to the specific factors that it considered in reaching its determination and supporting its decision. The Clover Leaf Board viewed its decision as being based on all of the information available and the factors presented to and considered by it. In addition, individual directors may have given different weight to different factors. This explanation of Clover Leaf’s
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reasons for the Business Combination and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under “Cautionary Note Regarding Forward-Looking Statements.”
The above discussion of the material factors considered by the Clover Leaf Board is not intended to be exhaustive, but does set forth the principal factors considered by the Clover Leaf Board. The Clover Leaf Board conducted an overall analysis of the factors described above, including thorough discussions with Clover Leaf’s legal and financial advisors, and considered the factors overall to be favorable to, and to support, its determination to approve the Business Combination and to recommend that Clover Leaf’s shareholders approve the Business Combination.
In considering the determination by the Clover Leaf Board that the Business Combination is advisable and fair to and in the best interests of Clover Leaf and its shareholders, shareholders should be aware that certain Clover Leaf directors and officers have arrangements that may cause them to have interests in the transaction that are different from, in addition to, or may conflict with the interests of Clover Leaf shareholders generally. See the sections titled “Risk Factors,” “Proposal 2: The Business Combination Proposal — Interests of Clover Leaf’s Directors and Officers and Advisors in the Business Combination and “Beneficial Ownership of Securities” for more information and other risks.
Engagement of Financial Advisor to Clover Leaf
Clover Leaf retained Newbridge to act as its financial advisor in connection with the Business Combination. Newbridge, as part of its investment banking business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. Clover Leaf selected Newbridge to act as its financial advisor in connection with the Business Combination on the basis of Newbridge’s experience in similar transactions and its reputation in the investment community.
On May 31, 2023, at a meeting of the Board held to evaluate the Business Combination, Newbridge delivered to the Clover Leaf Board an oral opinion, which was confirmed by delivery of a written opinion, dated May 31, 2023, to the effect that, as of the date of the opinion and based on and subject to various assumptions and limitations described in its written opinion, (i) the Aggregate Consideration to be paid by CLOE to Digital Ally, Inc. is fair, from a financial point of view, to CLOE and CLOE’s unaffiliated public stockholders and (ii) the Company has an aggregate fair market value equal to at least 80% of the net assets held by CLOE in its trust account (the “Trust Account”) for the benefit of CLOE’s public stockholders (excluding deferred underwriting commissions and taxes payable on the interest earned on the Trust Account), as of the date of the Purchase Agreement.
The full text of Newbridge’s written opinion to the Clover Leaf Board, which describes, among other things, the assumptions made, procedures followed, factors considered and limitations on the review undertaken, is attached as Annex __ hereto and is incorporated by reference herein in its entirety. The following summary of Newbridge’s opinion is qualified in its entirety by reference to the full text of the opinion. Newbridge delivered its opinion to the Clover Leaf Board for the benefit and use of the Clover Leaf Board (in its capacity as such) in connection with and for purposes of its evaluation of the Business Combination from a financial point of view. Newbridge’s opinion also does not address the relative merits of the Business Combination as compared to any alternative business strategies or transactions that might exist for Clover Leaf, or the underlying business decision of Clover Leaf whether to proceed with those business strategies or transactions.
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In connection with rendering its opinion, Newbridge, among other things:
• Considered our assessment of general economic, market and financial conditions as well as our experience in connection with similar transactions, and business and securities valuations generally;
• Reviewed multiple drafts of the Business Combination Agreement, with the final draft reviewed dated May 29, 2023;
• Reviewed Clover Leaf’s publicly available historical financial results, as well as certain publicly available information concerning the trading of, and the trading market for, the ordinary shares of Clover Leaf since its IPO in July 2021;
• Reviewed publicly available financial information of Clover Leaf filed with the SEC, including its Form 10-Qs, Form 10-Ks, and certain reports on material events filed on Forms 8-K between July 22, 2021, and May 31, 2023;
• Reviewed publicly available financial information of Digital Ally filed with the SEC, including its Form 10-Qs, Form 10-Ks, and certain reports on material events filed on Forms 8-K between January 1, 2021, and May 31, 2023, with a special emphasis on the portions of their revenue they classified as “Entertainment” in FY-2022;
• Reviewed a financial model of Kustom Entertainment with future financial projections (through 2024E) (including potential revenue growth, EBITDA, net income and free cash flow margins) provided by the Company’s management team;
• Conducted discussions with Kustom Entertainment’s management team to better understand Kustom Entertainment’s recent business history, and near-term financials;
• Performed a public company comparable analysis of similar companies to Kustom Entertainment that trade on a major U.S. stock exchanges and operate in the live event entertainment sectors, to derive certain forward enterprise value/revenue multiples;
• Performed a comparable precedent M&A transaction analysis of similar companies to Kustom Entertainment in the live event entertainment sectors, to derive recent enterprise value/revenue multiples; and
Newbridge also considered such other information, financial studies, analyses and investigations, and financial, economic and market criteria which it deemed relevant. In conducting its review and arriving at its opinion, Newbridge did not independently verify any of the foregoing information and Newbridge assumed and relied upon such information being accurate and complete in all material respects, and Newbridge further relied upon the assurances of management of Clover Leaf that they are not aware of any facts that would make any of the information reviewed by Newbridge inaccurate, incomplete or misleading in any material respect. In addition, Newbridge has not assumed any responsibility for any independent valuation or appraisal of the assets or liabilities, including any ongoing litigation and administrative investigations, if any, of the Company, nor has Newbridge been furnished with any such valuation or appraisal. In addition, Newbridge has not assumed any obligation to conduct, nor has it conducted, any physical inspection of the properties or facilities of Kustom Entertainment.
The issuance of Newbridge’s opinion was approved by an authorized internal committee of Newbridge. Newbridge’s opinion is necessarily based on economic, market and other conditions as they exist and can be evaluated on, and the information made available to it on, the date thereof. Newbridge expressed no opinion as to the underlying valuation, future performance or long-term viability of Clover Leaf and its successors. Further, Newbridge expressed no opinion as to what the value of the shares of Clover Leaf Common Stock actually will be when the Business Combination is consummated or the prices at which shares of Clover Leaf Common Stock will trade at any time. It should be understood that, although subsequent developments may affect Newbridge’s opinion, Newbridge does not have any obligation to update, revise or reaffirm its opinion and has expressly disclaimed any responsibility to do so.
The following represents a brief summary of the material financial analyses reviewed by the Clover Leaf Board and performed by Newbridge in connection with its opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses performed by Newbridge, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of
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the financial analyses performed by Newbridge. Considering the data set forth in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by Newbridge.
Financial Analyses. Newbridge employed a comparable public company analysis and a comparable transaction analysis to analyze the range of values of Kustom Entertainment.
Comparable Public Company Analysis
To calculate the implied equity value of the operating business, Newbridge first obtained the median enterprise value/2024E revenue multiples from eight comparable public companies identified by Newbridge and applied it to Kustom Entertainment’s proforma 2024E Sales estimates. The public company comparables were selected using the following criteria: (i) listed on a major stock exchange in the United States, Europe or Asia, (ii) had a business model focused on the live event entertainment industry, (iii) and had forecasted revenues for 2024.
The enterprise value/2024E revenue multiples of such comparable public companies were approximately 3.3x and this multiple was multiplied by the 2024E proforma sales estimates of Kustom Entertainment to obtain an enterprise value. No adjustments to the enterprise value for debt and cash were necessary to obtain an implied equity value, as debt and cash are zero. The implied equity value using this analysis was $132.9M.
The table below summarizes certain observed historical and projected financial performance and trading multiples of the selected public companies were sourced from S&P Capital IQ data as of May 26, 2023.
ADD TABLE
Comparable Precedent M&A Transaction Analysis
Newbridge analyzed data for M&A transactions since June 2020 in the live event entertainment industry to find similar transactions where the targets being acquired most resembled Kustom Entertainment. The universe of transactions where there were similarities to Kustom Entertainment, and where financial data was recorded for the transaction value was generally limited, as is usually the case with public comparables. The criteria used for the selected transactions were those in which the targets most resembled Kustom Entertainment, and included (i) targets with business models in the live event entertainment sector, (ii) transactions that occurred with companies headquarters in the United States, Europe or Asia, and (iii) where the identified the enterprise value/revenue multiple was known.
Newbridge obtained the median enterprise value/revenue multiple of 3.7x from this dataset and this multiple was multiplied by the 2024E proforma sales estimates of Kustom Entertainment to obtain an enterprise value. The debt (of zero) was subtracted, and the cash (of zero) was added to the enterprise Value to obtain an implied equity value using this analysis of $150.2M.
The table below summarizes the comparable precedent M&A transaction data set, and was sourced from S&P Capital IQ data as of May 26, 2023.
ADD TABLE 2
Miscellaneous
The discussion set forth above is a summary of the material financial analyses presented by Newbridge to the Clover Leaf Board in connection with its opinion and is not a comprehensive description of all analyses undertaken by Newbridge in connection with its opinion. The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial opinion is not readily susceptible to partial analysis or summary description. Newbridge believes that its analyses summarized above must be considered as a whole. Newbridge further believes that selecting portions of its analyses and the factors considered, or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying Newbridge’s analyses and opinion. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that such analysis was given greater weight than any other analysis referred to in the summary.
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In performing its analyses, Newbridge considered industry performance, general business and economic conditions and other matters, many of which are beyond the control of Clover Leaf. The estimates of the future performance of Clover Leaf in or underlying Newbridge’s analyses are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than those estimates or those suggested by Newbridge’s analyses. The analyses do not purport to be appraisals or to reflect the prices at which a company might actually be sold or the prices at which any securities have traded or may trade at any time in the future. Accordingly, the estimates used in, and the ranges of valuations resulting from, any particular analysis described above are inherently subject to substantial uncertainty and should not be taken to be Newbridge’s view of the actual values of the Clover Leaf Common Stock.
Conclusion
The values derived from the different analyses that Newbridge used show a range between $132.9M to $150.2M. The Merger Consideration to be paid by Clover Leaf of $125.0M is below the valuation ranges of the Analyses.
Based on its analysis, it is Newbridge’s opinion that, the Merger Consideration is fair, from a financial point of view, to Clover Leaf’s shareholders.
The type and amount of consideration payable in the Business Combination was determined through negotiations between Clover Leaf and Kustom Entertainment, and was approved by the Clover Leaf Board. The decision to enter into the Business Combination Agreement was solely that of the Clover Leaf Board. As described above, Newbridge’s opinion and analyses was only one of many factors considered by the Clover Leaf Board in its evaluation of the Business Combination and should not be viewed as determinative of the views of the Clover Leaf or Kustom Entertainment’s management with respect to the Business Combination.
Fees and Expenses
As compensation for Newbridge’s services in connection with the rendering of its Opinion to the Board, Clover Leaf agreed to pay Newbridge a fee of $125,000. $75,000 of the fee was paid upon delivery of the Opinion and the remaining $50,000 is payable upon consummation of the Business Combination. No portion of Newbridge’s fee is refundable or contingent upon the conclusion reached in the Opinion.
Satisfaction of 80% Test
It is a requirement under the Clover Leaf Charter and Nasdaq listing requirements that the business or assets acquired in Clover Leaf’s initial business combination have a fair market value equal to at least 80% of the balance of the funds in the Trust Account (excluding the deferred underwriting discount and Permitted Withdrawals) at the time of the execution of a definitive agreement for its initial business combination.
As of June 1, 2023, the date of the execution of the Merger Agreement, the balance of the funds in the Trust Account was $[•] (excluding the deferred underwriting discount and Permitted Withdrawals) and 80% thereof represents approximately $[•]. In reaching its conclusion that the Business Combination meets the 80% asset test, the Clover Leaf Board looked at the pre-transaction enterprise value of Kustom Entertainment of approximately $[•] million (excluding the $[•] million earnout). In determining whether the enterprise value described above represents the fair market value of Kustom Entertainment, the Clover Leaf Board considered all of the factors described above in this section and the fact that the purchase price for Kustom Entertainment was the result of an arm’s length negotiation with Kustom Entertainment. As a result, the Clover Leaf Board concluded that the fair market value of the business acquired was significantly in excess of 80% of the assets held in the Trust Account (excluding the deferred underwriting discount and Permitted Withdrawals). In light of the financial background and experience of the members of Clover Leaf management team and the Clover Leaf Board, the Clover Leaf Board believes that the members of its management team and the Clover Leaf Board are qualified to determine whether the Business Combination meets the 80% asset test.
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Interests of Clover Leaf’s Sponsor, Directors, Officers and Advisors in the Business Combination
When you consider the recommendation of the Clover Leaf Board to vote in favor of approval of the Proposals, you should keep in mind that Clover Leaf’s directors and officers have interests in the Business Combination that may be different from or in addition to (and which may conflict with) your interests as a stockholder and may be incentivized to complete a business combination that is less favorable to stockholders rather than liquidating Clover Leaf. These interests include, among other things, the fact that:
• [•] will be Clover Leaf’s designee to the Combined Company Board upon the effectiveness of the Merger. As a director, in the future [•] may receive any cash fees, stock options or stock awards that the Combined Company Board determines to pay to its directors;
• unless Clover Leaf consummates an initial business combination, it is possible that Clover Leaf’s officers, directors and the Sponsor may not receive reimbursement for out-of-pocket expenses incurred by them, to the extent that such expenses exceed the amount of available funds not deposited in the Trust Account (as of September 14, 2023, Clover Leaf’s officers and directors have incurred approximately $3,296,246 of out-of-pocket expenses exceeding funds available to Clover Leaf for reimbursement thereof, and Clover Leaf’s officers, directors and the Sponsor may not receive reimbursement therefor if the proposed Business Combination is not consummated).
• as a condition to the IPO, pursuant to the Insider Letter, the Clover Leaf Sponsor Shares became subject to a lock-up whereby, subject to certain limited exceptions, the Insiders’ Clover Leaf Sponsor Shares are not transferable or salable until the earlier of (A) six months after the completion of our initial business combination or (B) subsequent to our initial business combination, if (x) the closing price of the Clover Leaf Class A Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing after our initial business combination, or (y) Clover Leaf completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of Clover Leaf’s stockholders having the right to exchange their shares of Clover Leaf Common Stock for cash, securities or other property. In this regard, while the Clover Leaf Sponsor Shares are not the same as the Clover Leaf Class A Common Stock, are subject to certain restrictions that are not applicable to the Clover Leaf Class A Common Stock, and may become worthless if Clover Leaf does not complete a business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders);
• the Sponsor purchased an aggregate of 571,859 Sponsor Private Placement Units, each unit consisting of one share of Clover Leaf Class A Common Stock and one right to receive one-eighth of one share of Clover Leaf Class A Common Stock, which Private Placement Units were purchased at an aggregate purchase price of $5,718,590, or $10.00 per unit, in the Private Placement consummated simultaneously with the IPO, which have no redemption rights and will be worthless if a business combination is not consummated. Based on the closing trading price of the Public Units on September 29, 2023 which was $11.44, the Sponsor Private Placement Units would have an aggregate value of approximately $6,542,067 as of September 29, 2023;
• as a condition to the IPO, pursuant to the Insider Letter, the Insiders have agreed that the Sponsor Private Placement Units, and all of their underlying securities, will not be sold or transferred by it until 30 days after Clover Leaf has completed a business combination;
• the Sponsor can earn a positive rate of return on its investment even if other Clover Leaf stockholders experience a negative rate of return in the Combined Company. The Sponsor paid $25,000 to purchase 3,457,807 shares of Clover Leaf Class B Common Stock. These securities will have a significantly higher value at the time of the Business Combination, if it is consummated. Based on the closing trading price of the Class A Common Stock on [•], 2023, which was $[•], the Clover Leaf Sponsor Shares would have an aggregate value of approximately $[•] as of the same date. If Clover Leaf does not consummate the Business Combination or another initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), and Clover Leaf is therefore required to be liquidated, the Clover Leaf Sponsor Shares would be worthless, as the Sponsor is not entitled to participate in any redemption or liquidation of the Trust Account. Based on the difference in the effective purchase price of
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$0.007 per share that the members of the Sponsor paid for the Clover Leaf Sponsor Shares, as compared to the purchase price of $10.00 per Unit sold in the IPO, members of the Sponsor may earn a positive rate of return even if the share price of the Combined Company after the Closing falls below the price initially paid for the Units in the IPO and the Clover Leaf Public Stockholders experience a negative rate of return following the Closing of the Business Combination;
• each Insider has agreed not to redeem any of its Clover Leaf Sponsor Shares in connection with a stockholder vote to approve a proposed initial business combination;
• if Clover Leaf does not complete an initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), the proceeds from the sale of the Private Placement Units will be included in the liquidating distribution to Clover Leaf’s public stockholders and the Sponsor Private Placement Units will expire worthless;
• the fact that the Sponsor holds promissory notes issued by Clover Leaf in connection with the 2022 Extension and the 2023 Extension (the “Extension Notes”). In connection with the 2023 Extension, Clover Leaf will cause up to $360,000 to be deposited into the trust account in installments of $60,000 per month, for each calendar month or portion thereof (commencing on July 22, 2023 and on the 22nd of each subsequent month) until January 22, 2024, that Clover Leaf needs to complete an initial business combination. As of September 5, 2023, an aggregate of $120,000 had been deposited into trust to support the Extension, and as of September 5, 2023, an aggregate principal amount of $2,886,246 was outstanding under the Extension Notes.. In the event an initial business combination is consummated, the Extension Notes may be repaid out of the proceeds of the Trust Account released to the post-combination company, and $1,383,123 of the Extension Notes may be converted into Clover Leaf Units. Otherwise, the Extension Notes would be repaid only out of funds held outside the Trust Account. In the event that a business combination does not close, Clover Leaf may use a portion of proceeds held outside the Trust Account to repay the Extension Notes, but no proceeds held in the Trust Account would be used to repay the Extension Notes;
• The Sponsor, officers and directors (or their affiliates) may make loans from time to time to Clover Leaf in order to provide working capital or finance transaction costs in connection with an initial business combination. Up to $1,500,000 of such working capital loans may be convertible into private placement-equivalent units at a price of $10.00 per unit, at the option of the lender. Such units would be identical to the Private Placement Units. In the event an initial business combination is consummated, the working capital loans may be repaid out of the proceeds of the Trust Account released to the post-combination company. In the event that the initial business combination does not close, Clover Leaf may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds from the Trust Account would be used for such repayment;
• if the Trust Account is liquidated, including in the event Clover Leaf is unable to complete an initial business combination within the required time period, the Sponsor has agreed that it will be liable to Clover Leaf, if and to the extent any claims by a third party for services rendered or products sold to Clover Leaf, or a prospective target business with which Clover Leaf has entered into a written letter of intent, confidentiality or similar agreement or Merger Agreement, reduce the amount of funds in the Trust Account to below the lesser of (i) $10.15 per public share and (ii) the actual amount per public share held in the Trust Account as of the date of the liquidation of the Trust Account, if less than $10.15 per share due to reductions in the value of the trust assets, less Permitted Withdrawals, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to the monies held in the Trust Account (whether or not such waiver is enforceable), nor will it apply to any claims under Clover Leaf’s indemnity of the underwriters of the IPO against certain liabilities, including liabilities under the Securities Act; and
• the fact that the Sponsor and Clover Leaf’s officers and directors may benefit from the completion of a business combination and may be incentivized to complete an acquisition of a less favorable target company or on terms less favorable to stockholders rather than liquidate.
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In addition to the interests of the Clover Leaf Insiders in the Business Combination, Clover Leaf stockholders should be aware that the IPO Underwriter, Maxim may have financial interests that are different from, or in addition to, the interests of Clover Leaf stockholders, including:
• the fact that the IPO Underwriter is entitled to deferred underwriting fees in the amount of $0.35 per Unit, or $4,840,930.50, pursuant to the Underwriting Agreement and such fees (a portion of which the IPO Underwriter and Clover Leaf have agreed may be allocated following Closing of the proposed Business Combination with Kustom Entertainment to satisfy of a portion of the fees payable to Maxim pursuant to the Maxim Engagement Letter) are payable only if Clover Leaf completes an initial business combination;
• the fact that the IPO Underwriter purchased 103,734 Representative Units, each unit consisting of one share of Clover Leaf Class A Common Stock and one right to receive one-eighth of one share of Clover Leaf Class A Common Stock, which Representative Units were purchased at an aggregate purchase price of $1,037,340, or $10.00 per unit, in the Private Placement consummated simultaneously with the IPO, which have no redemption rights and will be worthless if a business combination is not consummated. Based on the closing trading price of the Public Units on [•], 2023 which was $[•], the Representative Units would have an aggregate value of approximately $[•] as of [•], 2023; and
• the fact that Clover Leaf issued to the IPO Underwriter and/or its designees 138,312 Representative Shares upon consummation of the IPO and the subsequent partial exercise of the underwriter’s over-allotment option. These Representative Shares were valued at a price of $10.00 which was the sale price of the units sold in the IPO. The IPO Underwriter agreed not to transfer, assign or sell any such shares until the completion of Clover Leaf’s initial business combination. In addition, the IPO Underwriter agreed (i) to waive its redemption rights with respect to such shares in connection with the completion of Clover Leaf’s initial business combination and (ii) to waive its rights to liquidating distributions from the Trust Account with respect to such shares if Clover Leaf fails to complete an initial business combination. Based on the closing trading price of the Clover Leaf Class A Common Stock on [•], 2023 which was $[•], the Representative Shares would have an aggregate value of approximately $[•] as of [•], 2023.
In addition, Clover Leaf’s executive officers and directors currently have fiduciary duties or contractual obligations to the following other entities. Clover Leaf does not believe that the pre-existing fiduciary duties or contractual obligations of its executive officers and directors materially impacted its decision to enter into the proposed Business Combination with Kustom Entertainment because, among other things, none of such executive officers or directors had any interest in, or affiliation with, Kustom Entertainment:
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Name of Individual |
Name of Affiliated Company |
Affiliation |
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Felipe MacLean |
Yntegra Trading LLC |
Manager & Owner |
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Solace Holdings General Partner, LLC |
Director |
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Spectrum Leaf LATAM, LLC |
Managing Member |
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Luis A. Guerra |
VITAX Partners LLC |
Managing Director |
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Welz |
Member of the Advisory Board |
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Markus Puusepp |
SHL Medical AG |
Chief Strategy Officer |
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Spowdi |
Director |
|||
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QulO |
Director |
|||
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Pharmaero ApS |
Director |
|||
|
Innovation Zed |
Chairman |
|||
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Per Bjorkman |
SHL Healthcare |
Director of Business Development |
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Marcos Angelini |
Red Bull Latin America |
President |
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Ambassador Manuel Rocha |
XCOAL Energy & Resources |
Senior Vice President, Global Corporate Affairs |
Other than arising out of the proposed Business Combination and related transactions, none of Clover Leaf, the Sponsor, or their respective affiliates had any interest in, or affiliation with, Kustom Entertainment. The existence of the differing, additional and/or conflicting interests described above may have influenced the decision of Clover Leaf’s officers and directors to enter into the Merger Agreement and Clover Leaf’s directors in making their recommendation that you vote in favor of the approval of the Business Combination. In particular, the existence of the interests described above may incentivize Clover Leaf’s officers and directors to complete an initial business
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combination, even if on terms less favorable to Clover Leaf Public Stockholders compared to liquidating Clover Leaf, because, among other things, if Clover Leaf is liquidated without completing an initial business combination, the Sponsor Shares and Private Placement Units would be worthless (which, if unrestricted and freely tradable, would be worth an aggregate of approximately $[•] million based on the closing price of Clover Leaf Class A Common Stock and Clover Leaf Public Units on [•], 2023), out-of-pocket expenses advanced by the Sponsor and loans made by the Sponsor to Clover Leaf, if any, would not be repaid to the extent such amounts exceed cash held by Clover Leaf outside of the Trust Account (which such expenses and loans, as of [•], 2023, were approximately $[•]). Upon completion of the Business Combination, it is not anticipated that any persons associated with Clover Leaf will be employed by or provide services to the Combined Company (other than [•] in his capacity as a director), and there have been no conversations regarding the same.
Clover Leaf’s management determined that, in light of the potential conflicting interests described above with respect to the Sponsor and its affiliates, the independent directors of Clover Leaf should separately review and consider the potential conflicts of interest with respect to the Sponsor and its affiliates arising out of the proposed business combination and the proposed terms in respect thereof. Accordingly, Clover Leaf’s independent directors on the Clover Leaf Audit Committee reviewed and considered such interests and, after taking into account the factors they deemed applicable (including the potential conflicting interests), Clover Leaf’s Board approved the Merger Agreement and the transactions contemplated therein. For more, see “Background of the Business Combination.”
Anticipated Accounting Treatment
The Business Combination will be accounted for as a reverse recapitalization, in accordance with U.S. GAAP. Under this method of accounting, Clover Leaf will be treated as the “acquired” company for financial reporting purposes, and Kustom Entertainment will be the accounting “acquirer” This determination was primarily based on the assumption that:
• Kustom Entertainment’s current shareholders will hold a majority of the voting power of Clover Leaf post Business Combination;
• Effective upon the Business Combination, the post-combination Board will consist of five (5) directors, including four (4) directors designated by Kustom Entertainment and one (1) director mutually agreed upon by Clover Leaf and Kustom Entertainment;
• Kustom Entertainment’s operations will substantially comprise the ongoing operations of Clover Leaf;
• Kustom Entertainment’s senior management will comprise the senior management of Clover Leaf.
Another determining factor was that Clover Leaf does not meet the definition of a “business” pursuant to ASC 805-10-55, and thus, for accounting purposes, the Business Combination will be accounted for as a reverse recapitalization, within the scope of ASC 805. The net assets of Clover Leaf will be stated at historical cost, with no goodwill or other intangible assets recorded. Any excess of the fair value of shares issued to Clover Leaf over the fair value of Clover Leaf’s identifiable net assets acquired represents compensation for the service of a stock exchange listing for its shares and is expensed as incurred.
The unaudited pro forma condensed combined financial information has been prepared using the assumptions below with respect to the potential redemption for cash of Clover Leaf common stock:
• Assuming No Additional Redemptions: This presentation assumes that, after the redemptions of 12,204,072 shares of Class A common stock of Clover Leaf in October 2022 (the “October Redemptions”) and the redemptions of 376,002 shares of Class A common stock of Clover Leaf in July 2023 (the “July Redemptions”), no additional public shareholders of Clover Leaf exercise redemption rights with respect to their Public Shares upon consummation of the Business Combination.
• Assuming Maximum Redemptions: This presentation assumes that, after the October Redemptions and July Redemptions, Clover Leaf public shareholders holding 765,022 shares of Clover Leaf Class A common stock will exercise their redemption rights for $8.6 million upon consummation of the Business Combination at a redemption price of approximately $11.26 per share. The maximum redemption amount reflects the maximum number of the Clover Leaf Public Shares that can be redeemed without violating the conditions of the Business Combination Agreement and the assumption that the NTA proposal is passed by
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the Clover Leaf shareholders and that Clover Leaf’s Existing Organizational Documents are amended such that they will not be required to maintain a minimum net tangible asset value of at least $5,000,001 prior to or upon consummation of the Business Combination after giving effect to the payments to redeeming shareholders. This scenario includes all adjustments contained in the “no additional redemptions” scenario and presents additional adjustments to reflect the effect of the maximum redemptions.
The unaudited pro forma condensed combined balance sheet as of June 30, 2023 and the unaudited pro forma condensed combined statements of operations for the three and six months ended June 30, 2023 and for the year ended December 31, 2022 are based on the audited and unaudited historical financial statements of Clover Leaf and Kustom Entertainment. The unaudited pro forma adjustments are based on information currently available, and assumptions and estimates underlying the unaudited pro forma adjustments are described in the accompanying notes. Actual results may differ materially from the assumptions used to present the accompanying unaudited pro forma condensed combined financial information and include immaterial rounding differences.
Potential Purchases of Public Shares
In connection with the stockholder vote to approve the proposed Business Combination, the Sponsor, directors, officers, or advisors or their respective affiliates may privately negotiate transactions to purchase shares from stockholders who would have otherwise elected to have their shares redeemed in conjunction with a proxy solicitation pursuant to the proxy rules for a per-share pro rata portion of the Trust Account. Such a purchase would include a contractual acknowledgement that such stockholder, although still the record holder of Clover Leaf’s shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption rights, and would include a contractual provision that directs such stockholder to vote such shares in favor of the proposals presented at the Special Meeting. In the event that the Sponsor or directors, officers or advisors or their affiliates of Clover Leaf purchase shares in privately negotiated transactions from public stockholders who have already elected to exercise their redemption rights, such selling stockholders would be required to revoke their prior elections to redeem their shares for a portion of the Trust Account. Any such privately negotiated purchases may be effected at purchase prices that are in excess of the per-share pro rata portion of the Trust Account. None of Clover Leaf’s directors, officers or advisors or their respective affiliates will make any such purchases when they are in possession of any material non-public information not disclosed to the seller or during a restricted period under Regulation M under the Exchange Act.
The purpose of such purchases would be to increase the likelihood of obtaining stockholder approval of the Business Combination and other proposals or, where the purchases are made by the Sponsor, directors, officers or advisors or their respective affiliates, to satisfy a closing condition in an agreement related to the Business Combination.
Regulatory Matters
Under the HSR Act and the rules that have been promulgated thereunder by the Federal Trade Commission (“FTC”), certain transactions may not be consummated unless notifications have been given and information has been furnished to the Antitrust Division of the Department of Justice (“DOJ”) and the FTC and certain statutory waiting period requirements have been satisfied. The Business Combination is not subject to these requirements.
At any time before or after consummation of the Business Combination, the DOJ and the FTC could take such action under applicable antitrust laws as each deems necessary or desirable, including seeking to enjoin the consummation of the Business Combination, to rescind the Business Combination or to conditionally permit completion of the Business Combination subject to regulatory conditions or other remedies. In addition, non-U.S. regulatory bodies and U.S. state attorneys general could take action under other applicable regulatory laws as they deem necessary or desirable, including, without limitation, seeking to enjoin or otherwise prevent the completion of the Business Combination or permitting completion subject to regulatory conditions. Private parties may also seek to take legal action under the antitrust laws under certain circumstances. There can be no assurance that the DOJ, the FTC, any state attorney general, or any other government authority will not attempt to challenge the Business Combination on antitrust grounds, and, if such a challenge is made, there can be no assurance as to its result. Neither Clover Leaf nor Kustom Entertainment is aware of any material regulatory approvals or actions that are required for completion of the Business Combination.
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Material Differences in Stockholder Rights
Because certain of the Proposals are conditioned on one another, Clover Leaf will only proceed with the Business Combination if (i) the holders of a majority of the shares of the Common Stock that are voted at the Clover Leaf Meeting, voting together as a single class, vote “FOR” the Business Combination Proposal, (iii) the holders of each of (x) at least a majority of the outstanding shares of Clover Leaf Common Stock, voting together as a single class, (y) at least a majority of the outstanding shares of Clover Leaf Class A Common Stock, voting as a separate class, and (z) at least a majority of the outstanding shares of Clover Leaf Class B Common Stock, voting as a separate class, vote “FOR” the Charter Proposal, and (iii) a majority of the votes cast on each of the Nasdaq Proposal, and the Incentive Plan Proposal are voted “FOR” such Proposal. In addition, a quorum must also be present at the Special Meeting.
In accordance with the Insider Letter entered into concurrently with the IPO, all of the shares of Clover Leaf Common Stock owned by the Insiders, equal to 68.3% of the issued and outstanding shares of Clover Leaf Common Stock, will be voted in favor of each of the Proposals. Accordingly, Clover Leaf will receive sufficient votes to approve the Business Combination and the Required Proposals regardless of how any other Clover Leaf Public Stockholder votes its shares.
Recommendation of the Clover Leaf Board
CLOVER LEAF’S BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
“FOR” THE BUSINESS COMBINATION PROPOSAL.
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THE CHARTER PROPOSAL (PROPOSAL 3)
If the Business Combination is to be consummated, Clover Leaf will replace the Current Charter (as amended following the approval of the NTA Proposal), with the Proposed Charter in the form attached to this proxy statement/prospectus as Annex B, which, in the judgment of the Clover Leaf Board, is necessary to adequately address the needs of the Combined Company following the Closing.
The following table sets forth a summary of the principal proposed changes and the differences between the Current Charter and the Proposed Charter. This summary is qualified by reference to the complete text of the Proposed Charter, a copy of which is attached to this proxy statement/prospectus as Annex B. All stockholders are encouraged to read the Proposed Charter in its entirety for a more complete description of its terms.
|
Current Charter |
Proposed Charter |
|||
|
Number of Authorized Shares |
The Current Charter authorizes 111,000,000 shares, consisting of (a) 110,000,000 shares of common stock, including (i) 100,000,000 shares of Clover Leaf Class A Common Stock, and (ii) 10,000,000 shares of Clover Leaf Class B Common Stock, and (b) 1,000,000 shares of preferred stock. As of the date of this proxy statement/prospectus, no shares of preferred stock are outstanding. |
The Proposed Charter authorizes [•] shares, consisting of (a) [•] shares of common stock, including [•] shares of Class A Common Stock, and (b) [•] shares of preferred stock. As of the date of this proxy statement/prospectus, no shares of preferred stock are outstanding. |
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Name |
Clover Leaf Capital Corp. |
Kustom Entertainment, Inc. |
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Purpose |
The Current Charter provides that the purpose of Clover Leaf is to engage in any lawful act or activity for which corporations may be organized under the DGCL. In addition to the powers and privileges conferred upon Clover Leaf by law and those incidental thereto, Clover Leaf shall possess and may exercise all the powers and privileges that are necessary or convenient to the conduct, promotion or attainment of the business or purposes of Clover Leaf, including, but not limited to, effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination, involving Clover Leaf and one or more businesses. |
The Proposed Charter provides that the purpose of the Combined Company is to engage in any lawful act or activity for which corporations may be organized under the DGCL. |
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Voting |
The Current Charter provides that the holders of the Clover Leaf Class A Common Stock and the Clover Leaf Class B Common Stock exclusively possess all voting power with respect to Clover Leaf. The holders of shares of Clover Leaf Common Stock shall be entitled to one vote for each such share on each matter properly submitted to Clover Leaf stockholders on which the holders of Clover Leaf Common Stock are entitled to vote. |
The Proposed Charter provides that except as otherwise provided by law or by the resolution or resolutions providing for the issue of any series of preferred stock, the holders of the common stock shall exclusively possess all voting power with respect to the Combined Company. Except as otherwise provided by law or by the resolution or resolutions providing for the issue of any series of preferred stock, the holders of shares of common stock shall be entitled to one vote for each such share on each matter properly submitted to the stockholders of the Combined Company on which the holders of the common stock are entitled to vote. |
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Duration of Existence |
The Current Charter provides that if Clover Leaf fails to complete an initial business combination by January 22, 2024 from the closing of the Offering (subject to the requirements of law), it will be required to dissolve and liquidate its trust account by returning the then-remaining funds in such account to the Public Stockholders. |
The Proposed Charter provides that the Combined Company has perpetual existence (subject to the requirements of law). |
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Provisions Specific to a Blank Check Company |
Under the Current Charter, Article IX sets forth various provisions related to our operations as a blank check company prior to the consummation of an initial business combination. |
The Proposed Charter deletes the provisions previously included as Article IX in the Current Charter in their entirety because, upon consummation of the business combination, Clover Leaf will cease to be a blank check company. In addition, the provisions requiring that the proceeds from the IPO be held in a trust account until a business combination or liquidation of Clover Leaf and the terms governing Clover Leaf’s consummation of a proposed business combination will not be applicable following consummation of the Business Combination and thus will be deleted. |
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Amendment to Certificate of Incorporation- |
The Current Charter requires a separate or specific vote for: • Amendments that relate solely to the terms of one or more outstanding series of preferred stock, or another series of common stock, if the holders thereof are entitled to a separate vote; • Amendments that would alter or change the powers, preferences or relative, participating, optional or other or special rights of the Clover Leaf Class B Common Stock, which require a separate class vote or written consent of the holders of a majority of the shares of Class B Common Stock then outstanding; |
The Proposed Charter requires a separate or specific vote for: • Amendments that would amendment provisions that relates solely to the terms of one or more outstanding series of preferred stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon pursuant to the Proposed Charter or the DGCL. |
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Proposed Charter |
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• Amendments to the provisions of the current certificate of incorporation related to the requirements for Clover Leaf’s initial business combination, redemption rights, distributions from the trust account, certain share issuances, transactions with affiliates, minimum value of target, which prior to the consummation of Clover Leaf’s initial business combination require the affirmative vote of holders of at least fifty percent (50%) of all then outstanding shares of the Clover Leaf Common Stock; and • Amendments to the provisions of the Current Charter related to the limitation of director liabilities shall not adversely affect any right or protection of a director of Clover Leaf in respect of any act or omission occurring prior to the time of such amendment. |
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Composition of the Board of Directors |
Under the Current Charter, Article V sets out the composition of the Board of Directors, dividing the board into two (2) classes, as nearly equal in number as possible, Class I and Class II. |
The Proposed Charter provides that the number of directors of the Combined Company, other than those who may be elected by the holders of one or more series of the preferred stock voting separately by class or series, shall be fixed from time to time exclusively by the Combined Company board of directors pursuant to a resolution adopted by a majority of the Combined Company board of directors. The directors are not divided into separate classes under the Proposed Charter. |
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Removal of Directors |
Under the Current Charter, any or all of the directors may be removed from office at any time, with or without cause, by the affirmative vote of holders of a majority of the voting power of all then outstanding shares of the Clover Leaf Class B Common Stock entitled to vote generally in the election of directors, voting together as a single class. |
Under the Proposed Charter, the number of directors that shall constitute the board of directors shall be fixed exclusively by resolutions adopted by a majority of the authorized number of directors constituting the board of directors. Subject to any limitations imposed by applicable law, any individual director or directors may be removed with cause by the affirmative vote of the holders of a majority of the voting power of all then-outstanding shares of capital stock of the Combined Company entitled to vote generally at an election of directors, voting together as a single class |
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Choice of Forum |
The Current Charter provides that unless Clover Leaf consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for any Clover Leaf stockholder to bring (i) any derivative action or proceeding brought on behalf of Clover Leaf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of Clover Leaf to Clover Leaf or Clover Leaf stockholders, (iii) any action asserting a claim against Clover Leaf, its directors, officers or employees arising pursuant to any provision of the DGCL or the Current Charter or the Clover Leaf bylaws, or (iv) any action asserting a claim against Clover Leaf, its directors, officers or employees governed by the internal affairs doctrine. The exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction and unless Clover Leaf consents in writing to the selection of an alternative forum. |
The Proposed Charter provides that unless the Combined Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) and any appellate court therefrom shall be the sole and exclusive forum for the following claims or causes of action under the Delaware statutory or common law: (i) any derivative claim or cause of action brought on behalf of the Combined Company; (ii) any claim or cause of action for breach of a fiduciary duty owed by any current or former director, officer or other employee of the Combined Company to the Combined Company or the Combined Company’s stockholders; (iii) any claim or cause of action against the Combined Company or any current or former director, officer or other employee of the Combined Company, arising out of or pursuant to any provision of the DGCL, the Proposed Charter or the Combined Company’s bylaws (as each may be amended from time to time); (iv) any claim or cause of action seeking to interpret, apply, enforce or determine the validity of the Proposed Charter or the Combined Company’s bylaws (as each may be amended from time to time, including any right, obligation or remedy thereunder); (v) any claim or cause of action as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware; and (vi) any claim or cause of action against the Combined Company or any current or former director, officer or other employee of the Combined Company governed by the internal-affairs doctrine or otherwise related to the Combined Company’s internal affairs, in all cases to the fullest extent permitted by law and subject to the court having personal jurisdiction over the indispensable parties named as defendants. |
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Reasons for the Amendments to Clover Leaf’s Charter
In the judgment of the Clover Leaf Board, the Proposed Charter is necessary to address the needs of the Combined Company following the Closing. In particular:
• The greater number of authorized shares of capital stock is desirable for the Combined Company to have sufficient shares to complete the Business Combination. Additionally, the Clover Leaf Board believes that it is important for us to have available for issuance a number of authorized shares sufficient to support our growth and to provide flexibility for future corporate needs (including, if needed, as part of financing for future growth acquisitions). The shares would be issuable for any proper corporate purpose, including future acquisitions, capital raising transactions consisting of equity or convertible debt, stock dividends or issuances under current and any future stock incentive plans, pursuant to which we may provide equity incentives to employees, officers and directors. The Clover Leaf Board believes that these additional shares will provide us with needed flexibility to issue shares in the future in a timely manner and under circumstances we consider favorable without incurring the risk, delay and potential expense incident to obtaining stockholder approval for a particular issuance. Upon the consummation of the Business Combination, all outstanding shares of Clover Leaf Class B Common Stock will be reclassified as shares of Class A Common Stock on a one-to-one basis.
• The additional changes to the Current Charter, including the name change from “Clover Leaf Capital Corp.” to “Kustom Entertainment, Inc.,” the change in purpose, the change in duration of existence, and the deletion of provisions specific to a blank check company, are necessary to adequately address the needs of the Combined Company following the Closing. The elimination of certain provisions related to Clover Leaf’s status as a blank check company is desirable because these provisions will serve no purpose following the Business Combination. For example, these proposed amendments remove the requirement to dissolve Clover Leaf and allow the Combined Company to continue as a corporate entity with perpetual existence following consummation of the Business Combination. Perpetual existence is the usual period of existence for corporations and the Clover Leaf Board believes it is the most appropriate period following the Business Combination. In addition, certain other provisions in the Current Charter require that proceeds from the IPO be held in the Trust Account until a business combination or liquidation of Clover Leaf has occurred. These provisions cease to apply once the Business Combination is consummated.
• The Clover Leaf Board believes the choice of forum provision is desirable to delineate matters for which the Court of Chancery of the State of Delaware or the federal district courts of the U.S., as applicable, is the sole and exclusive forum, in order that the Combined Company is not subject to such types of claims in numerous jurisdictions, unless the Combined Company consents in writing to the selection of an alternative forum.
Vote Required for Approval
This Charter Proposal will be approved and adopted only if the holders of (i) at least a majority of the issued and outstanding shares of Clover Leaf Common Stock as of the Record Date, voting together as a single class, (ii) at least a majority of the issued and outstanding shares of Clover Leaf Class A Common Stock as of the Record Date, voting as a separate class and (iii) at least a majority of the issued and outstanding shares of Clover Leaf Class B Common Stock as of the Record Date, voting as a separate class vote “FOR” the Charter Proposal. The implementation of the Proposed Charter is also subject to the approval of each of the Business Combination Proposal, the Nasdaq Proposal, and the Incentive Plan Proposal at the Special Meeting. Failure to vote by proxy or to vote in person online at the Special Meeting or an abstention from voting on the Charter Proposal will have the same effect as a vote “AGAINST” the Charter Proposal.
Recommendation of the Clover Leaf Board
CLOVER LEAF’S BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
“FOR” THE CHARTER PROPOSAL.
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ADVISORY CHARTER PROPOSALS (PROPOSALS 4 – 6)
In connection with the Business Combination, Clover Leaf is asking its stockholders to vote upon, on a non-binding advisory basis, proposals to approve certain governance provisions contained in the Proposed Charter. This separate vote is not otherwise required by Delaware law separate and apart from the NTA Proposal and the Charter Proposal. Pursuant to SEC guidance, Clover Leaf is submitting these provisions to its stockholders separately for approval, allowing stockholders the opportunity to present their separate views on important governance provisions. However, the stockholder votes regarding these proposals are advisory votes, and are not binding on Clover Leaf or the Clover Leaf Board (separate and apart from the approval of the NTA Proposal and the Charter Proposal). In the judgment of the Clover Leaf Board, these provisions are necessary to adequately address the needs of the Combined Company. Furthermore, the Business Combination is not conditioned on the separate approval of the Advisory Charter Proposals (separate and apart from approval of the Charter Proposal).
Clover Leaf stockholders will be asked to approve, on a non-binding advisory basis, the following material differences between the Proposed Charter and the Current Charter, which are being presented as four separate sub-proposals (the “Advisory Charter Proposals”):
(a) Advisory Charter Proposal 4 — to change the corporate name of the Combined Company to “Kustom Entertainment, Inc.” at and from the time of the Business Combination;
(b) Advisory Charter Proposal 5 — to increase the authorized shares of capital stock of the Combined Company to [•] shares of capital stock, consisting of (a) [•] shares of Class A Common Stock, and (b) [•] shares of undesignated preferred stock.
(c) Advisory Charter Proposal 6 — to remove certain blank check provisions that will no longer be necessary upon consummation of the Business Combination.
Reasons for the Charter Amendments
In the judgment of the Board, the amendments to the Current Charter are desirable for the following reasons:
• the name of the new public entity is desirable to reflect the Business Combination with Kustom Entertainment and the combined business going forward;
• the greater number of authorized number of shares of capital stock is desirable for the Combined Company to have enough additional authorized shares for financing its business, for acquiring other businesses, for forming strategic partnerships and alliances and for stock dividends and stock splits and to issue upon exercise of the equity grants made under the Incentive Plan (assuming the Incentive Plan is approved at the Special Meeting and contingent upon the Closing); and
• it is desirable to delete the provisions that relate to the operation of Clover Leaf as a blank check company prior to the consummation of its initial business combination because they would not be applicable after the Business Combination (such as the obligation to dissolve and liquidate if a business combination is not consummated within a certain period of time).
The approval of each of the Advisory Charter Proposals requires a majority of the votes cast on such Proposal by the holders of the shares of Clover Leaf Common Stock entitled to vote thereon at the Special Meeting, voting together as a single class.
A copy of the Proposed Charter, as will be in effect and upon consummation of the Business Combination and filing with the Delaware Secretary of State, is attached to this proxy statement/prospectus as Annex B.
Vote Required for Approval
As discussed above, the Advisory Charter Proposals are advisory votes and therefore are not binding on Clover Leaf or the Clover Leaf Board. Furthermore, the Business Combination is not conditioned on the separate approval of the Advisory Charter Proposals (separate and apart from approval of the Charter Proposal). Accordingly, regardless of the outcome of the non-binding advisory votes on the Advisory Charter Proposals, Clover Leaf intends that the Proposed Charter will take effect upon consummation of the Business Combination (assuming approval of the Charter Proposal).
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Recommendation of the Clover Leaf Board
CLOVER LEAF’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” EACH OF THE ADVISORY CHARTER PROPOSALS.
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THE INCENTIVE PLAN PROPOSAL (PROPOSAL 7)
Clover Leaf is seeking stockholder approval for approval of the Incentive Plan. The Incentive Plan was adopted by the Clover Leaf Board on [•], 2023, subject to stockholder approval at the Special Meeting. The Incentive Plan is attached to this Proxy Statement as Annex D.
The purpose of the Incentive Plan is to offer all Kustom Entertainment employees, directors and key consultants an opportunity to acquire a proprietary interest in Kustom Entertainment’s success and remain in service to Kustom Entertainment and to attract new employees, directors and consultants. The Incentive Plan provides for the direct award of shares, with or without restrictions, the grant of options to purchase shares, the grant of stock appreciation rights (“SARs”) and the grant of restricted stock units (“RSUs”) (collectively, “Awards”). Options granted under the Incentive Plan may include non-statutory options (“NSOs”) as well as incentive stock options (“ISOs”) intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).
The Clover Leaf Board believes that it is in the best interests of Kustom Entertainment, Clover Leaf and Clover Leaf’s stockholders for Clover Leaf to approve the Incentive Plan. The Clover Leaf Board believes that equity awards assist in retaining, motivating and rewarding employees, directors and consultants by giving them an opportunity to obtain long-term equity participation in Kustom Entertainment. In addition, equity awards are an important contributor to aligning the incentives of Kustom Entertainment’s employees with the interests of Clover Leaf’s stockholders. The Clover Leaf Board also believes equity awards are essential to attracting new employees and retaining current employees. Further, the granting of options to new and existing employees frequently permits Kustom Entertainment to pay lower salaries than otherwise might be the case. The Clover Leaf Board believes that to remain competitive with other entertainment companies in Kustom Entertainment’s long-term incentive plans, Kustom Entertainment must continue to provide employees with the opportunity to obtain equity in Kustom Entertainment and that an inability to offer equity incentives to new and current employees would put Kustom Entertainment at a competitive disadvantage in attracting and retaining qualified personnel. Kustom Entertainment’s named executive officers and directors have an interest in this proposal because they are expected to receive Awards under the Incentive Plan if the Incentive Plan is approved.
Summary of the Incentive Plan
The following paragraphs provide a summary of the principal features of the Incentive Plan and its operation. The following summary is qualified in its entirety by reference to the Incentive Plan as set forth in Annex D.
Objectives. The objective of the Incentive Plan is to provide incentives to Kustom Entertainment employees, directors and key consultants to achieve financial results aimed at increasing shareholder value and attracting talented individuals to us. Persons eligible to receive Awards under the Incentive Plan will be those persons whose performance, in the judgment of the Compensation Committee of The Clover Leaf Board, can have significant impact on Kustom Entertainment’s success. Each person to whom an Award is issued is referred to as a “Participant.”
Oversight. The Clover Leaf Board will administer the Incentive Plan by making determinations regarding the persons to whom Awards should be granted and the amount, terms, conditions and restrictions of the Awards. The Clover Leaf Board also has the authority to establish and amend rules for the administration of the Incentive Plan.
Number of Shares of Class A Common Stock Available Under the Incentive Plan. If Clover Leaf’s stockholders approve the Incentive Plan, a total of [•] shares of Class A Common Stock will be reserved for issuance under the Incentive Plan.
Types of Grants. The Incentive Plan allows for the grant of options (ISOs and NSOs), SARs, RSUs and Class A Common Stock, with or without restrictions. The Incentive Plan does not specify that an Award must be in any particular form.
Options.
— Exercise Price. All options granted under the Incentive Plan must have an exercise price at least equal to 100% of the fair market value of the Class A Common Stock as of the date of grant. ISOs granted to any person who owns, immediately after the grant, stock possessing more than 10% of the combined voting power of all classes of Clover Leaf’s stock, or of any parent or subsidiary corporation, must have an exercise price at least equal to 110% of the fair market value of the Class A Common Stock on the date of grant.
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The exercise price of an outstanding option may, by discretionary action of the Clover Leaf Board, be reduced, or the option may be cancelled and another Award substituted, at a time when its exercise price exceeds the then current fair market value of Class A Common Stock, except to the extent approval of the stockholders is required under any applicable exchange listing rules.
— Dollar limit. The aggregate fair market value, determined as of the time an ISO is granted, of the Class A Common Stock with respect to which ISOs are exercisable by an employee for the first time during any calendar year cannot exceed $100,000. However, there is no aggregate dollar limitation on the amount of NSOs that may be exercisable for the first time during any calendar year.
— Expiration date. Any option granted under the Incentive Plan will expire at the time fixed by the Clover Leaf Board, which, in the case of an ISO, cannot be more than ten years after the date it is granted or, in the case of any person who owns more than 10% of the combined voting power of all classes of Clover Leaf’s stock or of any parent or subsidiary corporation, not more than five years after the date of grant. It is anticipated that options will generally expire after [•] to [•] years. ISOs may be exercised only while Kustom Entertainment employs the optionee and both ISOs and NSOs generally expire at the end of the 90 day period following termination of employment or any other service relationship (generally 12 months after termination by reason of death, disability or retirement).
— Exercisability. The Clover Leaf Board may also specify when all or part of an option becomes exercisable, but in the absence of such specification, the option will ordinarily be exercisable in whole or in part at any time during its term. However, the Clover Leaf Board may accelerate the exercisability of any option at its discretion, and the Incentive Plan further provides for accelerated exercisability in the case of retirement or a change of control, each as defined in the Incentive Plan. It is anticipated that options will generally vest over [•] or more years for employees and [•] years for directors.
— Assignability. Options granted under the Incentive Plan are generally not assignable.
— Payment upon Exercise. Payment of the exercise price for any option may be in cash, or with Clover Leaf’s consent and in the case of an NSO, by withheld shares that have a fair market value at the time the option is exercised equal to the aggregate exercise price due (plus applicable withholding tax), with Clover Leaf’s consent in the form of shares of Class A Common Stock, in a combination of the foregoing or in any other manner acceptable to us.
Stock Appreciation Rights.
— Base Price. All SARs granted under the Incentive Plan must have a base price at least equal to 100% of the fair market value of the Class A Common Stock as of the date of grant.
The base price of an outstanding SAR may, by discretionary action of the Clover Leaf Board, be reduced, or the SAR may be cancelled and another Award substituted, at a time when its base price exceeds the then current fair market value of Class A Common Stock, except to the extent approval of the stockholders is required under any applicable exchange listing rules.
— Expiration date. Any SAR granted under the Incentive Plan will expire at the time fixed by the Clover Leaf Board.
— Exercisability. The Clover Leaf Board may also specify when all or part of a SAR becomes exercisable, but in the absence of such specification, the SAR will ordinarily be exercisable in whole or in part at any time during its term. However, the Clover Leaf Board may accelerate the exercisability of any SAR at its discretion.
— Assignability. SARs granted under the Incentive Plan are not assignable.
— Payment upon Exercise. Payment of the base price for any SAR may be in cash or in any other manner acceptable to us and specified in the underlying Award agreement.
— Settlement. An SAR may be settled in cash, Class A Common Stock or a combination thereof, as specified in the underlying Award agreement.
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Stock Grants. The Clover Leaf Board may make an Award in one or more of the following forms of stock grant.
— Stock grant without restrictions. The Clover Leaf Board may issue shares of Class A Common Stock to a Participant without any restrictions.
— Restricted stock grant. The Clover Leaf Board may issue shares of Class A Common Stock to a Participant with restrictions determined by the Clover Leaf Board in its discretion. Restrictions may include conditions that require the Participant to forfeit the shares in the event that the Participant ceases to provide services to Kustom Entertainment or any of Kustom Entertainment’s affiliates before a stated time or in the event that certain individual and/or Company-specific performance conditions are not satisfied.
— Restricted stock units. The Clover Leaf Board may make an Award of RSUs, which are similar to restricted stock Awards except that no shares are actually issued to the Participant on the RSU grant date. Rather, and provided all applicable restrictions, which may be time and/or performance based, are satisfied, shares of Class A Common Stock are generally delivered at settlement of the Award. Dividend equivalent units may, but are not required to, be issued with respect to RSUs. An RSU (and any dividend equivalent units) may be settled in cash, Class A Common Stock or in some combination of cash and shares of Class A Common Stock, as determined by the Clover Leaf Board and stated in the Award agreement. The period of restriction, the purchase price, if any, and the manner of settlement are determined by the Clover Leaf Board in an RSU Award agreement.
Rights of Participants with respect to Awards. Participants holding options, SARs and RSUs will not have voting rights or other rights (including generally rights as to dividends) as a stockholder until any shares on settlement of the options, SARs and RSUs are issued. A participant receiving an Award of restricted stock generally has dividend rights (provided that in the discretion of the Clover Leaf Board participants will not be entitled to dividends with respect to unvested restricted stock until the stock vests) but not voting rights with respect to unvested shares, unless otherwise provided by the Clover Leaf Board. After all conditions and restrictions applicable to restricted stock grants have been satisfied or have lapsed, shares of restricted stock will become freely transferable.
Merger or Sale of Assets. If Clover Leaf undergoes a change of control, as defined in the Incentive Plan, any unvested Awards will vest immediately prior to closing of the event resulting in the change of control, and the Clover Leaf Board shall have the power and discretion to provide for each Award holder’s election alternatives regarding the terms and conditions for the exercise of such Awards. Such an alternative may include requiring exercise in connection with the closing (and providing for the lapse of the Award if not so exercised).
Amendment and Termination of the Incentive Plan. The Clover Leaf Board has the authority to amend, alter, suspend or terminate the Incentive Plan, except that stockholder approval will be required for any amendment to the Incentive Plan to the extent required in connection with the issuance of ISOs or by any other applicable law, regulation or Nasdaq or stock exchange rule. Any amendment, alteration, suspension or termination will not, without the consent of the participant, materially adversely affect any rights or obligations under any Award previously granted. The Incentive Plan has a term of ten years beginning [•], 2023, unless terminated earlier by the Clover Leaf Board.
Federal Tax Aspects
The following description of the federal income tax consequences of Awards is general, does not purport to be complete and does not describe state, local or foreign tax consequences.
Tax consequences of nonqualified stock options.
A Participant realizes no taxable income when an NSO is granted. Instead, the difference between the fair market value of the Class A Common Stock acquired pursuant to the exercise of the option and the exercise price paid is taxed as ordinary compensation income when the option is exercised. The difference is measured and taxed as of the date of exercise, if the Class A Common Stock is not subject to a “substantial risk of forfeiture,” or as of the date or dates on which the risk terminates in other cases. A Participant may elect to be taxed on the difference between the exercise price and the fair market value of the Class A Common Stock on the date of exercise, even though some or all of the Class A Common Stock acquired is subject to a substantial risk of forfeiture. Once ordinary compensation income is recognized, gain on the subsequent sale of the Class A Common Stock is taxed as short-term or long-term capital gain, depending on the holding period after exercise. Clover Leaf receives no tax deduction on the grant of an NSO, but
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Clover Leaf is entitled to a tax deduction, subject to the limitations of Section 162(m) of the Internal Revenue Code, when a Participant recognizes ordinary compensation income on or after exercise of the option, in the same amount as the income recognized by the Participant.
Tax consequences of incentive stock options.
Generally, a Participant incurs no federal income tax liability on either the grant or the exercise of an ISO, although a Participant will generally have taxable income for alternative minimum tax purposes at the time of exercise equal to the excess of the fair market value of the Class A Common Stock subject to the option over the exercise price. Provided that the Class A Common Stock is held for at least one year after the date of exercise of the option and at least two years after its date of grant, any gain realized on a subsequent sale of the Class A Common Stock will be taxed as long-term capital gain. If the Class A Common Stock is disposed of within a shorter period of time, the Participant will recognize ordinary compensation income in an amount equal to the difference between the fair market value of the stock on the date of exercise (or the sale price of the shares sold, if less) over the exercise price. Clover Leaf receives no tax deduction on the grant or exercise of an ISO, but Clover Leaf is entitled to a tax deduction, subject to the limitations of Section 162(m) of the Internal Revenue Code, if the Participant recognizes ordinary compensation income on account of a premature disposition of shares acquired on exercise of an ISO, in the same amount and at the same time as the Participant recognizes income.
Tax consequences of stock appreciation rights.
A Participant realizes no income upon the grant of an SAR, but upon its exercise recognizes ordinary compensation income in an amount equal to the fair market value of the Class A Common Stock (or cash) received reduced, if applicable, by the aggregate base price set forth in the related Award agreement, assuming the Class A Common Stock is not subject to a substantial risk of forfeiture at exercise. Clover Leaf is entitled to a tax deduction, subject to the limitations of Section 162(m) of the Internal Revenue Code, in the amount of ordinary compensation income recognized.
Tax consequences of stock grants.
A person who receives an Award of Class A Common Stock without any restrictions will recognize ordinary compensation income equal to the fair market value of the Class A Common Stock over the amount (if any) paid. If the Class A Common Stock is subject to restrictions, the recipient generally will not recognize ordinary compensation income at the time the Award is received but will recognize ordinary compensation income when restrictions constituting a substantial risk of forfeiture lapse. The amount of that income will be equal to the excess of the aggregate fair market value, as of the date the restrictions lapse, over the amount (if any) paid for the Class A Common Stock. Alternatively, a Participant may elect to be taxed, pursuant to Section 83(b) of the Internal Revenue Code, on the excess of the fair market value of the Class A Common Stock at the time of grant over the amount (if any) paid for the Class A Common Stock, notwithstanding any restrictions. All such taxable amounts are deductible, subject to the limitations of Section 162(m) of the Internal Revenue Code, by us at the time and in the amount of the ordinary compensation income recognized by the Participant.
A Participant who receives RSUs generally will not recognize ordinary compensation income at the time of grant. Rather, the Participant will generally recognize ordinary compensation income equal to the fair market value of the Class A Common Stock or cash received less the price paid, if any, at the time the RSU settles shortly after vesting. When any Class A Common Stock received is subsequently sold, the Participant generally will recognize capital gain or loss equal to the difference between the amount realized upon the sale of the shares and his or her tax basis in the shares (generally, the fair market value of the stock when acquired plus any amount paid). The capital gain or loss will be long-term if the stock was held for more than one year or short-term if held for a shorter period. Clover Leaf will be entitled to a tax deduction, subject to the limitations of Section 162(m) of the Internal Revenue Code, when the Participant recognizes ordinary compensation income.
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Dividends.
The full amount of dividends or other distributions of property made with respect to restricted stock grants before the lapse of any applicable restrictions will constitute ordinary compensation income, and Clover Leaf is entitled to a deduction, subject to the limitations of Section 162(m) of the Internal Revenue Code, at the same time and in the same amount as the income is realized by the Participant (unless an election under Section 83(b) of the Internal Revenue Code has been made). Dividend equivalents on RSUs (if any) will be taxed as additional ordinary compensation income at settlement, and Clover Leaf will be entitled to a deduction, subject to the limitations of Section 162(m) of the Internal Revenue Code, at the same time and in the same amount.
Section 162(m) of the Internal Revenue Code.
Section 162(m) of the Internal Revenue Code generally disallows an income tax deduction to public companies for compensation in excess of $1,000,000 paid in any year to the principal executive officer, the principal financial officer and the three other most highly compensated executive officers. In addition, each person covered by Section 162(m) of the Internal Revenue Code for a particular year after 2016 remains subject to the $1,000,000-limit in subsequent years, even if not included in that group for the year. It is expected that certain of Clover Leaf’s compensation arrangements will result in non-deductible compensation when the total exceeds $1,000,000. Nevertheless, the deductibility of compensation is but one of the critical factors in the design and implementation of any compensation arrangement, and Board reserves the right to pay nondeductible compensation when appropriate.
Withholding and other consequences. Any ordinary compensation includible in the gross income of a Participant will be subject to appropriate federal, state and local income and employment tax withholding.
Vote Required and Recommendation
The affirmative vote of the holders of a majority of the votes cast will be required to approve the Incentive Plan.
CLOVER LEAF’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL OF THE INCENTIVE PLAN.
Vote Required for Approval
The approval of the Incentive Plan Proposal requires a majority of the votes cast by the holders of the shares of Clover Leaf Common Stock represented in person, online or by proxy, and entitled to vote thereon at the Special Meeting, voting together as a single class.
Recommendation of the Clover Leaf Board
CLOVER LEAF’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE “FOR” THE INCENTIVE PLAN PROPOSAL.
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THE NASDAQ PROPOSAL (PROPOSAL 8)
Overview
Pursuant to Rule 5635 of the Nasdaq Listing Rules, shareholder approval is required prior to the sale, issuance or potential issuance of common stock (or securities convertible into or exercisable for common stock), which equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance. Additionally, under Rule 5635 of the Nasdaq Listing Rules, shareholder approval is required prior to the issuance of securities when the issuance or potential issuance will result in a change of control of Clover Leaf.
Upon the consummation of the Business Combination, Clover Leaf expects to issue an estimated 11,220,826 shares of the Combined Company’s common stock in connection with the Business Combination
Accordingly, the aggregate number of shares of Clover Leaf common stock that the Combined Company will issue in connection with the Business Combination will exceed 20% of both the voting power and the shares of Clover Leaf common stock outstanding before such issuance and may result in a change of control of the registrant under Nasdaq Listing Rule 5635. For these reasons, Clover Leaf is seeking the approval of Clover Leaf stockholders for the issuance of shares of Combined Company’s Common Stock (and securities convertible into or exercisable for Common Stock) pursuant in connection with the Business Combination.
Effect of Proposal on Current Stockholders
If the Nasdaq Proposal is adopted, we expect to issue approximately 11,220,826 shares of Class A Common Stock to Digital Ally upon the Closing subject to adjustment based on the adjustment for indebtedness (net of cash) set forth in the Merger Agreement.
The issuance of the shares of Clover Leaf Common Stock described above would result in significant dilution to Clover Leaf stockholders and result in Clover Leaf stockholders having a smaller percentage interest in the voting power, liquidation value and aggregate book value of Clover Leaf.
Vote Required for Approval
The approval of the Nasdaq Proposal requires a majority of the votes cast by the holders of the shares of Clover Leaf Common Stock represented in person online or by proxy and entitled to vote thereon at the Special Meeting, voting together as a single class.
Failure to submit a proxy or to vote online during the Special Meeting, an abstention from voting or a broker non-vote will have no effect on the Nasdaq Proposal.
Recommendation of the Clover Leaf Board
CLOVER LEAF’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE ‘‘FOR’’ THE NASDAQ PROPOSAL.
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THE ADJOURNMENT PROPOSAL (PROPOSAL 9)
Overview
The Adjournment Proposal, if adopted, will allow the Clover Leaf Board to adjourn the Special Meeting to a later date or dates, at the determination of the Clover Leaf Board. The Adjournment Proposal will only be presented to Clover Leaf stockholders in the event that based upon the tabulated vote at the time of the Special Meeting there are insufficient votes for, or otherwise in connection with, the approval of the Business Combination Proposal, the Charter Proposal, the Nasdaq Proposal, or the Incentive Plan Proposal. In no event will the Clover Leaf Board adjourn the Special Meeting or consummate the Business Combination beyond the date by which it may properly do so under the Current Charter and Delaware law.
Consequences if the Adjournment Proposal is Not Approved
If the Adjournment Proposal is not approved by Clover Leaf’s stockholders, the Clover Leaf Board may not be able to adjourn the Special Meeting to a later date in the event that there are insufficient votes for, or otherwise in connection with, the approval of the Business Combination Proposal or any other Proposal.
Vote Required for Approval
Assuming a quorum, the approval of the Adjournment Proposal requires a majority of the votes cast by the holders of the shares of Clover Leaf Common Stock represented in person online or by proxy and entitled to vote thereon at the Special Meeting, voting together as a single class.
Recommendation of the Clover Leaf Board
CLOVER LEAF’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE “FOR” THE ADJOURNMENT PROPOSAL.
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U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of the material U.S. federal income tax considerations for holders of shares of Clover Leaf Class A Common Stock that (i) hold the Combined Company Common Stock following the adoption of the Proposed Charter in connection with the Business Combination or (ii) elect to have their Clover Leaf Class A Common Stock redeemed for cash if the Business Combination is completed. This discussion applies only to Clover Leaf Class A Common Stock or Combined Company Common Stock that is held as a capital asset for U.S. federal income tax purposes. This discussion does not describe all of the U.S. federal income tax consequences that may be relevant to you in light of your particular circumstances, including the alternative minimum tax, the Medicare tax on certain investment income and the different consequences that may apply if you are subject to special rules that apply to certain types of investors, such as:
• financial institutions or financial services entities;
• broker dealers;
• insurance companies;
• dealers or traders in securities subject to a mark-to-market method of accounting with respect to shares of Clover Leaf Class A Common Stock or Combined Company Common Stock;
• persons holding Clover Leaf Class A Common Stock or Combined Company Common Stock as part of a “straddle,” hedge, integrated transaction or similar transaction;
• U.S. holders (as defined below) whose functional currency is not the U.S. dollar;
• “specified foreign corporations” (including “controlled foreign corporations”), “passive foreign investment companies” and corporations that accumulate earnings to avoid U.S. federal income tax;
• U.S. expatriates or former long-term residents of the U.S.;
• governments or agencies or instrumentalities thereof;
• regulated investment companies or real estate investment trusts;
• persons subject to the alternative minimum tax provisions of the Code;
• persons who received their shares of Clover Leaf Class A Common Stock or Combined Company Common Stock as compensation or as a result of the exercise of an option or warrant received as compensation;
• persons subject to the applicable financial statement accounting rules under Section 451(b) of the Code;
• partnerships or other entities treated as pass-through entities for U.S. federal income tax purposes; and
• tax-exempt entities.
If an entity is treated as a partnership (or other pass-through entity) for U.S. federal income tax purposes, the U.S. federal income tax treatment of a partner (or other owners) will generally depend on the status of the partner and the activities of the partnership. Partnerships and their partners (or other owners) should consult their tax advisors with respect to the consequences to them under the circumstances described herein.
This discussion is based on the Code and administrative pronouncements, judicial decisions, and final, temporary and proposed Treasury regulations, all as of the date hereof and all of which are subject to differing interpretations or change. Any such change or differing interpretation, which may be retroactive, may affect the tax consequences described herein. We have not sought, and do not expect to seek, a ruling from the U.S. Internal Revenue Service (the “IRS”) as to any U.S. federal income tax consequence described herein. No assurance can be given that the IRS would not assert, or that a court would not sustain, a contrary position. This discussion does not address any aspect of state, local or non-U.S. taxation, or any U.S. federal taxes other than income taxes (such as gift and estate taxes). You are urged to consult your tax advisor with respect to the application of U.S. federal tax laws to your particular situation, as well as any tax consequences arising under the laws of any state, local or foreign jurisdiction.
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For purposes of this discussion, a “U.S. holder” is a beneficial owner of shares of Clover Leaf Class A Common Stock or Combined Company Common Stock that is, for U.S. federal income tax purposes:
• an individual who is a citizen or resident of the United States;
• a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized in or under the laws of the United States, any state thereof or the District of Columbia;
• an estate the income of which is subject to U.S. federal income taxation purposes regardless of its source; or
• an entity treated as a trust for U.S. federal income tax purposes if (i) a court within the United States is able to exercise primary supervision over the administration of such trust, and one or more such U.S. persons has the authority to control all substantial decisions of such trust or (ii) it has a valid election in effect under Treasury regulations to be treated as a U.S. person.
A “Non-U.S. holder” is a beneficial owner of Clover Leaf Class A Common Stock or Combined Company Common Stock that is not a U.S. holder and is not a partnership for U.S. federal income tax purposes.
Adoption of the Proposed Charter
Holders of Clover Leaf Class A Common Stock are not expected to recognize any income, gain or loss under U.S. federal income tax laws as a result of the adoption of the Proposed Charter in connection with the Business Combination. It is expected that each such holder would have the same basis in its Combined Company Common Stock after the adoption of the Proposed Charter as that holder had in the corresponding Clover Leaf Class A Common Stock immediately prior to the adoption of the Proposed Charter and such holder’s holding period in the Combined Company Common Stock would include the holder’s holding period in the corresponding Clover Leaf Class A Common Stock. Although the matter is not entirely clear, these consequences to the holders assume, and we intend to take the position, that the adoption of the Proposed Charter does not result in an exchange by the holders of Clover Leaf Class A Common Stock for the Combined Company Common Stock for U.S. federal income tax purposes. If contrary to this characterization, the adoption of the Proposed Charter does result in an exchange, it is expected that such exchange would be treated as a tax-deferred exchange for U.S. federal income tax purposes, with the tax consequences to a holder generally being as described above. Each holder should consult its own tax advisor regarding the U.S. federal income tax consequences to it of the adoption of the Proposed Charter in connection with the Business Combination.
Redemption of Clover Leaf Class A Common Stock
In the event that a holder’s shares of Clover Leaf Class A Common Stock are redeemed pursuant to the redemption provisions described in this proxy statement/prospectus under the section entitled “The Special Meeting — Redemption Rights,” the treatment of the redemption for U.S. federal income tax purposes will depend on whether the redemption qualifies as a sale or other exchange of shares of Clover Leaf Class A Common Stock under Section 302 of the Code. If the redemption qualifies as a sale of shares of Clover Leaf Class A Common Stock, a U.S. holder will be treated as described below under the section entitled “— U.S. Holders — Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Clover Leaf Class A Common Stock,” and a Non-U.S. holder will be treated as described under the section entitled “— Non-U.S. Holders — Gain on Sale, Taxable Exchange or Other Taxable Disposition of Clover Leaf Class A Common Stock.” If the redemption does not qualify as a sale of shares of Clover Leaf Class A Common Stock, a holder will be treated as receiving a corporate distribution with the tax consequences to a U.S. holder described below under the section entitled “— U.S. Holders — Taxation of Distributions,” and the tax consequences to a Non-U.S. holder described below under the section entitled “— Non-U.S. Holder — Taxation of Distributions.”
Whether a redemption of shares of Clover Leaf Class A Common Stock qualifies for sale treatment will depend largely on the total number of shares of our stock treated as held by the redeemed holder before and after the redemption (including any stock constructively owned by the holder as a result of owning any of our stock that a holder would directly or indirectly acquire pursuant to the Business Combination) relative to all of our shares outstanding both before and after the redemption. The redemption of Clover Leaf Class A Common Stock generally will be treated as a sale of Clover Leaf Class A Common Stock (rather than as a corporate distribution) if the redemption (i) is “substantially disproportionate” with respect to the holder, (ii) results in a “complete termination” of the holder’s interest in us or (iii) is “not essentially equivalent to a dividend” with respect to the holder. These tests are explained more fully below.
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In determining whether any of the foregoing tests result in a redemption qualifying for sale treatment, a holder takes into account not only shares of our stock actually owned by the holder, but also shares of our stock that are constructively owned by it. A holder may constructively own, in addition to stock owned directly, stock owned by certain related individuals and entities in which the holder has an interest or that have an interest in such holder, as well as any stock that the holder has a right to acquire by exercise of an option. Moreover, any shares of our stock that a holder directly or constructively acquires pursuant to the Business Combination generally should be included in determining the U.S. federal income tax treatment of the redemption.
In order to meet the substantially disproportionate test, the percentage of our outstanding voting stock actually and constructively owned by the holder immediately following the redemption of shares of Clover Leaf Class A Common Stock must, among other requirements, be less than 80 percent (80%) of the percentage of our outstanding voting stock actually and constructively owned by the holder immediately before the redemption (taking into account both redemptions by other holders of Clover Leaf Class A Common Stock and the Combined Company Common Stock to be issued pursuant to the Business Combination). Because the Clover Leaf Class A Common Stock is not entitled to vote for the election of directors prior to the Business Combination, the Clover Leaf Class A Common Stock may not be treated as voting stock for this purpose and, consequently, this substantially disproportionate test may not be applicable.
There will be a complete termination of a holder’s interest if either (i) all of the shares of our stock actually and constructively owned by the holder are redeemed or (ii) all of the shares of our stock actually owned by the holder are redeemed and the holder is eligible to waive, and effectively waives in accordance with specific rules, the attribution of stock owned by certain family members and the holder does not constructively own any other shares of our stock.
The redemption of Clover Leaf Class A Common Stock will not be essentially equivalent to a dividend if the redemption results in a “meaningful reduction” of the holder’s proportionate interest in us. Whether the redemption will result in a meaningful reduction in a holder’s proportionate interest in us will depend on the particular facts and circumstances.
However, the IRS has indicated in a published ruling that even a small reduction in the proportionate interest of a small minority stockholder in a publicly held corporation where such stockholder exercises no control over corporate affairs may constitute such a “meaningful reduction.”
If none of the foregoing tests is satisfied, then the redemption of shares of Clover Leaf Class A Common Stock will be treated as a corporate distribution to the redeemed holder and the tax effects to such a U.S. holder will be as described below under the section entitled “U.S. Holders — Taxation of Distributions,” and the tax effects to such a Non-U.S. holder will be as described below under the section entitled “Non-U.S. Holders — Taxation of Distributions.”
U.S. Holders
Taxation of Distributions. If our redemption of a U.S. holder’s shares of Clover Leaf Class A Common Stock is treated as a corporate distribution, as discussed above under the section entitled “— Redemption of Clover Leaf Class A Common Stock,” such distribution generally will constitute a dividend for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of current and accumulated earnings and profits will constitute a return of capital that will be applied against and reduce (but not below zero) the U.S. holder’s adjusted tax basis in Clover Leaf Class A Common Stock. Any remaining excess will be treated as gain realized on the sale or other disposition of the Clover Leaf Class A Common Stock and will be treated as described below under the section entitled “— Redemption of Clover Leaf Class A Common Stock — U.S. Holders — Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Clover Leaf Class A Common Stock.” After the application of these rules, any remaining tax basis of the holder in the redeemed Clover Leaf Class A Common Stock will be added to the holder’s adjusted tax basis in its remaining stock, or, if it has none, to the holder’s adjusted tax basis in other stock constructively owned by it.
Dividends we pay to a U.S. holder that is a taxable corporation generally will qualify for the dividends received deduction if the requisite holding period is satisfied. With certain exceptions (including, but not limited to, dividends treated as investment income for purposes of investment interest deduction limitations), and provided certain holding period requirements are met, dividends we pay to a non-corporate U.S. holder generally will constitute “qualified dividends” that will be subject to tax at the maximum tax rate accorded to long-term capital gains. It is unclear whether the redemption rights with respect to the Clover Leaf Class A Common Stock described in this proxy
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statement/prospectus may prevent a U.S. holder from satisfying the applicable holding period requirements with respect to the dividends received deduction or the preferential tax rate on qualified dividend income, as the case may be. If the holding period requirements are not satisfied, then a corporation may not be able to qualify for the dividends received deduction and would have taxable income equal to the entire dividend amount, and non-corporate U.S. holders may be subject to tax on such dividend at regular ordinary income tax rates instead of the preferential rate that applies to qualified dividend income.
Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Clover Leaf Class A Common Stock. If our redemption of a U.S. holder’s shares of Clover Leaf Class A Common Stock is treated as a sale, taxable exchange or other taxable disposition, as discussed above under the section entitled “— Redemption of Clover Leaf Class A Common Stock,” a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between the amount of cash received in the redemption and the U.S. holder’s adjusted tax basis in the shares of Clover Leaf Class A Common Stock redeemed. A U.S. holder’s adjusted tax basis in its Clover Leaf Class A Common Stock generally will equal the U.S. holder’s acquisition cost less any prior distributions paid to such U.S. holder with respect to its shares of Clover Leaf Class A Common Stock treated as a return of capital. Any such capital gain or loss generally will be long-term capital gain or loss if the U.S. holder’s holding period for the Clover Leaf Class A Common Stock so disposed of exceeds one year. It is unclear, however, whether the redemption rights with respect to the Clover Leaf Class A Common Stock may suspend the running of the applicable holding period for this purpose. Long-term capital gains recognized by noncorporate U.S. holders will be eligible to be taxed at reduced rates. The deductibility of capital losses is subject to limitations. U.S. holders who hold different blocks of Clover Leaf Class A Common Stock (shares of Clover Leaf Class A Common Stock purchased or acquired on different dates or at different prices) generally must apply the above rules separately to each identifiable block of shares of Clover Leaf Class A Common Stock.
Non-U.S. Holders
Taxation of Distributions. If our redemption of a Non-U.S. holder’s shares of Clover Leaf Class A Common Stock is treated as a corporate distribution, as discussed above under the section entitled “— Redemption of Class A Common Stock,” such distribution will constitute a dividend for U.S. federal income tax purposes to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles) and, provided such dividend is not effectively connected with the Non-U.S. holder’s conduct of a trade or business within the United States, we or our withholding agent will be required to withhold tax from the gross amount of the dividend at a rate of 30%, unless such Non-U.S. holder is eligible for a reduced rate of withholding tax under an applicable income tax treaty and provides proper certification of its eligibility for such reduced rate (usually on an IRS Form W-8BEN or W-8BEN-E, as applicable). Any distribution not constituting a dividend will be treated first as reducing (but not below zero) the Non-U.S. holder’s adjusted tax basis in its shares of Clover Leaf Class A Common Stock and, to the extent such distribution exceeds the Non-U.S. holder’s adjusted tax basis, as gain realized from the sale or other disposition of the Clover Leaf Class A Common Stock, which will be treated as described below under the section entitled “— Non-U.S. Holders — Gain on Sale, Taxable Exchange or Other Taxable Disposition of Clover Leaf Class A Common Stock.”
It may not be certain at the time a Non-U.S. holder is redeemed whether such Non-U.S. holder’s redemption will be treated as a sale of shares or a distribution constituting a dividend, and such determination will depend in part on a Non-U.S. holder’s particular circumstances. Therefore, we or the applicable withholding agent may not be able to determine whether (or to what extent) a Non-U.S. holder is treated as receiving a dividend for U.S. federal income tax purposes. Accordingly, we or the applicable withholding agent may withhold tax at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty) on the gross amount of any consideration paid to a Non-U.S. holder in redemption of such Non-U.S. holder’s shares of Clover Leaf Class A Common Stock, unless (i) we or the applicable withholding agent have established special procedures allowing Non-U.S. holders to certify that they are exempt from such withholding tax and (ii) such Non-U.S. holders are able to certify that they meet the requirements of such exemption (e.g., because such Non-U.S. holders are not treated as receiving a dividend under the Section 302 tests described above under the section titled “— Redemption of Clover Leaf Class A Common Stock”). There can be no assurance that we or any applicable withholding agent will establish such special certification procedures. If we or an applicable withholding agent withhold excess amounts from the amount payable to a Non-U.S. holder, the Non-U.S. holder generally may obtain a refund of any such excess amounts by timely filing an appropriate claim for refund with the IRS. Non-U.S. holders should consult their own tax advisors regarding the application of the foregoing rules in light of their particular facts and circumstances and any applicable procedures or certification requirements.
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The withholding tax described in the preceding paragraph does not apply to dividends paid to a Non-U.S. holder who provides an IRS Form W-8ECI certifying that the dividends are effectively connected with the Non-U.S. holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are also attributable to a permanent establishment or a fixed base in the United States maintained by such Non-U.S. holder). Instead, the effectively connected dividends will be subject to regular U.S. federal income tax as if the Non-U.S. holder were a U.S. resident, subject to an applicable income tax treaty providing otherwise. A Non-U.S. holder that is a corporation for U.S. federal income tax purposes and is receiving effectively connected dividends may also be subject to an additional “branch profits tax” imposed at a rate of 30% (or a lower applicable income tax treaty rate).
Gain on Sale, Taxable Exchange or Other Taxable Disposition of Clover Leaf Class A Common Stock. If our redemption of a U.S. holder’s shares of Clover Leaf Class A Common Stock is treated as a sale or other taxable disposition, as discussed above under the section entitled “— Redemption of Clover Leaf Class A Common Stock,” a Non-U.S. holder generally will not be subject to U.S. federal income or withholding tax in respect of the redemption, unless:
• the gain is effectively connected with the conduct of a trade or business by the Non-U.S. holder within the United States (and, if required by an applicable income tax treaty, is attributable to a United States permanent establishment or fixed base maintained by the Non-U.S. holder). in which case the Non-U.S. holder generally will be subject to tax on such gain in the same manner as a U.S. holder and, if the Non-U.S. holder is a foreign corporation, such corporation may be subject to branch profits tax at the rate of 30% (or such lower rate as may be specified by an applicable income tax treaty);
• such Non-U.S. holder is an individual who is present in the United States for 183 days or more during the taxable year in which the disposition takes place and certain other conditions are met, in which case the Non-U.S. holder generally will be subject to a 30% tax on the Non-U.S. holder’s net gain, which may be offset by U.S.-source capital losses of the Non-U.S. holder, if any; or
• we are or have been a “United States real property holding corporation” for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period that the Non-U.S. holder held Clover Leaf Class A Common Stock and, in the circumstance in which shares of Clover Leaf Class A Common Stock are regularly traded on an established securities market, the Non-U.S. holder has owned, directly or constructively, more than 5% of the Clover Leaf Class A Common Stock at any time within the shorter of the five-year period preceding the redemption or such Non-U.S. holder’s holding period for the shares of Clover Leaf Class A Common Stock. There can be no assurance that Clover Leaf Class A Common Stock will be treated as regularly traded on an established securities market for this purpose.
We believe that we are not, and have not been at any time since our formation, a United States real property holding corporation, and we do not expect to be a United States real property holding corporation immediately after the Business Combination is completed.
Information Reporting and Backup Withholding
Dividend payments with respect to Clover Leaf Class A Common Stock and proceeds from the sale, taxable exchange or other taxable disposition of Clover Leaf Class A Common Stock may be subject to information reporting to the IRS and possible United States backup withholding. Backup withholding will not apply, however, to a U.S. holder who furnishes a correct taxpayer identification number and makes other required certifications, or who is otherwise exempt from backup withholding and establishes such exempt status.
Amounts treated as dividends that are paid to a Non-U.S. holder are generally subject to reporting on IRS Form 1042-S even if the payments are exempt from withholding. A Non-U.S. holder generally will eliminate any other requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a holder’s United States federal income tax liability, and a holder generally may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information.
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FATCA Withholding Taxes
Provisions of the Code commonly referred to as “FATCA” impose withholding of 30% on payments of dividends (including amounts treated as dividends received pursuant to a redemption of stock) on, and (subject to the following paragraph) gross proceeds from the sale or other disposition of, Clover Leaf Class A Common Stock if paid to a foreign entity unless (i) if the foreign entity is a “foreign financial institution,” the foreign entity undertakes certain due diligence, reporting, withholding, and certification obligations, (ii) if the foreign entity is not a “foreign financial institution,” the foreign entity identifies certain of its U.S. investors, or (iii) the foreign entity is otherwise excepted under FATCA.
Previously, withholding would have applied with respect to the gross proceeds from the sale or other disposition of Clover Leaf Class A Common Stock made after December 31, 2018; however, such withholding has been eliminated under proposed U.S. Treasury regulations, which can be relied on until final regulations become effective. Because it may not be certain at the time a Non-U.S. holder is redeemed whether such Non-U.S. holder’s redemption will be treated as a sale or exchange of shares or a distribution constituting a dividend, we or the applicable withholding agent may treat the total payment of redemption proceeds as a dividend for FATCA purposes.
In general, no such withholding will be required with respect to a U.S. holder or an individual Non-U.S. holder that timely provides the certifications required on a valid IRS Form W-9 or W-8, respectively. If FATCA withholding is imposed, a holder generally will be entitled to a refund of any amounts withheld by filing a U.S. federal income tax return (which may entail significant administrative burden). Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules. Non-U.S. holders should consult their tax advisers regarding the effects of FATCA on a redemption of Clover Leaf Class A Common Stock.
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INFORMATION ABOUT CLOVER LEAF
Unless the context otherwise requires, all references in this section to the “Company,” “we,” “us” or “our” refer to Clover Leaf.
Overview
We are a blank check company incorporated as a Delaware corporation and formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses, which we refer to as our initial business combination.
IPO
On July 22, 2021, we consummated our initial public offering of 13,831,230 units. Each unit consists of one share of Class A common stock and one right to receive one-eighth (1/8) of a share of Class A common stock upon the consummation of an initial business combination, with every eight (8) rights entitling the holder thereof to receive one share of Class A common stock at the closing of the business combination. The units were sold at a price of $10.00 per unit, generating gross proceeds to the Company of $138,312,300.
Simultaneously with the closing of the initial public offering, we completed the private sale of an aggregate of 675,593 units to our sponsor and the representative at a purchase price of $10.00 per private placement unit, generating gross proceeds of $6,755,930.
Upon the consummation of our initial public offering, we also issued an additional 138,312 shares of Class A common stock, valued at $10.00 per share, to the IPO Underwriter.
A total of $140,386,985, comprised of $138,312,300 of the proceeds from the initial public offering and $2,074,685 of the proceeds of the sale of the private placement units, was placed in the trust account maintained by Continental, acting as trustee.
Pursuant to our amended and restated certificate of incorporation, as amended in connection with the First Extension, the Second Extension and the Third Extension, we must consummate our initial business combination by January 22, 2024, or such earlier date as determined by our board of directors.
It is the job of our Sponsor and management team to complete our initial business combination. Our management team is led by Felipe MacLean, our President and CEO. We must complete our initial business combination by January 22, 2024. If our initial business combination is not consummated by January 22, 2024, then our existence will terminate, and we will distribute all amounts in the trust account.
Redemption Rights for Public Stockholders upon Completion of our Initial Business Combination
Pursuant to the Current Charter, we will provide our public stockholders with the opportunity to redeem all or a portion of their shares of Class A Common Stock upon the completion of our initial business combination at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account as of two business days prior to the consummation of the initial business combination including interest earned on the funds held in the Trust Account and not previously released to us in connection with Permitted Withdrawals, divided by the number of then outstanding Public Shares, subject to the limitations described herein. The amount in the Trust Account as of [•], 2023 is approximately $[•] per public share. The per-share amount we will distribute to investors who properly redeem their shares will not be reduced by the deferred underwriting commissions we will pay to the underwriters. Our Sponsor, officers and directors have entered into the Insider Letter with us, pursuant to which they have agreed to waive their redemption rights with respect to any Clover Leaf Sponsor Shares and any Public Shares held by them in connection with the completion of our initial business combination, or to receive distributions with respect to any Clover Leaf Sponsor Shares and any Public Shares upon the liquidation of the Trust Account if we are unable to consummate a business combination. This waiver was made at the time of the IPO for no additional consideration. If Clover Leaf does not consummate the Business Combination or another initial business combination by January 22, 2024 (or such other date as approved by the Clover Leaf stockholders), and Clover Leaf is therefore required to be liquidated, the Clover
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Leaf Sponsor Shares would be worthless, as the Sponsor is not entitled to participate in any redemption or liquidation of the Trust Account. Based on the difference in the effective purchase price of $0.007 per share that the members of the Sponsor paid for the Clover Leaf Sponsor Shares, as compared to the purchase price of $10.00 per Unit sold in the IPO, members of the Sponsor may earn a positive rate of return even if the share price of the Combined Company after the Closing falls below the price initially paid for the Units in the IPO and the Clover Leaf Public Stockholders experience a negative rate of return following the Closing of the Business Combination.
For more information about how Clover Leaf stockholders can exercise their redemption rights in connection with the Special Meeting, please see section titled “The Special Meeting — Redemption Rights.”
In the event the aggregate cash consideration we would be required to pay for all shares of Class A Common Stock that are validly submitted for redemption plus any amount required to satisfy cash conditions pursuant to the terms of the proposed initial business combination exceed the aggregate amount of cash available to us, we will not complete the initial business combination or redeem any shares, and all shares of Class A Common Stock submitted for redemption will be returned to the holders thereof.
Notwithstanding the foregoing, if we seek stockholder approval of our initial business combination and we do not conduct redemptions in connection with our initial business combination pursuant to the tender offer rules, the Current Charter provides that a public stockholder, together with any affiliate of such stockholder or any other person with whom such stockholder is acting in concert or as a “group” (as defined under Section 13(d)(3) of the Exchange Act), will be restricted from seeking redemption rights with respect to more than an aggregate of 15% of the shares sold in our IPO, which we refer to as the “Excess Shares,” without the prior consent of Clover Leaf.
Such restriction shall also be applicable to our affiliates. We believe this restriction will discourage stockholders from accumulating large blocks of shares, and subsequent attempts by such holders to use their ability to exercise their redemption rights against a proposed initial business combination as a means to force us or our management to purchase their shares at a significant premium to the then-current market price or on other undesirable terms. Absent this provision, a public stockholder holding more than an aggregate of 15% of the shares sold in the IPO could threaten to exercise its redemption rights if such holder’s shares are not purchased by us or our management at a premium to the then-current market price or on other undesirable terms. By limiting our stockholders’ ability to redeem no more than 15% of the shares sold in our IPO without our prior consent, we believe we will limit the ability of a small group of stockholders to unreasonably attempt to block our ability to complete our initial business combination, particularly in connection with an initial business combination with a target that requires as a closing condition that we have a minimum net worth or a certain amount of cash. However, we would not be restricting our stockholders’ ability to vote all of their shares (including Excess Shares) for or against our initial business combination.
If our initial business combination is not approved or completed for any reason, then our public stockholders who elected to exercise their redemption rights would not be entitled to redeem their shares for the applicable pro rata share of the Trust Account. In such case, we will promptly return any certificates delivered by public holders who elected to redeem their shares.
If the Business Combination is not completed, we may continue to try to complete an initial business combination with a different target until January 22, 2024 (as such deadline may be extended by amendment to Clover Leaf’s organizational documents).
Facilities
We do not own any real estate or other physical properties materially important to our operation. Our executive offices are located 1450 Brickell Avenue, Suite 1420 Miami, FL 33131. Such facility is provided by an affiliate of the Sponsor for a monthly fee of $10,000.
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Employees
We currently have three officers and do not intend to have any full-time employees prior to the completion of our initial business combination. Members of our management team are not obligated to devote any specific number of hours to our matters, but they intend to devote as much of their time as they deem necessary to our affairs until we have completed our initial business combination. The amount of time that any such person will devote in any time period to our company will vary based on whether a target business has been selected for our initial business combination and the current stage of the business combination process.
Legal Proceedings
To the knowledge of Clover Leaf’s management, there is no material litigation, arbitration or governmental proceeding currently pending against us or any members of our management team in their capacity as such.
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CLOVER LEAF’S MANAGEMENT
Unless otherwise indicated or the context otherwise requires, references in this section to “we,” “our,” “us” and other similar terms refer to Clover Leaf before the Business Combination.
Directors and Executive Officers
We have seven directors. The directors and executive officers of Clover Leaf are as follows as of the date of this proxy statement/prospectus:
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Name |
Age |
Position |
||
|
Felipe MacLean |
39 |
Chairman of the Board, President and Chief Executive Officer |
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Luis A. Guerra |
49 |
Chief Financial Officer and Treasurer |
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Markus Puusepp |
41 |
Chief Operating Officer and Secretary |
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Per Bjorkman |
55 |
Director |
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Marcos Angelini |
51 |
Director |
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|
Ambassador Manuel Rocha |
72 |
Director |
Felipe MacLean, our President and CEO since inception and our Chairman of the Board since April 2021, is a successful self-made entrepreneur with over 15 years of experience capitalizing on complex, high-yield transactions in various industries across the globe. Mr. MacLean applied his financial and operational expertise in building vertically integrated businesses in the agriculture, seafood, and edible oil sectors. He is the founder and CEO of Yntegra Group, a family office and multi-service provider that specializes in high yield transactions that has managed over $1 billion in commodities trading activity and placement of over $100 million in private equity investments. In 2017, Mr. MacLean started his venture in the cannabis industry founding Solace Holdings and leading an investment of over $50 million. Solace Holdings is today one of the most renowned cultivation, extraction and manufacturing facilities in the Nevada market, with leading product categories on its portfolio and doubling sales year over year. Mr. MacLean’s involvement was crucial to the success of Solace Holdings, supported by his clear understanding of the cannabis industry opportunities and challenges. We believe Mr. MacLean is well qualified to serve as our Chairman and CEO due to his extensive knowledge in the cannabis industry. As an early investor in the field, he has lived through the multiple regulatory cycles and growth facets of this developing industry. His experience has proven instrumental in creating a successful large-scale profitable cannabis operation.
Luis A. Guerra, our CFO and Treasurer since April 2021, was one of the founders of Bulltick Capital Markets, a regional investment bank in the US, Europe and Latin America that became one of the top 10 brokers and trading firms with the highest volume traded in Latin America ADRs (American Depositary Receipts) on the Nasdaq. He was a co-managing partner of the firm and member of its Management Committee, directly responsible for all securities brokerage, electronic trading, and capital markets operations, from March 2000 to February 2011. He grew the firm’s brokerage and trading operations from a start-up to one of the largest regional investment banks in Latin America. Since November 2018, Mr. Guerra has served as co-founder and Managing Director of Vitax Partners, a private investment vehicle with a focus on private equity and structured finance. Since December 2019, he has also served as part of the Advisory Board of Welz, a European based private equity real estate Investment Manager, where he advises on their investment portfolio. He is a seasoned capital markets professional who brings experienced and structured financial reporting. We believe Mr. Guerra is well qualified to serve as our CFO due to his capital markets and financial background, ample experience dealing with regulated entities both in the US and internationally, and knowledge as a former senior executive at an investment bank and asset management business.
Markus Puusepp, our COO and Secretary since July 2022, has been employed as Chief Strategy Officer of SHL Medical AG (“SHL”) since 2017. SHL is a global solution provider in the design, development and manufacturing of advanced drug delivery systems. Mr. Puusepp previously spent over seven years in Hong Kong and Beijing within the private equity and medtech industries. Prior to that, he worked in investment banking in Sweden, as well as management consulting. Additionally, Mr. Puusepp has held several directorships, including as a board member for Spowdi since October 2020, a non-executive board member of QulO since October 2018, a board member of Pharmaero ApS since February 2018 and as a Chairman of Innovation Zed since February 2018. He received his Masters in Business Administration from Stockholm University in 2008. We believe Mr. Puusepp is well qualified to serve as our COO due to his experience, integrity, and track records across multiple industries.
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Per Bjorkman has served as one of our independent directors since July 2021. Since August 2020, he has served as Director of Business Development at SHL Healthcare, one of the world’s leading contract manufacturers and suppliers of MedTech solutions for home, hospital and long-term care use. As a customer-centric company, SHL offers a range of services, robust manufacturing capabilities and dedicated project management teams to best translate customer specifications into quality products. Prior to this role, he served as Managing Director of SHL Technologies & Group Ventures from January 2014 to December 2019. Mr. Bjorkman is a seasoned expert in the cannabis and healthcare industry. From October 2017 to July 2020, he served as Co-CEO of Solace Holdings in Nevada, a cGMP certified, vertically integrated THC and CBD cannabis company, focusing on the cultivation and manufacturing of leading cannabis consumer branded goods. Mr. Bjorkman holds a bachelor’s degree in Business Administration from the European University and was part of the Leadership and Strategic Execution Program at INSEAD in France. We believe Mr. Bjorkman is well qualified to serve as a director due to his extensive knowledge in the mainstream medical and pharmaceutical industry, and its potential application to the cannabis field, in addition to having managed a successful cannabis growing and production facility in the US.
Marcos Angelini has served as one of our independent directors since July 2021. He has served as the President of Red Bull Latin America since April 2017. Since August 2020, he has been an equity investor and a member of the advisory board to YVY Brazil. Prior to these roles, from May 2016 to February 2017, Mr. Angelini was the CEO of Facebook in Brazil, where he oversaw the media giant’s operations in the largest country in Latin America. Mr. Angelini has 24 years of international experience in marketing, innovation, media, advertising and general management. From January 1996 to March 2016, he worked at Unilever, initially in marketing, rising to Brand VP and later Vice President for Latin America. At Unilever, he had responsibility for numerous products for global client subsidiaries throughout the world. He was recognized by Meio & Mensagem as one of the top 10 Marketing Executives of 2015 and as one of the top 10 Media Executives of Brazil in 2016. Mr. Angelini received his MBA from the University of Durham and completed a Business Executive Program at Stanford University. We believe Mr. Angelini is well qualified to serve as a director due to his extensive experience working as a senior executive with internationally recognized brands such as Redbull and Facebook, and his ample consumer brands knowledge as a senior level global marketing manager at Unilever.
Ambassador Manuel Rocha has served as one of our independent directors since July 2021. Before moving to Miami in 2002, he spent well over two decades as a US diplomat. His last post was as US Ambassador to Bolivia from July 2000 to August 2002. His Foreign Service career included assignments in the Dominican Republic, Italy, Honduras, Argentina and Cuba. Importantly, he was also Director of Inter-American Affairs in the National Security Council at the White House. Making the transition to the private sector, he worked for two law firms, established his own business development company bringing business opportunities from China to the Western Hemisphere, worked for a private equity firm based in Argentina, and headed Corporate Affairs for Arcos Dorados, which owns most of the McDonald’s restaurants in Latin America. He also served as President of BARRICK Gold’s subsidiary in the Dominican Republic from September 2012 to April 2018, which represented the largest foreign direct investment in the country exceeding 5 billion dollars. Since May 2018, he has served as the SVP for Global Corporate Affairs for XCOAL, one of the largest exporters of US origin coals for use in integrated steel mills, cement plants, and power plants throughout the world. He graduated cum laude from Yale University, earned a master’s degree in Public Administration from Harvard University and a Master’s in International Relations from Georgetown University. We believe Mr. Rocha is well qualified to serve as a director due to his ample resources and network as a senior level, former State Department official, in addition to his experience running a large multinational operation. He is an expert negotiator who provides valuable input in a highly regulated industry like cannabis.
Involvement in Legal Proceedings
There are no legal proceedings that have occurred within the past ten years concerning our directors or control persons which involved a criminal conviction, a criminal proceeding, an administrative or civil proceeding limiting one’s participation in the securities or banking industries, or a finding of securities or commodities law violations.
Number and Terms of Office of Officers and Directors
We have four directors. Our board of directors is divided into two classes with only one class of directors being elected in each year and each class (except for those directors appointed prior to our first annual meeting of stockholders) serving a two-year term. In accordance with Nasdaq corporate governance requirements, we are not required to hold an annual meeting until one year after our first fiscal year end following our listing on Nasdaq. The
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term of office of the first class of directors, consisting of Manuel Rocha and Marcos Angelini, will expire at our first annual meeting of stockholders. The term of office of the second class of directors, consisting of Felipe MacLean and Per Bjorkman, will expire at the second annual meeting of stockholders.
Our officers are appointed by the board of directors and serve at the discretion of the board of directors, rather than for specific terms of office. Our board of directors is authorized to appoint persons to the offices set forth in our bylaws as it deems appropriate. Our bylaws provide that our officers may consist of a Chairman of the Board, Chief Executive Officer, Chief Financial Officer, President, Vice Presidents, Secretary, Treasurer, Assistant Secretaries and such other offices as may be determined by the board of directors.
Nasdaq listing standards require that a majority of our board of directors be independent. An “independent director” is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship that, in the opinion of the company’s board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Our board of directors has determined that Messrs. Angelini, Bjorkman and Ambassador Rocha are “independent directors” as defined in the Nasdaq listing standards and applicable SEC rules. Our independent directors have regularly scheduled meetings at which only independent directors are present.
Committees of the Board of Directors
Our board of directors has two standing committees: an audit committee and a compensation committee. Subject to phase-in rules and a limited exception, Nasdaq rules and Rule 10A-3 of the Exchange Act require that the audit committee of a listed company be comprised solely of independent directors, and Nasdaq rules require that the compensation committee of a listed company be comprised solely of independent directors.
Audit Committee
Marcos Angelini, Manuel Rocha and Per Bjorkman serve as members of our audit committee, and Marcos Angelini chairs the audit committee. Under the Nasdaq listing standards and applicable SEC rules, we are required to have at least three members of the audit committee, all of whom must be independent. Each of Marcos Angelini, Manuel Rocha, and Per Bjorkman meets the independent director standard under Nasdaq listing standards and under Rule 10-A-3(b)(1) of the Exchange Act.
Each member of the audit committee is financially literate, and our board of directors has determined that Marcos Angelini qualifies as an “audit committee financial expert” as defined in applicable SEC rules.
We have adopted an audit committee charter, which details the principal functions of the audit committee, including:
• the appointment, compensation, retention, replacement, and oversight of the work of the independent registered public accounting firm engaged by us;
• pre-approving all audit and permitted non-audit services to be provided by the independent registered public accounting firm engaged by us, and establishing pre-approval policies and procedures;
• setting clear hiring policies for employees or former employees of the independent registered public accounting firm, including but not limited to, as required by applicable laws and regulations;
• setting clear policies for audit partner rotation in compliance with applicable laws and regulations;
• obtaining and reviewing a report, at least annually, from the independent registered public accounting firm describing (i) the independent registered public accounting firm’s internal quality-control procedures, (ii) any material issues raised by the most recent internal quality-control review, or peer review, of the audit firm, or by any inquiry or investigation by governmental or professional authorities within the preceding five years respecting one or more independent audits carried out by the firm and any steps taken to deal with such issues and (iii) all relationships between the independent registered public accounting firm and us to assess the independent registered public accounting firm’s independence;
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• reviewing and approving any related party transaction required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the SEC prior to us entering into such transaction; and
• reviewing with management, the independent registered public accounting firm, and our legal advisors, as appropriate, any legal, regulatory or compliance matters, including any correspondence with regulators or government agencies and any employee complaints or published reports that raise material issues regarding our financial statements or accounting policies and any significant changes in accounting standards or rules promulgated by the Financial Accounting Standards Board, the SEC or other regulatory authorities.
Compensation Committee
Per Bjorkman, Marcos Angelini and Manuel Rocha serve as the members of our compensation committee. Under the Nasdaq listing standards and applicable SEC rules, we are required to have at least two members of the compensation committee, all of whom must be independent. Per Bjorkman, Marcos Angelini and Manuel Rocha are independent, and Per Bjorkman chairs the compensation committee.
We have adopted a compensation committee charter, which details the principal functions of the compensation committee, including:
• reviewing and approving on an annual basis the corporate goals and objectives relevant to our Chief Executive Officers’ compensation, if any is paid by us, evaluating our Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration (if any) of our Chief Executive Officer based on such evaluation;
• reviewing and approving on an annual basis the compensation, if any is paid by us, of all of our other officers;
• reviewing on an annual basis our executive compensation policies and plans;
• implementing and administering our incentive compensation equity-based remuneration plans;
• assisting management in complying with our proxy statement and annual report disclosure requirements;
• approving all special perquisites, special cash payments and other special compensation and benefit arrangements for our officers and employees;
• if required, producing a report on executive compensation to be included in our annual proxy statement; and
• reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors.
Notwithstanding the foregoing, as indicated above, other than the payment to an affiliate of our sponsor of $10,000 per month for office space, utilities and secretarial and administrative support and reimbursement of expenses, no compensation of any kind, including finders, consulting or other similar fees, will be paid to any of our existing stockholders, officers, directors or any of their respective affiliates, prior to, or for any services they render in order to effectuate the consummation of an initial business combination. Accordingly, it is likely that prior to the consummation of an initial business combination, the compensation committee will only be responsible for the review and recommendation of any compensation arrangements to be entered into in connection with such initial business combination.
The charter also provides that the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, legal counsel or other adviser and will be directly responsible for the appointment, compensation and oversight of the work of any such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel or any other adviser, the compensation committee will consider the independence of each such adviser, including the factors required by Nasdaq and the SEC.
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Code of Ethics
We have adopted a Code of Ethics applicable to our directors, officers and employees, which was filed, along with our audit and compensation committee charters, as exhibits to the Registration Statement. You can review these documents by accessing our public filings at the SEC’s web site at www.sec.gov. In addition, a copy of the Code of Ethics will be provided without charge upon request from us. We intend to disclose any amendments to or waivers of certain provisions of our Code of Ethics in a Current Report on Form 8-K.
Limitation on Liability and Indemnification of Directors and Officers
The Current Charter provides that our officers and directors will be indemnified by us to the fullest extent not prohibited by applicable law, as it now exists or may in the future be amended, with respect to matters arising by reason of the fact that he or she is or was director or officer of the Company or, while a director or officer of the Company, is or was serving at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, other enterprise or nonprofit entity, including service with respect to an employee benefit plan, except with respect to actions, suits or proceedings (or parts thereof) commenced by such person. In addition, the Current Charter provides that our directors will not be personally liable for monetary damages to us or stockholders for breaches of their fiduciary duty as directors, except to the extent such exemption from liability or limitation thereof is not permitted by the DGCL.
We have entered into agreements with our officers and directors to provide contractual indemnification in addition to the indemnification provided for in our amended and restated certificate of incorporation. Our bylaws also permit us to maintain insurance on behalf of any officer, director or employee for any liability arising out of his or her actions, regardless of whether Delaware law would permit such indemnification. We will obtain a policy of directors’ and officers’ liability insurance that insures our officers and directors against the cost of defense, settlement or payment of a judgment in some circumstances and insures us against our obligations to indemnify our officers and directors.
These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against officers and directors pursuant to these indemnification provisions.
We believe that these provisions, the insurance and the indemnity agreements are necessary to attract and retain talented and experienced officers and directors.
We have undertaken that insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CLOVER LEAF
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and the notes related thereto, which are included elsewhere in this proxy statement/prospectus. Certain information contained in the discussion and analysis set forth below includes forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements.”
Overview
We are a blank check company incorporated in the State of Delaware for the purpose of effecting a merger, stock exchange, asset acquisition, stock purchase, reorganization or similar Business Combination with one or more businesses (the “Business Combination”). We may pursue the initial Business Combination target in any industry or geographic location, and we intend to focus our search for a target business engaged in the cannabis industry.
The Registration Statement for our initial public offering was declared effective on July 19, 2021. On July 22, 2021, we consummated our initial public offering of 13,831,230 units at $10.00 per unit, and the sale of 675,593 units, at a price of $10.00 per unit, in the private placement to our sponsor and the representative that closed simultaneously with the initial public offering. On July 22, 2021, the underwriters partially exercised their over-allotment option and purchased 1,331,230 of their full 1,875,000 units available and subsequently forfeited the remainder of their option as of July 28, 2021. Our management has broad discretion with respect to the specific application of the net proceeds of the initial public offering and sale of the private placement units, although substantially all of the net proceeds are intended to be applied generally toward consummating an initial Business Combination.
Transaction costs amounted to $9,562,126 consisting of $2,766,246 of underwriting commissions, $4,840,931 of deferred underwriting commissions, $1,383,123 of fair value of the representative shares and $571,826 of other cash offering costs.
We originally had up to 12 months from the closing of our initial public offering, or until July 22, 2022, to consummate an initial Business Combination. Pursuant to our amended and restated certificate of incorporation, as amended in connection with the First Extension, the Second Extension and the Third Extension, we must consummate our initial business combination by January 22, 2024, or such earlier date as determined by our board of directors.
Results of Operations
Our entire activity since inception up to June 30, 2023 relates to our formation, the Initial Public Offering and, since the closing of the Initial Public Offering, a search for a Business Combination candidate. We will not be generating any operating revenues until the closing and completion of our initial Business Combination, at the earliest.
For the three months ended June 30, 2023, we had a net loss of $534,914, which consisted of formation and operating costs of $709,836 and provision for income taxes of $47,220 offset by interest earned on investments held in Trust Account of $222,121 and interest earned on cash held in bank of $21.
For the six months ended June 30, 2023, we had a net loss of $567,378, which consisted of formation and operating costs of $900,007 and provision for income taxes of $88,799, offset by interest earned on investments held in Trust Account of $421,354 and interest earned on cash held in bank of $74.
For the three months ended June 30, 2022, we had a net loss of $122,189, which consisted of formation and operating costs of $336,756 and provision for income taxes of $4,675, offset by interest earned on investments held in Trust Account of $219,232 and interest earned on cash held in bank of $10.
For the six months ended June 30, 2022, we had a net loss of $43,706, which consisted of formation and operating costs of $652,958 and provision for income taxes of $4,675, offset by recovery of previously incurred costs of $341,684, interest earned on investments held in Trust Account of $272,220 and interest earned on cash held in bank of $23.
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For the year ended December 31, 2022, we had a net income of $60,237, which consisted of formation and operating costs of $ 1,291,228 and provision for income taxes of $185,423, offset by interest earned on investments held in trust account of $1,195,135, interest earned on cash held in bank of $69 and recovery of previously incurred costs of $341,684.
For the period from February 25, 2021 (inception) to December 31, 2021 we had a net loss of $834,087, which consisted of $851,777 in formation and operating costs, offset by $47 in interest income from operating bank account and interest income of $17,643 from marketable securities held in our trust account.
Going Concern
As of June 30, 2023 and December 31, 2022, we had cash of $83,227 and $303,449 respectively, and working capital deficit of $3,518,185 and working capital of $2,882,521, respectively. Prior to the completion of the initial public offering, our liquidity needs had been satisfied through a payment from our sponsor of $25,000 for the founder shares to cover certain offering costs and the loan under an unsecured promissory note from our sponsor of $300,000.
In addition, on July 18, 2022, we issued the First Extension Note to our sponsor in the principal amount of $1,383,123, pursuant to which our sponsor loaned us $1,383,123 ($0.85 per public share after redemptions) to deposit into the trust account for each public share that was not redeemed in connection with the First Extension. At the election of our sponsor, up to $1,383,123 of the unpaid principal amount of the First Extension Note may be converted into Conversion Units, of which the total Conversion Units so issued shall be equal to: (x) the portion of the principal amount of the First Extension Note being converted divided by (y) the conversion price of ten dollars ($10.00), rounded up to the nearest whole number of units.
On October 19, 2022, we issued the Second Extension Note to our sponsor in the principal amount of $1,383,123, pursuant to which our sponsor loaned us $1,383,123 to deposit into the trust account for each public share that was not redeemed in connection with the Second Extension. The Second Extension Note bears no interest and is repayable in full upon the earlier of (a) the date of the consummation of an initial Business Combination, or (b) the date of the liquidation of the Company.
On July 24, 2023, the Company issued the Third Extension Note in the aggregate principal amount of up to $36,000 to the Sponsor, pursuant to which the Sponsor agreed to loan to the Company up to $360,000 to deposit into the Trust Account for the Company’s Class A common stock, held by the Company’s public stockholders that were not redeemed in connection with the Extension Amendment. The Third Extension Note bears no interest and is repayable in full upon the earlier of (a) the date of the consummation of the Company’s Initial Business Combination, or (b) the date of the liquidation of the Company.
In addition, in order to finance transaction costs in connection with an initial Business Combination, our sponsor or an affiliate of our sponsor or certain of our officers and directors may, but are not obligated to, provide us working capital loans. As of June 30, 2023 and December 31, 2022, there were no amounts outstanding under any working capital loans.
Until the consummation of an initial Business Combination, we will be using the funds not held in the trust account for identifying and evaluating prospective acquisition candidates, performing due diligence on prospective target businesses, paying for travel expenditures, selecting the target business to acquire, and structuring, negotiating and consummating the initial Business Combination. We will need to raise additional capital through loans or additional investments from our sponsor, shareholders, officers, directors, or third parties. Our sponsor, officers and directors may, but are not obligated to, loan us funds from time to time or at any time, in whatever amount they deem reasonable in their sole discretion, to meet our working capital needs. Accordingly, we may not be able to obtain additional financing. If we are unable to raise additional capital, it may be required to take additional measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing operations, suspending the pursuit of a potential transaction, and reducing overhead expenses.
We cannot provide any assurance that new financing will be available to us on commercially acceptable terms, if at all. In connection with our assessment of going concern considerations in accordance with FASB’s ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” We have until January 22, 2024 to consummate an initial Business Combination. It is uncertain that we will be able to consummate an initial Business Combination by this time. If an initial Business Combination is not consummated by this date, there will
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be a mandatory liquidation and subsequent dissolution. These conditions raise substantial doubt about our ability to continue as a going concern. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should we be unable to continue as a going concern, also do not include any adjustment that might result from the outcome of this uncertainty about should an initial Business Combination not occur.
Critical Accounting Policies and Estimates
The preparation of the unaudited condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. We have identified the following as our critical accounting policies:
Class A Common Stock Subject to Possible Redemption
All of the 13,831,230 Class A common stock sold as part of the units in the Initial Public Offering contain a redemption feature which allows for the redemption of such public shares in connection with the Company’s liquidation, if there is a stockholder vote or tender offer in connection with the Business Combination and in connection with certain amendments to the Company’s amended and restated certificate of incorporation. In accordance with SEC and its staff’s guidance on redeemable equity instruments, which has been codified in ASC 480-10-S99, redemption provisions not solely within the control of the Company require common stock subject to redemption to be classified outside of permanent equity.
If it is probable that the equity instrument will become redeemable, the Company has the option to either accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument or to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The Company has elected to recognize the changes immediately.
Net Income (Loss) Per Common Share
We comply with accounting and disclosure requirements of FASB ASC Topic 260, Earnings Per Share. Net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. We have two classes of shares, redeemable common stock and non-redeemable common stock. Our redeemable common stock is comprised of shares of Class A common stock sold in the initial public offering. Our non-redeemable shares are comprised of shares of Class B common stock purchased by our sponsor as well as shares of Class A common stock sold as part of the private placement units and the representative shares. Earnings and losses are shared pro rata between the two classes of shares. Our statements of operations ally the two-class method in calculating net income (loss) per share. Basic and diluted net income (loss) per common share for redeemable common stock and non-redeemable common stock is calculated by dividing net income (loss), allocated proportionally to each class of common stock, attributable to us by the weighted average number of shares of redeemable and non-redeemable stock outstanding.
The calculation of diluted income (loss) per share of common stock does not consider the effect of the rights issued in connection with the initial public offering since exercise of the rights is contingent upon the occurrence of future events and the inclusion of such rights would be anti-dilutive. Accretion of the carrying value of Class A common stock to redemption value is excluded from net income (loss) per redeemable share because the redemption value approximates fair value. As a result, diluted income (loss) per share is the same as basic income (loss) per share for the periods presented.
Off-Balance Sheet Financing Arrangements
We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of June 30, 2023 and December 31, 2022. 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
We do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities, other than an agreement to pay an affiliate of our Sponsor a monthly fee of $10,000 for office space, utilities and administrative support. Upon completion of our Business Combination or the Company’s liquidation, we will cease paying these monthly fees.
Registration Rights
The holders of the founder shares, private placement units and securities that may be issued upon conversion of working capital loans and extension loans will have registration rights to require us to register a sale of any of its securities held by them pursuant to a registration rights agreement. These holders will be entitled to make up to three demands, excluding short form registration demands, that we register such securities for sale under the Securities Act. In addition, these holders will have “piggy-back” registration rights to include their securities in other registration statements filed by the Company. Notwithstanding the foregoing, the underwriters may not exercise their demand and “piggyback” registration rights after five and seven years, respectively, after the effective date of the Registration Statement and may not exercise their demand rights on more than one occasion.
Underwriting Agreement
The underwriters had a 30-day option to purchase up to 1,875,000 additional units to cover any over-allotments, if any, at the initial public offering price less the underwriting discounts and commissions. On July 22, 2021, the underwriters partially exercised their over-allotment option and purchased an additional 1,331,230 units and forfeited the remainder of their over-allotment option as of July 28, 2021.
The underwriters are entitled to a deferred underwriting discount of 3.5% of the gross proceeds of the initial public offering held in the trust account upon the completion of the initial Business Combination, subject to the terms of the underwriting agreement.
Recent Accounting Pronouncements
In August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. The ASU also removes certain settlement conditions that are required for equity-linked contracts to qualify for the derivative scope exception, and it simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective January 1, 2024 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company is reviewing what impact, if any, adoption will have on the Company’s financial position, results of operations or cash flows.
Management does not believe that any other recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company’s unaudited condensed financial statements.
JOBS Act
The JOBS Act contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. We qualify as an “emerging growth company” and under the JOBS Act are allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies. We are electing to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result, the financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Additionally, we are in the process of evaluating the benefits of relying on the other reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404,
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(ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our initial public offering or until we are no longer an “emerging growth company,” whichever is earlier.
Factors That May Adversely Affect our Results of Operations
Our results of operations and our ability to complete an initial Business Combination may be adversely affected by various factors that could cause economic uncertainty and volatility in the financial markets, many of which are beyond our control. Our business could be impacted by, among other things, downturns in the financial markets or in economic conditions, increases in oil prices, inflation, increases in interest rates, supply chain disruptions, declines in consumer confidence and spending, the ongoing effects of the COVID-19 pandemic, including resurgences and the emergence of new variants, and geopolitical instability, such as the military conflict in Ukraine. We cannot at this time fully predict the likelihood of one or more of the above events, their duration or magnitude or the extent to which they may negatively impact our business and our ability to complete an initial Business Combination.
Recent Developments
We have evaluated subsequent events and transactions that have occurred after June 30, 2023 and until the date of this proxy statement/prospectus. Based upon this review, we did not identify any subsequent events that would require adjustment or disclosure in the financial statements.
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INFORMATION ABOUT KUSTOM ENTERTAINMENT
Unless otherwise indicated or the context otherwise requires, references in this section to “Kustom Entertainment” or “we,” “our,” “us,” and similar terms refer to Kustom Entertainment, Inc. and its subsidiaries before the Business Combination, which will be the business of Kustom Entertainment, Inc. (formerly Clover Leaf) and its consolidated subsidiaries immediately after giving effect to the Business Combination.
Overview
On December 8, 2022, the Company announced that its Board of Directors unanimously approved a plan to pursue a separation into two independent, publicly-traded companies to optimize investment and capital allocation, accelerate growth, and unlock shareholder value. Specifically, the Company plans to separate its entertainment operating segment, Kustom Entertainment, into an independent publicly traded company. Kustom Entertainment will be comprised of three operating subsidiaries, TicketSmarter, Inc. (“TicketSmarter”), Kustom 440, Inc. (“Kustom 440”), and BirdVu Jets, Inc. (“BirdVu Jets”). Through these subsidiaries Kustom Entertainment will be a multi-disciplinary entertainment company, anchored by a premier ticketing technology business, which we believe is poised to achieve substantial scaling opportunities, through TicketSmarter, which offers unique primary and secondary ticketing products to the market. Additionally, Kustom Entertainment’s offerings will include a distinctive event marketing and production company, with numerous customization options for unique events, festivals, and concerts, through Kustom 440 and BirdVu Jets.
Strategic Product and Service Offerings
We offer a range of services and products. These include:
TicketSmarter Platform
On September 1, 2021, TicketSmarter completed an acquisitions of Goody Tickets, LLC and TicketSmarter, LLC.
Kustom 440 Services
Kustom 440 is wholly owned subsidiary of Digital Ally and it was formed on March 21, 2022.
BirdVu Jets Services
BirdVu Jets is wholly owned subsidiary of Digital Ally and it was formed on August 15, 2022.
Digital Connect Services
Digital Connect, Inc. is wholly owned subsidiary of Digital Ally and it was formed on January 4, 2022.
Our Competition
Our business faces significant competition from other primary and secondary ticketing service providers to acquire new and retain existing ticket buyers and sellers. The main competitive factors are:
• availability and variety of ticket offerings;
• pricing, including pricing in the primary ticket market;
• brand recognition; and
• technology, including functionality and ease of use to search for offerings and complete a purchase.
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We believe we have several competitive advantages that enable us to maintain and grow our position as a leading secondary ticket provider:
• wide selection of listings and ticketing options;
• competitive pricing; and
• full-service marketplace with excellent customer service.
Our key competitors are Live Nation, Eventbrite, Vivid Seats, StubHub, Ticketmaster, SeatGeek and TicketNetwork.
We also face competition from other avenues for entertainment. Consumers have a wide array of entertainment options including restaurants, movies and television and we compete for the discretionary spend of our ticket buyers and users.
Our Strategy
[•].
Our Industry
We operate in the following main industries within the live entertainment business: ticketing services and event planning and marketing.
The U.S. live event ticketing market is large with a long history of secular growth. Consumer sentiment over the past few decades, accelerated by the coming of age of the millennial generation, has been shifting to favor experiences over material goods. Numerous studies have found that spending money on life experiences brings individuals more lasting joy than spending the same amount on physical goods. According to the Bureau of Economic Analysis, Gross Domestic Product attributable to arts, entertainment, recreation, accommodation and food services was nearly $1.6 trillion in 2019, up from $979 billion a decade ago.
Moreover, the rise of music streaming services in the mid-2000s forced artists to become increasingly reliant on generating income from touring rather than album sales. With less revenue from album sales, performers have turned to additional live performances to fill the gap. This behavior shift has resulted in an increasing number of multi-city road shows and music festivals with the top 100 North American tours grossing over $3.7 billion in 2019, up nearly $1 billion from 2015, according to Pollstar 2019 Business Analysis on the state of the concert business. The rise of the “Experience Economy”, along with the dynamics of artists financially incentivized to tour, has created a virtuous supply and demand cycle.
Buyers increasingly value flexibility and the ability to attend their desired events without needing to plan months in advance. The secondary ticketing market supports buyers by providing a liquid, efficient and flexible mechanism to purchase tickets at their convenience. Many tickets are initially offered far in advance of the event date and are often bundled as part of larger packages such as season tickets. These distribution practices can limit consumer convenience and choice as buyers are asked to commit to plans and make a financial outlay months in advance of the event and, in the case of season tickets, purchase tickets for events they may not want or be able to use.
The secondary live events ticketing market alleviates these pain points by allowing buyers the flexibility to purchase tickets when they want, sometimes hours before an event, and to attend otherwise sold out events. Likewise, these buyers are also able to sell tickets if plans change. Prices reflect real-time supply and demand. In many instances, tickets are available on the secondary market for below face value and help teams and artists fill venues.
Our Intellectual Property
Our ability to compete effectively primarily depends on our trade secrets and know-how and does not depend heavily on any proprietary technology or patents.
Properties
Our principal executive offices are located at 7007 College Blvd Suite 100, Overland Park, Kansas 66211. In September 2021, we took possession of the lease agreement for this office space. The lease term commenced on September 1, 2021 and ends on December 31, 2023. Our monthly rent under the lease agreement is $7,364.
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Corporate Information
History
Kustom Entertainment was formed on December 8, 2022 as a wholly-owned subsidiary of Digital Ally. In order to separate the Ticketing Business and Entertainment Business from Digital Ally, Digital Ally will transfer to Kustom Entertainment (i) 100% of the issued and outstanding shares of common stock of TicketSmarter Sub, (ii) 100% of the issued and outstanding shares of common stock of Kustom 440 Sub, (iii) 100% of the issued and outstanding shares of common stock of BirdVu Jets Subs, (iv) 100% of the issued and outstanding shares of common stock of Digital Connect Sub (v) all the Ticketing Assets of Digital Ally and (vi) all the Entertainment Assets of Digital Ally.
Other
Our principal executive offices are located at 7007 College Blvd Suite 100, Overland Park, Kansas 66211 and our telephone number is [•]. Our website address is www.kustoment.com. The information contained therein or connected thereto shall not be deemed to be incorporated into this proxy statement/prospectus.
We are an “emerging growth company” as defined in the JOBS Act. We will remain an emerging growth company for up to the last day of the fiscal year following the fifth anniversary of our initial public offering, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if, among other criteria, the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. Pursuant to Section 102 of the JOBS Act, we have provided reduced executive compensation disclosure and have omitted a compensation discussion and analysis from this proxy statement/prospectus. Pursuant to Section 107 of the JOBS Act, we have elected to utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.
Employees
As of June 30, 2023, we had 19 full-time employees, including four executives, two in finance and administration and four in sales and customer service. None of our employees are represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be satisfactory. Our future success depends on our continuing ability to attract and retain highly qualified employees and senior management personnel. In addition, we have independent contractors whose services we are using on an as-needed basis to assist with the engineering and design of our products.
Legal Proceedings
From time to time we may be involved in various claims and legal actions arising in the ordinary course of our business. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, or any of our subsidiaries, in which an adverse decision could have a material adverse effect upon our business, operating results, or financial condition.
Relationship with Digital Ally
Following the Merger, we will continue to benefit from the existing relationship with Digital Ally, which operates, and expects to continue to operate, the video solutions operating segment and the revenue cycle management operating segment.
For a more detailed description, see “Certain Relationships and Related Party Transactions — Kustom Entertainment Related Person Transaction.”
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF kustom entertainment
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the “Business” section and Kustom Entertainment’s unaudited condensed consolidated financial statements for the six months ended June 30, 2023 and 2022, Kustom Entertainment’s audited financial statements as of the year ended December 31, 2022 and December 31, 2021, and other information included elsewhere in this proxy statement/prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Kustom Entertainment’s actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this proxy statement/prospectus. Additionally, Kustom Entertainment’s historical results are not necessarily indicative of the results that may be expected in any future period. Amounts are presented in U.S. dollars.
Following the consummation of the Merger, Kustom Entertainment will hold, directly or through its subsidiaries, the Ticketing Business and Entertainment Business and will be the financial reporting entity.
Business Overview
We were formed on December 8, 2022 as a wholly-owned subsidiary of Digital Ally. In order to separate the Ticketing Business and Entertainment Business from Digital Ally, Digital Ally will transfer to us (i) 100% of the issued and outstanding shares of common stock of TicketSmarter Sub, (ii) 100% of the issued and outstanding shares of common stock of Kustom 440 Sub, (iii) 100% of the issued and outstanding shares of common stock of BirdVu Jets Subs, (iv) 100% of the issued and outstanding shares of common stock of Digital Connect Sub (v) all the Ticketing Assets of Digital Ally and (vi) all the Entertainment Assets of Digital Ally. Following the Merger, we will operate the Ticketing Business and Entertainment Business.
We are a premier multi-disciplinary entertainment company, anchored by a premier ticketing technology business poised to achieve substantial scaling opportunities, through our TicketSmarter, Inc. subsidiary, which offers unique primary and secondary ticketing products to the market. Additionally, Kustom Entertainment’s offerings will include a distinctive event marketing and production company, with numerous customization options for events, festivals, and concerts, through its Kustom 440, Inc., subsidiary.
To complete the Merger, Digital Ally will, following the internal reorganization, distribute to Digital Ally stockholders all of the outstanding shares of Kustom Entertainment common stock. The Digital Ally Distribution is subject to the satisfaction or waiver of certain conditions. In addition, until the Digital Ally Distribution has occurred, the Digital Ally board of directors has the right to not proceed with the Digital Ally Distribution, even if all of the conditions are satisfied.
Results of Operations
Six months ended June 30, 2023 compared with the six months ended June 30, 2022
Revenue and Gross Profit
Product revenues primarily includes the sale of tickets to concerts, sporting events, and other live events that have been purchased or received through Kustom Entertainment’s sponsorship and partnership network and held in inventory until their eventual sale.
Service and other revenues consist of sales generated through its secondary ticketing marketplace as Kustom Entertainment collects net service fees on secondary ticketing marketplace transactions.
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The following table presents revenues by type:
|
Six Months Ended December 31, |
|||||||||
|
2023 |
% Change |
2022 |
|||||||
|
Revenues: |
|
|
|
||||||
|
Product |
$ |
3,189,848 |
69.7 |
% |
$ |
1,879,769 |
|||
|
Service and other |
|
5,481,659 |
(43.4 |
)% |
|
9,681,969 |
|||
|
Total revenues |
$ |
8,671,507 |
(25.0 |
)% |
$ |
11,561,738 |
|||
Kustom Entertainment sells its products and services to customers in the following manner:
• Kustom Entertainment generates product revenues from the sale of tickets directly to consumers for a particular event that the entertainment operating segment has previously purchased and held in inventory for ultimate resale to the end consumer. Service sales through TicketSmarter, are driven largely in part to the usage of the TicketSmarter.com marketplace by buyers and sellers, in which the Company collects service fees for each transaction completed through this platform.
Gross profit for the six months ended June 30, 2023 and 2022 was $1,390,121 and $976,824, respectively, an increase of $413,297 (42%). Gross profit by revenue stream was as follows:
|
Six Months Ended December 31, |
|||||||
|
2023 |
2022 |
||||||
|
Gross Profit: |
|
|
|
||||
|
Product |
$ |
512,215 |
$ |
(505,640 |
) |
||
|
Service and other |
|
877,906 |
|
1,482,464 |
|
||
|
Total gross profit |
$ |
1,390,121 |
$ |
976,824 |
|
||
The overall increase is attributable to the decrease in cost of goods sold across Kustom Entertainment’s two revenue streams for the six months ended June 30, 2023, the cost of sales as a percentage of overall revenues to 84% for the six months ended June 30, 2023 from 92% for the six months ended June 30, 2022. Kustom Entertainment’s goal is to continue to improve its margins over the longer term based on its new marketing strategies and organic growth opportunities.
Operating Expenses
Overall operating expenses were $3,907,916 and $4,743,364 for the six months ended June 30, 2023 and 2022, respectively, a decrease of $835,448 (18%). The decrease was primarily attributable to the implementation of new marketing strategies and a reduction in the overall marketing expense throughout the first half of 2023. Kustom Entertainment’s operating expenses as a percentage of sales slightly increased to 45% for the six months ended June 30, 2023 compared to 41% in the six months ended June 30, 2022.
The significant components of operating expenses are as follows:
|
Six Month Ended December 31, |
||||||
|
2023 |
2022 |
|||||
|
Operating expenses: |
|
|
||||
|
Selling, advertising, and promotional expense |
$ |
1,493,465 |
$ |
2,852,888 |
||
|
General and administrative expense |
|
2,414,451 |
|
1,890,476 |
||
|
Total |
$ |
3,907,916 |
$ |
4,743,364 |
||
Non-Operating Income and Expenses
Interest Expense
Kustom Entertainment incurred interest expenses of $72,849 and $4,410 during the six months ended June 30, 2023 and 2022, respectively.
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Liquidity and Capital Resources
Management’s Liquidity Plan — Kustom Entertainment has experienced net losses and cash outflows from operating activities since inception. Based upon its current operating forecast, Kustom Entertainment anticipates that it will need to restore positive operating cash flows and/or raise additional capital in the short-term to fund operations, meet its customary payment obligations and otherwise execute its business plan over the next 12 months. Kustom Entertainment is continuously in discussions to raise additional capital, which may include a variety of equity and debt instruments; however, there can be no assurance that its capital raising initiatives will be successful. Kustom Entertainment’s recurring losses and level of cash used in operations, along with uncertainties concerning its ability to raise additional capital, raise substantial doubt about its ability to continue as a going concern.
Cash, cash equivalents: As of June 30, 2023, Kustom Entertainment had cash and cash equivalents with an aggregate balance of $128,544, a decrease from a balance of $214,738 for the year December 31, 2022. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the $86,194 net decrease in cash during the six months ended June 30, 2023:
• Operating activities: $1,594,073 of net cash used in operating activities. Net cash used in operating activities was $1,594,073 and $1,993,062 for the six months ended June 30, 2023 and 2022, respectively, an improvement of $398,987.
• Investing activities: $1,442,152 of net cash provided by investing activities. Cash provided by investing activities was $1,442,152 and $-0- for the six months ended June 30, 2023 and 2022 respectively.
• Financing activities: $65,727 of net cash provided by financing activities. Cash used in financing activities was $65,727 for the six months ended June 30, 2023, compared to cash provided by financing activities of $1,500,000 for the six months ended June 30, 2022.
The net result of these activities was a decrease in cash of $86,194 to $128,544 for the six months ended June 30, 2023.
Results of Operations
Year ended December 31, 2022 compared with the year ended December 31, 2021
Revenue and Gross Profit
Product revenues primarily includes the sale of tickets to concerts, sporting events, and other live events that have been purchased or received through Kustom Entertainment’s sponsorship and partnership network, and held in inventory until their eventual sale.
Service and other revenues consist of sales generated through Kustom Entertainment’s secondary ticketing marketplace as it collects net service fees on secondary ticketing marketplace transactions.
The following table presents revenues by type:
|
Year Ended December 31, |
|||||||||
|
2022 |
% Change |
2021 |
|||||||
|
Revenues: |
|
|
|
||||||
|
Product |
$ |
5,598,803 |
12.2 |
% |
$ |
4,990,658 |
|||
|
Service and other |
|
15,272,697 |
10.9 |
% |
|
13,766,822 |
|||
|
Total revenues |
$ |
20,871,500 |
11.3 |
% |
$ |
18,757,480 |
|||
Kustom Entertainment sells its products and services to customers in the following manner:
• Kustom Entertainment generates product revenues from the sale of tickets directly to consumers for a particular event that the entertainment operating segment has previously purchased and held in inventory for ultimate resale to the end consumer. Service sales through TicketSmarter, are driven largely in part to the usage of the TicketSmarter.com marketplace by buyers and sellers, in which the Company collects service fees for each transaction completed through this platform.
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Gross profit for the years ended December 31, 2022 and 2021 was $268,741 and $5,359,178, respectively, a decrease of $5,090,437 (95%). Gross profit by revenue stream was as follows:
|
Years Ended December 31, |
|||||||
|
2022 |
2021 |
||||||
|
Gross Profit: |
|
|
|
||||
|
Product |
$ |
(440,828 |
) |
$ |
1,283,719 |
||
|
Service and other |
|
709,569 |
|
|
4,075,459 |
||
|
Total gross profit |
$ |
268,741 |
|
$ |
5,359,178 |
||
The overall decrease is attributable to the increase in cost of goods sold across Kustom Entertainment’s two revenue streams for the year ended December 31, 2022, as there was an overall increase in the cost of sales as a percentage of overall revenues to 99% for the year ended December 31, 2022 from 71% for the year ended December 31, 2021. Kustom Entertainment’s goal is to improve its margins over the longer term based on our new marketing strategies and organic growth opportunities.
Operating Expenses
Overall operating expenses were $7,637,982 and $4,577,535 for the years ended December 31, 2022 and 2021, respectively, an increase of $3,060,447 (67%). The increase was primarily attributable to the implementation of new marketing strategies and the impacts on COVID-19 in early 2021 compared to the minor impact it had in 2022. Kustom Entertainment’s operating expenses as a percentage of sales increased to 37% for 2022 compared to 24% in the same period in 2021.
The significant components of operating expenses are as follows:
|
Year ended December 31, |
||||||
|
2022 |
2021 |
|||||
|
Operating expenses: |
|
|
||||
|
Selling, advertising, and promotional expense |
$ |
4,024,748 |
$ |
2,324,274 |
||
|
General and administrative expense |
|
3,613,234 |
|
2,253,261 |
||
|
Total |
$ |
7,637,982 |
$ |
4,577,535 |
||
Non-Operating Income and Expenses
Interest Expense
Kustom Entertainment incurred interest expenses of $91,874 and $51,271 during the years ended December 31, 2022 and 2021, respectively.
Gain on Extinguishment of Debt
Kustom Entertainment recognized a gain on extinguishment of debt totaling $-0- and $153,000 during the years ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2021 Kustom Entertainment was notified that its $153,000 Payroll Protection Program (the “PPP”) Loan was fully forgiven, thus included in “Gain on Extinguishment of Debt” in its Consolidated Statements of Operations for the year ended December 31, 2021, and further resulting in $-0- for the year ended December 31, 2022.
Liquidity and Capital Resources
Management’s Liquidity Plan — The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Kustom Entertainment incurred substantial operating losses in the year ended December 31, 2022 primarily due to reduced gross margins and increased selling, general, and administrative expenses. Kustom Entertainment incurred operating losses of approximately $7.4 million for the year ended December 31, 2022 and it had an accumulated deficit of $7.2 million as of December 31, 2022. Kustom Entertainment will have the ability to
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access the public and private capital markets to raise funding through the issuance of debt and equity. These equity raises could be utilized to fund its operations and acquisitions. Management expects to utilize this access until it achieves positive cash flows from operations, although it can offer no assurance in this regard.
Kustom Entertainment will have to restore positive operating cash flows and profitability over the next year and/or raise additional capital to fund its operational plans, meet its customary payment obligations and otherwise execute its business plan. There can be no assurance that it will be successful in restoring positive cash flows and profitability, or that it can raise additional financing when needed, and obtain it on terms acceptable or favorable to Kustom Entertainment.
Kustom Entertainment has significantly cut costs through the removal of several large partnerships and sponsorships. These were not yielding the results management expected; thus, it is not expected that these costs with significantly hinder total revenues in 2023 and beyond.
In addition to the initiatives described above, the board of directors of Kustom Entertainment is conducting a review of a full range of strategic alternatives to best position Kustom Entertainment for the future including, but not limited to, the sale of all or certain assets, properties or groups of properties or individual businesses or merger or combination with another company. The result of this review may also include the continued implementation of Kustom Entertainment’s business plan. There can be no assurance that any additional transactions or financings will result from this process.
Based on the uncertainties described above, Kustom Entertainment believes its business plan does not alleviate the existence of substantial doubt about its ability to continue as a going concern within one year from the date of the issuance of these consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should Kustom Entertainment be unable to continue as a going concern.
Kustom Entertainment had $214,738 of available cash and equivalents and negative net working capital of $3,744,812 as of December 31, 2022. Net working capital as of December 31, 2022, included approximately $2.2 million of accounts receivable and other receivables and $0.7 million of current inventory.
Cash, cash equivalents: As of December 31, 2022, Kustom Entertainment had cash and cash equivalents with an aggregate balance of $214,738, a decrease from a balance of $1,263,618 for the year December 31, 2021. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the $1,048,880 net decrease in cash during the year ended December 31, 2022:
• Operating activities: $2,070,690 of net cash (used in) provided by operating activities. Net cash (used in) provided by operating activities was ($2,070,690) and $36,778 for the years ended December 31, 2022 and 2021, respectively, a deterioration of $2,107,468.
• Investing activities: $1,576,530 of net cash (used in) provided by investing activities. Cash used in investing activities was ($1,576,530) and $43,392 for the years ended December 31, 2022 and 2021 respectively.
• Financing activities: $2,598,340 of net cash provided by financing activities. Cash provided by financing activities was $2,598,340 for the year ended December 31, 2022, compared to cash provided by financing activities of $1,103,399 for the year ended December 31, 2021.
The net result of these activities was a decrease in cash of $1,048,880 to $214,738 for the year ended December 31, 2022.
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Off Balance Sheet Arrangements
Kustom Entertainment does not have any off-balance sheet debt, nor did it have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have a material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses other than the following:
Kustom Entertainment is a party to operating leases and license agreements that represent commitments for future payments (described in Note 8, “Operating Leases,” to Kustom Entertainment’s consolidated financial statements), and Kustom Entertainment has issued purchase orders in the ordinary course of business that represent commitments to future payments for goods and services.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses” to improve information on credit losses for financial assets and net investment in leases that are not accounted for at fair value through net income. ASU 2016-13 replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. In April 2019 and May 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” and ASU No. 2019-05, “Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief” which provided additional implementation guidance on the previously issued ASU. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments — Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” which defers the effective date for public filers that are considered small reporting companies (“SRC”) as defined by the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Since the Company is an SRC, implementation is not needed until January 1, 2023. The Company will continue to evaluate the effect of adopting ASU 2016-13 will have on the Company’s consolidated financial statements.
Critical Accounting Policies and Estimates
The above discussion and analysis of financial condition and results of operations is based upon Kustom Entertainment’s combined financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. Certain accounting policies and estimates are particularly important to the understanding of Kustom Entertainment’s financial position and results of operations and require the application of significant judgment by Kustom Entertainment’s management or can be materially affected by changes from period to period in economic factors or conditions that are outside of its control. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, Kustom Entertainment’s management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on Kustom Entertainment’s historical operations, its future business plans and projected financial results, its observance of trends in the industry and information available from other outside sources, as appropriate.
Kustom Entertainment is an emerging growth company within the meaning of the rules under the Securities Act, and it intends to utilize certain exemptions from various reporting requirements that are applicable to public companies that are emerging growth companies. For example, Kustom Entertainment will not have to provide an auditor’s attestation report on its internal controls in future annual reports on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act. In addition, Section 107 of the JOBS Act provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Kustom Entertainment has elected to utilize this extended transition period. As part of the election, Kustom Entertainment will not be required to comply with any new or revised financial accounting standard until such time that a company that does not qualify as an “issuer” (as defined under Section 2(a) of the Sarbanes-Oxley Act of 2002) is required to comply with such new or revised accounting standards. Kustom Entertainment’s financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards as they become applicable to public companies.
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Goodwill and Intangible Assets
Goodwill — In connection with acquisitions, Kustom Entertainment applies the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill. In accordance with ASC 350, Intangibles — Goodwill and Other, Kustom Entertainment assesses goodwill for impairment annually as of December 31, and more frequently if events and circumstances indicate that goodwill might be impaired.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.
Traditionally, goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating an implied fair value of goodwill. Kustom Entertainment has adopted ASU 2017-04 which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test. As a result, Kustom Entertainment compares the fair value of a reporting unit with its respective carrying value and recognized an impairment charge for the amount by which the carrying amount exceeded the reporting unit’s fair value.
Kustom Entertainment determines the fair value of its reporting units using the market approach. Under the market approach, Kustom Entertainment estimates the fair value based on multiples of comparable public companies and precedent transactions. Significant estimates in the market approach include: identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit.
Long-lived and Other Intangible Assets — Kustom Entertainment periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Kustom Entertainment groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. Kustom Entertainment has determined that the lowest level for which identifiable cash flows are available is the operating segment level.
Factors considered by Kustom Entertainment include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, Kustom Entertainment estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, Kustom Entertainment recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available. Kustom Entertainment last assessed potential impairments of its long-lived assets as of December 31, 2022, and concluded that there was no impairment.
Revenue Recognition
Kustom Entertainment applies the provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts with Customers, and all related appropriate guidance. Kustom Entertainment recognizes revenue under the core principle to depict the transfer of control to its customers in an amount reflecting the consideration to which it expects to be entitled. In order to achieve that core principle, Kustom Entertainment applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.
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Kustom Entertainment has two different revenue streams, product and service. Revenues generated are reported net of sales taxes.
Kustom Entertainment reports ticketing revenue on a gross or net basis based on management’s assessment of whether Kustom Entertainment is acting as a principal or agent in the transaction. The determination is based upon the evaluation of control over the event ticket, including the right to sell the ticket, prior to its transfer to the ticket buyer.
Kustom Entertainment sells tickets held in inventory, which consists of one performance obligation, being to transfer control of an event ticket to the buyer upon confirmation of the order. Kustom Entertainment acts as the principal in these transactions as the ticket is owned by Kustom Entertainment at the time of sale, therefore controlling the ticket prior to transferring to the customer. In these transactions, revenue is recorded on a gross basis based on the value of the ticket and is recognized when an order is confirmed. Payment is typically due upon delivery of the ticket.
Kustom Entertainment also acts as an intermediary between buyers and sellers through the online secondary marketplace. Revenues derived from this marketplace primarily consist of service fees from ticketing operations, and consists of one primary performance obligation, which is facilitating the transaction between the buyer and seller, being satisfied at the time the order has been confirmed. As Kustom Entertainment does not control the ticket prior to the transfer, Kustom Entertainment acts as an agent in these transactions. Revenue is recognized on a net basis, net of the amount due to the seller when an order is confirmed. The seller is then obligated to deliver the tickets to the buyer per the seller’s listing, and payment is due at the time of sale.
Sales returns and allowances aggregated $99,297 and $28,103 for the years ended December 31, 2022 and December 31, 2021, respectively. Obligations for estimated sales returns and allowances are recognized at the time of sales on an accrual basis. The accrual is determined based upon historical return rates adjusted for known changes in key variables affecting these return rates.
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DESCRIPTION OF SECURITIES OF THE COMBINED COMPANY
The following summary of the material terms of the Combined Company’s securities following the Business Combination is not intended to be a complete summary of the rights and preferences of such securities. We urge you to read the Proposed Charter and the proposed new amended and restated bylaws of the Combined Company (the “Proposed Bylaws”) in their entirety for a complete description of the rights and preferences of Clover Leaf’s securities following the Business Combination. The Proposed Charter is described in “The Charter Proposal (Proposal 3),” and the full text of the Proposed Charter and Proposed Bylaws are attached as Annex B and Annex C to this proxy statement/prospectus, respectively.
General
The Current Charter authorizes 111,000,000 shares, consisting of (a) 110,000,000 shares of Clover Leaf Common Stock, including (i) 100,000,000 shares of Clover Leaf Class A Common Stock, and (ii) 10,000,000 shares of Clover Leaf Class B Common Stock, and (b) 1,000,000 shares of preferred stock.
Upon completion of the Business Combination, pursuant to the Proposed Charter, the authorized capital stock of the Combined Company will consist of [•] shares of Class A Common Stock, $0.0001 par value per share, consisting of [•] shares of Class A Common Stock and (b) [•] shares of undesignated preferred stock, $0.0001 par value per share.
It is anticipated that, immediately after the Closing of the Business Combination, the Combined Company expects to have approximately [•] shares of Class A Common Stock outstanding immediately after the consummation of the Business Combination, assuming no public stockholders exercise their redemption rights in connection with the Business Combination. Following consummation of the Business Combination, the Combined Company is not expected to have any preferred stock outstanding.
Class A Common Stock
Voting Rights
Following the Business Combination, holders of shares of Class A Common Stock will be entitled to one vote for each share of Class A Common Stock held on all matters submitted to a vote of stockholders except as otherwise expressly provided by the Proposed Charter or as provided by law. Following the Business Combination (assuming that no public stockholders exercise their redemption rights in connection with the Business Combination and the other assumptions described above), the Combined Company directors, executive officers, and beneficial owners of 5% or greater of the Combined Company outstanding Common Stock and their respective affiliates will hold 61.8% of the voting power in the aggregate.
The Combined Company has not provided for cumulative voting for the election of directors in the Proposed Charter. Accordingly, holders of at least a majority of the voting power of then-outstanding shares of the Combined Company Common Stock entitled to vote in the election of directors, voting together as a single class, will be able to elect all of the Combined Company directors.
Dividend Rights
Subject to preferences that may apply to any shares of convertible preferred stock outstanding at the time, the holders of shares of the Combined Company Common Stock are entitled to receive dividends out of funds legally available if the Combined Company Board, in its discretion, determines to issue dividends and then only at the times and in the amounts that the Combined Company Board may determine. Stock dividends with respect to each class of the Combined Company Common Stock may only be paid with shares of stock of the same class of common stock.
No Preemptive or Similar Rights
The Combined Company Common Stock is not entitled to preemptive rights, and is not subject to redemption or sinking fund provisions.
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Right to Receive Liquidation Distributions
Upon the Combined Company liquidation, dissolution or winding-up, the assets legally available for distribution to the Combined Company stockholders would be distributed among the holders of the then outstanding Common Stock pro rata in accordance with the number of shares of Combined Company Common Stock held by each such holder, subject to prior satisfaction of all outstanding debt and liabilities and the preferential rights of and the payment of liquidation preferences, if any, on any outstanding shares of preferred stock.
Preferred Stock
The Proposed Charter provides that shares of preferred stock may be issued from time to time in one or more series. Our board of directors will be authorized to fix the voting powers, if any, designations, powers, preferences, the relative, participating, optional or other special rights and any qualifications, limitations and restrictions thereof, applicable to the shares of each series. Our board of directors will be able to, without stockholder approval, issue preferred stock with voting powers and other rights that could have anti-takeover effects. The ability of our board of directors to issue preferred stock without stockholder approval could have the effect of delaying, deferring or preventing a change of control of us or the removal of existing management. We have no preferred stock outstanding at the date hereof. Although we do not currently intend to issue any shares of preferred stock, we cannot assure you that we will not do so in the future. No shares of preferred stock are being issued or registered in the Business Combination.
Rights
Each holder of a right will receive one-eighth (1/8) of one share of Class A Common Stock, upon and subject to, the Closing of Business Combination. Upon completion of the Business Combination, each holder of a right will be required to affirmatively convert its rights in order to receive the 1/8 share of Class A common stock underlying each right (without paying any additional consideration). Every eight (8) rights that you hold will entitle you to receive one share at the closing of the business combination. We will not issue fractional shares of Class A common stock upon exchange of the rights. If, upon conversion of the rights, a holder would be entitled to receive a fractional interest in a share, fractional shares will be rounded up to the nearest whole share.
As soon as practicable upon the Closing of the Business Combination, we will direct registered holders of the rights to return their rights to our rights agent. Upon receipt of the rights, the rights agent will issue to the registered holder of such rights the number of full shares of Class A common stock to which it is entitled. We will notify registered holders of the rights to deliver their rights to the rights agent promptly upon the Closing of the Business Combination and have been informed by the rights agent that the process of exchanging their rights for shares of Class A common stock should take no more than a matter of days. The foregoing exchange of rights is solely ministerial in nature and is not intended to provide us with any means of avoiding our obligation to issue the shares underlying the rights upon the Closing of the Business Combination. Other than confirming that the rights delivered by a registered holder are valid, we will have no ability to avoid delivery of the shares underlying the rights. There are no specific contractual penalties for failure to deliver securities to the holders of the rights upon the Closing of the Business Combination, however the holders of the rights will have the ability to bring claims against us pursuant to the rights agreement. Additionally, in no event will we be required to net cash settle the rights.
The shares issuable upon conversion of the rights will be freely tradable (except to the extent held by affiliates of ours).
We have agreed that, subject to applicable law, any action, proceeding or claim against us arising out of or relating in any way to the rights agreement will be brought and enforced in the courts of the State of New York or the United States District Court for the Southern District of New York, and we irrevocably submit to such jurisdiction, which jurisdiction will be the exclusive forum for any such action, proceeding or claim. See “Risk Factors — Our rights agreement will designate the courts of the State of New York or the United States District Court for the Southern District of New York as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by holders of our rights, which could limit the ability of right holders to obtain a favorable judicial forum for disputes with our company.” This provision does not apply to claims under the Exchange Act or any claim for which the federal district courts of the United States of America are the sole and exclusive forum.
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In addition, the rights agreement provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall, to the fullest extent permitted by law, be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act or the rules and regulations promulgated thereunder.
We note that there is uncertainty as to whether a court would enforce this provision and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Section 22 of the Securities Act creates concurrent jurisdiction for state and federal courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder.
Our Transfer Agent and Rights Agent
The transfer agent for our common stock and rights agent for our rights is Continental Stock Transfer & Trust Company. We have agreed to indemnify Continental Stock Transfer & Trust Company in its roles as transfer agent and rights agent, its agents and each of its stockholders, directors, officers and employees against all claims and losses that may arise out of acts performed or omitted for its activities in that capacity, except for any liability due to any gross negligence, willful misconduct or bad faith of the indemnified person or entity.
Anti-Takeover Provisions
The Proposed Charter and the Proposed Bylaws following this offering could have the effect of delaying, deferring or discouraging another person from acquiring control of the Combined Company. These provisions, which are summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and encourage persons seeking to acquire control of the Combined Company to first negotiate with the Combined Company Board. We believe that the benefits of increased protection of the Combined Company’s potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire the Combined Company because negotiation of these proposals could result in an improvement of their terms.
Among other things, the Proposed Charter and the Proposed Bylaws include provisions regarding:
• the ability of the Combined Company Board to issue shares of preferred stock, including “blank check” preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
• the limitation of the liability of, and the indemnification of, the Combined Company’s directors and officers;
• the exclusive right of the Combined Company Board to elect a director to fill a vacancy created by the expansion of the Combined Company Board or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on the Combined Company Board;
• the requirement that a special meeting of stockholders may be called only by the Combined Company Board, the chairperson of the Combined Company Board, or the Combined Company’s chief executive officer, which could delay the ability of stockholders to force consideration of a proposal or to take action, including the removal of directors;
• controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings;
• the ability of the Combined Company Board to amend the bylaws, which may allow the Combined Company Board to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend the bylaws to facilitate an unsolicited takeover attempt;
• advance notice procedures with which stockholders must comply to nominate candidates to the Combined Company Board or to propose matters to be acted upon at a stockholders’ meeting, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in the Combined Company Board and also may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Combined Company; and
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These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in the Combined Company Board or management.
Proposed Charter and Restated Bylaw Provisions
The Proposed Charter and the Proposed Bylaws will include a number of provisions that may have the effect of deterring hostile takeovers, or delaying or preventing changes in control of the Combined Company management team or changes in the Combined Company Board or the Combined Company governance or policy, including the following:
Issuance of Undesignated Preferred Stock
The Combined Company anticipates that after the filing of the Proposed Charter, the Combined Company Board will have the authority, without further action by the stockholders, to issue up to [•] shares of undesignated preferred stock with rights, powers and preferences, including voting powers, designated from time to time by the Combined Company Board. The existence of authorized but unissued shares of preferred stock enables the Combined Company Board to render more difficult or to discourage an attempt to obtain control of the Combined Company by means of a merger, tender offer, proxy contest or otherwise.
Exclusive forum for certain lawsuits
The Proposed Charter requires, to the fullest extent permitted by law, that derivative actions brought in the Combined Company’s name, actions against any current or former directors, officers, employees or stockholders of the Combined Company for breach of fiduciary duty and certain other actions may be brought only in the Court of Chancery in the State of Delaware or if such court does not have subject matter jurisdiction, the federal district court of the State of Delaware. The Proposed Charter also requires, to the fullest extent permitted by applicable law, the federal district courts of the United States to be the exclusive forum for the resolution of any complaint asserting a cause of action under the Securities Act. Although we believe these provisions benefit us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, a court may determine that these provisions are unenforceable, and to the extent they are enforceable, the provisions may have the effect of discouraging lawsuits against the Combined Company’s directors, officers, employees and stockholders although the Combined Company stockholders will not be deemed to have waived the Combined Company’s compliance with federal securities laws and the rules and regulations thereunder.
Notwithstanding the Current Charter provides that the exclusive forum provision will be applicable to the fullest extent permitted by applicable law. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, (i) the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction, and (ii) unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall, to the fullest extent permitted by law, be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act or the rules and regulations promulgated thereunder.
Special meeting of stockholders
The Proposed Bylaws provide that special meetings of our stockholders may be called only by the chairman of the Combined Company board, or a Chief Executive Officer, or the Combined Company board pursuant to a resolution adopted by a majority of the board, and may not be called by any other person.
Advance notice requirements for stockholder proposals and director nominations
The Proposed Bylaws provide that stockholders seeking to bring business before the Combined Company’s annual meeting of stockholders, or to nominate candidates for election as directors at the Combined Company’s annual meeting of stockholders, must provide timely notice of their intent in writing. To be timely, a stockholder’s notice will need to be received by the company secretary at the Combined Company’s principal executive offices not later than the close of business on the 90th day nor earlier than the opening of business on the 120th day prior to the anniversary date of the immediately preceding annual meeting of stockholders. Pursuant to Rule 14A-8 of the Exchange Act, proposals seeking inclusion in the Combined Company’s annual proxy statement must comply with the notice periods contained
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therein. The Proposed Bylaws also specify certain requirements as to the form and content of a stockholders’ meeting. These provisions may preclude the Combined Company’s stockholders from bringing matters before the Combined Company’s annual meeting of stockholders or from making nominations for directors at the Combined Company’s annual meeting of stockholders.
No action by written consent
The Proposed Charter provides that the stockholders of the Combined Company will not be entitled to take any action by consent in lieu of a meeting of stockholders.
Board of Directors
The Proposed Charter provides that the number of directors of the Combined Company, other than those who may be elected by the holders of one or more series of the preferred stock voting separately by class or series, shall be fixed from time to time exclusively by the Combined Company board of directors pursuant to a resolution adopted by a majority of the Combined Company board of directors. Subject to the rights of the holders of any series of preferred stock to elect additional directors under specified circumstances, each director shall serve for a term expiring on the date of the first annual meeting of stockholders following the annual meeting of stockholders at which such director was elected; provided further, that the term of each director shall continue until the election and qualification of his or her successor and be subject to his or her earlier death, disqualification, resignation or removal. The Proposed Charter and the Proposed Bylaws provide that the authorized number of directors may be changed only by resolution of the board of directors. Subject to the terms of any preferred stock, any or all of the directors may be removed only for cause and only by the affirmative vote of the holders of at least the majority of the voting power of the outstanding shares of capital stock of the Combined Company entitled to vote thereon. Any vacancy on the Combined Company Board, including a vacancy resulting from an enlargement of the Combined Company Board, may be filled only by the affirmative vote of a majority of the Combined Company’s directors then in office.
Listing of Securities
Clover Leaf Class A Common Stock and Public Rights are currently listed on Nasdaq under the symbols “CLOE” and “CLOER,” respectively. It is currently expected that after the Closing, our Class A Common Stock and Public Rights will be listed on Nasdaq under the symbols “[•]” and “[•],” respectively.
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SECURITIES ACT RESTRICTIONS ON RESALE OF COMMON STOCK
Rule 144
Pursuant to Rule 144, a person who has beneficially owned restricted shares of our common stock for at least six months would be entitled to sell their securities provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the three months preceding, a sale and (ii) we are subject to the Exchange Act periodic reporting requirements for at least three months before the sale and have filed all required reports under Section 13 or 15(d) of the Exchange Act during the 12 months (or such shorter period as we were required to file reports) preceding the sale.
Persons who have beneficially owned restricted shares of our common stock for at least six months but who are our affiliates at the time of, or at any time during the three months preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of:
• 1% of the total number of shares of Clover Leaf Class A Common Stock (or after the Closing, Class A Common Stock) then outstanding; or
• the average weekly reported trading volume of the Clover Leaf Class A Common Stock (or after the Closing, Class A Common Stock) then during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.
Sales by our affiliates under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of current public information about us.
Restrictions on the Use of Rule 144 by Shell Companies or Former Shell Companies
Rule 144 is not available for the resale of securities initially issued by shell companies (other than business combination related shell companies) or issuers that have been at any time previously a shell company. However, Rule 144 also includes an important exception to this prohibition if the following conditions are met:
• the issuer of the securities that was formerly a shell company has ceased to be a shell company;
• the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act;
• the issuer of the securities has filed all Exchange Act reports and materials required to be filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Current Reports on Form 8-K; and
• at least one year has elapsed from the time that the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company.
As of the date of this proxy statement/prospectus, there are [•] shares of Clover Leaf Common Stock outstanding. Of these shares, the [•] shares sold in the IPO are freely tradable without restriction or further registration under the Securities Act. All of the remaining 3,457,807 shares owned by our Sponsor are restricted securities under Rule 144, in that they were issued in a private transaction not involving a public offering.
Kustom Entertainment anticipates that following the consummation of the Business Combination, the Combined Company will no longer be a shell company, and so, once the conditions set forth in the exceptions listed above are satisfied, Rule 144 will become available for the resale of the above-noted restricted securities.
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COMPARISON OF STOCKHOLDER RIGHTS
Both Clover Leaf and Kustom Entertainment are incorporated under the laws of the State of Delaware and, accordingly, the rights of the stockholders of each are currently, and will continue to be, governed by the DGCL. If the Business Combination is completed, Digital Ally will become a stockholder of Clover Leaf, and their rights will be governed by the DGCL, and, assuming the Charter Proposal are approved by the Clover Leaf stockholders at the Special Meeting, the Proposed Charter attached to this proxy statement/prospectus as Annex B, and the Proposed Bylaws of Clover Leaf attached to this proxy statement/prospectus as to Annex C.
The table below summarizes the material differences between the current rights of Clover Leaf stockholders under the Current Charter and bylaws, and the rights of the Combined Company stockholders, post-Closing, under the Proposed Charter and Proposed Bylaws of the Combined Company, each as amended, as applicable, and as in effect immediately following the Business Combination.
While Clover Leaf and Kustom Entertainment believe that the summary tables cover the material differences between the rights of their respective stockholders prior to the Business Combination and the rights of Clover Leaf stockholders following the Business Combination, these summary tables may not contain all of the information that is important to you. You should carefully read this entire proxy statement/prospectus and the other documents referred to in this proxy statement/prospectus for a more complete understanding of the differences between being a stockholder of Clover Leaf or Kustom Entertainment before the Business Combination and being a stockholder of Combined Company after the Business Combination. Clover Leaf has attached as Annex B to this proxy statement/prospectus a copy of the proposed Amended Charter, and attached as Annex C to this proxy statement/prospectus a copy of the form of the Combined Company Proposed Bylaws, and will send copies of the documents referred to in this proxy statement/prospectus to you upon your request. See the section titled “Where You Can Find More Information” in this proxy statement/prospectus.
Current Clover Leaf Rights Versus the Combined Company Rights Post-Merger
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Provision |
Clover Leaf Capital Corp. |
The Combined Company |
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Authorized Capital Stock |
The Current Charter authorizes 111,000,000 shares, consisting of (a) 110,000,000 shares of common stock, including (i) 100,000,000 shares of Clover Leaf Class A Common Stock, and (ii) 10,000,000 shares of Clover Leaf Class B Common Stock, and (b) 1,000,000 shares of preferred stock. As of the date of this proxy statement/prospectus, no shares of preferred stock are outstanding. |
The Proposed Charter authorizes [•] shares, consisting of (a) [•] shares of common stock, including [•] shares of Class A common stock, and (b) [•] shares of preferred stock. As of the date of this proxy statement/prospectus, no shares of preferred stock are outstanding. |
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Number of Directors |
The Current Charter provides that the number of directors of Clover Leaf, other than those who may be elected by the holders of one or more series of the preferred stock voting separately by class or series, shall be fixed from time to time exclusively by the Clover Leaf Board pursuant to a resolution adopted by a majority of the Clover Leaf Board. |
The Proposed Charter provides that the number of directors of the Combined Company, other than those who may be elected by the holders of one or more series of the preferred stock voting separately by class or series, shall be fixed from time to time exclusively by the Combined Company board of directors pursuant to a resolution adopted by a majority of the Combined Company board of directors. |
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Provision |
Clover Leaf Capital Corp. |
The Combined Company |
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Classification of the Board of Directors |
Subject to the special rights of the holders of any series of preferred stock to elect directors, the Clover Leaf Board shall be divided into two classes, as nearly equal in number as possible and designated Class I and Class II. The Clover Leaf Board is authorized to assign members of the board already in office to Class I or Class II. At each succeeding annual meeting of the stockholders of Clover Leaf, successors to the class of directors whose term expires at that annual meeting shall be elected for a two-year term or until the election and qualification of their respective successors in office, subject to their earlier death, resignation, retirement, disqualification or removal. |
Subject to the rights of the holders of any series of preferred stock to elect additional directors under specified circumstances, each director shall serve for a term expiring on the date of the first annual meeting of stockholders following the annual meeting of stockholders at which such director was elected; provided further, that the term of each director shall continue until the election and qualification of his or her successor and be subject to his or her earlier death, disqualification, resignation or removal. |
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Appointment of Directors |
The Current Charter requires that the directors be elected by a plurality of the votes cast by the stockholders present in person or represented by proxy at the meeting and entitled to vote on the election of directors. In addition, except as otherwise required by law, whenever the holders of one or more series of the preferred stock shall have the right, voting separately by class or series, to elect one or more directors, the term of office, the filling of vacancies, the removal from office and other features of such directorships shall be governed by the terms of such series of the preferred stock as set forth in the Current Charter (including any preferred stock designation) and such directors shall not be included in any of the classes described above unless expressly provided by such terms. |
The Proposed Charter requires that the holders of at least a majority of the voting power of then-outstanding shares of the common stock entitled to vote in the election of directors, voting together as a single class, will be able to elect all of the Combined Company directors. In addition, except as otherwise required by law, whenever the holders of one or more series of the preferred stock shall have the right, voting separately by class or series, to elect one or more directors, the term of office, the filling of vacancies, the removal from office and other features of such directorships shall be governed by the terms of such series of the preferred stock as set forth in the Proposed Charter (including any preferred stock designation) and such directors shall not be included in any of the classes described above unless expressly provided by such terms. |
||
|
Removal of Directors |
The Current Charter provides that any and all of the directors may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of a majority of the voting power of all then outstanding shares of capital stock of Clover Leaf entitled to vote generally in election of directors, voting together as a single class. |
The Proposed Charter provides that any and all of the directors may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of a majority of the voting power of all then outstanding shares of capital stock of the Combined Company entitled to vote generally in election of directors, voting together as a single class. |
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|
Provision |
Clover Leaf Capital Corp. |
The Combined Company |
||
|
Voting |
The Current Charter provides that holders of Clover Leaf Class A Common Stock and holders of Clover Leaf Class B Common Stock will vote together as a single class on all matters submitted to a vote of our stockholders, except as required by law or otherwise designated by preferred stock, if any. Each share of common stock will have one vote on all such matters. Except as otherwise required by law, holders of common stock shall not be entitled to vote on any amendment to the charter of Clover Leaf that relates solely to the terms of one or more outstanding series of preferred stock if the holders of such affected series of preferred stock are entitled exclusively, either separately or together with the holders of one or more other such series of preferred stock, to vote thereon pursuant to the charter of Clover Leaf or the DGCL. |
The Proposed Charter provides that except as otherwise provided by law or by the resolution or resolutions providing for the issue of any series of preferred stock, the holders of the common stock shall exclusively possess all voting power with respect to the Combined Company. Except as otherwise provided by law or by the resolution or resolutions providing for the issue of any series of preferred stock, the holders of shares of common stock shall be entitled to one vote for each such share on each matter properly submitted to the stockholders of the Combined Company on which the holders of the common stock are entitled to vote. Notwithstanding any other provision of the Proposed Charter, the holders of common stock shall not be entitled to vote on any amendment to the Proposed Charter that relates solely to the terms of one or more outstanding series of preferred stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon pursuant to the Proposed Charter or the DGCL. |
||
|
Conversion |
The Current Charter provides that the Clover Leaf Class B Common Stock shall be convertible into shares of Class A Common Stock on a one-for-one basis on the closing of the Business Combination, and under certain circumstances being subject to a different conversion ratio into shares of Clover Leaf Class A Common Stock. |
Not applicable since the Proposed Charter has only one class of common stock. |
||
|
Limitation of Liability of Directors and Officers |
The Current Charter provides that a director of Clover Leaf shall not be personally liable to Clover Leaf or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the DGCL as the same exists or may hereafter be amended unless they violated their duty of loyalty to Clover Leaf or its stockholders, acted in bad faith, knowingly or intentionally violated the law, authorized unlawful payments of dividends, unlawful stock purchases or unlawful redemptions, or derived improper personal benefit from their actions as directors. |
The Proposed Charter provides that the liability of a director of the Combined Company for monetary damages shall be eliminated to the fullest extent under applicable law, and, to the fullest extent permitted by applicable law, the Combined Company is authorized to provide indemnification of (and advancement of expenses to) directors, officers and agents of the Combined Company (and any other persons to which applicable law permits the Combined Company to provide indemnification) through bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise in excess of the indemnification and advancement otherwise permitted by such applicable law. |
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|
Provision |
Clover Leaf Capital Corp. |
The Combined Company |
||
|
Corporate Opportunities |
To the extent allowed by law, the doctrine of corporate opportunity, or any other analogous doctrine, shall not apply with respect to Clover Leaf or any of its officers or directors, or any of their respective affiliates, in circumstances where the application of any such doctrine would conflict with any fiduciary duties or contractual obligations they may have as of the date of Current Charter or in the future, and Clover Leaf renounces any expectancy that any of the directors or officers of Clover Leaf will offer any such corporate opportunity of which he or she may become aware to Clover Leaf, except, the doctrine of corporate opportunity shall apply with respect to any of the directors or officers of Clover Leaf with respect to a corporate opportunity that was offered to such person solely in his or her capacity as a director or officer of Clover Leaf and (i) such opportunity is one Clover Leaf is legally and contractually permitted to undertake and would otherwise be reasonable for Clover Leaf to pursue and (ii) the director or officer is permitted to refer that opportunity to Clover Leaf without violating any legal obligation. |
The Proposed Charter does not include any provision regarding the doctrine of corporate opportunity. |
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|
Choice of Forum |
The Current Charter provides that unless Clover Leaf consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for any Clover Leaf stockholder to bring (i) any derivative action or proceeding brought on behalf of Clover Leaf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of Clover Leaf to Clover Leaf or Clover Leaf stockholders, (iii) any action asserting a claim against Clover Leaf, its directors, officers or employees arising pursuant to any provision of the DGCL or the Current Charter or the Clover Leaf bylaws, or (iv) any action asserting a claim against Clover Leaf, its directors, officers or employees governed by the internal affairs doctrine. The exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction and unless Clover Leaf consents in writing to the selection of an alternative forum. |
The Proposed Charter provides that unless the Combined Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) and any appellate court therefrom shall be the sole and exclusive forum for the following claims or causes of action under the Delaware statutory or common law: (i) any derivative claim or cause of action brought on behalf of the Combined Company; (ii) any claim or cause of action for breach of a fiduciary duty owed by any current or former director, officer or other employee of the Combined Company to the Combined Company or the Combined Company’s stockholders; (iii) any claim or cause of action against the Combined Company or any current or former director, officer or other employee of the Combined Company, arising out of or pursuant to any provision of the DGCL, |
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|
Provision |
Clover Leaf Capital Corp. |
The Combined Company |
||
|
the Proposed Charter or the Combined Company’s bylaws (as each may be amended from time to time); (iv) any claim or cause of action seeking to interpret, apply, enforce or determine the validity of the Proposed Charter or the Combined Company’s bylaws (as each may be amended from time to time, including any right, obligation or remedy thereunder); (v) any claim or cause of action as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware; and (vi) any claim or cause of action against the Combined Company or any current or former director, officer or other employee of the Combined Company governed by the internal-affairs doctrine or otherwise related to the Combined Company’s internal affairs, in all cases to the fullest extent permitted by law and subject to the court having personal jurisdiction over the indispensable parties named as defendants. |
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|
Amendment to Certificate of Incorporation |
The Current Charter requires a separate or specific vote for: • Amendments that relate solely to the terms of one or more outstanding series of preferred stock, or another series of common stock, if the holders thereof are entitled to a separate vote; • Amendments that would alter or change the powers, preferences or relative, participating, optional or other or special rights of the Clover Leaf Class B Common Stock, which require a separate class vote or written consent of the holders of a majority of the shares of Class B Common Stock then outstanding; |
The Proposed Charter requires a separate or specific vote for: • Amendments that relate solely to the terms of one or more outstanding series of preferred stock, or another series of common stock, if the holders thereof are entitled to a separate vote. |
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|
Provision |
Clover Leaf Capital Corp. |
The Combined Company |
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|
• Amendments to the provisions of the current certificate of incorporation related to the requirements for Clover Leaf’s initial business combination, redemption rights, distributions from the trust account, certain share issuances, transactions with affiliates, minimum value of target, which prior to the consummation of Clover Leaf’s initial business combination require the affirmative vote of holders of at least fifty percent (50%) of all then outstanding shares of the Clover Leaf Common Stock; and • Amendments to the provisions of the Current Charter related to the limitation of director liabilities shall not adversely affect any right or protection of a director of Clover Leaf in respect of any act or omission occurring prior to the time of such amendment. |
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Amendment to Bylaws |
The current bylaws provide that the Clover Leaf Board shall have the power to adopt, amend, alter or repeal the current bylaws. The affirmative vote of a majority of the Clover Leaf Board shall be required to adopt, amend, alter or repeal the current bylaws. The current bylaws also may be adopted, amended, altered or repealed by the stockholders; provided, however, that in addition to any vote of the holders of any class or series of capital stock of Clover Leaf required by applicable law or the current Clover Leaf Charter, (A) the affirmative vote of the holders of at least a majority of the voting power of all outstanding shares of capital stock of Clover Leaf entitled to vote generally in the election of directors, voting together as a single class, shall be required for the stockholders to adopt, amend, alter or repeal the current bylaws. |
The board of directors of the Combined Company is expressly empowered to adopt, amend or repeal the bylaws of the Combined Company. Any adoption, amendment or repeal of the bylaws by the board of directors shall require the approval of a majority of the authorized number of directors. The stockholders shall also have power to adopt, amend or repeal the bylaws; provided, however, that, in addition to any vote of the holders of any class or series of stock of the Combined Company required by law or by the Proposed Charter, such action by stockholders shall require the affirmative vote of the holders of at least a majority of the voting power of all of the then-outstanding shares of the capital stock of the Combined Company entitled to vote generally in the election of directors, voting together as a single class. |
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BENEFICIAL OWNERSHIP OF SECURITIES
The following table and accompanying footnotes set forth information regarding (i) the beneficial ownership of Clover Leaf as of September 26, 2023 (the “Ownership Date”), prior to the consummation of the Business Combination; and (ii) the Combined Company as of immediately following the Closing, assuming that no further Public Shares are redeemed (“no redemption”), and, alternatively, that 765,022 remaining Public Shares are redeemed in connection with the Business Combination (“100% redemption”), with respect to:
• each person known by Clover Leaf to be the beneficial owner of more than 5% of the outstanding shares of the Clover Leaf Common Stock on such dates;
• each of Clover Leaf’s current executive officers and directors and all executive officers and directors of Clover Leaf as a group;
• each person who will (or is expected to) become an executive officer or director of the Combined Company post-Business Combination; and
• all such executive officers and directors as a group.
The expected beneficial ownership of shares of the Combined Company Common Stock upon the closing of the Business Combination assumes two scenarios:
(a) a “no redemption” scenario where (i) no public stockholders exercise their redemption rights in connection with the Business Combination and (ii) the Combined Company has 19,553,064 outstanding shares of common stock immediately following the Business Combination, of which 11,220,826 shares will be issued to Digital Ally, 3,048,031 shares will be held by the public stockholders and 4,459,688 shares will be held by the Sponsor; and
(b) a “100% redemption” scenario where (i) 765,022 of Clover Leaf’s outstanding public shares are redeemed in connection with the Business Combination and (ii) the Combined Company has 18,788,042 outstanding shares of common stock immediately following the Business Combination, of which 11,220,826 shares will be issued to Digital Ally, 2,283,009 shares will be held by the public stockholders and 4,459,688 shares will be held by the Sponsor.
Both scenarios assume that, at the Closing, an estimated 11,220,826 shares of common stock of the Combined Company will be issued to Digital Ally based on the number of shares of Kustom Entertainment outstanding on an as-converted to common stock basis and assume:
1. That Digital Ally exercises appraisal rights in connection with the Merger.
2. That Kustom Entertainment does not issue any additional equity or equity-linked securities prior to the Closing.
3. That no Public Stockholders exercise their redemption rights prior to (in the event that, in connection with a meeting of Clover Leaf stockholders convened prior to the Closing Date, if any, Public Stockholders are provided an opportunity to redeem Public Shares in accordance with the terms of the Current Charter) or in connection with the Closing of the Business Combination. Please see the section entitled “The Special Meeting — Redemption Rights.”
4. That there are no transfers or forfeitures of securities held by the Sponsor on or prior to the Closing Date.
5. That 15,050,593 Clover Leaf rights are converted into 1,881,324 shares of Combined Company Stock at Closing, and that the sole outstanding share of Class B Common Stock is converted into one share of Combined Company Stock at Closing.
6. That, other than as described above, there are no issuances of equity securities by Clover Leaf prior to the Closing.
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7. That there will be no adjustment to the number of the Combined Company Common Stock issued to Digital Ally in the Merger for Kustom Entertainment’s Closing Net Indebtedness, provided, however, that the actual amount of Kustom Entertainment’s Closing Net Indebtedness, which will be determined as of the Reference Time in accordance with the terms of the Merger Agreement, is not yet known and may be a positive number resulting in additional shares of Combined Company Common Stock issued to Digital Ally in the Merger.
The beneficial ownership information below also assumes: 11,220,826 shares of Class A Common Stock are issued to Digital Ally in accordance with the Merger Agreement.
Based on the foregoing assumptions, we estimate that there would be 19,553,064 shares of Class A Common Stock issued and outstanding as of immediately following consummation of the Business Combination under the “no redemption” scenario and 18,788,042 shares of Class A Common Stock issued and outstanding as of immediately following consummation of the Business Combination under the “100% redemption” scenario.
If the actual facts are different than these assumptions (which they are likely to be), the percentage ownership retained by Clover Leaf’s existing stockholders in the Combined Company will be different.
Unless otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to their beneficially owned securities.
Pre-Business Combination Beneficial Ownership Table
|
Class A Common Stock |
Class B Common Stock |
Approximate |
||||||||||
|
Name and Address of Beneficial Owner(1) |
Number of |
Approximate |
Number of |
Approximate |
||||||||
|
Yntegra Capital Investments, LLC(2) |
4,029,665 |
68.3 |
% |
1 |
100.0 |
68.3 |
% |
|||||
|
Felipe MacLean(2) |
4,029,665 |
68.3 |
% |
1 |
100.0 |
68.3 |
% |
|||||
|
Markus Puusepp(2) |
— |
— |
|
— |
— |
— |
|
|||||
|
Luis A. Guerra(3) |
— |
— |
|
— |
— |
— |
|
|||||
|
Per Bjorkman(3) |
— |
— |
|
— |
— |
— |
|
|||||
|
Marcos Angelini(3) |
— |
— |
|
— |
— |
— |
|
|||||
|
Ambassador Manuel Rocha(3) |
— |
— |
|
— |
— |
— |
|
|||||
|
All executive officers, directors and director nominees as a group |
4,029,665 |
68.3 |
% |
1 |
100.0 |
68.3 |
% |
|||||
____________
* less than 1%
(1) Unless otherwise noted, the business address of each of the following entities or individuals is Kustom Entertainment, Inc., 14001 Marshall Drive Lenexa, KS 66215.
(2) Represents shares held by Yntegra Capital Investments, LLC, the Company’s sponsor. Yntegra Capital Management, LLC is the sole managing member of the Sponsor and a U.S. entity. Felipe MacLean, a U.S. citizen and the Company’s Chairman and Chief Executive Officer, is the sole manager of Yntegra Capital Management, LLC, and as such, may be deemed to share beneficial ownership of the common stock held directly by our sponsor. Mr. McLean and Markus Puusepp, the Company’s Chief Operating Officer, each own 50% of Yntegra Capital Management, LLC. Each such person disclaims any beneficial ownership of the reported shares other than to the extent of any pecuniary interest they may have therein, directly or indirectly.
(3) Does not include any shares held by our sponsor. This individual is a member of our sponsor but does not have voting or dispositive control over the shares held by our sponsor.
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Post-Business Combination Beneficial Ownership Table
|
Combined Company Post-Business Combination |
||||||||||
|
(assuming no redemptions by |
(assuming 100% redemptions by |
|||||||||
|
Name and Address of Beneficial Owner(1) |
Number of |
% of |
Number of |
% of |
||||||
|
Sponsor and Directors and Executive Officers Post-Business Combination:(1) |
|
|
||||||||
|
Yntegra Capital Investments, LLC(2) |
4,459,688 |
22.8 |
% |
4,459,688 |
23.7 |
% |
||||
|
Stanton E. Ross |
— |
— |
|
— |
— |
|
||||
|
Peng Han |
— |
— |
|
— |
— |
|
||||
|
Leroy C. Richie |
— |
— |
|
— |
— |
|
||||
|
Daniel F. Hutchins |
— |
— |
|
— |
— |
|
||||
|
[•] |
|
|
||||||||
|
All directors and executive officers of Combined Company post-Business Combination as a group |
|
|
||||||||
____________
* less than 1%.
(1) Unless otherwise noted, the business address of each of the following entities or individuals is Kustom Entertainment, Inc. 14001 Marshall Drive Lenexa, KS 66215.
(2) Represents shares held by Yntegra Capital Investments, LLC, the Company’s sponsor. Yntegra Capital Management, LLC is the sole managing member of the Sponsor and a U.S. entity. Felipe MacLean, a U.S. citizen and the Company’s Chairman and Chief Executive Officer, is the sole manager of Yntegra Capital Management, LLC, and as such, may be deemed to share beneficial ownership of the common stock held directly by our sponsor. Mr. McLean and Markus Puusepp, the Company’s Chief Operating Officer, each own 50% of Yntegra Capital Management, LLC. Each such person disclaims any beneficial ownership of the reported shares other than to the extent of any pecuniary interest they may have therein, directly or indirectly. The business address of Yntegra Capital Investments, LLC is 1450 Brickell Avenue, Suite 2520, Miami, FL 33131.
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MANAGEMENT AFTER THE BUSINESS COMBINATION
Executive Officers and Directors After the Business Combination
Upon the consummation of the Business Combination, the business and affairs of the Combined Company will be managed by or under the direction of the Combined Company Board.
The following table sets forth the name, age and position of each of the expected directors and executive officers of the Combined Company upon consummation of the Business Combination:
|
Name |
Age |
Position |
||
|
Executive Officers |
||||
|
Stanton E. Ross |
61 |
Chairman, President and Chief Executive Officer |
||
|
Peng Han |
[•] |
Chief Technology Officer |
||
|
[•] |
[•] |
[•] |
||
|
Non-Executive Directors |
||||
|
Leroy C. Richie |
81 |
Lead Outside Director |
||
|
Daniel F. Hutchins |
66 |
[•] |
||
|
[•] |
[•] |
[•] |
||
____________
(1) Member of nominating and corporate governance committee.
(2) Member of compensation committee.
(3) Member of audit committee.
Information regarding the executive officers and directors following the Business Combination is set forth below:
Executive Officers
Stanton E. Ross has served as Chairman and Chief Executive Officer since September 2005. From March 1992 to June 2005, Mr. Ross was the Chairman and President of American Noble Gas, Inc. (former Infinity Energy Resources, Inc.), a publicly held oil and gas exploration and development company (“Infinity”) and served as an officer and director of each of Infinity’s subsidiaries. He resigned from all his positions with Infinity in June 2005, except Chairman, but was reappointed President in October 2006. From 1991 until March 1992, he founded and served as President of Midwest Financial, a financial services corporation involved in mergers, acquisitions, and financing for corporations in the Midwest. From 1990 to 1991, Mr. Ross was employed by Duggan Securities, Inc., an investment banking firm in Lenexa, Kansas, where he primarily worked in corporate finance. From 1989 to 1990, he was employed by Stifel, Nicolaus & Co., a member of the New York Stock Exchange, where he was an investment executive. From 1987 to 1989, Mr. Ross was self-employed as a business consultant. From 1985 to 1987, Mr. Ross was President and founder of Kansas Microwave, Inc., which developed a radar detector product. From 1981 to 1985, he was employed by Birdview Satellite Communications, Inc., which manufactured and marketed home satellite television systems, initially as a salesman and later as National Sales Manager. Mr. Ross estimates he devoted most of his time to Digital Ally and the balance to Infinity in 2020. In late 2007, Infinity sold a substantial portion of its operating assets and has not required a substantial amount of his time since such point. From September 2005 to January 2023, Mr. Ross was the President of Digital Ally. Since September 2005, Mr. Ross was the Chairman and Chief Executive Officer of Digital Ally. Mr. Ross holds no public company directorships other than with the Company and Infinity and has only held the forementioned position in Digital Ally during the previous five years. The Company
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believes that Mr. Ross’s broad entrepreneurial, financial, and business expertise and his experience with micro-cap public companies and his role as President and Chief Executive Officer give him the qualifications and skills to serve as a Director.
Peng Han has served as Chief Operating Officer (“COO”) since November 2021. Joining Digital Ally in February 2010, Mr. Han served as Lead Software Engineer, Software Manager, Vice President of Engineering, and CTO. With over two decades of experience in spearheading the development of innovative and cutting-edge software and hardware products, Mr. Han’s expertise lies in large-scale software development, video technology, real-time embedded systems, telecommunications, and intellectual property management. From 2005 to 2010, Mr. Han worked as Senior Staff Engineer for Ingenient Technologies, a leading provider of embedded multimedia system solutions. From 2004 to 2005, Mr. Han was employed by WMS Gaming, an electronic game entertainment company, where he worked as Core Software Engineer. From 2001 to 2003, he was employed as a Software Engineer by Tellabs, a telecommunication software and hardware solution provider. Mr. Han received his Master of Science degree in Computer Science at Iowa State University in Ames, Iowa.
Non-Employee Directors
Leroy C. Richie has been the Lead Outside Director of Kustom Entertainment since September 2005. He is also the Chairman of the Compensation Committee and Nominating and Governance Committee and a member of the Audit Committee. Since June 1, 1999, Mr. Richie has been a director of Infinity Energy Resources, Inc., a publicly held oil and gas exploration and development company. Additionally, until 2017, Mr. Richie served as a member of the board of directors of Columbia Mutual Funds, (or mutual fund companies acquired by or merged with Columbia Mutual Funds), a family of investment companies managed by Ameriprise Financial, Inc. From 2004 to 2015, he was of counsel to the Detroit law firm of Lewis & Munday, P.C. From 2007 to 2014, Mr. Richie served as a member of the board of directors of OGE Energy Corp. Since September 2005,, Mr. Richie was the Lead Outside Director of Digital Ally. Mr. Ross holds no public company directorships other than with the Company and has only held the forementioned position in Digital Ally during the previous five years. Until 2019, Mr. Richie served as the Vice-Chairman of the Board of Trustees and Chairman of the Compensation Committee for the Henry Ford Health System, in Detroit. Mr. Richie was formerly Vice President of Chrysler Corporation and General Counsel for automotive legal affairs, where he directed all legal affairs for its automotive operations from 1986 until his retirement in 1997. Before joining Chrysler, he was an associate with the New York law firm of White & Case (1973-1978) and served as director of the New York office of the Federal Trade Commission (1978-1983). Mr. Richie received a B.A. from City College of New York, where he was valedictorian, and a J.D. from the New York University School of Law, where he was awarded an Arthur Garfield Hays Civil Liberties Fellowship. The Company believes that Mr. Richie’s extensive experience as a lawyer and as an officer or director of public companies gives him the qualifications and skills to serve as a Director.
Board Composition
Effective from the consummation of the Business Combination, the Combined Company Board will consist of five (5) directors. Subject to the rights of the holders of any series of preferred stock to elect additional directors under specified circumstances, each director shall serve for a term expiring on the date of the first annual meeting of stockholders following the annual meeting of stockholders at which such director was elected; provided further, that the term of each director shall continue until the election and qualification of his or her successor and be subject to his or her earlier death, disqualification, resignation or removal. The Proposed Charter and the Proposed Bylaws provide that the authorized number of directors may be changed only by resolution of the board of directors. Subject to the terms of any preferred stock, any or all of the directors may be removed only for cause and only by the affirmative vote of the holders of at least the majority of the voting power of the outstanding shares of capital stock of the Combined Company entitled to vote thereon.
When considering whether directors and director nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the Combined Company Board to satisfy its oversight responsibilities effectively in light of its business and structure, the Combined Company Board expects to focus primarily on each person’s background and experience as reflected in the information discussed in each of the directors’ individual biographies set forth above in order to provide an appropriate mix of experience and skills relevant to the size and nature of its business.
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Director Independence
As a result of the Combined Company Common Stock being listed on Nasdaq following consummation of the Business Combination, it will be required to comply with the applicable rules of such exchange in determining whether a director is independent. Prior to the completion of the Business Combination, the Combined Company Board undertook a review of the independence of the individuals named above and have determined that each of [•] qualifies as “independent” as defined under the applicable Nasdaq rules, and the Combined Company Board will consist of a majority of “independent directors,” as defined under the rules of the SEC and Nasdaq relating to director independence requirements. In addition, the Combined Company will be subject to the rules of the SEC and Nasdaq relating to the membership, qualifications and operations of the audit committee, as discussed below.
Board Committees
The Combined Company Board will direct the management of its business and affairs, as provided by Delaware law, and will conduct its business through meetings of the board of directors and standing committees. The Combined Company will have a standing audit committee, compensation committee and nominating and corporate governance committee, each of which will operate under a written charter.
In addition, from time to time, special committees may be established under the direction of the Combined Company Board when the Combined Company Board deems it necessary or advisable to address specific issues. Following the Business Combination, current copies of the Combined Company’s committee charters will be posted on its website, [•], as required by applicable SEC and the Nasdaq rules. The information on or available through any of such website is not deemed incorporated in this proxy statement/prospectus and does not form part of this proxy statement/prospectus.
Audit Committee
Upon the consummation of the Business Combination, the Combined Company’s audit committee will consist of [•]. The Combined Company Board has determined that each of these individuals meets the independence requirements of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, Rule 10A-3 under the Exchange Act and the applicable listing standards of Nasdaq. Each member of the Combined Company’s audit committee meets the requirements for financial literacy under the applicable Nasdaq rules. In arriving at this determination, the board has examined each audit committee member’s scope of experience and the nature of their prior and/or current employment.
The Combined Company Board has determined that [•] qualifies as an audit committee financial expert within the meaning of SEC regulations and meets the financial sophistication requirements of the Nasdaq rules. In making this determination, the Combined Company Board has considered [•] formal education and previous and current experience in financial and accounting roles. Both the Combined Company’s independent registered public accounting firm and management will periodically meet privately with the Combined Company’s audit committee.
The composition and function of the audit committee will comply with applicable requirements of the Sarbanes-Oxley Act, SEC rules and regulations and Nasdaq listing rules.
Compensation Committee
Upon the consummation of the Business Combination, the Combined Company’s compensation committee will consist of [•]. [•] are non-employee directors, as defined in Rule 16b-3 promulgated under the Exchange Act. The Combined Company Board has determined that [•] are “independent” as defined under the applicable Nasdaq listing standards, including the standards specific to members of a compensation committee.
The composition and function of its compensation committee will comply with all applicable requirements of the Sarbanes-Oxley Act, SEC rules and regulations and the Nasdaq listing rules.
Nominating and Corporate Governance Committee
Upon the consummation of the Business Combination, the Combined Company’s nominating and corporate governance committee will consist of [•]. It is expected that each of [•] is “independent” as defined under the applicable listing standards of the Nasdaq and SEC rules and regulations. It is expected that [•] will not be considered “independent” as defined under the applicable listing standards of Nasdaq and SEC rules and regulations.
169
The composition of the nominating and corporate governance committee will not be comprised of all “independent” directors, as generally required by Nasdaq listing standards, in reliance on the exemption from certain corporate governance requirements as a “controlled company” within the meaning of Nasdaq listing standards.
Compensation Committee Interlocks and Insider Participation
None of the intended members of the Combined Company’s compensation committee has ever been an executive officer or employee of the Combined Company. None of the Combined Company’s executive officers currently serve, or have served during the last completed fiscal year, on the compensation committee or board of directors of any other entity that has one or more executive officers that will serve as a member of the Combined Company Board or compensation committee.
Role of the Combined Company Board in Risk Oversight/Risk Committee
Upon the consummation of Business Combination, one of the key functions of the Combined Company Board will be informed oversight of the Combined Company’s risk management process. The Combined Company Board does not anticipate having a standing risk management committee, but rather anticipates administering this oversight function directly through the Combined Company Board as a whole, as well as through various standing committees of the Combined Company Board that address risks inherent in their respective areas of oversight. For example, the Combined Company audit committee will be responsible for overseeing the management of risks associated with the Combined Company’s financial reporting, accounting, and auditing matters; the Combined Company’s compensation committee will oversee the management of risks associated with our compensation policies and programs.
Board Oversight of Cybersecurity Risks
The Combined Company will face a number of risks, including cybersecurity risks and those other risks described under the section titled “Risk Factors” included in this proxy statement/prospectus. The Combined Company Board will play an active role in monitoring cybersecurity risks and will be committed to the prevention, timely detection, and mitigation of the effects of any such incidents on the Combined Company’s operations. In addition to regular reports from each of the Combined Company Board’s committees, the Combined Company Board will receive regular reports from management on material cybersecurity risks and the degree of the Combined Company’s exposure to those risks. While the Combined Company Board will oversee its cybersecurity risk management, management will be responsible for day-to-day risk management processes. Management will work with third party service providers to maintain appropriate controls. We believe this division of responsibilities is the most effective approach for addressing the Combined Company’s cybersecurity risks and that the Combined Company Board leadership structure supports this approach.
Limitation on Liability and Indemnification of Directors and Officers
[•]
Corporate Governance Guidelines and Code of Business Conduct
The Combined Company Board will adopt Corporate Governance Guidelines that address items such as the qualifications and responsibilities of its directors and director candidates and corporate governance policies and standards applicable. In addition, the Combined Company Board will adopt a Code of Business Conduct and Ethics that applies to all of its employees, officers and directors, including its Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers. The full text of the Combined Company’s Corporate Governance Guidelines and its Code of Business Conduct and Ethics will be posted on the Corporate Governance portion of the Combined Company’s website at [•]. Information contained on or accessible through the Combined Company’s website is not a part of this proxy statement/prospectus, and the inclusion of the Combined Company’s website address in this proxy statement/prospectus is an inactive textual reference only. The Combined Company intends to make any legally required disclosures regarding amendments to, or waivers of, provisions of its code of ethics on its website rather than by filing a Current Report on Form 8-K.
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EXECUTIVE COMPENSATION OF KUSTOM ENTERTAINMENT
Executive Compensation prior to the Business Combination
Unless otherwise indicated or the context otherwise requires, references in this section of the proxy statement/prospectus to “Kustom Entertainment,” “we,” “us” or “our” refers to Kustom Entertainment prior to the consummation of the Business Combination. The following discussion and analysis of the compensation arrangements of our Named Executive Officers for the fiscal year ended December 31, 2022 should be read together with the compensation tables and related disclosures provided below and in conjunction with Kustom Entertainment’s financial statements and related notes appearing elsewhere in this proxy statement/prospectus. Compensation information included in the following discussion is presented in actual dollar amounts.
Until the Business Combination occurs, the business conducted by Kustom Entertainment will be a part of Digital Ally. In connection with and prior to the Business Combination, we expect to appoint each of the individuals who are named in the “2022 Summary Compensation Table” below (the “named executive officers”), who are currently employed by Digital Ally, as executive officers of Kustom Entertainment. We have not yet made any determinations as to which other individuals, if any, will serve as our post-Business Combination executive officers. The named executive officers, as well as their expected positions with us following the Business Combination, are listed below.
• Stanton E. Ross, Chairman, Chief Executive Officer and President; and
• Peng Han, Chief Technology Officer.
During 2022, Mr. Ross served as the Chairman, President and Chief Executive Officer of Digital Ally and Mr. Han served as the Chief Operating Officer of Digital Ally.
Because Kustom Entertainment was not an independent company during 2022, all compensation and benefits described below were provided by Digital Ally and all decisions as to the compensation of the named executive officers during 2022 were made by Digital Ally. Accordingly, this section describes the material components of the executive compensation programs established by Digital Ally. In connection with the Business Combination, we expect to establish a compensation committee of the board of directors of Kustom Entertainment which will determine the compensation of our named executive officers following the Business Combination.
This discussion may contain forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt following the completion of the Business Combination may differ materially from the currently planned programs summarized in this discussion.
The following table sets forth information concerning the compensation of the named executive officers for the fiscal year ended December 31, 2022:
2022 Summary Compensation Table
|
Name and Principal Position |
Year |
Salary |
Bonus |
Stock |
Option |
All other |
Total |
||||||||||||||
|
Stanton E. Ross Chairman, CEO and President |
2022 |
$ |
300,000 |
$ |
100,000 |
$ |
374,500 |
(3) |
$ |
— |
$ |
32,034 |
$ |
806,534 |
|||||||
|
|
|
|
|
|
|
|
|||||||||||||||
|
Peng Han, |
2022 |
$ |
250,000 |
$ |
— |
$ |
107,000 |
(4) |
$ |
— |
$ |
10,576 |
$ |
367,576 |
|||||||
____________
(1) Represents aggregate grant date fair value pursuant to ASC Topic 718 for the respective year for stock options granted. Please refer to Note 14 to the consolidated financial statements that appear in Digital Ally’s Annual Report on Form 10-K, filed with the SEC on March 31, 2023, for a further description of the awards and the underlying assumptions utilized to determine the amount of grant date fair value related to such grants.
(2) Amounts included in all other compensation include the following items: the employer contribution to Digital Ally’s 401(k) Retirement Savings Plan (the “401(k) Plan”) on behalf of the named executive. Digital Ally is required to provide a 100% matching contribution for all who elect to contribute up to 3% of their compensation to the plan and a 50% matching contribution for all employees’ elective deferral between 4% and 5%. The employee (i) is 100% vested at all times in
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the employee contributions and employer matching contributions; (ii) receives Digital Ally paid healthcare insurance; (iii) receives Digital Ally paid contributions to health savings accounts; and (iv) receives Digital Ally paid life, accident and disability insurance. See “All Other Compensation Table” below.
(3) Stock awards include the following restricted stock granted during 2022 to Mr. Ross: 17,500 shares at $21.40 per share that vest 50% on January 7, 2023 and 50% on January 7, 2024, subject to Mr. Ross remaining an employee of Digital Ally at that point in time.
(4) Stock awards include the following restricted stock granted during 2022 to Mr. Han: 5,000 shares at $21.40 per share that vest 20% annually on the anniversary of January 7 from 2023 to 2027, subject to Mr. Han remaining an employee of Digital Ally at that point in time.
2022 All Other Compensation Table
|
Name and Principal Position |
Year |
401(k) Plan |
Company |
Flexible & |
Company |
Other |
Total |
|||||||||||||
|
Stanton E. Ross, Chairman, CEO and President |
2022 |
$ |
10,039 |
$ |
20,319 |
$ |
1,100 |
$ |
576 |
$ |
— |
$ |
32,034 |
|||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Peng Han, |
2022 |
$ |
10,000 |
$ |
— |
$ |
— |
$ |
576 |
$ |
— |
$ |
10,576 |
|||||||
Compensation Policy. Digital Ally’s executive compensation plan is based on attracting and retaining qualified professionals who possess the skills and leadership necessary to enable Digital Ally to achieve earnings and profitability growth to satisfy its stockholders. Digital Ally must, therefore, create incentives for these executives to achieve both Digital Ally’s and individual performance objectives using performance-based compensation programs. No one component is considered by itself, but all forms of the compensation package are considered in total. Wherever possible, objective measurements will be utilized to quantify performance, but many subjective factors still come into play when determining performance.
Compensation Components. The main elements of its compensation package consist of base salary, stock options or restricted stock awards and bonus.
Base Salary. The base salary for each executive officer is reviewed and compared to the prior year, with considerations given for increase or decrease. The review is generally on an annual basis but may take place more often in the discretion of the compensation committee of Digital Ally.
Stock Options and Restricted Stock Awards. The compensation committee of Digital Ally determined stock option and restricted stock awards based on numerous factors, some of which include responsibilities incumbent with the role of each executive with us, tenure with us, as well as our performance. The vesting period of options and restricted stock is also tied, in some instances, to Digital Ally’s performance directly related to certain executive’s responsibilities with Digital Ally.
Bonuses. The compensation committee determined to award bonuses to each of the executive officers in 2022, as set forth in the foregoing table. Refer to the “Summary Compensation Table” above for the bonuses paid to Mr. Ross in 2022. Mr. Ross was awarded a partial 2022 bonus of $100,000. The compensation committee of Digital Ally reviews each executive officer’s performance on a quarterly basis and determines what, if any, portion of the bonus he has earned and will be paid as of such point.
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The following table presents information concerning the grants of plan-based awards to the named executive officers during the year ended December 31, 2022:
Grant of Plan-Based Awards
|
Name |
Grant date |
Date approved |
All other stock |
Exercise or base |
Grant date fair |
||||||||
|
Stanton E. Ross |
|
|
|
||||||||||
|
Chairman, CEO and President |
January 7, 2022 |
January 7, 2022 |
17,500 |
(1) |
$ |
21.40 |
$ |
374,500 |
|||||
|
Peng Han |
|
|
|
||||||||||
|
COO |
January 7, 2022 |
January 7, 2022 |
5,000 |
(3) |
$ |
21.40 |
$ |
107,000 |
|||||
____________
(1) These restricted stock awards were made under the Digital Ally, Inc. Stock Option and Restricted Stock Plans and vest over a two-year period (50% on January 7, 2023 and 50% on January 7, 2024) contingent upon whether the individual is still employed by Digital Ally at that point.
(2) These restricted stock awards were made under the Digital Ally, Inc. Stock Option and Restricted Stock Plans and vest over a one-year period contingent upon whether the individual is still employed by Digital Ally at that point.
(3) These restricted stock awards were made under the Digital Ally, Inc. Stock Option and Restricted Stock Plans and vest over a five-year period (20% on each anniversary of January 7 from 2023 to 2027) contingent upon whether the individual is still employed by Digital Ally at that point.
(4) Stock awards noted represent the aggregate amount of grant date fair value as determined under ASC Topic 718. Please refer to Note 14 to the consolidated financial statements that appear in Digital Ally’s Annual Report on Form 10-K, filed with the SEC on April 15, 2022, for a further description of the awards and the underlying assumptions utilized to determine the amount of grant date fair value related to such grants.
Employment Contracts; Termination of Employment and Change-in-Control Arrangements
Digital Ally does not have any employment agreements with any of its executive officers. However, on December 23, 2008, Digital Ally entered into retention agreements with Stanton E. Ross. In April 2018 Digital Ally amended the agreement.
Retention Agreements — Potential Payments upon Termination or Change of Control
The following table sets forth for each named executive officer potential post-employment payments and payments on a change in control and assumes that the triggering event took place on January 1, 2023 and that the amendments to the retention agreements of each person were in effect.
Retention Agreement Compensation
|
Name |
Change in |
Severance |
Total |
||||||
|
Stanton E. Ross |
$ |
125,000 |
$ |
500,000 |
$ |
625,000 |
|||
The retention agreement guarantee the executive officer’s specific payments and benefits upon a Change in Control of Digital Ally. The retention agreements also provide for specified severance benefits if, after a Change in Control of Digital Ally occurs, the executive officer voluntarily terminates employment for “Good Reason” or is involuntarily terminated without “Cause.”
Under the retention agreement, a “Change in Control” means (i) one party alone, or acting with others, has acquired or gained control over more than 50% of the voting shares of Digital Ally; (ii) Digital Ally merges or consolidates with or into another entity or completes any other corporate reorganization, if more than 50% of the
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combined voting power of the surviving entity’s securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not stockholders of Digital Ally immediately prior to such merger, consolidation or other reorganization; (iii) a majority of the board of directors of Digital Ally is replaced and/or dismissed by the stockholders of Digital Ally without the recommendation of or nomination by Digital Ally’s current board of directors; (iv) Digital Ally’s Chief Executive Officer (the “CEO”) is replaced and/or dismissed by stockholders without the approval of the board of directors of Digital Ally; or (v) Digital Ally sells, transfers or otherwise disposes of all or substantially all of the consolidated assets of Digital Ally and Digital Ally does not own stock in the purchaser or purchasers having more than 50% of the voting power of the entity owning all or substantially all of the consolidated assets of Digital Ally after such purchase.
“Good Reason” means either (i) a material adverse change in the executive’s status as an executive or other key employee of Digital Ally, including without limitation, a material adverse change in the executive’s position, authority, or aggregate duties or responsibilities; (ii) any adverse change in the executive’s base salary, target bonus or benefits; or (iii) a request by Digital Ally to materially change the executive’s geographic work location.
“Cause” means (i) the executive has acted in bad faith and to the detriment of Digital Ally; (ii) the executive has refused or failed to act in accordance with any specific lawful and material direction or order of his or her supervisor; (iii) the executive has exhibited, in regard to employment, unfitness or unavailability for service, misconduct, dishonesty, habitual neglect, incompetence, or has committed an act of embezzlement, fraud or theft with respect to the property of Digital Ally; (iv) the executive has abused alcohol or drugs on the job or in a manner that affects the executive’s job performance; and/or (v) the executive has been found guilty of or has plead nolo contendere to the commission of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person. Prior to termination for Cause, Digital Ally shall give the executive written notice of the reason for such potential termination and provide the executive a 30-day period to cure such conduct or act or omission alleged to provide grounds for such termination.
If any Change in Control occurs and the executive continues to be employed as of the completion of such Change in Control, upon completion of such Change in Control, as payment for the executive’s additional efforts during such Change in Control, Digital Ally shall pay the executive a Change in Control benefit payment equal to three months of the his base salary at the rate in effect immediately prior to the Change in Control completion date, payable in a lump sum net of required tax withholdings. If any Change in Control occurs, and if, during the one-year period following the Change in Control, Digital Ally terminates the executive’s employment without Cause or the executive submits a resignation for Good Reason (the effective date of such termination or resignation, the “Termination Date”), then:
a) Digital Ally shall pay the executive severance pay equal to 12 months of his base salary at the higher of the rate in effect immediately prior to the Termination Date or the rate in effect immediately prior to the occurrence of the event or events constituting Good Reason, payable on the Termination Date in a lump sum net of required tax withholdings, plus all other amounts then payable by Digital Ally to the executive less any amounts then due and owing from the executive to Digital Ally;
b) Digital Ally shall provide continuation of the executive’s health benefits at Digital Ally’s expense for 18 months following the Termination Date; and
c) The executive’s outstanding employee stock options shall fully vest and be exercisable for a 90-day period following the Termination Date.
The executive is not entitled to the above severance benefits for a termination based on death or disability, resignation without Good Reason or termination for Cause. Following the Termination Date, Digital Ally shall also pay the executive all reimbursements for expenses in accordance with Digital Ally’ policies, within ten days of submission of appropriate evidence thereof by the executive.
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The following table presents information concerning the outstanding equity awards for the named executive officers as of December 31, 2022:
Outstanding Equity Awards at Fiscal Year End
|
Option Awards |
Stock Awards |
|||||||||||||||||||
|
Name |
Number of |
Number of |
Equity |
Option |
Option |
Number |
Market |
Equity |
Equity |
|||||||||||
|
Stanton E. Ross |
|
|
||||||||||||||||||
|
Chairman, CEO and President |
— |
— |
— |
— |
25,000 |
$ |
115,000 |
— |
$ |
— |
||||||||||
|
|
|
|||||||||||||||||||
|
Peng Han |
|
|
||||||||||||||||||
|
COO |
— |
— |
— |
— |
— |
6,250 |
$ |
28,750 |
— |
$ |
— |
|||||||||
____________
(1) These stock option and restricted stock awards were made under the Digital Ally, Inc. Stock Option and Restricted Stock Plans and vest over the prescribed period contingent upon whether the individual is still employed by Digital Ally at that point.
(2) Market value based upon the closing market price of $4.60 on December 31, 2022.
The following table presents information concerning the stock options exercised and the vesting of restricted stock awards during 2021 for the named executive officers for the year ended December 31, 2022:
|
Option Exercises and Restricted Stock Vested |
|||||||||||
|
Option Awards |
Stock Awards |
||||||||||
|
Number of |
Value |
Number of |
Value on |
||||||||
|
Stanton E. Ross |
|
|
|
||||||||
|
Chairman, CEO and President |
— |
$ |
— |
7,500 |
$ |
160,500 |
(1) |
||||
|
Peng Han |
|
|
|
||||||||
|
COO |
331 |
$ |
28,520 |
1,250 |
$ |
15,000 |
(2) |
||||
____________
(1) Based on the closing market price of Digital Ally’s common stock of $21.40 on January 7, 2022, the date of vesting for 7,500 shares of Common Stock for Mr. Ross.
(2) Based on the closing market price of Digital Ally’s common stock of $12.00 on September 20, 2022, the date of vesting for 1,250 shares of common stock for Mr. Han.
The number of stock options and restricted stock awards that an employee, director, or consultant may receive under Digital Ally’s Plans is in the discretion of the administrator and therefore cannot be determined in advance. The Digital Ally’s board of directors’ policy in 2022 was to grant officers an award of 17,500 restricted shares of
175
common stock to Digital Ally’s CEO/President and 3,750 restricted shares of Common Stock to our CFO/Treasurer and each non-employee director an award of options to purchase 5,000 shares of Common Stock, all subject to vesting requirements.
The following table sets forth (a) the aggregate number of shares of common stock subject to options granted under the Plans during the year ended December 31, 2022 and (b) the average per share exercise price of such options.
Stock Options and Restricted Stock Grants
|
Name of Individual or Group |
Number of |
Number of |
Average per |
||||
|
Stanton E. Ross |
17,500 |
— |
$ |
— |
|||
|
Peng Han |
5,000 |
— |
$ |
— |
|||
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DIRECTOR COMPENSATION
Following the completion of the Business Combination, compensation for directors of the Combined Company will be determined by the Combined Company Board. We anticipate that compensation for service on the Combined Company Board will be provided only to the non-employee directors of the Combined Company who are not officers or employees of Combined Company or its affiliates.
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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
Clover Leaf Related Person Transactions
On March 4, 2021, Clover Leaf issued an aggregate of 3,593,750 Clover Leaf Sponsor Shares to the Sponsor (135,942 of which were forfeited by the Sponsor because the underwriters’ over-allotment option was not exercised in full) for an aggregate purchase price of $25,000 in cash. The number of Clover Leaf Sponsor Shares issued was determined based on the expectation that such Clover Leaf Sponsor Shares would represent 20% of the outstanding shares upon completion of the IPO (excluding shares included in the Private Placement Units or shares of the Clover Leaf Class A Common Stock issuable to the representative). The Clover Leaf Sponsor Shares (including the Clover Leaf Class A Common Stock issuable upon exercise thereof) may not, subject to certain limited exceptions, be transferred, assigned or sold by the holder.
On April 8, 2021, the Sponsor transferred a membership interest in the Sponsor to each of Clover Leaf’s three officers and three independent directors, representing an aggregate 75,000 Clover Leaf Sponsor Shares. The interest of each officer and director relates solely to the number of Clover Leaf Sponsor Shares laid out in their respective agreements. The transferred shares will vest upon Clover Leaf consummating an initial business combination (the “Vesting Date”). If prior to the Vesting Date, any of the grantees ceases to remain in their role, either voluntarily or for a cause, (a “Separation Event”), 100% of the shares granted will be automatically and immediately transferred back to our sponsor upon such Separation Event.
The Sponsor purchased an aggregate of 571,859 Private Placement Units at a price of $10.00 per unit, for an aggregate purchase price of $5,718,590. The Private Placement Units (including the underlying securities) may not, subject to certain limited exceptions, be transferred, assigned or sold by it until after the completion of the initial business combination.
If any of Clover Leaf’s officers or directors becomes aware of an initial business combination opportunity that falls within the line of business of any entity to which he or she has then-current fiduciary or contractual obligations, he or she will honor his or her fiduciary or contractual obligations to present such business combination opportunity to such other entity. Clover Leaf’s officers and directors currently have certain relevant fiduciary duties or contractual obligations that may take priority over their duties to it.
Commencing July 19, 2021, Clover Leaf agreed to pay an affiliate of the Sponsor a total of $10,000 per month for office space, utilities and secretarial and administrative support. Upon completion of an initial business combination or liquidation, it will cease paying these monthly fees.
Prior to the closing of the IPO, the Sponsor agreed to loan Clover Leaf up to $300,000 to be used for a portion of the expenses of the offering. These loans were non-interest bearing, unsecured and due at the earlier of September 30, 2021 or the closing of the IPO. $173,500 had been advanced on June 30, 2021. The loan was to be repaid upon the closing of the IPO out of the offering proceeds. As of December 31, 2021, $0 was outstanding under such loan. The value of the Sponsor’s interest in this transaction corresponds to the principal amount outstanding under any such loan.
In connection with the First Extension, on July 18, 2022, Clover Leaf issued a promissory note to the Sponsor in the principal amount of $1,383,123, which was deposited into the Trust Account. The promissory note bears no interest and is due and payable upon the earlier to occur of (i) the date on which Clover Leaf’s initial business combination is consummated and (ii) the liquidation of Clover Leaf. At the election of the Sponsor, up to $1,383,123 of the unpaid principal amount of the promissory note may be converted into units of Clover Leaf (the “Conversion Units”). The total Conversion Units so issued shall be equal to: (x) the portion of the principal amount of the promissory note being converted divided by (y) the conversion price of ten dollars ($10.00), rounded up to the nearest whole number of units.
In connection with the Second Extension, on October 19, 2022, Clover Leaf issued a promissory note to the Sponsor in the principal amount of $1,383,123, which was deposited into the Trust Account. The promissory note bears no interest and is repayable in full upon the earlier of (a) the date of the consummation of Clover Leaf’s initial business combination, or (b) the date of the liquidation of Clover Leaf.
In connection with the Third Extension, on July 19, 2023, Clover Leaf issued a promissory note to the Sponsor in the principal amount of $360,000, which was deposited into the Trust Account. The promissory note bears no interest and is repayable in full upon the earlier of (a) the date of the consummation of Clover Leaf’s initial business combination, or (b) the date of the liquidation of Clover Leaf.
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On [•], 2023, we issued an aggregate of 3,457,806 shares of Clover Leaf Class A Common Stock to the Sponsor, upon the conversion of an equal number of Clover Leaf Class B Common Stock held by the Sponsor (the “Conversion”). The shares issued in connection with the Conversion are subject to the same restrictions as applied to Clover Leaf Class B Common Stock before the Conversion, including, among other things, certain transfer restrictions, waiver of redemption rights and the obligation to vote in favor of an initial business combination as described in the prospectus for the IPO.
In addition, in order to finance transaction costs in connection with an intended initial business combination, the Sponsor or an affiliate of the Sponsor or certain of Clover Leaf’s officers and directors may, but are not obligated to, loan Clover Leaf funds as may be required. If Clover Leaf completes an initial business combination, it would repay such loaned amounts. In the event that the initial business combination does not close, Clover Leaf may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds from the Trust Account would be used for such repayment. Up to $1,500,000 of such working capital loans may be convertible into private placement-equivalent units at a price of $10.00 per unit (which, for example, would result in the holders being issued units to purchase 150,000 units if $1,500,000 of notes were so converted), at the option of the lender. Such units would be identical to the Private Placement Units. The terms of such working capital loans by the Sponsor or its affiliates, or Clover Leaf’s officers and directors, if any, have not been determined and no written agreements exist with respect to such loans. Clover Leaf does not expect to seek loans from parties other than the Sponsor or an affiliate of the Sponsor as it does not believe third parties will be willing to loan such funds and provide a waiver against any and all rights to seek access to funds in the Trust Account.
Other than the foregoing, no compensation of any kind, including any finder’s fee, reimbursement, consulting fee or monies in respect of any payment of a loan, will be paid by Clover to the Sponsor, Clover Leaf’s officers and directors, or any affiliate of the Sponsor or officers, prior to, or in connection with any services rendered in order to effectuate, the consummation of an initial business combination (regardless of the type of transaction that it is). However, these individuals are reimbursed for any out-of-pocket expenses incurred in connection with activities on Clover Leaf’s behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations. The audit committee of the Clover Leaf Board reviews on a quarterly basis all payments that were made to the Sponsor, Clover Leaf’s officers, directors or its or their affiliates and determines which expenses and the amount of expenses that are to be reimbursed. There is no cap or ceiling on the reimbursement of out-of-pocket expenses incurred by such persons in connection with activities on Clover Leaf’s behalf.
After Clover Leaf’s initial business combination, members of its management team who remain with Clover Leaf may be paid consulting, management or other fees from the combined company with any and all amounts being fully disclosed to Clover Leaf’s stockholders, to the extent then known, in the tender offer or proxy solicitation materials, as applicable, furnished to its stockholders. It is unlikely the amount of such compensation will be known at the time of distribution of such tender offer materials or at the time of a stockholder meeting held to consider our initial business combination, as applicable, as it will be up to the directors of the post-combination business to determine executive and director compensation.
Clover Leaf entered into a registration rights agreement with respect to the Private Placement Units, the securities issuable upon conversion of working capital loans and extension loans (if any) and the shares of Clover Leaf Class A Common Stock issuable upon exercise or conversion or exercise of the foregoing and upon conversion of the Clover Leaf Sponsor Shares.
The Sponsor has agreed that it will be liable to Clover Leaf if and to the extent any claims by a third party for services rendered or products sold to us, or a prospective target business with which Clover Leaf has entered into a written letter of intent, confidentiality or similar agreement or business combination agreement, reduce the amount of funds in the Trust Account to below the lesser of (i) $10.15 per Public Share and (ii) the actual amount per Public Share held in the Trust Account as of the date of the liquidation of the Trust Account, if less than $10.15 per share due to reductions in the value of the trust assets, less Permitted Withdrawals, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to the monies held in the Trust Account (whether or not such waiver is enforceable) nor will it apply to any claims under Clover Leaf’s indemnity of the underwriters of this offering against certain liabilities, including liabilities under the Securities Act. However, Clover Leaf has not asked the Sponsor to reserve for such indemnification obligations, nor has it independently verified whether the Sponsor has sufficient funds to satisfy its indemnity obligations and believe
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that the Sponsor’s only assets are securities of Clover Leaf. Therefore, Clover Leaf cannot assure you that the Sponsor would be able to satisfy those obligations. None of Clover Leaf’s officers or directors will indemnify it for claims by third parties including, without limitation, claims by vendors and Kustom Entertainment.
Clover Leaf Related Person Transactions Policy
The audit committee of the Clover Leaf Board has adopted a policy setting forth the policies and procedures for its review and approval or ratification of “related party transactions.” A “related party transaction” is any consummated or proposed transaction or series of transactions: (i) in which Clover Leaf was or is to be a participant; (ii) the amount of which exceeds (or is reasonably expected to exceed) $120,000 in the aggregate over the duration of the transaction (without regard to profit or loss); and (iii) in which a “related party” had, has or will have a direct or indirect material interest. “Related parties” under this policy will include: (i) Clover Leaf’s directors, nominees for director or executive officers; (ii) any record or beneficial owner of more than 5% of any class of Clover Leaf’s voting securities; (iii) any immediate family member of any of the foregoing if the foregoing person is a natural person; and (iv) any other person who may be a “related person” pursuant to Item 404 of Regulation S-K under the Exchange Act. Pursuant to the policy, Clover Leaf’s audit committee will consider (i) the relevant facts and circumstances of each related party transaction, including if the transaction is on terms comparable to those that could be obtained in arm’s-length dealings with an unrelated third party, (ii) the extent of the related party’s interest in the transaction, (iii) whether the transaction contravenes Clover Leaf’s code of ethics or other policies, (iv) whether the audit committee believes the relationship underlying the transaction to be in the best interests of Clover Leaf and its stockholders and (v) the effect that the transaction may have on a director’s status as an independent member of the board and on his or her eligibility to serve on the board’s committees. Management will present to the audit committee each proposed related party transaction, including all relevant facts and circumstances relating thereto. Under the policy, Clover Leaf may consummate related party transactions only if Clover Leaf’s audit committee approves or ratifies the transaction in accordance with the guidelines set forth in the policy. The policy does not permit any director or executive officer to participate in the discussion of, or decision concerning, a related person transaction in which he or she is the related party.
Kustom Entertainment Related Person Transactions
Other Existing Arrangements
Except as described below, other than compensation arrangements, during the past two fiscal years, there have been no transactions, whether directly or indirectly, between Kustom Entertainment and any of its expected officers, directors, beneficial owners of more than 5% of Kustom Entertainment’s outstanding common stock or their family members that exceeded the lesser of (i) $120,000 or (ii) 1% of the average of Kustom Entertainment’s total assets at year end.
Statement of Policy Regarding Transactions with Related Persons
Following the completion of the Merger, we anticipate that our Board of Directors will instruct our Audit Committee to consider and approve or disapprove any related person transaction as required by NASDAQ Stock Market regulations. Our Audit Committee will only approve those related party transactions that are on terms comparable to, or more beneficial to us than, those that could be obtained in arm’s length dealings with an unrelated third party.
Combined Company Related Person Transactions
The Merger Agreement contemplates that, at the Closing, Clover Leaf, the Sponsor and Digital Ally will enter into a registration rights agreement (the “Company Registration Rights Agreement”), pursuant to which, among other things, the Combined Company will agree to register for resale, pursuant to Rule 415 under the Securities Act, certain shares of Class A Common Stock and other equity securities of the Combined Company that are held by the parties thereto from time to time.
180
Policies and Procedures for Related Persons Transactions
Upon the Closing, it is anticipated that the Combined Company will adopt a written related person transaction policy that sets forth the following policies and procedures for the review and approval or ratification of related person transactions.
A “Related Person Transaction” is a transaction, arrangement or relationship in which the Combined Company or any of its subsidiaries was, is or will be a participant, the amount of which involved exceeds $120,000, and in which any related person had, has or will have a direct or indirect material interest.
A “Related Person” means:
• any person who is, or at any time during the applicable period was, one of the Combined Company’s executive officers or a member of the Board of the Combined Company;
• any person who is known by the Combined Company to be the beneficial owner of more than 5% of its voting stock;
• any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, daughter-in-law, brother-in-law or sister-in-law of a director, officer or a beneficial owner of more than 5% of the Combined Company’s voting stock, and any person (other than a tenant or employee) sharing the household of such director, executive officer or beneficial owner of more than 5% of the Combined Company’s voting stock; and
• any firm, corporation or other entity in which any of the foregoing persons is a partner or principal or in a similar position or in which such person has a 10% or greater beneficial ownership interest.
It is also anticipated that the Combined Company will have policies and procedures designed to minimize potential conflicts of interest arising from any dealings it may have with its affiliates and to provide appropriate procedures for the disclosure of any real or potential conflicts of interest that may exist from time to time.
181
APPRAISAL RIGHTS
Clover Leaf stockholders do not have appraisal rights in connection with the Business Combination under the DGCL.
182
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
This joint proxy statement/prospectus registers under the Securities Act the potential resale of Combined Company Common Stock that will be received in the Business Combination by the selling stockholders listed in the table below. The table below sets forth information, based upon written representations supplied to Clover Leaf, by the selling stockholders identified in the table, with respect to such selling stockholders’ beneficial ownership of Clover Leaf common stock as of the date hereof and such selling stockholders’ expected beneficial ownership of shares of Combined Company Common Stock as of the Closing.
The securities being offered by the selling stockholders hereby represent approximately [•]% of the total number of shares of Combined Company Common Stock expected to be outstanding as of the Closing (assuming no redemptions). The sale of all of the securities registered for resale hereunder, or the perception that such sales may occur, may cause the market prices of the shares of Combined Company Common Stock to decline significantly. See “Risk Factors” for more information.
The selling stockholders may from time to time offer and sell any or all of the shares of Combined Company Common Stock set forth below pursuant to this joint proxy statement/prospectus. When we refer to the “selling stockholders” in this joint proxy statement/prospectus, we mean the persons listed in the table below, and the pledgees, donees, transferees, assignees, successors and others who later come to hold any of the selling stockholders’ interests in the Combined Company Common Stock after the date of this joint proxy statement/prospectus such that registration rights shall apply to those securities.
Because each such selling stockholder may, from time to time, sell, transfer or otherwise dispose of all, some or none of the shares of Combined Company Common Stock covered by this joint proxy statement/prospectus, we cannot determine the number of such shares of Combined Company Common Stock that will be sold, transferred or otherwise disposed of by each such selling stockholder, or the amount or percentage of the shares of Combined Company Common Stock that will be beneficially held by each such selling stockholder upon termination of the offering; provided, however, that Digital Ally intends to distribute to its stockholders 15% of the Combined Company Common Stock received as Merger Consideration immediately following the Closing. For purposes of the table below, we assume that each selling stockholder will sell all of the shares of Combined Company Common Stock covered by this joint proxy statement/prospectus.
Unless otherwise described below, none of the selling stockholders nor any of their affiliates have held any position or office with or otherwise had any material relationship with Clover Leaf, or any of its respective affiliates during the three years prior to the date of this joint proxy statement/prospectus, other than in connection with the Merger.
|
Selling Stockholder |
Held Prior to the |
Received in |
|
|||||||||
|
Number of |
Percent of |
Maximum |
Number of |
Percent of |
Percent of |
|||||||
|
Digital Ally, Inc. |
— |
— |
[•] |
[•] |
[•] |
[•] |
||||||
____________
* less than 1%
The resales of the shares of Combined Company Common Stock which the selling stockholders listed in the table above may receive in the Business Combination are being registered to permit public secondary trading of these securities by the holders of such securities from time to time. Registration of the shares of Combined Company Common Stock does not mean that such securities necessarily will be offered or sold. Clover Leaf will not receive any proceeds from any such offer or sale by the selling stockholders.
183
The selling stockholders may sell such shares of Combined Company Common Stock from time to time directly to purchasers or through underwriters, broker-dealers or agents, at fixed prices, at prevailing market prices at the time of sale, at varying prices or negotiated prices, by a variety of methods, including the following:
• in negotiated transactions;
• in underwritten transactions;
• in a block trade in which a broker-dealer will attempt to sell the offered securities as agent but may purchase and resell a portion of the block as principal to facilitate the transaction;
• through purchases by a broker-dealer as principal and resale by the broker-dealer for its account pursuant to this joint proxy statement/prospectus;
• in ordinary brokerage transactions and transactions in which the broker solicits purchasers;
• in the trading markets for shares of Combined Company Common Stock;
• in the over-the-counter market or on any national securities exchange on which shares of Combined Company Common Stock may be listed or quoted at the time of sale;
• through the distribution of the securities by any selling stockholder to its partners, members, stockholders or other equity holders, to the extent that such transaction constitutes a sale under this joint proxy statement/prospectus;
• by the writing of options (including put or call options) or other hedging transactions, whether through an options exchange or otherwise;
• in transactions otherwise than on such exchanges or in the over-the-counter market;
• through a combination of any such methods; or
• through any other method permitted under applicable law.
In addition, a selling stockholder that is an entity may elect to make a pro rata in-kind distribution of securities to its members, partners or stockholders pursuant to the registration statement of which this joint proxy statement/prospectus is a part by delivering a prospectus with a plan of distribution. Such members, partners or stockholders would thereby receive freely tradeable securities pursuant to the distribution through a registration statement. To the extent a distributee is an affiliate of the Combined Company (or to the extent otherwise required by law), the Combined Company may file a prospectus supplement in order to permit the distributees to use this joint proxy statement/prospectus to resell the securities acquired in the distribution.
The selling stockholders may sell the securities at prices then prevailing, related to the then prevailing market price or at negotiated prices. The offering price of the securities from time to time will be determined by the selling stockholders and, at the time of the determination, may be higher or lower than the market price of the Combined Company’s securities on NASDAQ or any other exchange or market.
The selling stockholders will pay any underwriting commissions and discounts, and expenses incurred by the selling stockholders for brokerage, marketing costs, or legal services (other than those detailed below). The Combined Company will bear the costs, fees and expenses incurred in effecting the registration of the securities covered by this joint proxy statement/prospectus, including all registration and filing fees, securities or blue sky law compliance fees, NASDAQ listing fees and expenses of the Combined Company’s counsel and our independent registered public accounting firm, and fees and expenses of one legal counsel of the selling stockholders.
The selling stockholders are subject to the applicable provisions of the Exchange Act and the rules and regulations under the Exchange Act, including Regulation M. This regulation may limit the timing of purchases and sales of any of the securities offered in this joint proxy statement/prospectus by the selling stockholders. The anti-manipulation rules under the Exchange Act may apply to sales of the securities in the market and to the activities of the selling stockholders and their affiliates. Furthermore, Regulation M may restrict the ability of any person engaged in the
184
distribution of the securities to engage in market-making activities for the particular securities being distributed for a period of up to five business days before the distribution. The restrictions may affect the marketability of the securities and the ability of any person or entity to engage in market-making activities for the securities.
At the time a particular offer of securities is made, if required, a prospectus supplement will be distributed that will set forth the number of securities being offered and the terms of the offering, including the name of any underwriter, dealer or agent, the purchase price paid by any underwriter, any discount, commission and other item constituting compensation, any discount, commission or concession allowed or reallowed or paid to any dealer, and the proposed selling price to the public. To the extent required, this joint proxy statement/prospectus may be amended and/or supplemented from time to time to describe a specific plan of distribution.
Instead of selling the securities under this joint proxy statement/prospectus, the selling stockholders may sell the securities in compliance with the provisions of Rule 144 under the Securities Act, if available, or pursuant to other available exemptions.
185
LEGAL MATTERS
Certain legal matters relating to the validity of the common stock to be issued hereunder will be passed upon for Clover Leaf by Ellenoff Grossman & Schole LLP, New York, New York.
EXPERTS
The financial statements of Clover Leaf as of and for the years ended December 31, 2022 and as of December 31, 2021, for the year ended December 31, 2022, and for the period from February 25, 2021 (inception) through December 31, 2021, included in this proxy statement/prospectus have been audited by Marcum LLP, independent registered public accounting firm, as set forth in their report appearing thereon (which contains an explanatory paragraph relating to substantial doubt about the ability of Clover Leaf to continue as a going concern as described in Note 1 to the financial statements), appearing elsewhere in this proxy statement/prospectus, and are included in reliance on the report of such firm given upon their authority as experts in auditing and accounting.
The financial statements of Kustom Entertainment as of and for the years ended December 31, 2022 and 2021 included in this proxy statement/prospectus have been audited by RBSM LLP, an independent registered public accounting firm, as stated in their report appearing herein, (which contains an explanatory paragraph relating to substantial doubt about the ability of Kustom Entertainment to continue as a going concern), and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Clover Leaf’s securities is Continental Stock Transfer & Trust Company.
186
DELIVERY OF DOCUMENTS TO STOCKHOLDERS
Pursuant to the rules of the SEC, Clover Leaf and servicers that it employs to deliver communications to Clover Leaf stockholders are permitted to deliver to two or more stockholders sharing the same address a single copy of this proxy statement/prospectus. Upon written or oral request, Clover Leaf will deliver a separate copy of this proxy statement/prospectus to any stockholder at a shared address to which a single copy of this proxy statement/prospectus was delivered and who wishes to receive separate copies in the future. Stockholders receiving multiple copies of this proxy statement/prospectus may likewise request that Clover Leaf deliver single copies of Clover Leaf’s proxy statement in the future. Stockholders may notify Clover Leaf of their requests by calling or writing Clover Leaf at its principal executive offices at c/o Clover Leaf Capital Corp., 1450 Brickell Avenue, Suite 1420 Miami, FL 33131, (305) 577-0031. Following the Business Combination, communications should be sent to Kustom Entertainment at 14001 Marshall Drive Lenexa, KS 66215.
SUBMISSION OF STOCKHOLDER PROPOSALS
Clover Leaf Board is aware of no other matter that may be brought before the Special Meeting. Under the DGCL, only business that is specified in the notice of the Special Meeting to stockholders may be transacted at the Special Meeting.
FUTURE STOCKHOLDER PROPOSALS
For any proposal to be considered for inclusion in our proxy statement and form of proxy for submission to the stockholders at the Combined Company’s 2023 annual meeting of stockholders, assuming consummation of the Business Combination, it must be submitted in writing and comply with the requirements of Rule 14a-8 of the Exchange Act and the Proposed Bylaws.
In addition, the Proposed Bylaws provide notice procedures for stockholders to nominate a person as a director and to propose business to be considered by stockholders at a meeting. To be timely, a stockholder’s notice must be delivered to the Combined Company at our offices at its headquarters, not later than the close of business on the 90th day nor earlier than the opening of business on the 120th day prior to the first anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is advanced by more than 30 days or delayed by more than 60 days, from the first anniversary of the preceding year’s annual meeting, or if no annual meeting was held or deemed to have been held in the preceding year, notice by the stockholder to be timely must be so received no earlier than the 120th day prior to such annual meeting and not later than the close of the business on the later of (i) the 90th day prior to such annual meeting and (ii) the 10th day following the day on which notice of the date of such annual meeting was given or public disclosure of the date of such annual meeting was first made by the Combined Company, whichever first occurs. Nominations and proposals also must satisfy other requirements set forth in the Proposed Bylaws. The board of directors or the chairman of the stockholder meeting may refuse to acknowledge the introduction of any stockholder proposal not made in compliance with the foregoing procedures.
STOCKHOLDER COMMUNICATIONS
Stockholders and interested parties may communicate with the Clover Leaf Board, any committee chairperson or the non-management directors as a group by writing to the board or committee chairperson in care of Felipe MacLean, Chief Executive Officer, c/o Clover Leaf Capital Corp., 1450 Brickell Avenue, Suite 1420 Miami, FL 33131. Following the Business Combination, such communications should be sent to 14001 Marshall Drive Lenexa, KS 66215. Each communication will be forwarded, depending on the subject matter, to the board of directors, the appropriate committee chairperson or all non-management directors.
187
WHERE YOU CAN FIND MORE INFORMATION
Clover Leaf has filed a registration statement on Form S-4 to register the issuance of securities described elsewhere in this proxy statement/prospectus. This proxy statement/prospectus is a part of that registration statement.
Clover Leaf files reports, proxy statements and other information with the SEC as required by the Exchange Act. You may access Clover Leaf’s filings, including this proxy statement/prospectus, over the internet at the SEC’s website at: http://www.sec.gov. Those filings are also available free of charge to the public on, or accessible through, Clover Leaf’s corporate website at https://cloverlcc.com. Clover Leaf’s website and the information contained on, or that can be accessed through, the website is not deemed to be incorporated by reference in, and is not considered part of, this proxy statement/prospectus.
Information and statements contained in this proxy statement/prospectus or any annex to this proxy statement/prospectus are qualified in all respects by reference to the copy of the relevant contract or other annex filed as an exhibit to the registration statement of which this proxy statement/prospectus forms a part, which includes exhibits incorporated by reference from other filings made with the SEC.
If you would like additional copies of this proxy statement/prospectus or if you have questions about the Business Combination or the proposals to be presented at the Special Meeting, you should contact Clover Leaf by telephone or in writing at the following address and telephone number:
Felipe MacLean
c/o Clover Leaf Capital Corp.
1450 Brickell Avenue, Suite 1420
Miami, FL 33131
(305) 577-0031
You may also obtain these documents by requesting them in writing or by telephone from Clover Leaf’s proxy solicitation agent, [•], at the following address and telephone number:
[•]
If you are a stockholder of Clover Leaf and would like to request documents, please do so by [•], 2023, in order to receive them before the Special Meeting. If you request any documents from Clover Leaf, Clover Leaf will mail them to you by first class mail, or another equally prompt means.
All information contained in this proxy statement/prospectus relating to Clover Leaf has been supplied by or on behalf of Clover Leaf, and all such information relating to Kustom Entertainment has been supplied by or on behalf of Kustom Entertainment. Information provided by either Clover Leaf or Kustom Entertainment, or their respective representatives, does not constitute any representation, estimate or projection of any other party. Clover Leaf’s website is https://cloverlcc.com and Kustom Entertainment’s website is [•]. The information on these websites is neither incorporated by reference into this proxy statement/prospectus, or into any other filings with, or into any other information furnished or submitted to, the SEC.
This document is a proxy statement of Clover Leaf for the Special Meeting and constitutes a prospectus of Clover Leaf under the Securities Act with respect to the shares of Clover Leaf Common Stock to be issued to Kustom Entertainment’s securityholders and noteholders under the Merger Agreement. Clover Leaf has not authorized anyone to give any information or make any representation about the Business Combination, Clover Leaf or Kustom Entertainment that is different from, or in addition to, that contained in this proxy statement/prospectus. Therefore, if anyone does give you information of this sort, you should not rely on it. The information contained in this proxy statement/prospectus speaks only as of the date of this proxy statement/prospectus, unless the information specifically indicates that another date applies.
188
INDEX TO FINANCIAL STATEMENTS
CLOVER LEAF CAPITAL CORP.
|
Report of Independent Registered Public Accounting Firm PCAOB ID Number 688 |
F-23 |
|
|
F-24 |
||
|
F-25 |
||
|
F-26 |
||
|
F-27 |
||
|
F-28 |
Kustom Entertainment, Inc.
F-1
CLOVER LEAF CAPITAL CORP.
CONDENSED BALANCE SHEETS
|
June 30, |
December 31, |
|||||||
|
Unaudited |
||||||||
|
Assets: |
|
|
|
|
||||
|
Current assets: |
|
|
|
|
||||
|
Cash |
$ |
|
|
$ |
|
|
||
|
Prepaid expenses |
|
|
|
|
|
|
||
|
Total current assets |
|
|
|
|
|
|
||
|
|
|
|
|
|||||
|
Investments held in Trust Account |
|
|
|
|
|
|
||
|
Total Assets |
$ |
|
|
$ |
|
|
||
|
|
|
|
|
|||||
|
Liabilities, Redeemable Common Stock and Stockholders’ Deficit |
|
|
|
|
||||
|
Accrued costs and expenses |
$ |
|
|
$ |
|
|
||
|
Income taxes payable |
|
|
|
|
|
|
||
|
Deferred income tax |
|
|
|
|
|
|||
|
Promissory note to Related Party |
|
|
|
|
|
|
||
|
Total current liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|||||
|
Deferred underwriting commissions |
|
|
|
|
|
|
||
|
Total Liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|||||
|
Commitments and Contingencies (see Note 7) |
|
|
|
|
||||
|
|
|
|
|
|||||
|
Redeemable Common Stock: |
|
|
|
|
||||
| Class A common stock subject to possible redemption, |
|
|
|
|
|
|
||
|
|
|
|
|
|||||
|
Stockholders’ Deficit: |
|
|
|
|
||||
| Preferred stock, $ |
|
|
|
|
||||
| Class A common stock, $ |
|
|
|
|
|
|
||
| Class B common stock, $ |
|
|
|
|
|
|
||
|
Accumulated deficit |
|
( |
) |
|
( |
) |
||
|
Total Stockholders’ Deficit |
|
( |
) |
|
( |
) |
||
|
Total Liabilities, Redeemable Common Stock and Stockholders’ Deficit |
$ |
|
|
$ |
|
|
||
The accompanying notes are an integral part of these unaudited condensed financial statements.
F-2
CLOVER LEAF CAPITAL CORP.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
|
Three Months Ended |
Six Months Ended |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Formation and operating costs |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
|
Loss from operations |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Other income: |
|
|
|
|
|
|
|
|
||||||||
|
Recovery of previously incurred costs |
|
|
|
|
|
|
|
|
|
|||||||
|
Interest and dividends earned on investments held in trust account |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest earned on cash held in bank |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total other income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Loss before provision for income taxes |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
||||
|
Provision for income taxes |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
||||
|
Net loss |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
| $ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||||
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
| $ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
F-3
CLOVER LEAF CAPITAL CORP.
UNAUDITED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023
|
Class A |
Class B |
Additional |
Accumulated |
Total |
|||||||||||||||||
|
Shares |
Amount |
Shares |
Amount |
||||||||||||||||||
|
Balance as of January 1, 2023 |
|
$ |
|
|
$ |
|
$ |
$ |
( |
) |
$ |
( |
) |
||||||||
|
Accretion of Class A ordinary shares to redemption amount |
— |
|
— |
|
|
|
( |
) |
|
( |
) |
||||||||||
|
Net loss |
— |
|
— |
|
|
|
( |
) |
|
( |
) |
||||||||||
|
Balance as of March 31, 2023 |
|
$ |
|
|
$ |
|
$ |
$ |
( |
) |
$ |
( |
) |
||||||||
|
Accretion of Class A ordinary shares to redemption amount |
— |
|
— |
|
|
|
( |
) |
|
( |
) |
||||||||||
|
Net loss |
— |
|
— |
|
|
|
( |
) |
|
( |
) |
||||||||||
|
Balance as of June 30, 2023 |
|
$ |
|
|
$ |
|
$ |
$ |
( |
) |
$ |
( |
) |
||||||||
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022
|
Class A |
Class B |
Additional |
Accumulated |
Total |
|||||||||||||||||
|
Shares |
Amount |
Shares |
Amount |
||||||||||||||||||
|
Balance as of January 1, 2022 |
|
$ |
|
|
$ |
|
$ |
$ |
( |
) |
$ |
( |
) |
||||||||
|
Net income |
— |
|
— |
|
|
|
|
|
|
|
|
||||||||||
|
Balance as of March 31, 2022 |
|
|
|
|
|
|
|
|
( |
) |
|
( |
) |
||||||||
|
Net loss |
— |
|
— |
|
|
|
( |
) |
|
( |
) |
||||||||||
|
Balance as of June 30, 2022 |
|
$ |
|
|
$ |
|
$ |
$ |
( |
) |
$ |
( |
) |
||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
F-4
CLOVER LEAF CAPITAL CORP.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
|
For the Six Months Ended |
||||||||
|
2023 |
2022 |
|||||||
|
Cash flows from operating activities: |
|
|
|
|
||||
|
Net loss |
$ |
( |
) |
$ |
( |
) |
||
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
||||
|
Interest and dividends earned on investment in Trust |
|
( |
) |
|
( |
) |
||
|
Amortization of prepaid expenses |
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|
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|
|
|
||
|
Changes in operating assets and liabilities: |
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|
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||||
|
Accrued costs and expenses |
|
|
|
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( |
) |
||
|
Prepaid expenses |
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|
|
|
|
|||
|
Due to related party |
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|
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( |
) |
|||
|
Income taxes payable |
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||
|
Net cash used in operating activities |
|
( |
) |
|
( |
) |
||
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|
|||||
|
Cash flows from financing activities: |
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||||
|
Proceeds from issuance of promissory note to related party |
|
|
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|||
|
Net cash provided by financing activities |
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|||
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|
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|
|||||
|
Net change in cash |
|
( |
) |
|
( |
) |
||
|
Cash, beginning of the period |
|
|
|
|
|
|
||
|
Cash, end of the period |
$ |
|
|
$ |
|
|
||
|
|
|
|
|
|||||
|
Supplemental disclosure of cash flow information: |
|
|
|
|
||||
|
Accretion of Class A ordinary shares to redemption amount |
$ |
|
|
$ |
|
|||
The accompanying notes are an integral part of these unaudited condensed financial statements.
F-5
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 — Organization, Business Operation and Going Concern
Clover Leaf Capital Corp. (the “Company”) a blank check company recently incorporated in the State of Delaware for the purpose of effecting a merger, stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (the “Business Combination”). The Company may pursue the initial Business Combination target in any industry or geographic location, the Company intends to focus its search for a target business engaged in the cannabis industry.
As of June 30, 2023, the Company had not commenced any operations. All activity for the period from February 25, 2021 (inception) through June 30, 2023 relates to the Company’s formation, the initial public offering (the “IPO”) and the Company’s efforts to pursue a Business Combination described below. The Company will not generate any operating revenues until after the completion of its initial Business Combination, at the earliest. The Company will generate non-operating income in the form of interest income on cash and cash equivalents from the proceeds derived from the IPO.
The Company’s sponsor is Yntegra Capital Investments, LLC, a Delaware limited liability company (the “Sponsor”).
The registration statement for the Company’s IPO was declared effective on July 19, 2021 (the “Effective Date”). On July 22, 2021, the Company consummated its IPO of
Transaction costs amounted to $
The Company’s Business Combination must be with one or more target businesses that together have a fair market value equal to at least
Following the closing of the IPO on July 22, 2021, $
F-6
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 — Organization, Business Operation and Going Concern (cont.)
Combination within the applicable period or (B) with respect to any other provision relating to stockholders’ rights or pre-initial Business Combination activity; and (3) the redemption of the public shares if the Company has not completed an initial Business Combination within the applicable period, subject to applicable law.
The Company will provide its public stockholders with the opportunity to redeem all or a portion of their public shares upon the completion of the initial Business Combination either (1) in connection with a stockholder meeting called to approve the Business Combination or (2) by means of a tender offer. The decision as to whether the Company will seek stockholder approval of a proposed Business Combination or conduct a tender offer will be made by the Company, solely in its discretion, and will be based on a variety of factors such as the timing of the transaction and whether the terms of the transaction would require it to seek stockholder approval under applicable law or stock exchange listing requirement. The Company will provide its public stockholders with the opportunity to redeem all or a portion of their public shares upon the completion of the initial Business Combination at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account calculated as of two business days prior to the consummation of the initial Business Combination, including interest earned on the funds held in the Trust Account and not previously released to the Company to pay franchise and income taxes, divided by the number of then issued and outstanding public shares, subject to the limitations described herein.
The shares of common stock subject to redemption will be recorded at a redemption value and classified as temporary equity upon the completion of the IPO, in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” The Company will proceed with a Business Combination if the Company has net tangible assets of at least $
On July 18, 2022, the Company issued a promissory note (the “Note”) in the principal amount of $
On October 19, 2022, the Company held a special meeting of stockholders (the “Meeting”). At the Meeting, the Company’s stockholders approved an amendment to the Company’s amended and restated certificate of incorporation (the “Extension Amendment”) to extend the date by which the Company must consummate its initial Business Combination from October 22, 2022 to July 22, 2023, or such earlier date as determined by the Company’s board of directors (the “Extension”). In connection with the Meeting, stockholders holding
F-7
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 — Organization, Business Operation and Going Concern (cont.)
On July 19, 2023, the Company held a special meeting of stockholders in lieu of an annual meeting of stockholders (the “Meeting”). At the Meeting, the Company’s stockholders approved an amendment (the “Extension Amendment”) to the Company’s amended and restated certificate of incorporation to extend the date by which the Company must consummate its initial business combination from July 22, 2023 to January 22, 2024, or such earlier date as determined by the Company’s board of directors (the “Extension”).
If the Company has not completed the initial Business Combination within the Combination Period, the Company will: (1) cease all operations except for the purpose of winding up; (2) as promptly as reasonably possible but not more than ten business days thereafter, redeem the public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest earned on the funds held in the Trust Account and not previously released to the Company to pay franchise and income taxes (less up to $
The Sponsor, officers and directors have entered into a letter agreement with the Company, pursuant to which they have agreed to waive: (1) their redemption rights with respect to any Founder Shares, private placement shares and public shares held by them, as applicable, in connection with the completion of the initial Business Combination; (2) their redemption rights with respect to any Founder Shares and public shares held by them in connection with a stockholder vote to amend the Company’s amended and restated certificate of incorporation (A) to modify the substance or timing of the Company’s obligation to redeem
Going Concern
As of June 30, 2023 and December 31, 2022, the Company had $
F-8
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 — Organization, Business Operation and Going Concern (cont.)
Prior to the completion of the IPO, the Company’s liquidity needs had been satisfied through a payment from the Sponsor of $
In addition, in order to finance transaction costs in connection with a Business Combination, the Company’s Sponsor or an affiliate of the Sponsor or certain of the Company’s officers and directors may, but are not obligated to, provide the Company Working Capital Loans, as defined below (see Note 5). As of June 30, 2023 and December 31, 2022, there were no amounts outstanding under any Working Capital Loans.
Until the consummation of a Business Combination, the Company will be using the funds not held in the Trust Account for identifying and evaluating prospective acquisition candidates, performing due diligence on prospective target businesses, paying for travel expenditures, selecting the target business to acquire, and structuring, negotiating and consummating the Business Combination. The Company will need to raise additional capital through loans or additional investments from its Sponsor, stockholders, officers, directors, or third parties. The Company’s Sponsor, officers and directors may, but are not obligated to, loan the Company funds from time to time or at any time, in whatever amount they deem reasonable in their sole discretion, to meet the Company’s working capital needs. Accordingly, the Company may not be able to obtain additional financing. If the Company is unable to raise additional capital, it may be required to take additional measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing operations, suspending the pursuit of a potential transaction, and reducing overhead expenses.
The Company cannot provide any assurance that new financing will be available to it on commercially acceptable terms, if at all. In connection with the Company’s assessment of going concern considerations in accordance with Financial Accounting Standard Board’s Account Standards Update (“ASU”) 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The Company has until January 22, 2024 to consummate a Business Combination, unless otherwise extended (see Note 5). It is uncertain that the Company will be able to consummate a Business Combination by this time. If a Business Combination is not consummated by this date, there will be a mandatory liquidation and subsequent dissolution of the Company. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These unaudited condensed financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary, should the Company be unable to continue as a going concern, and also do not include any adjustment that might result from the outcome of the uncertainty about should a Business Combination not occur.
Business Combination Agreement
On June 1, 2023, Clover Leaf Capital Corp., a Delaware corporation (together with its successors, “Clover Leaf”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CL Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of Clover Leaf (“Merger Sub”), Yntegra Capital Investments LLC, a Delaware limited liability company, in the capacity as the representative from and after the Effective Time (as defined in the Merger Agreement) for the stockholders of Clover Leaf (other than the Company Stockholder (as defined below) as of immediately prior to the Effective Time and its successors and assignees) in accordance with the terms and conditions of the Merger Agreement (the “Sponsor” or the “Purchaser Representative”), Kustom Entertainment, Inc., a Nevada corporation with a focus and mission to own and produce events, festivals, and entertainment alongside its evolving primary and secondary ticketing technologies (the “Company”), and Digital Ally, Inc., a Nevada corporation and the sole stockholder of the Company (the “Company Stockholder”).
Pursuant to the Merger Agreement, subject to the terms and conditions set forth therein upon the consummation of the transactions contemplated by the Merger Agreement (the “Closing”), Merger Sub will merge with and into the Company (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Transactions”), with the Company continuing as the surviving corporation in the Merger and a wholly-owned subsidiary of Clover Leaf. In the Merger, all of the issued and outstanding capital stock of the Company immediately
F-9
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 — Organization, Business Operation and Going Concern (cont.)
prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, in exchange for the right for the Company Stockholder to receive the Merger Consideration (as defined herein). Upon consummation of the Transactions, Clover Leaf will change its name to “Kustom Entertainment, Inc.”
The aggregate merger consideration to be paid pursuant to the Merger Agreement to the Company Stockholder as of immediately prior to the Effective Time will be an amount equal to (the “Merger Consideration”) (i) $
Risks and Uncertainties
Management continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position, results of its operations, and/or search for a target company, the specific impact is not readily determinable as of the date of these unaudited condensed financial statements. The unaudited condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Inflation Reduction Act of 2022
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal
Any redemption or other repurchase that occurs after December 31, 2022, in connection with a Business Combination, a vote by the stockholders of the Company to extend the period of time to complete the Business Combination (“extension vote”) or otherwise, may be subject to the excise tax. Whether and to what extent the Company would be subject to the excise tax in connection with a Business Combination, extension vote or otherwise would depend on a number of factors, including (i) the fair market value of the redemptions and repurchases in connection with the Business Combination, extension or otherwise, (ii) the structure of a Business Combination, (iii) the nature and amount of any “PIPE” or other equity issuances in connection with a Business Combination (or otherwise issued not in connection with a Business Combination but issued within the same taxable year of a Business Combination) and (iv) the content of regulations and other guidance from the Treasury. In addition, because the excise tax would be payable by the Company and not by the redeeming holder, the mechanics of any required payment of the excise tax have not been determined. The foregoing could cause a reduction in the cash available on hand to complete a Business Combination and in the Company’s ability to complete a Business Combination.
F-10
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X of the SEC. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a complete presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.
The accompanying unaudited condensed financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on April 14, 2023. The accompanying condensed balance sheet as of December 31, 2022 has been derived from the Company’s audited financial statements included in the Form 10-K. The interim results for the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or for any future periods.
Emerging Growth Company Status
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s unaudited condensed financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Use of Estimates
The preparation of these unaudited condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
F-11
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2 — Summary of Significant Accounting Policies (cont.)
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. As of June 30, 2023 and December 31, 2022, the Company had $
Investments Held in Trust Account
As of June 30, 2023 and December 31, 2022, the Company had $
The Company classifies its United States Treasury securities as held-to-maturity in accordance with FASB ASC Topic 320 “Investments — Debt and Equity Securities.” Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. Held-to-maturity treasury securities are recorded at amortized cost and adjusted for the amortization or accretion of premiums or discounts.
A decline in the market value of held-to-maturity securities below cost that is deemed to be other than temporary, results in an impairment that reduces the carrying costs to such securities’ fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other than temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and the duration of the impairment, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry in which the investee operates.
Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective-interest method. Such amortization and accretion are included in the “Interest and dividends earned on investment held in Trust” line item in the statements of operations. Interest income is recognized when earned.
|
Carrying |
Gross |
Gross |
Fair |
|||||||||
|
U.S. Treasury Securities (matures July 5, 2023) |
|
|
|
|
|
|
|
|||||
|
$ |
|
$ |
|
$ |
$ |
|
||||||
|
Carrying |
Gross |
Gross |
Fair |
|||||||||
|
U.S. Treasury Securities (matures November 25, 2022) |
|
|
|
|
|
|
|
|||||
|
$ |
|
$ |
$ |
|
$ |
|
||||||
F-12
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2 — Summary of Significant Accounting Policies (cont.)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which, at times, may exceed the federal depository insurance coverage of $
Offering Costs Associated with Initial Public Offering
The Company complies with the requirements of the ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A — “Expenses of Offering”. Offering costs consist of legal, accounting, underwriting and other costs incurred through the consummation of the Public Offering. Offering costs amounted to $
Fair Value of Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under FASB ASC 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the balance sheet, primarily due to its short-term nature.
The Company follows the guidance in ASC 820 for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.
The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
• Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not being applied. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
• Level 2 — Valuations based on (i) quoted prices in active markets for similar assets and liabilities, (ii) quoted prices in markets that are not active for identical or similar assets, (iii) inputs other than quoted prices for the assets or liabilities, or (iv) inputs that are derived principally from or corroborated by market through correlation or other means.
• Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815, “Derivatives and Hedging”. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with changes in the fair value reported in the statement of operations. The classification of derivative instruments, including whether such instruments should be
F-13
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2 — Summary of Significant Accounting Policies (cont.)
recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.
Class A Common Stock Subject to Possible Redemption
All of the
If it is probable that the equity instrument will become redeemable, the Company has the option to either accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument or to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The Company has elected to recognize the changes immediately.
Immediately upon the closing of the Initial Public Offering, the Company recognized the accretion from initial book value to redemption amount, which approximates fair value. The change in the carrying value of Class A common stock subject to possible redemption resulted in charges against additional paid-in capital (to the extent available) and accumulated deficit and Class A common stock.
|
Gross Proceeds |
$ |
|
|
|
|
Proceeds allocated to equity rights |
|
( |
) |
|
|
Less: |
|
|
||
|
Issuance costs related to Class A common stock subject to possible redemption |
|
( |
) |
|
|
Plus: |
|
|
||
|
Remeasurement of carrying value to redemption value |
|
|
|
|
|
Contingently redeemable Class A common stock subject to possible redemption (December 31, 2021) |
|
|
|
|
|
Less: |
|
|
||
|
Redemptions of Class A common stock |
|
( |
) |
|
|
Plus: |
|
|
||
|
Remeasurement of carrying value to redemption value |
|
|
|
|
|
Contingently redeemable Class A common stock subject to possible redemption (December 31, 2022) |
$ |
|
|
|
|
Plus: |
|
|
||
|
Remeasurement of carrying value to redemption value |
|
|
|
|
|
Contingently redeemable Class A common stock subject to possible redemption |
$ |
|
|
|
|
Plus: |
|
|
||
|
Remeasurement of carrying value to redemption value |
|
|
|
|
|
Contingently redeemable Class A common stock subject to possible redemption |
$ |
|
|
F-14
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2 — Summary of Significant Accounting Policies (cont.)
Net Income (Loss) Per Common Stock
The Company complies with accounting and disclosure requirements of FASB ASC Topic 260, Earnings Per Share. Net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. The Company has two classes of shares, redeemable common stock and non-redeemable common stock. The Company’s redeemable common stock is comprised of Class A shares sold in the IPO. The Company’s non-redeemable shares are comprised of Class B shares purchased by the Sponsor as well as Class A shares sold in the Private Units and Representative Shares. Earnings and losses are shared pro rata between the two classes of shares. The Company’s statement of operations applies the two-class method in calculating net income (loss) per share. Basic and diluted net income (loss) per common share for redeemable common stock and non-redeemable common stock is calculated by dividing net income (loss), allocated proportionally to each class of common stock, attributable to the Company by the weighted average number of shares of redeemable and non-redeemable stock outstanding.
The calculation of diluted income (loss) per share of common stock does not consider the effect of the rights issued in connection with the IPO since exercise of the rights is contingent upon the occurrence of future events and the inclusion of such rights would be anti-dilutive. Accretion of the carrying value of Class A common stock to redemption value is excluded from net income (loss) per redeemable share because the redemption value approximates fair value. As a result, diluted net income (loss) per share is the same as basic net income (loss) per share for the periods presented.
|
For the Three |
For the Three |
For the Six |
For the Six |
|||||||||||||
|
Common stock subject to possible redemption |
|
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|
|
|
|
||||||||
|
Numerator: |
|
|
|
|
|
|
|
|
||||||||
|
Net loss allocable to Class A common stock subject to possible redemption |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||||
| Denominator: |
|
|
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|
|
|
||||||||
|
|
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|
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|
|
|
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|
|||||
| $ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Non-redeemable common stock |
|
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|
|
|
||||||||
|
Numerator: |
|
|
|
|
|
|
|
|
||||||||
|
Net loss allocable to Class B common |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||||
| Denominator: |
|
|
|
|
|
|
|
|
||||||||
|
|
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|
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|
|
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|||||
| $ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||||
F-15
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2 — Summary of Significant Accounting Policies (cont.)
Income Taxes
The Company accounts for income taxes under ASC 740, “Income Taxes.” ASC 740, Income Taxes, requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the unaudited condensed financial statements and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards. ASC 740 additionally requires a valuation allowance to be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. As of June 30, 2023 and December 31, 2022, the Company’s deferred tax asset had a full valuation allowance recorded against it.
Our effective tax rate was (
ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure and transition.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of June 30, 2023 and December 31, 2022. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.
The Company has identified the United States and Florida as its only “major” tax jurisdictions. The Company is subject to income taxation by major taxing authorities since inception. These examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal and state tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. The ASU also removes certain settlement conditions that are required for equity-linked contracts to qualify for the derivative scope exception, and it simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective January 1, 2024 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company is reviewing what impact, if any, adoption will have on the Company’s financial position, results of operations or cash flows.
Management does not believe that any other recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company’s unaudited condensed financial statements.
F-16
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3 — Initial Public Offering
On July 22, 2021, the Company consummated its IPO of
The Company paid an underwriting fee at the closing of the IPO of $
Note 4 — Private Placement
Simultaneously with the closing of the IPO and the sale of the Units, the Sponsor purchased an aggregate of
The Private Placement Units and their component securities will not be transferable, assignable or salable until after the completion of the initial Business Combination except to permitted transferees. There will be no redemption rights or liquidating distributions from the Trust Account with respect to the Founder Shares, private placement shares or private placement rights, which will expire worthless if the Company does not consummate a Business Combination within the Combination Period.
Note 5 — Related Party Transactions
Founder Shares
In March 2021, the Sponsor paid $
On April 8, 2021, the Sponsor transferred a membership interest (the “Interest”) to 3 of the Company’s officers and the 3 Independent Directors of
The Company’s initial stockholders, including the Interests transferred to the Company’s officers and directors, have agreed not to transfer, assign or sell any of their Founder Shares until the earlier to occur of: (A) six months after the completion of the initial Business Combination; and (B) subsequent to the initial Business Combination (x) if the closing price of the shares of the Class A common stock equals or exceeds $12.00 per share (as adjusted
F-17
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 5 — Related Party Transactions (cont.)
Promissory Note — Related Party
On March 4, 2021, the Sponsor agreed to loan the Company up to $
On July 18, 2022, the Company issued a promissory note (the “July Note”) in the principal amount of $
On October 19, 2022, in connection with the extension of the period of initial Business Combination from October 22, 2022, to July 22, 2023, the Company issued a further promissory note (the “October Note”) in the principal amount of $
As of June 30, 2023 and December 31, 2022, there is $
Related Party Loans
In order to fund working capital deficiencies or finance transaction costs in connection with an intended initial Business Combination, the Sponsor, an affiliate of the Sponsor or certain of the Company’s officers and directors may, but is not obligated to, loan the Company funds as may be required (the “Working Capital Loans”). If the Company completes an initial Business Combination, the Company would repay such loaned amounts out of the proceeds of the Trust Account released to the Company. Otherwise, such loans would be repaid only out of funds held outside the Trust Account. In the event that the initial Business Combination does not close, the Company may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds from the Trust Account would be used to repay such loaned amounts.
F-18
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 5 — Related Party Transactions (cont.)
Administrative Support Agreement
Commencing on the date of the IPO, the Company has agreed to pay an affiliate of the Sponsor for office space, secretarial and administrative services provided to members of the management team, in the amount of $
Note 6 — Commitments and Contingencies
Registration Rights
The holders of the Founder Shares, Private Placement Units and securities that may be issued upon conversion of Working Capital Loans and extension loans will have registration rights to require the Company to register a sale of any of its securities held by them pursuant to a registration rights agreement. These holders will be entitled to make up to three demands, excluding short form registration demands, that the Company registers such securities for sale under the Securities Act. In addition, these holders will have “piggy-back” registration rights to include their securities in other registration statements filed by the Company. Notwithstanding the foregoing, the underwriters may not exercise their demand and “piggyback” registration rights after five and seven years, respectively, after the effective date of the registration statement of which the IPO forms a part and may not exercise their demand rights on more than one occasion.
Underwriting Agreement
The Company has granted the underwriters a 30-day option to purchase up to
The Company agreed to pay or reimburse the underwriters for travel, lodging and other “road show” expenses, expenses of the underwriters’ legal counsel and certain diligence and other fees, including the preparation, binding and delivery of bound volumes in form and style reasonably satisfactory to the Representative, transaction Lucite cubes or similar commemorative items in a style as reasonably requested by the Representative, and reimbursement for background checks on the Company’s directors and executive officers, which such fees and expenses are capped at an aggregate of $
The underwriters will be entitled to a deferred underwriting discount of
Representative’s Common Stock
The Company agreed to issue to Maxim and/or its designees,
F-19
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6 — Commitments and Contingencies (cont.)
Business Combination. In addition, Maxim has agreed (i) to waive its redemption rights with respect to such shares in connection with the completion of the Company’s initial Business Combination and (ii) to waive its rights to liquidating distributions from the trust account with respect to such shares if the Company fails to complete an initial Business Combination within the applicable period.
The shares have been deemed compensation by FINRA and are therefore subject to a lock-up for a period of 180 days immediately following the date of the effectiveness of the registration statement of the IPO pursuant to Rule 5110(g)(1) of FINRA’s NASD Conduct Rules. Pursuant to FINRA Rule 5110(g)(1), these securities will not be the subject of any hedging, short sale, derivative, put or call transaction that would result in the economic disposition of the securities by any person for a period of 180 days immediately following the effective date of the registration statement of the IPO, nor may they be sold, transferred, assigned, pledged or hypothecated for a period of 180 days immediately following the effective date of the registration statement of the IPO except to any underwriter and selected dealer participating in the offering and their bona fide officers or partners.
Right of First Refusal
Subject to certain conditions, the Company will grant Maxim, for a period beginning on the closing of the IPO and ending 15 months after the date of the consummation of the Business Combination, a right of first refusal to act as lead left book-running managing underwriter with at least
Note 7 — Stockholders’ Deficit
Preferred Stock — The Company is authorized to issue
Class A common stock — The Company is authorized to issue
Class B common stock — The Company is authorized to issue
The Company’s initial stockholders have agreed not to transfer, assign or sell any of their Founder Shares until the earlier to occur of: (A) six months after the date of the consummation of the initial Business Combination; and (B) subsequent to the initial Business Combination (x) if the closing price of our shares of Class A common stock equals or exceeds $
Common stockholders of record are entitled to one vote for each share held on all matters to be voted on by stockholders. Holders of the Class A common stock and holders of the Class B common stock will vote together as a single class on all matters submitted to a vote of our stockholders, except as required by law. The shares of
F-20
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 7 — Stockholders’ Deficit (cont.)
Class B common stock will automatically convert into shares of Class A common stock at the time of the initial Business Combination on a one-for-one basis (subject to adjustment for stock splits, stock dividends, reorganizations, recapitalizations and the like), and subject to further adjustment as provided herein. In the case that additional shares of Class A common stock, or equity-linked securities, are issued or deemed issued in excess of the amounts offered in the Initial Public Offering and related to the closing of the initial Business Combination, the ratio at which shares of Class B common stock shall convert into shares of Class A common stock will be adjusted (unless the holders of a majority of the outstanding shares of Class B common stock agree to waive such adjustment with respect to any such issuance or deemed issuance) so that the number of shares of Class A common stock issuable upon conversion of all shares of Class B common stock will equal, in the aggregate, on an as-converted basis,
Rights
Each holder of a right will receive one-eighth (1/8) of one Class A common stock upon consummation of the initial Business Combination. In the event the Company will not be the surviving entity upon completion of the initial Business Combination, each holder of a right will be required to affirmatively convert its rights in order to receive the 1/8 share of Class A common stock underlying each right (without paying any additional consideration). If the Company is unable to complete an initial Business Combination within the required time period and the Company redeems the public shares of Class A common stock for the funds held in the trust account, holders of rights will not receive any such funds in exchange for their rights and the rights will expire worthless. Every eight (8) rights that you hold will entitle you to receive one share at the closing of the Business Combination. The Company will not issue fractional shares of Class A common stock upon exchange of the rights. If, upon conversion of the rights, a holder would be entitled to receive a fractional interest in a share, fractional shares will be rounded up to the nearest whole share.
If the Company is unable to complete an initial Business Combination within the required time period and it liquidates the funds held in the Trust Account, holders of rights will not receive any such funds with respect to any of their rights, nor will they receive any distribution from the Company’s assets held outside of the trust account with respect to such rights, and all rights will expire worthless.
Note 8 — Subsequent Events
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the unaudited condensed financial statements were issued. Based upon this review, other as identified below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statement.
On July 19, 2023, the Company held a special meeting of stockholders in lieu of an annual meeting of stockholders (the “Meeting”). At the Meeting, the Company’s stockholders approved an amendment (the “Extension Amendment”) to the Company’s amended and restated certificate of incorporation to extend the date by which the Company must consummate its initial business combination from July 22, 2023 to January 22, 2024, or such earlier date as determined by the Company’s board of directors (the “Extension”).
On July 20, 2023 the Company filed the Extension Amendment with the Secretary of State of the State of Delaware. The Extension Amendment extends the date by which the Company must consummate its initial business combination from July 22, 2023 to January 22, 2024, or such earlier date as determined by the Company’s board of directors (the “Board”).
F-21
CLOVER LEAF CAPITAL CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 8 — Subsequent Events (cont.)
In connection with the Meeting, stockholders holding
In connection with the Extension, the Company will cause up to $
On July 24, 2023, the Company issued a promissory note (the “Third Extension Note”) in the aggregate principal amount of up to $
On July 20, 2023, the Company issued an aggregate of
F-22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Clover Leaf Capital Corp.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Clover Leaf Capital Corp. (the “Company”) as of December 31, 2022 and 2021, the related statements of operations, changes in stockholders’ deficit and cash flows for the year ended December 31, 2022 and for the period from February 25, 2021 (inception) through December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021 and the results of its operations and its cash flows for the year ended December 31, 2022 and for the period from February 25, 2021 (inception) through December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph — Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1 to the financial statements, the Company’s ability to execute its business plan is dependent upon the consummation of a business combination and it lacks the financial resources it needs to sustain operations for a reasonable period of time, which is considered to be one year from the issuance date of the financial statements. Further, if the Company does not complete a business combination by July 22, 2023, or obtain approval for an extension of this deadline, it will be required to cease all operations except for the purpose of liquidating. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Marcum llp
Marcum llp
We have served as the Company’s auditor since 2021.
New York, NY
April 14, 2023
F-23
CLOVER LEAF CAPITAL CORP.
BALANCE SHEETS
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December 31, |
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2022 |
2021 |
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Assets: |
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Current assets: |
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Cash |
$ |
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$ |
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Prepaid expenses – current portion |
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Total current assets |
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Prepaid expenses – long term portion |
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Investments held in Trust Account |
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Total Assets |
$ |
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$ |
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Liabilities, Redeemable Common Stock and Stockholder’s Deficit |
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Accrued costs and expenses |
$ |
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$ |
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Income taxes payable |
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Deferred income tax |
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Promissory note to Related Party |
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Due to related party |
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Total current liabilities |
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Deferred underwriting commissions |
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Total Liabilities |
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Commitments and Contingencies (see Note 7) |
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Redeemable Common Stock: |
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| Class A common stock subject to possible redemption, |
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Stockholder’s Deficit: |
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| Preferred stock, $ |
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| Class A common stock, $ |
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| Class B common stock, $ |
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Accumulated deficit |
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( |
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Total Stockholder’s Deficit |
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( |
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( |
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Total Liabilities, Redeemable Common Stock and Stockholder’s Deficit |
$ |
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$ |
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The accompanying notes are an integral part of these financial statements.
F-24
CLOVER LEAF CAPITAL CORP.
STATEMENTS OF OPERATIONS
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For the Year |
For the |
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Formation and operating costs |
$ |
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$ |
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Loss from operations |
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Other income: |
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Recovery of previously incurred costs |
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Interest earned on investments held in Trust Account |
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Interest earned on cash held in bank |
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Total other income |
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Income (Loss) before provision for income taxes |
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Provision for income taxes |
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Net income (loss) |
$ |
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$ |
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The accompanying notes are an integral part of these financial statements.
F-25
CLOVER LEAF CAPITAL CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2022 AND FOR THE PERIOD FROM FEBRUARY 25, 2021 (INCEPTION) THROUGH DECEMBER 31, 2021
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Class A |
Class B |
Additional |
Accumulated |
Total |
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Shares |
Amount |
Shares |
Amount |
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Balance as of February 25, 2021 (Inception) |
— |
$ |
— |
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$ |
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$ |
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$ |
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$ |
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Class B common stock issued to initial stockholder |
— |
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| Sales of |
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| Sale of |
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Representative shares |
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Forfeiture of shares due to over-allotment not exercised in full |
— |
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Proceeds allocated to equity rights |
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Issuance costs allocated to equity rights |
— |
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Class A share remeasurement to redemption value, net of allocation of rights proceeds and offering costs |
— |
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— |
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Net loss |
— |
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— |
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Balance as of December 31, 2021 |
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Remeasurement of Class A ordinary shares to redemption amount |
— |
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— |
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Net income |
— |
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— |
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Balance as of December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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The accompanying notes are an integral part of these financial statements.
F-26
CLOVER LEAF CAPITAL CORP.
STATEMENTS OF CASH FLOWS
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For the Year |
For the Period |
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Cash flows from operating activities: |
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Net income (loss) |
$ |
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$ |
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Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Formation cost paid by Sponsor |
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Interest earned on investments in Trust Account |
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Amortization of prepaid expenses |
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Changes in operating assets and liabilities: |
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Accrued costs and expenses |
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Prepaid expenses |
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Due to related party |
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Income taxes payable |
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Deferred income tax |
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Net cash used in operating activities |
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Cash Flows from Investing Activities: |
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Investment of cash in Trust Account |
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Disposal of trust assets for redemptions |
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Withdrawal of trust funds to pay taxes |
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Net cash provided by (used in) Investing Activities |
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Cash Flows from Financing Activities: |
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Proceeds from Initial Public Offering |
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Proceeds from Private placement |
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Proceeds from sale of founder shares to initial stockholders |
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Proceeds from issuance of promissory note to related party |
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Payment of promissory note to related party |
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( |
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Payment of deferred offering costs |
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( |
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Payment for redemptions of shares subject to possible redemption |
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( |
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Net cash (used in) provided by financing activities |
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( |
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Net change in cash |
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( |
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Cash – beginning of the period |
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Cash, end of the period |
$ |
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$ |
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Supplemental disclosure of cash flow information: |
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Remeasurement of Class A ordinary shares to redemption amount |
$ |
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$ |
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Initial value of Class A common stock subject to possible redemption |
$ |
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$ |
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Deferred underwriters commission |
$ |
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$ |
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|||
|
Deferred offering costs paid by promissory note – related party |
$ |
|
$ |
|
|
|||
|
Forfeiture of shares due to over-allotment not exercised in full |
$ |
|
$ |
|
|
|||
|
Fair value of representative shares issued |
$ |
|
$ |
|
|
|||
The accompanying notes are an integral part of these financial statements.
F-27
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 1 — Organization, Business Operation and Going Concern
Clover Leaf Capital Corp. (the “Company”) a blank check company incorporated in the State of Delaware for the purpose of effecting a merger, stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (the “Business Combination”). The Company may pursue the initial Business Combination target in any industry or geographic location, the Company intends to focus its search for a target business engaged in the cannabis industry.
As of December 31, 2022, the Company had not commenced any operations. All activity for the period from February 25, 2021 (inception) through December 31, 2022 relates to the Company’s formation and the initial public offering (the “IPO”) and search for the business combination target as described below. The Company will not generate any operating revenues until after the completion of its initial Business Combination, at the earliest. The Company will generate non-operating income in the form of interest income on cash and cash equivalents from the proceeds derived from the IPO and placed in the Trust Account.
The Company’s sponsor is Yntegra Capital Investments, LLC, a Delaware limited liability company (the “Sponsor”).
The registration statement for the Company’s IPO was declared effective on July 19, 2021 (the “Effective Date”). On July 22, 2021, the Company consummated its IPO of
Transaction costs amounted to $
The Company’s Business Combination must be with one or more target businesses that together have a fair market value equal to at least
Following the closing of the IPO on July 22, 2021, $
F-28
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 1 — Organization, Business Operation and Going Concern (cont.)
stockholders’ rights or pre-initial Business Combination activity; and (3) the redemption of the public shares if the Company has not completed an initial Business Combination within 12 months from the closing of the IPO (or up to 21 months if the Company extends the period of time to consummate an initial Business Combination), subject to applicable law.
The Company will provide its public stockholders with the opportunity to redeem all or a portion of their public shares upon the completion of the initial Business Combination either (1) in connection with a stockholder meeting called to approve the Business Combination or (2) by means of a tender offer. The decision as to whether the Company will seek stockholder approval of a proposed Business Combination or conduct a tender offer will be made by the Company, solely in its discretion, and will be based on a variety of factors such as the timing of the transaction and whether the terms of the transaction would require it to seek stockholder approval under applicable law or stock exchange listing requirement. The Company will provide its public stockholders with the opportunity to redeem all or a portion of their public shares upon the completion of the initial Business Combination at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account calculated as of two business days prior to the consummation of the initial Business Combination, including interest earned on the funds held in the Trust Account and not previously released to the Company to pay franchise and income taxes, divided by the number of then issued and outstanding public shares, subject to the limitations described herein.
The shares of common stock subject to redemption will be recorded at a redemption value and classified as temporary equity upon the completion of the IPO, in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” The Company will proceed with a Business Combination if the Company has net tangible assets of at least $
On July 18, 2022, the Company issued a promissory note (the “Note”) in the principal amount of $
On October 19, 2022, the Company held a special meeting of stockholders (the “Meeting”). At the Meeting, the Company’s stockholders approved an amendment to the Company’s amended and restated certificate of incorporation (the “Extension Amendment”) to extend the date by which the Company must consummate its initial business combination from October 22, 2022 to July 22, 2023, or such earlier date as determined by the Company’s board of directors (the “Extension”). In connection with the Meeting, stockholders holding
If the Company has not completed the initial Business Combination within the Combination Period, the Company will: (1) cease all operations except for the purpose of winding up; (2) as promptly as reasonably possible but not more than ten business days thereafter, redeem the public shares, at a per-share price, payable in cash, equal to the aggregate
F-29
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 1 — Organization, Business Operation and Going Concern (cont.)
amount then on deposit in the Trust Account, including interest earned on the funds held in the Trust Account and not previously released to the Company to pay franchise and income taxes (less up to $
The Sponsor, officers and directors have entered into a letter agreement with the Company, pursuant to which they have agreed to waive: (1) their redemption rights with respect to any Founder Shares, private placement shares and public shares held by them, as applicable, in connection with the completion of the initial Business Combination; (2) their redemption rights with respect to any Founder Shares and public shares held by them in connection with a stockholder vote to amend the Company’s amended and restated certificate of incorporation (A) to modify the substance or timing of the Company’s obligation to redeem
Going Concern
As of December 31, 2022, and 2021, the Company had $
Prior to the completion of the IPO, the Company’s liquidity needs had been satisfied through a payment from the Sponsor of $
In addition, in order to finance transaction costs in connection with a Business Combination, the Company’s Sponsor or an affiliate of the Sponsor or certain of the Company’s officers and directors may, but are not obligated to, provide the Company Working Capital Loans, as defined below (see Note 5). As of December 31, 2022 and 2021, there were no amounts outstanding under any Working Capital Loans.
F-30
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 1 — Organization, Business Operation and Going Concern (cont.)
Until the consummation of a Business Combination, the Company will be using the funds not held in the Trust Account for identifying and evaluating prospective acquisition candidates, performing due diligence on prospective target businesses, paying for travel expenditures, selecting the target business to acquire, and structuring, negotiating and consummating the Business Combination. The Company will need to raise additional capital through loans or additional investments from its Sponsor, stockholders, officers, directors, or third parties. The Company’s Sponsor, officers and directors may, but are not obligated to, loan the Company funds from time to time or at any time, in whatever amount they deem reasonable in their sole discretion, to meet the Company’s working capital needs. Accordingly, the Company may not be able to obtain additional financing. If the Company is unable to raise additional capital, it may be required to take additional measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing operations, suspending the pursuit of a potential transaction, and reducing overhead expenses.
The Company cannot provide any assurance that new financing will be available to it on commercially acceptable terms, if at all. In connection with the Company’s assessment of going concern considerations in accordance with Financial Accounting Standard Board’s Account Standards Update (“ASU”) 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The Company has until July 22, 2023 to consummate a Business Combination, unless otherwise extended (see Note 5). It is uncertain that the Company will be able to consummate a Business Combination by this time. If a Business Combination is not consummated by this date, there will be a mandatory liquidation and subsequent dissolution of the Company. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary, should the Company be unable to continue as a going concern, and also do not include any adjustment that might result from the outcome of the uncertainty about should a Business Combination not occur.
Risks and Uncertainties
Management continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position, results of its operations, and/or search for a target company, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Inflation Reduction Act of 2022
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal
Any redemption or other repurchase that occurs after December 31, 2022, in connection with a Business Combination, a vote by the stockholders of the Company to extend the period of time to complete the Business Combination (“extension vote”) or otherwise, may be subject to the excise tax. Whether and to what extent the Company would be subject to the excise tax in connection with a Business Combination, extension vote or otherwise would depend on a number of factors, including (i) the fair market value of the redemptions and repurchases in connection with the Business Combination, extension or otherwise, (ii) the structure of a Business Combination, (iii) the nature and amount of any “PIPE” or other equity issuances in connection with a Business Combination (or otherwise issued not in connection with a Business Combination but issued within the same taxable year of a Business
F-31
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 1 — Organization, Business Operation and Going Concern (cont.)
Combination) and (iv) the content of regulations and other guidance from the Treasury. In addition, because the excise tax would be payable by the Company and not by the redeeming holder, the mechanics of any required payment of the excise tax have not been determined. The foregoing could cause a reduction in the cash available on hand to complete a Business Combination and in the Company’s ability to complete a Business Combination.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements of the Company are presented in U.S. dollars in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
Emerging Growth Company Status
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Use of Estimates
The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. As of December 31, 2022 and 2021, the Company had $
F-32
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies (cont.)
Investments Held in Trust Account
As of December 31, 2022 and 2021, the Company had $
The Company classifies its United States Treasury securities as held-to-maturity securities in accordance with FASB ASC Topic 320 “Investments — Debt and Equity Securities.” Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. Held-to-maturity treasury securities are recorded at amortized cost and adjusted for the amortization or accretion of premiums or discounts.
A decline in the market value of held-to-maturity securities below cost that is deemed to be other than temporary, results in an impairment that reduces the carrying costs to such securities’ fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other than temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and the duration of the impairment, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry in which the investee operates.
Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective-interest method. Such amortization and accretion are included in the “Interest earned on investment held in Trust Account” line item in the statements of operations. Interest income is recognized when earned.
|
Carrying |
Gross |
Gross |
Fair |
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U.S. Treasury Securities (matures May 25, 2023) |
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|
$ |
|
$ |
$ |
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$ |
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|
Carrying |
Gross |
Gross |
Fair |
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|
U.S. Treasury Securities (matures February 24, 2022) |
|
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|
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( |
) |
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|
|||||
|
$ |
|
$ |
$ |
( |
) |
$ |
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Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which, at times, may exceed the federal depository insurance coverage of $
F-33
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies (cont.)
Offering Costs Associated with Initial Public Offering
The Company complies with the requirements of the ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A — “Expenses of Offering”. Offering costs consist of legal, accounting, underwriting and other costs incurred through the consummation of the Public Offering. Offering costs amounted to $
Fair Value of Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under FASB ASC 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the balance sheets, primarily due to its short-term nature.
The Company follows the guidance in ASC 820 for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.
The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
• Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not being applied. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
• Level 2 — Valuations based on (i) quoted prices in active markets for similar assets and liabilities, (ii) quoted prices in markets that are not active for identical or similar assets, (iii) inputs other than quoted prices for the assets or liabilities, or (iv) inputs that are derived principally from or corroborated by market through correlation or other means.
• Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815, “Derivatives and Hedging”. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative liabilities are classified in the balance sheets as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.
F-34
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies (cont.)
Class A Common Stock Subject to Possible Redemption
All of the
If it is probable that the equity instrument will become redeemable, the Company has the option to either accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument or to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The Company has elected to recognize the changes immediately.
Immediately upon the closing of the Initial Public Offering, the Company recognized the accretion from initial book value to redemption amount, which approximates fair value. The change in the carrying value of Class A common stock subject to possible redemption resulted in charges against additional paid-in capital (to the extent available) and accumulated deficit and Class A common stock.
|
Gross Proceeds |
$ |
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|
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|
Proceeds allocated to equity rights |
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( |
) |
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Less: |
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Issuance costs related to Class A common stock subject to possible redemption |
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( |
) |
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Plus: |
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Remeasurement of carrying value to redemption value |
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Contingently redeemable Class A common stock subject to possible redemption (December 31, 2021) |
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Less: |
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Redemptions of Class A common stock |
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( |
) |
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Plus: |
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Remeasurement of carrying value to redemption value |
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|
Contingently redeemable Class A common stock subject to possible redemption (December 31, 2022) |
$ |
|
|
Net Income (Loss) Per Common Stock
The Company complies with accounting and disclosure requirements of FASB ASC Topic 260, Earnings Per Share. Net loss per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. The Company has two classes of shares, redeemable common stock and non-redeemable common stock. The Company’s redeemable common stock is comprised of Class A shares sold in the IPO. The Company’s non-redeemable shares are comprised of Class B shares purchased by the Sponsor as well as Class A shares sold in the Private Units and Representative Shares. Earnings and losses are shared pro rata between the two classes of shares. The Company’s statements of operations applies the two-class method in calculating net income (loss) per share. Basic and diluted net income (loss) per common share for redeemable common stock
F-35
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies (cont.)
and non-redeemable common stock is calculated by dividing net income (loss), allocated proportionally to each class of common stock, attributable to the Company by the weighted average number of shares of redeemable and non-redeemable stock outstanding.
The calculation of diluted income (loss) per share of common stock does not consider the effect of the rights issued in connection with the IPO since exercise of the rights is contingent upon the occurrence of future events and the inclusion of such rights would be anti-dilutive. Accretion of the carrying value of Class A common stock to redemption value is excluded from net income (loss) per redeemable share because the redemption value approximates fair value. As a result, diluted income (loss) per share is the same as basic income (loss) per share for the periods presented.
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For the |
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Common stock subject to possible redemption |
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Numerator: |
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Net income (loss) allocable to Class A common stock subject to possible redemption |
$ |
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$ |
( |
) |
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| Denominator: |
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$ |
( |
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Non-redeemable common stock |
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Numerator: |
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Net income (loss) allocable to Class B common stock |
$ |
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$ |
( |
) |
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| Denominator: |
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| $ |
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$ |
( |
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Income Taxes
The Company accounts for income taxes under FASB ASC 740, “Income Taxes” (“ASC 740”). ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statement and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards. ASC 740 additionally requires a valuation allowance to be established when it is more likely than not that all or a portion of deferred tax assets will not be realized.
ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure and transition.
F-36
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies (cont.)
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of December 31, 2022 and 2021. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.
The Company has identified the United States as its only “major” tax jurisdiction.
The Company is subject to income tax examinations by major taxing authorities since inception. These examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal and state tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. The ASU also removes certain settlement conditions that are required for equity-linked contracts to qualify for the derivative scope exception, and it simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective January 1, 2024 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company is reviewing what impact, if any, adoption will have on the Company’s financial position, results of operations or cash flows.
Management does not believe that any other recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
Note 3 — Initial Public Offering
On July 22, 2021, the Company consummated its IPO of
The Company paid an underwriting fee at the closing of the IPO of $
Note 4 — Private Placement
Simultaneously with the closing of the IPO and the sale of the Units, the Sponsor purchased an aggregate of
The Private Placement Units and their component securities will not be transferable, assignable or salable until after the completion of the initial Business Combination except to permitted transferees. There will be no redemption rights or liquidating distributions from the Trust Account with respect to the Founder Shares, private placement shares or private placement rights, which will expire worthless if the Company does not consummate a Business Combination within the Combination Period.
F-37
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 5 — Related Party Transactions
Founder Shares
In March 2021, the Sponsor paid $
On April 8, 2021, the Sponsor transferred a membership interest (the “Interest”) to 3 of the Company’s officers and the 3 Independent Directors of
Promissory Note — Related Party
On March 4, 2021, the Sponsor agreed to loan the Company up to $
On July 18, 2022, the Company issued a promissory note (the “July Note”) in the principal amount of $
F-38
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 5 — Related Party Transactions (cont.)
On October 19, 2022, in connection with the extension of the period of initial Business Combination from October 22, 2022, to July 22, 2023, the Company issued a further promissory note (the “October Note”) in the principal amount of $
As of December 31, 2022 and 2021, there is $
Related Party Loans
In order to fund working capital deficiencies or finance transaction costs in connection with an intended initial Business Combination, the Sponsor, an affiliate of the Sponsor or certain of the Company’s officers and directors may, but is not obligated to, loan the Company funds as may be required (the “Working Capital Loans”). If the Company completes an initial Business Combination, the Company would repay such loaned amounts out of the proceeds of the Trust Account released to the Company. Otherwise, such loans would be repaid only out of funds held outside the Trust Account. In the event that the initial Business Combination does not close, the Company may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds from the Trust Account would be used to repay such loaned amounts.
Administrative Support Agreement
Commencing on the date of the IPO, the Company has agreed to pay an affiliate of the Sponsor for office space, secretarial and administrative services provided to members of the management team, in the amount of $
Note 6 — Commitments and Contingencies
Registration Rights
The holders of the Founder Shares, Private Placement Units and securities that may be issued upon conversion of Working Capital Loans and extension loans will have registration rights to require the Company to register a sale of any of its securities held by them pursuant to a registration rights agreement. These holders will be entitled to make up to three demands, excluding short form registration demands, that the Company registers such securities for sale under the Securities Act. In addition, these holders will have “piggy-back” registration rights to include their securities in other registration statements filed by the Company. Notwithstanding the foregoing, the underwriters may not exercise their demand and “piggyback” registration rights after five and seven years, respectively, after the effective date of the registration statement of which the IPO forms a part and may not exercise their demand rights on more than one occasion.
F-39
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 6 — Commitments and Contingencies (cont.)
Underwriting Agreement
The Company has granted the underwriters a 30-day option to purchase up to
The Company agreed to pay or reimburse the underwriters for travel, lodging and other “road show” expenses, expenses of the underwriters’ legal counsel and certain diligence and other fees, including the preparation, binding and delivery of bound volumes in form and style reasonably satisfactory to the Representative, transaction Lucite cubes or similar commemorative items in a style as reasonably requested by the Representative, and reimbursement for background checks on the Company’s directors and executive officers, which such fees and expenses are capped at an aggregate of $
The underwriters will be entitled to a deferred underwriting discount of
Representative’s Common Stock
The Company agreed to issue to Maxim and/or its designees,
The shares have been deemed compensation by FINRA and are therefore subject to a lock-up for a period of 180 days immediately following the date of the effectiveness of the registration statement of the IPO pursuant to Rule 5110(g)(1) of FINRA’s NASD Conduct Rules. Pursuant to FINRA Rule 5110(g)(1), these securities will not be the subject of any hedging, short sale, derivative, put or call transaction that would result in the economic disposition of the securities by any person for a period of 180 days immediately following the effective date of the registration statement of the IPO, nor may they be sold, transferred, assigned, pledged or hypothecated for a period of 180 days immediately following the effective date of the registration statement of the IPO except to any underwriter and selected dealer participating in the offering and their bona fide officers or partners.
Right of First Refusal
Subject to certain conditions, the Company will grant Maxim, for a period beginning on the closing of the IPO and ending 15 months after the date of the consummation of the Business Combination, a right of first refusal to act as lead left book-running managing underwriter with at least
F-40
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 7 — Stockholders’ Deficit
Preferred Stock — The Company is authorized to issue
Class A common stock — The Company is authorized to issue
Class B common stock — The Company is authorized to issue
Common stockholders of record are entitled to one vote for each share held on all matters to be voted on by stockholders. Holders of the Class A common stock and holders of the Class B common stock will vote together as a single class on all matters submitted to a vote of our stockholders, except as required by law. The shares of Class B common stock will automatically convert into shares of Class A common stock at the time of the initial Business Combination on a one-for-one basis (subject to adjustment for stock splits, stock dividends, reorganizations, recapitalizations and the like), and subject to further adjustment as provided herein. In the case that additional shares of Class A common stock, or equity-linked securities, are issued or deemed issued in excess of the amounts offered in the Initial Public Offering and related to the closing of the initial Business Combination, the ratio at which shares of Class B common stock shall convert into shares of Class A common stock will be adjusted (unless the holders of a majority of the outstanding shares of Class B common stock agree to waive such adjustment with respect to any such issuance or deemed issuance) so that the number of shares of Class A common stock issuable upon conversion of all shares of Class B common stock will equal, in the aggregate, on an as-converted basis,
Rights
Each holder of a right will receive one-eighth (1/8) of one Class A common stock upon consummation of the initial Business Combination. In the event the Company will not be the surviving entity upon completion of the initial Business Combination, each holder of a right will be required to affirmatively convert its rights in order to receive the 1/8 share of Class A common stock underlying each right (without paying any additional consideration). If the Company is unable to complete an initial Business Combination within the required time period and the Company redeems the public shares of Class A common stock for the funds held in the trust account, holders of rights will not receive any such funds in exchange for their rights and the rights will expire worthless. Every eight (8) rights that you
F-41
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 7 — Stockholders’ Deficit (cont.)
hold will entitle you to receive one share at the closing of the Business Combination. The Company will not issue fractional shares of Class A common stock upon exchange of the rights. If, upon conversion of the rights, a holder would be entitled to receive a fractional interest in a share, fractional shares will be rounded up to the nearest whole share.
If the Company is unable to complete an initial Business Combination within the required time period and it liquidates the funds held in the Trust Account, holders of rights will not receive any such funds with respect to any of their rights, nor will they receive any distribution from the Company’s assets held outside of the trust account with respect to such rights, and all rights will expire worthless.
Note 8 — Income Tax
|
December 31, |
December 31, |
|||||||
|
Deferred tax asset |
|
|
|
|
||||
|
Federal net operating loss |
$ |
|
$ |
|
|
|||
|
Organizational costs/Start-up costs |
|
|
|
|
|
|
||
|
Total deferred tax asset |
|
|
|
|
|
|
||
|
Deferred tax liability |
|
|
|
|
||||
|
Unrealized gain/loss |
|
( |
) |
|
( |
) |
||
|
Valuation allowance |
|
( |
) |
|
( |
) |
||
|
Deferred tax asset (liability), net of allowance |
$ |
( |
) |
$ |
|
|||
|
December 31, |
December 31, |
|||||||
|
Federal |
|
|
|
|
||||
|
Current |
$ |
|
|
$ |
|
|||
|
Deferred |
|
( |
) |
|
( |
) |
||
|
State |
|
|
|
|
||||
|
Current |
|
|
|
|
|
|||
|
Deferred |
|
( |
) |
|
( |
) |
||
|
Change in valuation allowance |
|
|
|
|
|
|
||
|
Income tax provision |
$ |
|
|
$ |
|
|||
The Company’s federal and state net operating loss carryforwards as of December 31, 2022 and 2021 amounted to $
In assessing the realization of the deferred tax assets, management considers whether it is more likely than not that some portion of all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the information available, management believes that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established a full valuation allowance. For the year ended December 31, 2022, the change in the valuation allowance was $
F-42
CLOVER LEAF CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Note 8 — Income Tax (cont.)
|
December 31, |
December 31, |
|||||
|
Statutory federal income tax rate |
|
% |
|
% |
||
|
State taxes, net of federal tax benefit |
|
% |
|
% |
||
|
Prior year true-up |
( |
)% |
|
|||
|
Change in valuation allowance |
|
% |
( |
)% |
||
|
Effective tax rate |
|
|
|
|||
The Company’s effective tax rates for the periods presented differ from the expected (statutory) rates due to the recording of full valuation allowances on deferred tax assets.
The Company files income tax returns in the U.S. federal jurisdiction and Florida and is subject to examination by the various taxing authorities, since inception.
Note 9 — Subsequent Events
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued. Based upon this review, the Company did not identify any subsequent events that would have required adjustment or disclosure in the financial statement.
F-43
KUSTOM ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2023 AND DECEMBER 31, 2022
|
June 30, |
December 31, |
|||||||
|
(Unaudited) |
||||||||
|
Assets |
|
|
|
|
||||
|
Current assets: |
|
|
|
|
||||
|
Cash and cash equivalents |
$ |
128,544 |
|
$ |
214,738 |
|
||
|
Accounts receivable – trade, net of $-0- allowance – June 30, 2023 and $5,221 – December 31, 2022 |
|
502,799 |
|
|
579,431 |
|
||
|
Notes receivable, net of $0 allowance – June 30, 2023 and |
|
150,154 |
|
|
1,598,340 |
|
||
|
Inventories, net |
|
716,930 |
|
|
711,246 |
|
||
|
Prepaid expenses |
|
1,565,011 |
|
|
2,863,018 |
|
||
|
|
|
|
|
|||||
|
Total current assets |
|
3,063,438 |
|
|
5,966,773 |
|
||
|
|
|
|
|
|||||
|
Property, plant, and equipment, net |
|
1,184,245 |
|
|
1,210,207 |
|
||
|
Goodwill and other intangible assets, net |
|
6,827,293 |
|
|
7,465,294 |
|
||
|
Operating lease right of use assets, net |
|
21,017 |
|
|
42,403 |
|
||
|
Other assets |
|
128,687 |
|
|
116,827 |
|
||
|
|
|
|
|
|||||
|
Total assets |
$ |
11,224,680 |
|
$ |
14,801,504 |
|
||
|
|
|
|
|
|||||
|
Liabilities and Stockholder’s Equity |
|
|
|
|
||||
|
Current liabilities: |
|
|
|
|
||||
|
Accounts payable |
$ |
5,290,930 |
|
$ |
6,610,135 |
|
||
|
Accrued expenses |
|
110,846 |
|
|
104,791 |
|
||
|
Operating lease obligations |
|
21,017 |
|
|
42,403 |
|
||
|
Subordinated notes payable, current |
|
175,617 |
|
|
— |
|
||
|
Deferred Revenue, current |
|
403,650 |
|
|
— |
|
||
|
Related party payable |
|
1,798,902 |
|
|
2,954,256 |
|
||
|
|
|
|
|
|||||
|
Total liabilities |
|
7,800,962 |
|
|
9,711,585 |
|
||
|
|
|
|
|
|||||
|
Stockholder’s Equity: |
|
|
|
|
||||
|
Common stock, $0.001 par value per share; 1,000 shares authorized; shares issued: 1,000 shares issued – June 30, 2023 and 1,000 shares issued – December 31, 2022 |
|
1 |
|
|
1 |
|
||
|
Additional paid in capital |
|
13,240,044 |
|
|
12,315,601 |
|
||
|
Accumulated deficit |
|
(9,816,327 |
) |
|
(7,225,683 |
) |
||
|
|
|
|
|
|||||
|
Total stockholder’s equity |
|
3,423,718 |
|
|
5,089,919 |
|
||
|
|
|
|
|
|||||
|
Total liabilities and stockholder’s equity |
$ |
11,224,680 |
|
$ |
14,801,504 |
|
||
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-44
KUSTOM ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2023 AND 2022
(Unaudited)
|
For the Three Months Ended |
For the Six Months Ended |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Revenue: |
|
|
|
|
|
|
|
|
||||||||
|
Product |
$ |
1,929,059 |
|
$ |
805,939 |
|
$ |
3,189,848 |
|
$ |
1,879,769 |
|
||||
|
Service and other |
|
2,726,211 |
|
|
4,375,024 |
|
|
5,481,659 |
|
|
9,681,969 |
|
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total revenue |
|
4,655,270 |
|
|
5,180,963 |
|
|
8,671,507 |
|
|
11,561,738 |
|
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Cost of revenue: |
|
|
|
|
|
|
|
|
||||||||
|
Product |
|
1,414,126 |
|
|
1,041,073 |
|
|
2,677,633 |
|
|
2,385,409 |
|
||||
|
Service and other |
|
2,085,685 |
|
|
4,137,084 |
|
|
4,603,753 |
|
|
8,199,505 |
|
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total cost of revenue |
|
3,499,811 |
|
|
5,178,157 |
|
|
7,281,386 |
|
|
10,584,914 |
|
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Gross profit |
|
1,155,459 |
|
|
2,806 |
|
|
1,390,121 |
|
|
976,824 |
|
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Selling, general and administrative expenses: |
|
|
|
|
|
|
|
|
||||||||
|
Selling, advertising and promotional expense |
|
841,310 |
|
|
1,394,622 |
|
|
1,493,465 |
|
|
2,852,888 |
|
||||
|
General and administrative expense |
|
1,085,761 |
|
|
928,877 |
|
|
2,414,451 |
|
|
1,890,476 |
|
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total selling, general and administrative expenses |
|
1,927,071 |
|
|
2,323,499 |
|
|
3,907,916 |
|
|
4,743,364 |
|
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Operating loss |
|
(771,612 |
) |
|
(2,320,693 |
) |
|
(2,517,795 |
) |
|
(3,766,540 |
) |
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Other income (expense): |
|
|
|
|
|
|
|
|
||||||||
|
Interest expense |
|
(41,947 |
) |
|
(4,410 |
) |
|
(72,849 |
) |
|
(4,410 |
) |
||||
|
Other income (expense) |
|
— |
|
|
(381 |
) |
|
— |
|
|
809 |
|
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total other income (expense) |
|
(41,947 |
) |
|
(4,791 |
) |
|
(72,849 |
) |
|
(3,601 |
) |
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Loss before income tax benefit |
|
(813,559 |
) |
|
(2,325,484 |
) |
|
(2,590,644 |
) |
|
(3,770,141 |
) |
||||
|
Income tax benefit |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net loss |
$ |
(813,559 |
) |
$ |
(2,325,484 |
) |
$ |
(2,590,644 |
) |
$ |
(3,770,141 |
) |
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net loss per share information: |
|
|
|
|
|
|
|
|
||||||||
|
Basic |
$ |
(813.56 |
) |
$ |
(2,325.48 |
) |
$ |
(2,590.64 |
) |
$ |
(3,770.14 |
) |
||||
|
Diluted |
$ |
(813.56 |
) |
$ |
(2,325.48 |
) |
$ |
(2,590.64 |
) |
$ |
(3,770.14 |
) |
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
||||||||
|
Basic |
|
1,000 |
|
|
1,000 |
|
|
1,000 |
|
|
1,000 |
|
||||
|
Diluted |
|
1,000 |
|
|
1,000 |
|
|
1,000 |
|
|
1,000 |
|
||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-45
KUSTOM ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(Unaudited)
|
|
Additional |
Retained Earnings |
Total |
|||||||||||||
|
Shares |
Amount |
|||||||||||||||
|
Balance, December 31, 2021 |
1,000 |
$ |
1 |
$ |
11,105,874 |
$ |
175,432 |
|
$ |
11,281,307 |
|
|||||
|
Net loss |
— |
|
— |
|
— |
|
(1,444,657 |
) |
|
(1,444,657 |
) |
|||||
|
|
|
|
|
|
|
|||||||||||
|
Balance, March 31, 2022 |
1,000 |
$ |
1 |
$ |
11,105,874 |
$ |
(1,269,225 |
) |
$ |
9,836,650 |
|
|||||
|
|
|
|
|
|
|
|||||||||||
|
Net loss |
— |
|
— |
|
— |
|
(2,325,484 |
) |
|
(2,325,484 |
) |
|||||
|
|
|
|
|
|
|
|||||||||||
|
Balance, June 30, 2022 |
1,000 |
$ |
1 |
$ |
11,105,874 |
$ |
(3,594,709 |
) |
$ |
7,511,166 |
|
|||||
|
|
|
|
|
|
|
|||||||||||
|
Balance, December 31, 2022 |
1,000 |
$ |
1 |
$ |
12,315,601 |
$ |
(7,225,683 |
) |
$ |
5,089,919 |
|
|||||
|
Parent investment in subsidiary |
— |
|
— |
|
481,761 |
|
— |
|
|
481,761 |
|
|||||
|
Net loss |
— |
|
— |
|
— |
|
(1,777,085 |
) |
|
(1,777,085 |
) |
|||||
|
|
|
|
|
|
|
|||||||||||
|
Balance, March 31, 2023 |
1,000 |
$ |
1 |
$ |
12,797,362 |
$ |
(9,002,768 |
) |
$ |
3,794,595 |
|
|||||
|
|
|
|
|
|
|
|||||||||||
|
Parent investment in subsidiary |
— |
|
— |
|
442,682 |
|
— |
|
|
442,682 |
|
|||||
|
Net loss |
— |
|
— |
|
— |
|
(813,559 |
) |
|
(813,559 |
) |
|||||
|
|
|
|
|
|
|
|||||||||||
|
Balance, June 30, 2023 |
1,000 |
$ |
1 |
$ |
13,240,044 |
$ |
(9,816,327 |
) |
$ |
3,423,718 |
|
|||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-46
KUSTOM ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Six Months |
Six Months |
|||||||
|
Cash Flows from Operating Activities: |
|
|
|
|
||||
|
Net loss |
$ |
(2,590,644 |
) |
$ |
(3,770,141 |
) |
||
|
Adjustments to reconcile net loss to net cash flows used in operating activities: |
|
|
|
|
||||
|
Depreciation and amortization |
|
669,997 |
|
|
640,153 |
|
||
|
Provision for inventory obsolescence |
|
(59,923 |
) |
|
111,996 |
|
||
|
Provision for doubtful accounts receivable |
|
(5,221 |
) |
|
(3,249 |
) |
||
|
Change in operating assets and liabilities (net of assets and liabilities acquired): |
|
|
|
|
||||
|
(Increase) decrease in: |
|
|
|
|
||||
|
Accounts receivable – trade |
|
81,853 |
|
|
708,119 |
|
||
|
Inventories |
|
54,239 |
|
|
699,812 |
|
||
|
Prepaid expenses |
|
1,298,007 |
|
|
1,682,452 |
|
||
|
Operating lease right of use assets |
|
21,386 |
|
|
41,514 |
|
||
|
Deferred tax assets |
|
— |
|
|
190,000 |
|
||
|
Other assets |
|
(11,860 |
) |
|
(1,940,981 |
) |
||
|
Increase (decrease) in: |
|
|
|
|
||||
|
Accounts payable |
|
(1,319,205 |
) |
|
(184,826 |
) |
||
|
Accrued expenses |
|
6,055 |
|
|
72,036 |
|
||
|
Operating lease obligations |
|
(21,386 |
) |
|
(41,514 |
) |
||
|
Related party payable |
|
(121,021 |
) |
|
(138,433 |
) |
||
|
Deferred revenue |
|
403,650 |
|
|
— |
|
||
|
Net cash used in operating activities |
|
(1,594,073 |
) |
|
(1,933,062 |
) |
||
|
|
|
|
|
|||||
|
Cash Flows from Investing Activities: |
|
|
|
|
||||
|
Purchases of furniture, fixtures and equipment |
|
(6,034 |
) |
|
— |
|
||
|
Payments received for co-marketing arrangement |
|
1,448,186 |
|
|
— |
|
||
|
Net cash provided by investing activities |
|
1,442,152 |
|
|
— |
|
||
|
|
|
|
|
|||||
|
Cash Flows from Financing Activities: |
|
|
|
|
||||
|
Parent investment in subsidiary |
|
924,443 |
|
|
— |
|
||
|
Principal Proceeds from notes payable |
|
1,000,000 |
|
|
— |
|
||
|
Principal payments on notes payable |
|
(824,383 |
) |
|
— |
|
||
|
Principal proceeds on line of credit facility |
|
— |
|
|
1,500,000 |
|
||
|
Principal payments on line of credit facility |
|
(1,034,333 |
) |
|
— |
|
||
|
Net cash provided by financing activities |
|
65,727 |
|
|
1,500,000 |
|
||
|
|
|
|
|
|||||
|
Net decrease cash and cash equivalents |
|
(86,194 |
) |
|
(433,062 |
) |
||
|
Cash, cash equivalents, beginning of period |
|
214,738 |
|
|
1,263,618 |
|
||
|
Cash, cash equivalents, end of period |
$ |
128,544 |
|
$ |
830,556 |
|
||
|
|
|
|
|
|||||
|
Supplemental disclosures of cash flow information: |
|
|
|
|
||||
|
Cash paid for interest |
$ |
73,599 |
|
$ |
4,410 |
|
||
|
Cash paid for taxes |
$ |
— |
|
$ |
— |
|
||
|
|
|
|
|
|||||
|
Supplemental disclosures of non-cash investing and financing activities: |
$ |
— |
|
$ |
— |
|
||
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-47
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations:
Kustom Entertainment, Inc. (the “Company” and “Kustom Entertainment”), will provide oversight to currently wholly-owned subsidiaries TicketSmarter, Inc. (“TicketSmarter”), Kustom 440, Inc. (“Kustom 440”), BirdVu Jets, Inc. (“BirdVu”), and Digital Connect, Inc (“Digital Connect”).
On September 1, 2021, Digital Ally, Inc. (“Digital Ally”) formed TicketSmarter, through which the acquisition of Goody Tickets, LLC, a Kansas limited liability company (“Goody Tickets”) and TicketSmarter, LLC, a Kansas limited liability company (“TicketSmarter LLC”) (such acquisitions, collectively, the “TicketSmarter Acquisition”) was completed. TicketSmarter acquired all of the issued and outstanding membership interests in both Goody Tickets and TicketSmarter LLC through a certain Unit Purchase Agreement, dated September 1, 2021 (the “Unit Purchase Agreement”), resulting in both acquired companies becoming wholly owned subsidiaries of TicketSmarter. The TicketSmarter Acquisition was entered into in order to increase market share, achieve synergies and broaden the TicketSmarter’s offerings as a combined company. The TicketSmarter Acquisition represented a change of control with respect to TicketSmarter LLC and Goody Tickets and was accounted for as a business combination in accordance with the guidance prescribed in Accounting Standard Codification (“ASC”) Topic 805 — Business Combinations (“ASC 805”). The Company applied pushdown accounting as of the acquisition date. As a result of the application of pushdown accounting, the separately issued financial statements of the Company reflect Digital Ally’s basis in the assets and liabilities of the Company as of the acquisition date.
The TicketSmarter Acquisition was accounted for as a business combination in accordance with the guidance prescribed in Accounting Standard Codification (“ASC”) Topic 805 — Business Combinations (“ASC 805”). Accordingly, the fair value of the consideration was transferred by TicketSmarter based on the fair values of these items on the transaction date. Pursuant to ASC 805, the fair value of the purchase price was first allocated to the Company’s identifiable net assets and the excess of the purchase price over the net identifiable assets acquired was accounted for as goodwill. The TicketSmarter Acquisition was structured as a stock purchase; however the parties agreed to coordinate the election to invoke IRS Section 338(h)(10) relative to this transaction for tax purposes. Therefore, the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will be amortized over 15 years for income tax filing purposes. Likewise, the other acquired assets were stepped up to fair value and are deductible for income tax purposes.
Goodwill is required to be allocated to one or more reporting units for the purpose of evaluating impairment. The Company determines its reporting units based on the level of financial information used and reviewed by its chief operating decision maker to make decisions regarding the management of the Company. The Company has one operating segment and one reporting unit — the “ticketing” reporting unit. All goodwill resulting from the TicketSmarter Acquisition was allocated to the ticketing reporting unit.
Immediately prior to the TicketSmarter Acquisition, TicketSmarter and Goody Tickets’s outstanding equity consisted of three individual persons (the “Sellers”), who collectively owned all of the issued and outstanding membership interests in both companies. On the transaction date, TicketSmarter obtained control of TicketSmarter LLC and Goody Tickets by purchasing all issued and outstanding membership interests pursuant to the Unit Purchase Agreement. As a result of the TicketSmarter Acquisition, TicketSmarter obtained 100% ownership of the acquired companies.
TicketSmarter offers tickets to more than 125,000 live events ranging from concerts to sports and theatre shows. TicketSmarter is the official ticket resale partner of over 35 collegiate conferences, over 300 universities, and hundreds of events and venues nationally. TicketSmarter is a primary and secondary ticketing solution for events and high-profile venues across North America.
Established in late 2022, Kustom 440 is an entertainment division of the Company, whose mission it is to attract, manage and promote concerts, sports and private events. Kustom 440 is unique in that it brings a primary and secondary ticketing platform, in addition to its well-established relationships with artists, venues, and municipalities.
F-48
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Business Combination:
On June 1, 2023, Digital Ally (the “Company Stockholder”), and the sole stockholder of the Company (as defined below), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Clover Leaf Capital Corp., a Delaware corporation (together with its successors, “Clover Leaf”), CL Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of Clover Leaf (“Merger Sub”), Yntegra Capital Investments LLC, a Delaware limited liability company, in the capacity as the representative from and after the Effective Time (as defined in the Merger Agreement) for the stockholders of Clover Leaf (other than the Company Stockholder as of immediately prior to the Effective Time and its successors and assignees) in accordance with the terms and conditions of the Merger Agreement (the “Sponsor” or the “Purchaser Representative”), and Kustom Entertainment with a focus and mission to own and produce events, festivals, and entertainment alongside its evolving primary and secondary ticketing technologies.
Pursuant to the Merger Agreement, subject to the terms and conditions set forth therein upon the consummation of the transactions contemplated by the Merger Agreement (the “Closing”), Merger Sub will merge with and into the Company (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Transactions”), with the Company continuing as the surviving corporation in the Merger and a wholly-owned subsidiary of Clover Leaf. In the Merger, all of the issued and outstanding capital stock of the Company immediately prior to the effective time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist in exchange for the right for the Company Stockholder to receive the Merger Consideration (as defined herein). Upon consummation of the Transactions, Clover Leaf will change its name to “Kustom Entertainment, Inc.”
The aggregate Merger Consideration to be paid pursuant to the Merger Agreement to the Company Stockholder as of immediately prior to the effective time will be an amount equal to (the “Merger Consideration”) (i) $125 million, minus (ii) the estimated consolidated indebtedness of the Company as of the Closing (“Closing Indebtedness”). The Merger Consideration to be paid to the Company Stockholder will be paid solely by the delivery of new shares of Clover Leaf Class A Common Stock, each valued at $11.14 per share (the “Merger Consideration Shares”). The Closing Indebtedness (and the resulting Merger Consideration) is based solely on estimates determined shortly prior to the Closing and is not subject to any post-Closing true-up or adjustment. For more information on the transaction, please refer to the Company Stockholder’s current report filed on Form 8-K on June 1, 2023 with the Securities and Exchange Commission.
The combined company will be known as Kustom Entertainment and will operate under the same management team as the Company which is currently led by Stanton E. Ross, the current CEO of the Company Stockholder. The transaction contemplates an equity value of $125 million for the Company, with the proposed Merger expected to provide approximately $18.1 million in gross proceeds from the cash held in trust by Clover Leaf, assuming no redemptions. Additionally, the Company Stockholder will distribute to its shareholders 15% of the Merger Consideration Shares obtained in the Company immediately following the closing of the Merger and intends to distribute the balance of such Merger Consideration Shares following a six-month lock-up period.
The transaction has been approved by the board of directors of the Company (the “Board”) and the board of directors of Clover Leaf and is subject to approval by the stockholders of Clover Leaf and other customary closing conditions. The Company Stockholder, as the sole holder of the Company common stock, has approved the transaction.
Basis of Presentation and Consolidation:
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) pursuant to the accounting and disclosure rules and regulations of the United States Securities and Exchange Commission (“SEC”). The accompanying financial statements include the consolidated accounts of Kustom Entertainment, Inc., its wholly-owned subsidiaries, Kustom 440, TicketSmarter, Digital Connect, and BirdVu Jets. All intercompany balances and transactions have been eliminated during consolidation.
F-49
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
The Company formed TicketSmarter on September 1, 2021, upon its acquisition of Goody Tickets and TicketSmarter LLC, to facilitate its global entertainment operations. The Company formed Digital Connect and BirdVu Jets for travel and transportation purposes in 2022. The Company formed Kustom 440 in 2022 to create unique entertainment experiences directly for consumers.
The accompanying unaudited condensed consolidated financial statements of the Company were prepared for the six months ended June 30, 2023 and 2022, which include all of the Company’s operations which have been conducted within Digital Ally, which also has other activities. These financial statements have been prepared on a stand-alone basis derived from the financial statements and related accounting records of Digital Ally. The accompanying financial statements present the historical financial position, results of operations, changes in cash flows of the Company as it was historically conducted. The financial information in these financial statements does not necessarily include all the expenses that would have been incurred had the Company operated as a separate stand-alone entity and may not reflect results of operations, financial position and cash flows had the Company been a stand-alone company during the six months ended June 30, 2023 and 2022.
The accompanying unaudited condensed consolidated financial statements (“financial statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and have been consistently applied. Certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP, but which are not required for interim reporting purposes, have been omitted. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position as of June 30, 2023 and the results of operations and cash flows for the interim periods ended June 30, 2023 and 2022, have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2022 and 2021 included in, as filed with the Securities and Exchange Commission on Form S-4. Operating results for the six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2023.
For all periods, the Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).
Fair Value of Financial Instruments:
The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, accrued expenses, notes payable and related party payable approximate fair value because of the short-term nature of these items.
Revenue Recognition:
The Company applies the provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts with Customers, and all related appropriate guidance. The Company recognizes revenue under the core principle to depict the transfer of control to its customers in an amount reflecting the consideration to which it expects to be entitled. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.
The Company has two different revenue streams, product and service. Revenues generated are reported net of sales taxes.
F-50
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
The Company reports ticketing revenue on a gross or net basis based on management’s assessment of whether the Company is acting as a principal or agent in the transaction. The determination is based upon the evaluation of control over the event ticket, including the right to sell the ticket, prior to its transfer to the ticket buyer.
The Company sells tickets held in inventory, which consists of one performance obligation, being to transfer control of an event ticket to the buyer upon confirmation of the order. The Company acts as the principal in these transactions as the ticket is owned by the Company at the time of sale, therefore controlling the ticket prior to transferring to the customer. In these transactions, revenue is recorded on a gross basis based on the value of the ticket and is recognized when an order is confirmed. Payment is typically due upon delivery of the ticket.
The Company also acts as an intermediary between buyers and sellers through the online secondary marketplace. Revenues derived from this marketplace primarily consist of service fees from ticketing operations, and consists of one primary performance obligation, which is facilitating the transaction between the buyer and seller, being satisfied at the time the order has been confirmed. As the Company does not control the ticket prior to the transfer, the Company acts as an agent in these transactions. Revenue is recognized on a net basis, net of the amount due to the seller when an order is confirmed. The seller is then obligated to deliver the tickets to the buyer per the seller’s listing, and payment is due at the time of sale.
Sales returns and allowances aggregated $99,297 and $99,297 for the six months ended June 30, 2023 and year ended December 31, 2022, respectively. Obligations for estimated sales returns and allowances are recognized at the time of sales on an accrual basis. The accrual is determined based upon historical return rates adjusted for known changes in key variables affecting these return rates.
Use of Estimates:
The preparation of the consolidated financial statements 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management utilizes various other estimates, including but not limited to determining the estimated lives of long-lived assets, determining the potential impairment of long-lived assets, the recognition of revenue, inventory valuation reserve, fair value of assets and liabilities acquired in a business combination, incremental borrowing rate on leases, the valuation allowance for deferred tax assets and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary.
Cash and cash equivalents:
The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At June 30, 2023 and December 31, 2022, the uninsured balance amounted to $-0- and $-0-, respectively.
Accounts Receivable:
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a weekly basis. The Company determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions.
F-51
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Accounts receivables are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. An accounts receivable is considered to be past due if any portion of the receivable balance is outstanding for more than thirty (30) days beyond terms. No interest is charged on overdue trade receivables. The allowance for doubtful accounts totaled $-0- as of June 30, 2023 and $5,221 as of December 31, 2022.
Goodwill and Other Intangibles:
Goodwill — In connection with acquisitions, the Company applies the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill. In accordance with ASC 350, Intangibles — Goodwill and Other, the Company assesses goodwill for impairment annually as of December 31, and more frequently if events and circumstances indicate that goodwill might be impaired.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.
Traditionally, goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating an implied fair value of goodwill. The Company has adopted ASU 2017-04 which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test. As a result, the Company compares the fair value of a reporting unit with its respective carrying value and recognized an impairment charge for the amount by which the carrying amount exceeded the reporting unit’s fair value.
The Company determines the fair value of its reporting units using the market approach. Under the market approach, we estimate the fair value based on multiples of comparable public companies and precedent transactions. Significant estimates in the market approach include: identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit.
Long-lived and Other Intangible Assets — The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the operating segment level.
Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available. The Company last assessed potential impairments of its long-lived assets as of December 31, 2022, and concluded that there was no impairment.
F-52
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Inventories:
Inventories consist of event tickets that are carried at lower of cost or net realizable value, and fully written off at the time the event occurs if the ticket is unsold and remaining in inventory after the completion of the event. Management has established inventory reserves based on estimates of excess and/or obsolete current inventory.
Note Receivable
Note receivable are carried at the original note amount less an estimate made for doubtful receivables based on a review of all outstanding notes on a quarterly basis. The Company determines the allowance for doubtful accounts by regularly evaluating each note receivable and considering the borrower’s financial condition, credit history, and current economic conditions. The Company entered into a promissory note as part of a co-marketing agreement, with a principal amount of $3,000,000. Principal payments, since its inception, on this promissory note totaled $2,849,846 as of June 30, 2023, resulting in a remaining balance of $150,154 maturing December 31, 2023.
Leases:
The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, the Company will evaluate whether to account for the lease as an operating or finance lease. Operating leases are included in the right of use assets (ROU) and operating lease liabilities on the consolidated balance sheet as of June 30, 2023 and December 31, 2022. Finance leases would be included in property, plant and equipment, net and long-term debt and finance lease obligations on the balance sheet. The Company had operating leases for its office space at June 30, 2023 and December 31, 2022 but no financing leases.
ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the operating lease liabilities if the operating lease does not provide an implicit rate. Lease terms may include the option to extend when Company is reasonably certain that the option will be exercised. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
The Company elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for short term leases.
Property, plant and equipment:
Property, plant and equipment is stated at cost net of accumulated depreciation. Additions and improvements are capitalized while ordinary maintenance and repair expenditures are charged to expense as incurred. Depreciation is recorded by the straight-line method over the estimated useful life of the asset, which ranges from three to thirty years, other than the infinite useful life of land. Amortization expense on capitalized leases is included with depreciation expense. The cost and accumulated depreciation related to assets sold or retired are removed from the accounts and any gain or loss is credited or charged to income.
Advertising Costs:
Advertising costs include costs related to conventions, promotional material and supplies, and media costs. Advertising costs are expensed in the period in which they are incurred. The Company incurred total advertising expenses of approximately $1,493,465 and $2,852,888 for the six months ended June 30, 2023 and 2022, respectively. Such costs are included in selling, advertising and promotional expenses in the Consolidated Statements of Operations.
F-53
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Income Taxes:
Deferred taxes are provided for by the liability method in which deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company applies the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 740 - Income Taxes that provides a framework for accounting for uncertainty in income taxes and provided a comprehensive model to recognize, measure, present, and disclose in its financial statements uncertain tax positions taken or expected to be taken on a tax return. It initially recognizes tax positions in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Application requires numerous estimates based on available information. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, and it recognized tax positions and tax benefits may not accurately anticipate actual outcomes. As it obtains additional information, the Company may need to periodically adjust its recognized tax positions and tax benefits. These periodic adjustments may have a material impact on its Consolidated Statements of Operations.
The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as income tax expense in the Consolidated Statements of Operations. There was no interest expense related to the underpayment of estimated taxes during the six months ended June 30, 2023 and year ended December 31, 2022. There were no penalties in 2022 and 2021.
The Company is subject to taxation in the United States and various states. As of June 30, 2023, the Company’s tax returns filed for 2019, 2020 and 2021 and to be filed for 2022 are subject to examination by the relevant taxing authorities. With a few exceptions, as of June 30, 2023, the Company is no longer subject to Federal, state, or local examinations by tax authorities for taxable years prior to 2019.
Basic and Diluted Net Loss per Share
The Company computes net income (loss) per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants.
Related Party Transaction
A related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
F-54
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.
Going Concern Matters and Management’s Plans
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred substantial operating losses in the six months ended June 30, 2023 primarily due to reduced gross profits and substantial selling, general, and administrative expenses. For the six months ended June 30, 2023, the Company had a net loss of approximately $2.6 million and it had an accumulated deficit of $9.8 million as of June 30, 2023. The Company will have the ability to access the public and private capital markets to raise funding through the issuance of debt and equity. These equity raises could be utilized to fund its operations and acquisitions. Management expects to utilize this access until it achieves positive cash flows from operations, although it can offer no assurance in this regard.
The Company will have to restore positive operating cash flows and profitability over the next year and/or raise additional capital to fund its operational plans, meet its customary payment obligations and otherwise execute its business plan. There can be no assurance that it will be successful in restoring positive cash flows and profitability, or that it can raise additional financing when needed, and obtain it on terms acceptable or favorable to the Company.
The Company has significantly cut costs through the removal of several large partnerships and sponsorships. These were not yielding the results management expected; thus, it is not expected that these costs with significantly hinder total revenues in 2023 and beyond.
In addition to the initiatives described above, the Board of Directors is conducting a review of a full range of strategic alternatives to best position the Company for the future including, but not limited to, the sale of all or certain assets, properties or groups of properties or individual businesses or merger or combination with another company. The result of this review may also include the continued implementation of the Company’s business plan. There can be no assurance that any additional transactions or financings will result from this process.
Based on the uncertainties described above, the Company believes its business plan does not alleviate the existence of substantial doubt about its ability to continue as a going concern within one year from the date of the issuance of these unaudited condensed consolidated financial statements. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
New Accounting Standards
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses” to improve information on credit losses for financial assets and net investment in leases that are not accounted for at fair value through net income. ASU 2016-13 replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. In April 2019 and May 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” and ASU No. 2019-05, “Financial Instruments — Credit Losses (Topic 326): Targeted Transition Relief” which provided additional implementation guidance on the previously issued ASU. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments — Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” which defers the effective date for public filers that are considered small reporting companies (“SRC”) as defined by the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As such, we adopted ASC 326 effective January 1, 2023. The adoption of this standard did not have a significant impact on the Company’s financial position and results of operations.
F-55
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to concentrations of credit risk consist of accounts receivable. Sales to domestic customers are typically made on credit and the Company generally does not require collateral while sales to international customers require payment before shipment or backing by an irrevocable letter or credit. The Company performs ongoing credit evaluations of its customers’ financial condition and maintains an allowance for estimated losses. Accounts are written off when deemed uncollectible and accounts receivable are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts totaled $-0- as of June 30, 2023 and $5,221 as of December 31, 2022.
The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At June 30, 2023 and December 31, 2022, the uninsured balance amounted to $-0- and $-0-, respectively. No one individual customer receivable balance exceeded 10% of total accounts receivable as of June 30, 2023 and December 31, 2022.
NOTE 3. NOTES RECEIVABLE
Notes receivable were the following at June 30, 2023 and December 31, 2022:
|
June 30, |
December 31, |
|||||
|
Notes receivable |
$ |
150,154 |
$ |
1,598,340 |
||
|
Total |
$ |
150,154 |
$ |
1,598,340 |
||
Notes receivable decreased by over $1.4 million at June 30, 2023 compared to December 31, 2022, due to a note receivable issued by the Company during 2022. The Company entered into a promissory note as part of a co-marketing agreement, with a principal amount of $3,000,000. Principal payment, since its inception, on this promissory note totaled $2,849,846 as of June 30, 2023, resulting in a remaining balance of $150,154 maturing December 31, 2023.
NOTE 4. INVENTORIES
Inventories consisted of the following at June 30, 2023 and December 31, 2022:
|
June 30, |
December 31, |
|||||||
|
Finished goods |
$ |
1,036,134 |
|
$ |
970,527 |
|
||
|
Subtotal |
|
1,036,134 |
|
|
970,527 |
|
||
|
Reserve for excess and obsolete inventory |
|
(319,204 |
) |
|
(259,281 |
) |
||
|
Total inventories |
$ |
716,930 |
|
$ |
711,246 |
|
||
We recorded $319,204 and $259,281 in reserves for obsolete and excess inventories for the six months ended June 30, 2023 and year ended December 31, 2022, respectively. Finished goods balances were $1,036,134 and $970,527 for the six months ended June 30, 2023 and year ended December 31, 2022, respectively, an increase of $65,607 (7%) which was attributable to an increase in ticket inventory for TicketSmarter, Inc. The Company determined a reasonable reserve for inventory held, in which some inventory items sell below cost or go unsold, thus having to be fully written-off following the event date. We believe the reserves are appropriate given our inventory levels as of June 30, 2023 and December 31, 2022.
F-56
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. PREPAID EXPENSES
Prepaid expenses were the following at June 30, 2023 and December 31, 2022:
|
June 30, |
December 31, |
|||||
|
Prepaid inventory |
$ |
813,126 |
$ |
794,520 |
||
|
Prepaid advertising |
|
655,429 |
|
1,931,628 |
||
|
Other |
|
96,456 |
|
136,870 |
||
|
Total prepaid expenses |
$ |
1,565,011 |
$ |
2,863,018 |
||
Prepaid expenses decreased by approximately $1.3 million primarily due to a decrease in prepaid advertising as the year progressed and annual contracts expired at the six months ended June 30, 2023.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at June 30, 2023 and December 31, 2022:
|
Estimated |
June 30, |
December 31, |
||||||||
|
Aircraft |
20 years |
$ |
1,256,629 |
|
$ |
1,256,629 |
|
|||
|
Office equipment |
3 – 7 years |
|
11,073 |
|
|
5,040 |
|
|||
|
Total cost |
|
1,267,702 |
|
|
1,261,669 |
|
||||
|
Less: accumulated depreciation and amortization |
|
(83,457 |
) |
|
(51,462 |
) |
||||
|
Net property, plant and equipment |
$ |
1,184,245 |
|
$ |
1,210,207 |
|
||||
Depreciation expense for the three months ended June 30, 2023 and June 30, 2022 was $15,709 and $1,004, respectively, and is included in general and administrative expenses. Depreciation expense for the six months ended June 30, 2023 and June 30, 2022 was $31,996 and $1,795, respectively, and is included in general and administrative expenses.
NOTE 7. OPERATING LEASE
On September 1, 2021, the Company completed the acquisition of Goody Tickets, LLC and TicketSmarter, LLC through TicketSmarter. Upon completion of this acquisition, the Company became responsible for the operating lease for TicketSmarter’s office space. The lease terms include monthly payments ranging from $7,211 to $7,364 thereafter, with a termination date of December 31, 2022. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on September 1, 2021. The Company signed a six-month extension for the lease, extending the remaining lease term for the Company’s office with an expiry date of June 30, 2023. The Company signed a three-month extension for the lease, extending the remaining lease term for the Company’s office and the remaining lease term for the Company’s operating lease as of June 30, 2023 was three months.
Lease expense related to the office space were recorded on a straight-line basis over the respective lease terms. Total lease expense under the operating lease was approximately $43,683 and $44,184 during the six months ended June 30, 2023 and June 30, 2022, respectively.
The weighted-average remaining lease term related to the Company’s lease liabilities as of June 30, 2023 was 0.3 years.
The discount rate implicit within the Company’s operating leases was not generally determinable and therefore the Company determined the discount rate based on its incremental borrowing rate on the information available at commencement date. As of commencement date, the operating lease liabilities reflect a weighted average discount rate of 8%.
F-57
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. OPERATING LEASE (cont.)
The following sets forth the operating lease ROU and liabilities as of June 30, 2023 and December 31, 2022:
|
June 30, |
December 31, |
|||||
|
Assets: |
|
|
||||
|
Operating lease right of use assets |
$ |
21,017 |
$ |
42,403 |
||
|
|
|
|||||
|
Liabilities: |
|
|
||||
|
Operating lease obligations-current portion |
$ |
21,017 |
$ |
42,403 |
||
|
Operating lease obligations-less current portion |
|
— |
|
— |
||
|
Total operating lease obligations |
$ |
21,017 |
$ |
42,403 |
||
The components of lease expense were as follows for the six months ended June 30, 2023 and June 30, 2022:
|
June 30, |
June 30, |
|||||
|
Selling, general and administrative |
$ |
43,683 |
$ |
44,184 |
||
Following are the minimum lease payments for each year and in total:
|
Year ending December 31: |
||||
|
2023 |
$ |
22,092 |
|
|
|
2024 |
|
— |
|
|
|
2025 |
|
— |
|
|
|
2026 |
|
— |
|
|
|
Thereafter |
|
— |
|
|
|
Total undiscounted minimum future lease payments |
|
22,092 |
|
|
|
Imputed interest |
|
(1,075 |
) |
|
|
Total operating lease liability |
$ |
21,017 |
|
|
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consisted of the following at June 30, 2023 and December 31, 2022:
|
June 30, 2023 |
December 31, 2022 |
|||||||||||||||||
|
Gross |
Accumulated |
Net |
Gross |
Accumulated |
Net |
|||||||||||||
|
Amortized intangible assets: |
|
|
|
|
|
|
||||||||||||
|
Sponsorship agreement network |
$ |
5,600,000 |
$ |
2,053,333 |
$ |
3,546,667 |
$ |
5,600,000 |
$ |
1,493,333 |
$ |
4,106,667 |
||||||
|
SEO content |
|
600,000 |
|
275,000 |
|
325,000 |
|
600,000 |
|
200,000 |
|
400,000 |
||||||
|
Personal seat licenses |
|
180,081 |
|
11,003 |
|
169,078 |
|
180,081 |
|
8,002 |
|
172,079 |
||||||
|
|
6,380,081 |
|
2,339,336 |
|
4,040,745 |
|
6,380,081 |
|
1,701,335 |
|
4,678,746 |
|||||||
|
|
|
|
|
|
|
|||||||||||||
|
Indefinite life intangible assets: |
|
|
|
|
|
|
||||||||||||
|
Goodwill |
|
2,186,548 |
|
— |
|
2,186,548 |
|
2,186,548 |
|
— |
|
2,186,548 |
||||||
|
Trade name |
|
600,000 |
|
— |
|
600,000 |
|
600,000 |
|
— |
|
600,000 |
||||||
|
Total |
$ |
9,166,629 |
$ |
2,339,336 |
$ |
6,827,293 |
$ |
9,166,629 |
$ |
1,701,335 |
$ |
7,465,294 |
||||||
F-58
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS (cont.)
Amortization expense for the six months ended June 30, 2023 and June 30, 2022 was $638,001 and $638,358, respectively. Estimated amortization for intangible assets with definite lives for the next five years ending December 31 and thereafter is as follows:
|
Year ending December 31: |
|||
|
2023 (July 1, to December 31, 2023) |
$ |
638,001 |
|
|
2024 |
|
1,274,503 |
|
|
2025 |
|
1,224,502 |
|
|
2026 |
|
751,169 |
|
|
2027 and thereafter |
|
152,570 |
|
|
Total |
$ |
4,040,745 |
|
NOTE 9. DEBT OBLIGATIONS
2023 Commercial Extension of Credit
On February 23, 2023, TicketSmarter, Inc. (“Borrower”) entered into an extension of credit in the form of a loan to use in marketing and operating its business in accordance with the Private Label Agreement previously entered into with the Lender. The Lender agreed to extend, subject to the conditions hereof, and Borrower agreed to take, a Loan for Principal Sum of $1,000,000.
Lender shall retain 25% of each remittance owed to Borrower under the terms of the Private Label Agreement. Such remittances shall include regular weekly remittances and any additional incentive payments to which the Borrower may be entitled. The 25% withholding of the Borrower’s applicable remittance shall be deemed a “Payment” under the terms of this Note, and Payments shall continue until the earlier of (i) repayment of the Principal Sum, accrued Interest, and a fee of $35,000.00 or (ii) expiration of the Private Label Agreement on December 31, 2023.
As of the six months ended June 30, 2023, the Company’s had repaid $824,383 towards the principal on the loan through remittances and had an outstanding balance of $175,617.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluate and update accruals as matters progress over time.
F-59
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11. NET EARNINGS (LOSS) PER SHARE
The calculation of the weighted average number of shares outstanding and loss per share outstanding for the three and six months ended June 30, 2023 and 2022 are as follows:
|
For the three months |
For the six months |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Numerator for basic and diluted income per share – Net loss attributable to common stockholders |
$ |
(813,559 |
) |
$ |
(2,325,484 |
) |
$ |
(2,590,644 |
) |
$ |
(3,770,141 |
) |
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Denominator for basic loss per share – weighted average shares outstanding |
|
1,000 |
|
|
1,000 |
|
|
1,000 |
|
|
1,000 |
|
||||
|
Dilutive effect of shares issuable under stock options and warrants outstanding |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
||||
|
Denominator for diluted loss per share – adjusted weighted average shares outstanding |
|
1,000 |
|
|
1,000 |
|
|
1,000 |
|
|
1,000 |
|
||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net loss per share: |
|
|
|
|
|
|
|
|
||||||||
|
Basic |
$ |
(813.56 |
) |
$ |
(2,325.48 |
) |
$ |
(2,590.64 |
) |
$ |
(3,770.14 |
) |
||||
|
Diluted |
$ |
(813.56 |
) |
$ |
(2,325.48 |
) |
$ |
(2,590.64 |
) |
$ |
(3,770.14 |
) |
||||
Basic income (loss) per share is based upon the weighted average number of shares of common stock outstanding during the period.
NOTE 12. TICKETSMARTER ACQUISITION
On September 1, 2021, Digital Ally formed TicketSmarter, through which the Company completed the acquisition of Goody Tickets and TicketSmarter LLC. In accordance with the stock purchase agreement, the Company agreed to an initial payment of $9,403,600 through a combination of cash and common stock. Additionally, included in the agreement, the Company agreed to place $500,000 in escrow, subject to a working capital adjustment based on actual working capital amounts on the acquisition date as defined in the agreement. This amount was subject to disbursement 45 days following the close of the acquisition. The parties completed the working capital adjustment resulting in the Company retaining $297,726 of the escrow amount with the $202,274 released to the sellers. Lastly, the acquisition had an earn-out liability of $3.7 million, which was contingent on TicketSmarter achieving defined financial metrics during the agreed upon measurement period. Due to ASC 805’s push down accounting guidance, this earn-out liability and any associated gain related to it are not disclosed in these standalone financial statements.
The Company accounts for business combinations using the acquisition method and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, the presentation of the assets acquired, historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the TicketSmarter Acquisition has been allocated to Goody Tickets’ and TicketSmarter LLC’s acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the TicketSmarter Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our financial statements. The TicketSmarter Acquisition was structured as a stock purchase; however the parties agreed to coordinate the election to invoke IRS Section 338(h)(10) relative to this transaction for tax purposes. Therefore, the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will be amortized over 15 years
F-60
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12. TICKETSMARTER ACQUISITION (cont.)
for income tax filing purposes. Likewise, the other acquired assets were stepped up to fair value and is deductible for income tax purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
The purchase price of the TicketSmarter Acquisition was allocated to Goody Tickets’ and TicketSmarter LLC’s tangible assets, goodwill, identifiable intangible assets, and assumed liabilities based on their preliminary estimated fair values at the time of the TicketSmarter Acquisition. The Company retained the services of an independent valuation firm to determine the fair value of these identifiable intangible assets. The Company will continue to evaluate the fair value of the identified intangible assets. The preliminary and final estimated fair value of assets acquired, and liabilities assumed in the TicketSmarter Acquisition were as follows:
|
Preliminary purchase price |
||||||||
|
Description |
As allocated |
As allocated |
||||||
|
Assets acquired: |
|
|
|
|
||||
|
Tangible assets acquired, including $51,432 of cash acquired |
$ |
7,139,930 |
|
$ |
5,748,290 |
|
||
|
Identifiable intangible assets acquired |
|
— |
|
|
6,800,000 |
|
||
|
Goodwill |
|
7,594,908 |
|
|
2,186,548 |
|
||
|
Liabilities assumed |
|
(5,128,964 |
) |
|
(5,128,964 |
) |
||
|
Liabilities assumed pursuant to stock purchase agreement |
|
(5,128,964 |
) |
|
(5,128,964 |
) |
||
|
Net assets acquired and liabilities assumed |
$ |
9,605,874 |
|
$ |
9,605,874 |
|
||
|
Consideration: |
|
|
|
|
||||
|
Cash paid at TicketSmarter Acquisition date |
$ |
8,413,240 |
|
$ |
8,413,240 |
|
||
|
Common stock issued as consideration for TicketSmarter Acquisition at date of acquisition |
|
990,360 |
|
|
990,360 |
|
||
|
Cash paid at closing to escrow amount |
|
500,000 |
|
|
500,000 |
|
||
|
Cash retained from escrow amount pursuant to settlement of working capital target |
|
(297,726 |
) |
|
(297,726 |
) |
||
|
Total TicketSmarter Acquisition purchase price |
$ |
9,605,874 |
|
$ |
9,605,874 |
|
||
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives in years as of the date of acquisition:
|
Cost |
Amortization |
Estimated |
||||||
|
Identifiable intangible assets: |
|
|
||||||
|
Trademarks |
$ |
600,000 |
$ |
— |
indefinite |
|||
|
Sponsorship agreement network |
|
5,600,000 |
|
2,053,333 |
5 years |
|||
|
Search engine optimization/content |
|
600,000 |
|
275,000 |
4 years |
|||
|
$ |
6,800,000 |
$ |
2,328,333 |
|||||
For the period from the date of the TicketSmarter Acquisition to December 31, 2021, the Company adjusted its preliminary fair value estimates and estimated useful lives based upon information obtained through December 31, 2021, which resulted in adjustments to the preliminary allocation of the purchase price. These adjustments primarily related to estimated identifiable intangible asset fair values (primarily related to the sponsorship agreement network), the estimated fair value of the contingent earn-out agreement liability and goodwill. There were no adjustments to the allocation of the purchase price during the six months ended June 30, 2023.
F-61
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12. TICKETSMARTER ACQUISITION (cont.)
During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date.
NOTE 13. INCOME TAXES
The effective tax rate for the six months ended June 30, 2023 and 2022 varied from the expected statutory rate due to the Company continuing to provide a 100% valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of June 30, 2023, primarily because of the Company’s history of operating losses.
The Company has incurred operating losses in recent years, and it continues to be in a three-year cumulative loss position at June 30, 2023. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore, it is determined to continue to provide a 100% valuation allowance on its net deferred tax assets. The Company expects to continue to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed.
NOTE 14. RELATED PARTY TRANSACTIONS
Transactions with Digital Ally, Inc.
On June 6, 2022, the Company drew $1,500,000 of their line of credit with Digital Ally, Inc., the Company’s current parent company until completion of the Agreement and Plan of Merger described above, which was included in the stock purchase agreement dated September 1, 2021. Additionally, the Company drew another $2,500,000 during the month of September 2022. The line of credit carries an interest rate that coincides with the prime rate. The balance of the line of credit was $1,654,798 and $2,689,131 at June 30, 2023 and December 31, 2022, respectively. The interest expense related to the line of credit was $64,878 and $4,410 for the six months ended June 30, 2023 and June 30, 2022. The Company repaid $2,500,000 and $-0- for the six months ended June 30, 2023 and June 30, 2022, respectively.
Additionally, the Company owed Digital Ally, Inc. $144,104 and $265,125 at June 30, 2023 and December 31, 2022, respectively, related to operating expenses paid by Digital Ally, Inc. on behalf of the Company. No interest is accrued related to these transactions.
NOTE 15. EQUITY
As of September 1, 2021, TicketSmarter LLC and Goody Tickets was owned by TicketSmarter. The September 1, 2021 Operating Agreement establishes certain rights and privileges of the Company’s members. The September 1, 2021 Operating Agreement does not explicitly designate specific classes of units.
As of September 1, 2021 and through the six months ended June 30, 2023, 100% of TicketSmarter LLC and Goody Tickets outstanding membership units or ownership interests were held by TicketSmarter, a wholly owned subsidiary of Kustom Entertainment, Inc.
Under the September 1, 2021 Unit Purchase Agreement, ownership of the Sellers’ units generally provides the holder with (a) the acquired companies’ capital, (b) the acquired companies’ net profits and net losses and the right to receive distributions from the acquired companies, and (c) the right to participate in the management of the acquired companies.
F-62
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 15. EQUITY (cont.)
At the transaction date, the total consideration of $9,605,875, discussed in Note 12, relative to the transaction was recorded as additional paid in capital in the Company as contributions from the transaction. Additionally, pursuant to the transaction agreements, the $1,500,000 in working capital contributions from the Company was also recorded as additional paid in capital.
During 2022 Digital Ally contributed $1,209,727 in property, plant, and equipment to the Company, which was recorded as additional paid in capital in the Company.
During the six months ended June 30, 2023 the Company received an investment in the Company from Digital Ally, contributing $924,443 in capital to the Company, which was recorded as additional paid in capital.
NOTE 16. SUBSEQUENT EVENTS
None.
F-63
|
|
New York Office: 805 Third Avenue New York, NY 10022 212.838-5100 www.rbsmllp.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Kustom Entertainment, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Kustom Entertainment, Inc. (the “Company” or “Successor”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, changes in stockholder’s equity, and cash flows for the year ended December 31, 2022, the period from September 1, 2021 through December 31, 2021 (Successor) and the period from January 1, 2021 through August 31, 2021 (Predecessor), and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the year ended December 31, 2022, the period from September 1, 2021 through December 31, 2021 (Successor) and the period from January 1, 2021 through August 31, 2021 (Predecessor), in conformity with accounting principles generally accepted in the United States of America.
Emphasis of a Matter
As discussed in Note 1 to the financial statements, on September 1, 2021, Digital Ally, Inc. formed TicketSmarter, Inc., through which the acquisition of Goody Tickets, LLC, and TicketSmarter, LLC, was completed. Kustom Entertainment, Inc., will provide oversight to currently wholly-owned subsidiaries TicketSmarter, Inc. and Kustom 440, Inc. As a result of the application of pushdown accounting, the Company’s financial statements for the Successor periods are not comparable to the 2021 Predecessor Period which is from January 1, 2021 through August 31, 2021.
The Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred substantial operating losses and will require additional capital to continue as a going concern. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
F-64
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RBSM LLP
We have served as the Company’s auditor since 2023.
New York, NY
July 7, 2023
F-65
KUSTOM ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2022 and 2021
|
(Successor) December 31, 2022 |
(Successor) December 31, 2021 |
||||||
|
Assets |
|
|
|
||||
|
Current assets: |
|
|
|
||||
|
Cash and cash equivalents |
$ |
214,738 |
|
$ |
1,263,618 |
||
|
Accounts receivable – trade, net of $5,221 allowance – December 31, |
|
579,431 |
|
|
1,205,011 |
||
|
Notes receivable, net of $0 allowance – December 31, 2022 and $0 – December 31, 2021 |
|
1,598,340 |
|
|
— |
||
|
Inventories, net |
|
711,246 |
|
|
1,540,641 |
||
|
Prepaid expenses |
|
2,863,018 |
|
|
2,615,743 |
||
|
Total current assets |
|
5,966,773 |
|
|
6,625,013 |
||
|
Property, plant, and equipment, net |
|
1,210,207 |
|
|
3,449 |
||
|
Goodwill and other intangible assets, net |
|
7,465,294 |
|
|
8,762,902 |
||
|
Operating lease right of use assets, net |
|
42,403 |
|
|
83,917 |
||
|
Deferred tax asset |
|
— |
|
|
190,000 |
||
|
Other assets |
|
116,827 |
|
|
12,020 |
||
|
Total assets |
$ |
14,801,504 |
|
$ |
15,677,301 |
||
|
|
|
|
|||||
|
Liabilities and Stockholder’s Equity |
|
|
|
||||
|
Current liabilities: |
|
|
|
||||
|
Accounts payable |
$ |
6,610,135 |
|
$ |
3,954,102 |
||
|
Accrued expenses |
|
104,791 |
|
|
45,626 |
||
|
Operating lease obligations |
|
42,403 |
|
|
83,917 |
||
|
Related party payable |
|
2,954,256 |
|
|
312,349 |
||
|
Total liabilities |
|
9,711,585 |
|
|
4,395,994 |
||
|
|
|
|
|||||
|
Stockholder’s Equity: |
|
|
|
||||
|
Common stock, $0.001 par value per share; 1,000 shares authorized; shares issued: 1,000 shares issued – December 31, 2022 and 1,000 shares issued – December 31, 2021 |
|
1 |
|
|
1 |
||
|
Additional paid in capital |
|
12,315,601 |
|
|
11,105,874 |
||
|
(Accumulated deficit) retained earnings |
|
(7,225,683 |
) |
|
175,432 |
||
|
Total stockholder’s equity |
|
5,089,919 |
|
|
11,281,307 |
||
|
|
|
|
|||||
|
Total liabilities and stockholder’s equity |
$ |
14,801,504 |
|
$ |
15,677,301 |
||
See Notes to Consolidated Financial Statements.
F-66
KUSTOM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 2022 AND 2021
|
(Successor) |
(Successor) |
(Predecessor) |
||||||||||
|
Revenue: |
|
|
|
|
|
|
||||||
|
Product |
$ |
5,598,803 |
|
$ |
2,787,237 |
|
$ |
2,203,421 |
|
|||
|
Service and other |
|
15,272,697 |
|
|
7,922,523 |
|
|
5,844,299 |
|
|||
|
Total revenue |
|
20,871,500 |
|
|
10,709,760 |
|
|
8,047,720 |
|
|||
|
|
|
|
|
|
|
|||||||
|
Cost of revenue: |
|
|
|
|
|
|
||||||
|
Product |
|
6,039,631 |
|
|
2,437,986 |
|
|
1,268,953 |
|
|||
|
Service and other |
|
14,563,128 |
|
|
5,131,392 |
|
|
4,559,971 |
|
|||
|
Total cost of revenue |
|
20,602,759 |
|
|
7,569,378 |
|
|
5,828,924 |
|
|||
|
Gross profit |
|
268,741 |
|
|
3,140,382 |
|
|
2,218,796 |
|
|||
|
|
|
|
|
|
|
|||||||
|
Selling, general and administrative expenses: |
|
|
|
|
|
|
||||||
|
Selling, advertising and promotional expense |
|
4,024,748 |
|
|
1,541,670 |
|
|
782,604 |
|
|||
|
General and administrative expense |
|
3,613,234 |
|
|
1,363,280 |
|
|
889,981 |
|
|||
|
Total selling, general and administrative expenses |
|
7,637,982 |
|
|
2,904,950 |
|
|
1,672,585 |
|
|||
|
Operating (loss) income |
|
(7,369,241 |
) |
|
235,432 |
|
|
546,211 |
|
|||
|
|
|
|
|
|
|
|||||||
|
Other income (expense): |
|
|
|
|
|
|
||||||
|
Interest income |
|
— |
|
|
— |
|
|
4 |
|
|||
|
Interest expense |
|
(91,874 |
) |
|
— |
|
|
(51,271 |
) |
|||
|
Gain on forgiveness of SBA PPP and EIDL Loan |
|
— |
|
|
— |
|
|
153,000 |
|
|||
|
Total other (expense) income |
|
(91,874 |
) |
|
— |
|
|
101,733 |
|
|||
|
(Loss) income before income tax benefit |
|
(7,461,115 |
) |
|
235,432 |
|
|
647,944 |
|
|||
|
Income tax benefit (expense) |
|
60,000 |
|
|
(60,000 |
) |
|
— |
|
|||
|
Net (loss) income |
$ |
(7,401,115 |
) |
$ |
175,432 |
|
$ |
647,944 |
|
|||
|
|
|
|
|
|
|
|||||||
|
Net (loss) income per share information: |
|
|
|
|
|
|
||||||
|
Basic |
$ |
(7,401.12 |
) |
$ |
175.43 |
|
$ |
— |
|
|||
|
Diluted |
$ |
(7,401.12 |
) |
$ |
175.43 |
|
$ |
— |
|
|||
|
|
|
|
|
|
|
|||||||
|
Weighted average shares outstanding: |
|
|
|
|
|
|
||||||
|
Basic |
|
1,000 |
|
|
1,000 |
|
|
— |
|
|||
|
Diluted |
|
1,000 |
|
|
1,000 |
|
|
— |
|
|||
See Notes to Consolidated Financial Statements.
F-67
KUSTOM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
SUCCESSOR
SEPTEMBER 1, 2021 THROUGH DECEMBER 31, 2021 AND
JANUARY 1, 2022 THROUGH DECEMBER 31, 2022
|
Common Stock |
Additional |
Retained |
Total |
||||||||||||||
|
Shares |
Amount |
||||||||||||||||
|
Balance, September 1, 2021 |
— |
$ |
— |
$ |
— |
|
$ |
— |
|
$ |
— |
|
|||||
|
Contributions from the transaction |
|
|
9,605,875 |
|
|
|
|
9,605,875 |
|
||||||||
|
Issuance of common stock to sponsor |
1,000 |
|
1 |
|
(1 |
) |
|
— |
|
|
— |
|
|||||
|
Working Capital contribution from parent |
— |
|
— |
|
1,500,000 |
|
|
— |
|
|
1,500,000 |
|
|||||
|
Net income |
— |
|
— |
|
— |
|
|
175,432 |
|
|
175,432 |
|
|||||
|
Balance, December 31, 2021 |
1,000 |
$ |
1 |
$ |
11,105,874 |
|
$ |
175,432 |
|
$ |
11,281,307 |
|
|||||
|
Asset contribution from Parent |
— |
|
— |
|
1,209,727 |
|
|
— |
|
|
1,209,727 |
|
|||||
|
Net loss |
— |
|
— |
|
|
|
(7,401,115 |
) |
|
(7,401,115 |
) |
||||||
|
Balance, December 31, 2022 |
1,000 |
$ |
1 |
$ |
12,315,601 |
|
$ |
(7,225,683 |
) |
$ |
5,089,919 |
|
|||||
See Notes to Consolidated Financial Statements.
F-68
KUSTOM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
PREDECESSOR
FOR THE PERIOD JANUARY 1, 2021 THROUGH AUGUST 31, 2021
|
Member’s Capital (Deficit) |
||||||||
|
Accumulated |
Total |
|||||||
|
Balance, January 1, 2021 |
$ |
(1,029,674 |
) |
$ |
(1,029,674 |
) |
||
|
Net income |
$ |
647,944 |
|
|
647,944 |
|
||
|
Balance, August 31, 2021 |
$ |
(381,730 |
) |
$ |
(381,730 |
) |
||
See Notes to Consolidated Financial Statements.
F-69
KUSTOM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Successor) |
(Successor) |
(Predecessor) |
||||||||||
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
||||||
|
Net (loss) income |
$ |
(7,401,115 |
) |
$ |
175,432 |
|
$ |
647,944 |
|
|||
|
|
|
|
|
|
|
|||||||
|
Adjustments to reconcile net (loss) income to net cash flows (used in) provided by operating activities: |
|
|
|
|
|
|
||||||
|
Depreciation and amortization |
|
1,278,766 |
|
|
427,127 |
|
|
— |
|
|||
|
Gain on forgiveness of loan |
|
— |
|
|
— |
|
|
(153,000 |
) |
|||
|
Provision for inventory obsolescence |
|
(302,350 |
) |
|
— |
|
|
405 |
|
|||
|
Provision for doubtful accounts receivable |
|
4,067 |
|
|
627 |
|
|
— |
|
|||
|
|
|
|
|
|
|
|||||||
|
Change in operating assets and liabilities (net of assets and liabilities acquired): |
|
|
|
|
|
|
||||||
|
(Increase) decrease in: |
|
|
|
|
|
|
||||||
|
Accounts receivable – trade |
|
621,513 |
|
|
(347,398 |
) |
|
(851,272 |
) |
|||
|
Accounts receivable – other |
|
— |
|
|
54,546 |
|
|
(54,546 |
) |
|||
|
Inventories |
|
1,131,745 |
|
|
(121,252 |
) |
|
23,055 |
|
|||
|
Prepaid expenses |
|
(247,275 |
) |
|
412,880 |
|
|
(2,900,752 |
) |
|||
|
Operating lease right of use assets |
|
41,514 |
|
|
33,293 |
|
|
50,255 |
|
|||
|
Deferred tax asset |
|
190,000 |
|
|
(190,000 |
) |
|
|
||||
|
Other assets |
|
(104,807 |
) |
|
— |
|
|
— |
|
|||
|
|
|
|
|
|
|
|||||||
|
Increase (decrease) in: |
|
|
|
|
|
|
||||||
|
Accounts payable |
|
2,656,034 |
|
|
(1,057,751 |
) |
|
3,573,612 |
|
|||
|
Accrued expenses |
|
59,165 |
|
|
45,626 |
|
|
(28,680 |
) |
|||
|
Accrued interest, related party |
|
— |
|
|
— |
|
|
13,333 |
|
|||
|
Operating lease obligations |
|
(41,514 |
) |
|
(33,293 |
) |
|
(50,255 |
) |
|||
|
Accrued interest |
|
— |
|
|
— |
|
|
54,494 |
|
|||
|
Related party payable |
|
43,567 |
|
|
312,349 |
|
|
— |
|
|||
|
Net cash (used in) provided by operating activities |
|
(2,070,690 |
) |
|
(287,814 |
) |
|
324,592 |
|
|||
|
|
|
|
|
|
|
|||||||
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
||||||
|
Purchases of furniture, fixtures and equipment |
|
(40 |
) |
|
— |
|
|
(1,442 |
) |
|||
|
Proceeds from sale of intangible assets |
|
21,850 |
|
|
— |
|
|
44,834 |
|
|||
|
Advances paid for co-marketing arrangement |
|
|
|
(3,000,000 |
) |
|
— |
|
||||
|
Payments received for co-marketing arrangement |
|
1,401,660 |
|
|
— |
|
|
— |
|
|||
|
Net cash (used in) provided by investing activities |
|
(1,576,530 |
) |
|
— |
|
|
43,392 |
|
|||
|
|
|
|
|
|
|
|||||||
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
||||||
|
Principal payments on 2020 SBA loan |
|
— |
|
|
— |
|
|
(149,900 |
) |
|||
|
Principal proceeds on 2021 SBA loan |
|
— |
|
|
— |
|
|
143,000 |
|
|||
|
Principal payments on line of credit facility |
|
— |
|
|
— |
|
|
(950,000 |
) |
|||
|
Principal proceeds on line of credit facility |
|
— |
|
|
— |
|
|
750,000 |
|
|||
|
Principal payments on term loan |
|
— |
|
|
— |
|
|
(149,701 |
) |
|||
|
Working capital contribution from parent |
|
— |
|
|
1,500,000 |
|
|
— |
|
|||
|
Principal proceeds on related party loan |
|
4,000,000 |
|
|
— |
|
|
— |
|
|||
|
Principal payments on related party loan |
|
(1,401,660 |
) |
|
— |
|
|
(40,000 |
) |
|||
|
Net cash (used in) provided by financing activities |
|
2,598,340 |
|
|
1,500,000 |
|
|
(396,601 |
) |
|||
|
|
|
|
|
|
|
|||||||
|
Net (decrease) increase in cash and cash equivalents |
|
(1,048,880 |
) |
|
1,212,186 |
|
|
(28,617 |
) |
|||
|
Cash, cash equivalents, beginning of period |
|
1,263,618 |
|
|
51,432 |
|
|
80,049 |
|
|||
|
Cash, cash equivalents, end of period |
$ |
214,738 |
|
$ |
1,263,618 |
|
$ |
51,432 |
|
|||
|
|
|
|
|
|
|
|||||||
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
||||||
|
Cash paid for interest |
$ |
— |
|
$ |
— |
|
$ |
37,938 |
|
|||
|
Cash paid for taxes |
$ |
— |
|
$ |
— |
|
$ |
— |
|
|||
|
|
|
|
|
|
|
|||||||
|
Supplemental disclosures of non-cash investing and financing activities: |
|
|
|
|
|
|
||||||
|
Asset contribution from Parent |
$ |
1,209,727 |
|
$ |
— |
|
$ |
— |
|
|||
|
Contribution from the transaction |
$ |
— |
|
$ |
9,605,875 |
|
$ |
— |
|
|||
See Notes to Consolidated Financial Statements.
F-70
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations:
Kustom Entertainment, Inc. (the “Company”), will provide oversight to currently wholly-owned subsidiaries TicketSmarter, Inc. (“TicketSmarter”) and Kustom 440, Inc. (“Kustom 440”).
On September 1, 2021, Digital Ally, Inc. (“Digital Ally”) formed TicketSmarter, Inc. (“TicketSmarter” or the “Acquirer”), through which the acquisition of Goody Tickets, LLC, a Kansas limited liability company (“Goody Tickets”) and TicketSmarter, LLC, a Kansas limited liability company (“TicketSmarter LLC”) (such acquisitions, collectively, the “TicketSmarter Acquisition”) was completed. TicketSmarter acquired all of the issued and outstanding membership interests in both Goody Tickets and TicketSmarter LLC through a Unit Purchase Agreement, resulting in both acquired companies becoming wholly owned subsidiaries of TicketSmarter. The Transaction was entered into in order to increase market share, achieve synergies and broaden the Acquirer’s offerings as a combined company. The Transaction represented a change of control with respect to TicketSmarter, LLC and Goody Tickets, LLC and was accounted for as a business combination in accordance with the guidance prescribed in Accounting Standard Codification (“ASC”) Topic 805 — Business Combinations (“ASC 805”). The Company applied pushdown accounting as of the Acquisition Date. As a result of the application of pushdown accounting, the separately issued financial statements of the Company reflect Digital Ally’s basis in the assets and liabilities of the Company as of the Acquisition Date. The consolidated statement of operations, changes in stockholder’s equity and cash flows for the period from January 1, 2021 through August 31, 2021 (the “2021 Predecessor Period”) reflect the pre-Transaction activity of the Company. The consolidated statements of operations, changes in stockholder’s equity and cash flows for the period September 1, 2021 through December 31, 2021 (the “2021 Successor Period”) and January 1, 2022 through December 31, 2022 (the “2022 Successor Period”) reflect the post-Transaction activity of the Company. Collectively the 2022 Successor Period and the 2021 Successor Period are referred to as the “Successor Periods.” Due to the application of pushdown accounting, the Successor Periods are not comparable to the 2021 Predecessor Period.
The Transaction was accounted for as a business combination in accordance with the guidance prescribed in Accounting Standard Codification (“ASC”) Topic 805 — Business Combinations (“ASC 805”). Accordingly, the fair value of the consideration was transferred by the Acquirer based on the fair values of these items on the Transaction Date. Pursuant to ASC 805, the fair value of the purchase price was first allocated to the Company’s identifiable net assets and the excess of the purchase price over the net identifiable assets acquired was accounted for as goodwill. The Transaction was structured as a stock purchase; however the parties agreed to coordinate the election to invoke IRS Section 338(h)(10) relative to this transaction for tax purposes. Therefore, the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will be amortized over 15 years for income tax filing purposes. Likewise, the other acquired assets were stepped up to fair value and are deductible for income tax purposes.
Goodwill is required to be allocated to one or more reporting units for the purpose of evaluating impairment. The Company determines its reporting units based on the level of financial information used and reviewed by its chief operating decision maker (“CODM”) to make decisions regarding the management of the Company. The Company has one operating segment and one reporting unit — the “ticketing” reporting unit. All goodwill resulting from the Transaction was allocated to the ticketing reporting unit.
Immediately prior to the Transaction, TicketSmarter LLC and Goody Tickets LLC’s outstanding equity consisted of three individual persons, the “Sellers”, who collectively owned all of the issued and outstanding membership interests in both companies. On the Transaction Date, TicketSmarter obtained control of TicketSmarter LLC and Goody Tickets LLC by purchasing all issued and outstanding membership interests pursuant to the Unit Purchase Agreement dated September 1, 2021. As a result of the Transaction, TicketSmarter obtained 100% ownership of the acquired companies.
TicketSmarter offers tickets to more than 125,000 live events ranging from concerts to sports and theatre shows. TicketSmarter is the official ticket resale partner of over 35 collegiate conferences, over 300 universities, and hundreds of events and venues nationally. TicketSmarter is a primary and secondary ticketing solution for events and high-profile venues across North America.
F-71
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Established in late 2022, Kustom 440 is an entertainment division of Kustom Entertainment, Inc., whose mission it is to attract, manage and promote concerts, sports and private events. Kustom 440 is unique in that it brings a primary and secondary ticketing platform, in addition to its well-established relationships with artists, venues, and municipalities.
Basis of Presentation and Consolidation:
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) pursuant to the accounting and disclosure rules and regulations of the United States Securities and Exchange Commission (“SEC”). The accompanying financial statements include the consolidated accounts of Kustom Entertainment, Inc., its wholly-owned subsidiaries, Kustom 440, Inc., TicketSmarter, Inc., Digital Connect, Inc., and BirdVu Jets, Inc. All intercompany balances and transactions have been eliminated during consolidation.
The Company formed TicketSmarter, Inc. on September 1, 2021, upon its acquisition of Goody Tickets, LLC and TicketSmarter, LLC, to facilitate its global entertainment operations. The Company formed Digital Connect, Inc. and BirdVu Jets, Inc. for travel and transportation purposes in 2022. The Company formed Kustom 440, Inc. in 2022 to create unique entertainment experiences directly for consumers.
The Company’s financial statement were carved-out from Digital Ally’s financial statements for the years ended December 31, 2022 and 2021, which include all of the Company’s operations which have been conducted within Digital Ally since TicketSmarter was acquired by Digital Ally. Digital Ally also has other activities. These financial statements have been prepared on a stand-alone basis derived from the financial statements and related accounting records of Digital Ally. The accompanying financial statements present the historical financial position, results of operations and cash flows of the Company as it was historically conducted. The financial information in these financial statements does not necessarily include all the expenses that would have been incurred had the Company operated as a separate stand-alone entity and may not reflect results of operations, financial position and cash flows had the Company been a stand-alone company during the years ended December 31, 2022 and 2021.
For all periods, the Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).
Fair Value of Financial Instruments:
The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, accrued expenses and related party payable approximate fair value because of the short-term nature of these items.
Revenue Recognition:
The Company applies the provisions of Accounting Standards Codification (ASC) 606-10, Revenue from Contracts with Customers, and all related appropriate guidance. The Company recognizes revenue under the core principle to depict the transfer of control to its customers in an amount reflecting the consideration to which it expects to be entitled. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.
The Company has two different revenue streams, product and service. Revenues generated are reported net of sales taxes.
The Company reports ticketing revenue on a gross or net basis based on management’s assessment of whether the Company is acting as a principal or agent in the transaction. The determination is based upon the evaluation of control over the event ticket, including the right to sell the ticket, prior to its transfer to the ticket buyer.
F-72
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
The Company sells tickets held in inventory, which consists of one performance obligation, being to transfer control of an event ticket to the buyer upon confirmation of the order. The Company acts as the principal in these transactions as the ticket is owned by the Company at the time of sale, therefore controlling the ticket prior to transferring to the customer. In these transactions, revenue is recorded on a gross basis based on the value of the ticket and is recognized when an order is confirmed. Payment is typically due upon delivery of the ticket.
The Company also acts as an intermediary between buyers and sellers through the online secondary marketplace. Revenues derived from this marketplace primarily consist of service fees from ticketing operations, and consists of one primary performance obligation, which is facilitating the transaction between the buyer and seller, being satisfied at the time the order has been confirmed. As the Company does not control the ticket prior to the transfer, the Company acts as an agent in these transactions. Revenue is recognized on a net basis, net of the amount due to the seller when an order is confirmed. The seller is then obligated to deliver the tickets to the buyer per the seller’s listing, and payment is due at the time of sale.
Sales returns and allowances aggregated $99,297 and $28,103 for the years ended December 31, 2022 and December 31, 2021, respectively. Obligations for estimated sales returns and allowances are recognized at the time of sales on an accrual basis. The accrual is determined based upon historical return rates adjusted for known changes in key variables affecting these return rates.
Use of Estimates:
The preparation of the consolidated financial statements 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management utilizes various other estimates, including but not limited to determining the estimated lives of long-lived assets, determining the potential impairment of long-lived assets, the recognition of revenue, inventory valuation reserve, fair value of assets and liabilities acquired in a business combination, incremental borrowing rate on leases, the valuation allowance for deferred tax assets and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary.
Cash and cash equivalents:
The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At December 31, 2022 and December 31, 2021, the uninsured balance amounted to $0 and $1,012,917, respectively.
Accounts Receivable:
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a weekly basis. The Company determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions.
Accounts receivables are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received. An accounts receivable is considered to be past due if any portion of the receivable balance is outstanding for more than thirty (30) days beyond terms. No interest is charged on overdue trade receivables. The allowance for doubtful accounts totaled $5,221 as of December 31, 2022 and $1,154 as of December 31, 2021.
F-73
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Goodwill and Other Intangibles:
Goodwill — In connection with acquisitions, the Company applies the provisions of ASC 805, Business Combinations, using the acquisition method of accounting. The excess purchase price over the fair value of net tangible assets and identifiable intangible assets acquired is recorded as goodwill. In accordance with ASC 350, Intangibles — Goodwill and Other, the Company assesses goodwill for impairment annually as of December 31, and more frequently if events and circumstances indicate that goodwill might be impaired.
Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill.
Traditionally, goodwill impairment testing is a two-step process. Step one involves comparing the fair value of the reporting units to its carrying amount. If the carrying amount of a reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step two involves calculating an implied fair value of goodwill. The Company has adopted ASU 2017-04 which simplifies subsequent goodwill measurement by eliminating step two from the goodwill impairment test. As a result, the Company compares the fair value of a reporting unit with its respective carrying value and recognized an impairment charge for the amount by which the carrying amount exceeded the reporting unit’s fair value.
The Company determines the fair value of its reporting units using the market approach. Under the market approach, we estimate the fair value based on multiples of comparable public companies and precedent transactions. Significant estimates in the market approach include: identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit.
Long-lived and Other Intangible Assets — The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of ASC 360, Accounting for the Impairment or Disposal of Long-lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. The Company groups its assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. The Company has determined that the lowest level for which identifiable cash flows are available is the operating segment level.
Factors considered by the Company include, but are not limited to, significant underperformance relative to historical or projected operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset, based on the fair value if available, or discounted cash flows, if fair value is not available. The Company last assessed potential impairments of its long-lived assets as of December 31, 2022, and concluded that there was no impairment.
Inventories:
Inventories consist of event tickets that are carried at lower of cost or net realizable value, and fully written off at the time the event occurs if the ticket is unsold and remaining in inventory after the completion of the event. Management has established inventory reserves based on estimates of excess and/or obsolete current inventory.
F-74
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Note Receivable
Note receivable are carried at the original note amount less an estimate made for doubtful receivables based on a review of all outstanding notes on a quarterly basis. The Company determines the allowance for doubtful accounts by regularly evaluating each note receivable and considering the borrower’s financial condition, credit history, and current economic conditions. The Company entered into a promissory note as part of a co-marketing agreement, with a principal amount of $3,000,000. Principal payment, since its inception, on this promissory note totaled $1,401,660 as of December 31, 2022, resulting in a remaining balance of $1,598,340 maturing December 31, 2023.
Leases:
The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, the Company will evaluate whether to account for the lease as an operating or finance lease. Operating leases are included in the right of use assets (ROU) and operating lease liabilities on the consolidated balance sheet as of December 31, 2022 and 2021. Finance leases would be included in property, plant and equipment, net and long-term debt and finance lease obligations on the balance sheet. The Company had operating leases for its office space at December 31, 2022 and 2021 but no financing leases.
ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the operating lease liabilities if the operating lease does not provide an implicit rate. Lease terms may include the option to extend when Company is reasonably certain that the option will be exercised. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
The Company elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for short term leases.
Property, plant and equipment:
Property, plant and equipment is stated at cost net of accumulated depreciation. Additions and improvements are capitalized while ordinary maintenance and repair expenditures are charged to expense as incurred. Depreciation is recorded by the straight-line method over the estimated useful life of the asset, which ranges from three to thirty years, other than the infinite useful life of land. Amortization expense on capitalized leases is included with depreciation expense. The cost and accumulated depreciation related to assets sold or retired are removed from the accounts and any gain or loss is credited or charged to income.
Advertising Costs:
Advertising costs include costs related to conventions, promotional material and supplies, and media costs. Advertising costs are expensed in the period in which they are incurred. The Company incurred total advertising expenses of approximately $4,024,748 and $2,324,274 for the years ended December 31, 2022 and 2021, respectively. Such costs are included in selling, advertising and promotional expenses in the Consolidated Statements of Operations.
Income Taxes:
Deferred taxes are provided for by the liability method in which deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
F-75
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
The Company applies the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 740 — Income Taxes that provides a framework for accounting for uncertainty in income taxes and provided a comprehensive model to recognize, measure, present, and disclose in its financial statements uncertain tax positions taken or expected to be taken on a tax return. It initially recognizes tax positions in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Application requires numerous estimates based on available information. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, and it recognized tax positions and tax benefits may not accurately anticipate actual outcomes. As it obtains additional information, the Company may need to periodically adjust its recognized tax positions and tax benefits. These periodic adjustments may have a material impact on its Consolidated Statements of Operations.
The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as income tax expense in the Consolidated Statements of Operations. There was no interest expense related to the underpayment of estimated taxes during the years ended December 31, 2022 and 2021. There were no penalties in 2022 and 2021.
The Company is subject to taxation in the United States and various states. As of December 31, 2022, the Company’s tax returns filed for 2019, 2020 and 2021 and to be filed for 2022 are subject to examination by the relevant taxing authorities. With a few exceptions, as of December 31, 2022, the Company is no longer subject to Federal, state, or local examinations by tax authorities for taxable years prior to 2019.
Basic and Diluted Net Loss per Share
The Company computes net income (loss) per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants.
Related Party Transaction
A related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.
Going Concern Matters and Management’s Plans
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred substantial operating losses in the year ended December 31, 2022 primarily due to reduced gross margins and increased selling, general, and administrative expenses. The Company incurred operating losses of approximately $7.5 million for the year ended December 31, 2022 and it had an accumulated deficit of $7.2 million as of December 31, 2022. The Company will have the
F-76
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
ability to access the public and private capital markets to raise funding through the issuance of debt and equity. These equity raises could be utilized to fund its operations and acquisitions. Management expects to utilize this access until it achieves positive cash flows from operations, although it can offer no assurance in this regard.
The Company will have to restore positive operating cash flows and profitability over the next year and/or raise additional capital to fund its operational plans, meet its customary payment obligations and otherwise execute its business plan. There can be no assurance that it will be successful in restoring positive cash flows and profitability, or that it can raise additional financing when needed, and obtain it on terms acceptable or favorable to the Company.
The Company has significantly cut costs through the removal of several large partnerships and sponsorships. These were not yielding the results management expected; thus, it is not expected that these costs with significantly hinder total revenues in 2023 and beyond.
In addition to the initiatives described above, the Board of Directors is conducting a review of a full range of strategic alternatives to best position the Company for the future including, but not limited to, the sale of all or certain assets, properties or groups of properties or individual businesses or merger or combination with another company. The result of this review may also include the continued implementation of the Company’s business plan. There can be no assurance that any additional transactions or financings will result from this process.
Based on the uncertainties described above, the Company believes its business plan does not alleviate the existence of substantial doubt about its ability to continue as a going concern within one year from the date of the issuance of these consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
New Accounting Standards
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses” to improve information on credit losses for financial assets and net investment in leases that are not accounted for at fair value through net income. ASU 2016-13 replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. In April 2019 and May 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” and ASU No. 2019-05, “Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief” which provided additional implementation guidance on the previously issued ASU. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments — Credit Loss (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” which defers the effective date for public filers that are considered small reporting companies (“SRC”) as defined by the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Since the Company is an SRC, implementation is not needed until January 1, 2023. The Company will continue to evaluate the effect of adopting ASU 2016-13 will have on the Company’s consolidated financial statements.
NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to concentrations of credit risk consist of accounts receivable. Sales to domestic customers are typically made on credit and the Company generally does not require collateral while sales to international customers require payment before shipment or backing by an irrevocable letter or credit. The Company performs ongoing credit evaluations of its customers’ financial condition and maintains an allowance for estimated losses. Accounts are written off when deemed uncollectible and accounts receivable are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts totaled $5,221 as of December 31, 2022 and $1,154 as of December 31, 2021 (Successor).
F-77
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (cont.)
The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At December 31, 2022 and 2021, the uninsured balance amounted to $0 and $1,012,917, respectively (Successor). No one individual customer receivable balance exceeded 10% of total accounts receivable as of December 31, 2022 and December 31, 2021.
NOTE 3. NOTES RECEIVABLE
Notes receivable were the following at December 31, 2022 and December 31, 2021:
|
(Successor) |
(Successor) |
|||||
|
Notes receivable |
$ |
1,598,340 |
$ |
— |
||
|
Total |
$ |
1,598,340 |
$ |
— |
||
Notes receivable increased by nearly $1.6 million at December 31, 2022 compared to December 31, 2021, due to a note receivable issued by the Company during 2022. The Company entered into a promissory note as part of a co-marketing agreement, with a principal amount of $3,000,000. Principal payment, since its inception, on this promissory note totaled $1,401,660 as of December 31, 2022, resulting in a remaining balance of $1,598,340 maturing December 31, 2023.
NOTE 4. INVENTORIES
Inventories consisted of the following at December 31, 2022 and December 31, 2021:
|
(Successor) |
(Successor) |
|||||||
|
Finished goods |
$ |
970,527 |
|
$ |
2,102,272 |
|
||
|
Subtotal |
|
970,527 |
|
|
2,102,272 |
|
||
|
Reserve for excess and obsolete inventory |
|
(259,281 |
) |
|
(561,631 |
) |
||
|
Total inventories |
$ |
711,246 |
|
$ |
1,540,641 |
|
||
We recorded $259,281, $561,631, and $561,226 in reserves for obsolete and excess inventories for the 2022 Successor Period, the 2021 Successor Period and the 2021 Predecessor Period, respectively. Finished goods balances were $970,527 and $2,102,272 for the years ended December 31, 2022 and December 31, 2021, respectively, a decrease of $1,131,745 (54%) which was attributable to a reduction in ticket inventory for TicketSmarter, Inc. The Company determined a reasonable reserve for inventory held, in which some inventory items sell below cost or go unsold, thus having to be fully written-off following the event date. We believe the reserves are appropriate given our inventory levels as of December 31, 2022 and 2021.
NOTE 5. PREPAID EXPENSES
Prepaid expenses were the following at December 31, 2022 and December 31, 2021:
|
(Successor) |
(Successor) |
|||||
|
Prepaid inventory |
$ |
794,520 |
$ |
93,005 |
||
|
Prepaid advertising |
|
1,931,628 |
|
2,455,527 |
||
|
Other |
|
136,870 |
|
67,211 |
||
|
Total prepaid expenses |
$ |
2,863,018 |
$ |
2,615,743 |
||
Prepaid expenses increased by nearly $0.2 million primarily due to an increase in prepaid inventory purchases, offset by a reduction in prepaid advertising expenses in 2022.
F-78
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31, 2022 and December 31, 2021:
|
Estimated |
(Successor) |
(Successor) |
||||||||
|
Aircraft |
20 years |
$ |
1,256,629 |
|
$ |
— |
|
|||
|
Warehouse and production equipment |
3 – 7 years |
|
5,040 |
|
|
5,000 |
|
|||
|
Total cost |
|
1,261,669 |
|
|
5,000 |
|
||||
|
Less: accumulated depreciation and amortization |
|
(51,462 |
) |
|
(1,551 |
) |
||||
|
Net property, plant and equipment |
$ |
1,210,207 |
|
$ |
3,449 |
|
||||
Depreciation and amortization of property, plant and equipment aggregated $3,009, $1,551, and $-0- for the 2022 Successor Period, the 2021 Successor Period and the 2021 Predecessor Period, respectively, and is included in general and administrative expenses.
NOTE 7. OPERATING LEASE
On September 1, 2021, the Company completed the acquisition of Goody Tickets, LLC and TicketSmarter, LLC through TicketSmarter. Upon completion of this acquisition, the Company became responsible for the operating lease for TicketSmarter’s office space. The lease terms include monthly payments ranging from $7,211 to $7,364 thereafter, with a termination date of December 31, 2022. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on September 1, 2021. The Company signed a six-month extension for the lease, extending the remaining lease term for the Company’s office and the remaining lease term for the Company’s operating lease as of December 31, 2022 was six months.
Lease expense related to the office space were recorded on a straight-line basis over the respective lease terms. Total lease expense under the operating lease was approximately $89,104, $28,842, and $87,817 during the 2022 Successor Period, the 2021 Successor Period and the 2021 Predecessor Period, respectively.
The weighted-average remaining lease term related to the Company’s lease liabilities as of December 31, 2022 was 0.5 years.
The discount rate implicit within the Company’s operating leases was not generally determinable and therefore the Company determined the discount rate based on its incremental borrowing rate on the information available at commencement date. As of commencement date, the operating lease liabilities reflect a weighted average discount rate of 8%.
The following sets forth the operating lease right of use assets and liabilities as of December 31, 2022 and December 31, 2021:
|
(Successor) |
(Successor) |
|
|
Assets: |
||
|
Operating lease right of use assets |
$42,403 |
$83,917 |
|
Liabilities: |
||
|
Operating lease obligations-current portion |
$42,403 |
$83,917 |
|
Operating lease obligations-less current portion |
— |
— |
|
Total operating lease obligations |
$42,403 |
$83,917 |
F-79
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. OPERATING LEASE (cont.)
The components of lease expense were as follows for the year ended December 31, 2022:
|
(Successor) |
(Successor) |
(Predecessor) |
|||||||
|
Selling, general and administrative |
$ |
89,104 |
$ |
28,842 |
$ |
87,817 |
|||
Following are the minimum lease payments for each year and in total:
|
Year ending December 31: |
||||
|
2023 |
$ |
44,184 |
|
|
|
2024 |
|
— |
|
|
|
2025 |
|
— |
|
|
|
2026 |
|
— |
|
|
|
Thereafter |
|
— |
|
|
|
Total undiscounted minimum future lease payments |
|
44,184 |
|
|
|
Imputed interest |
|
(1,781 |
) |
|
|
Total operating lease liability |
$ |
42,403 |
|
|
NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 2022 and December 31, 2021:
|
(Successor) December 31, 2022 |
(Successor) December 31, 2021 |
|||||||||||||||||
|
Gross |
Accumulated |
Net |
Gross |
Accumulated |
Net |
|||||||||||||
|
Amortized intangible assets: |
|
|
|
|
|
|
||||||||||||
|
Sponsorship agreement network |
$ |
5,600,000 |
$ |
1,493,333 |
$ |
4,106,667 |
$ |
5,600,000 |
$ |
373,333 |
$ |
5,226,667 |
||||||
|
SEO content |
|
600,000 |
|
200,000 |
|
400,000 |
|
600,000 |
|
50,000 |
|
550,000 |
||||||
|
Personal seat licenses |
|
180,081 |
|
8,002 |
|
172,079 |
|
201,931 |
|
2,244 |
|
199,687 |
||||||
|
|
6,380,081 |
|
1,701,335 |
|
4,678,746 |
|
6,401,931 |
|
425,577 |
|
5,976,354 |
|||||||
|
Indefinite life intangible assets: |
|
|
|
|
|
|
||||||||||||
|
Goodwill |
|
2,186,548 |
|
— |
|
2,186,548 |
|
2,186,548 |
|
— |
|
2,186,548 |
||||||
|
Trade name |
|
600,000 |
|
— |
|
600,000 |
|
600,000 |
|
— |
|
600,000 |
||||||
|
Total |
$ |
9,166,629 |
$ |
1,701,335 |
$ |
7,465,294 |
$ |
9,188,479 |
$ |
425,577 |
$ |
8,762,902 |
||||||
Amortization expense for the 2022 Successor Period, the 2021 Successor Period and the 2021 Predecessor Period was $1,275,758, $425,577, and $0, respectively. Estimated amortization for intangible assets with definite lives for the next five years ending December 31 and thereafter is as follows:
|
Year ending December 31: |
|||
|
2023 |
$ |
1,276,003 |
|
|
2024 |
|
1,276,003 |
|
|
2025 |
|
1,226,003 |
|
|
2026 |
|
752,669 |
|
|
2027 and thereafter |
|
148,068 |
|
|
Total |
$ |
4,678,746 |
|
F-80
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. DEBT OBLIGATIONS
2020 Small Business Administration Notes
On May 13, 2020, the Company received $150,000 in loan funding from the SBA under the EIDL program administered by the SBA, which program was expanded pursuant to the recently enacted CARES Act. The EIDL is evidenced by an unsecured promissory note, dated May 8, 2020, in the original principal amount of $150,000 with the SBA, the lender.
Under the terms of the note issued under the EIDL program, interest accrues on the outstanding principal at the rate of 3.75% per annum. The Company paid off the entirety of these loans and accrued interest of $7,518 during the predecessor period of 2021. This resulted in a balance of $0 and $0 at December 31, 2022 and December 31, 2021, respectively.
2021 Small Business Administration Notes
On March 5, 2021, the Company received a combined $153,000 in loan funding from the SBA under the PPP loan program administered by the SBA, which program was expanded pursuant to the recently enacted CARES Act. The PPP loan is evidenced by an unsecured promissory note, dated March 5, 2021, in the original principal amount of $153,000 with the SBA, the lender.
Under the terms of the note issued under the SBA PPP loan program, interest accrues on the outstanding principal at the rate of 1.00% per annum. The Company received loan forgiveness in 2021 and has recorded $153,000 in other income for forgiveness of the loan for the predecessor period of 2021. This resulted in a balance of $0 and $0 at December 31, 2022 and December 31, 2021, respectively.
Line of Credit Facility
On December 29, 2020, the Company received $1,365,207 through a term loan funding ongoing operations for the Company, with an interest rate per annum equal to the Prime Rate and maturity date of December 31, 2021. The Company paid off $500,000 during 2020 and the remaining balance along with accrued interest of $18,296 during the predecessor period of 2021, as a condition for the TicketSmarter Acquisition, resulting in a balance of $0 and $0 at December 31, 2022 and December 31, 2021, respectively.
Term Loan
On December 29, 2020, the Company received $400,000 through a revolving line of credit to assist in funding ongoing operations for the Company, with an interest rate per annum equal to the Prime Rate and maturity date of September 3, 2021. The Company withdrew an additional $750,000, while repaying $1,150,000 and accrued interest of $12,124 during the predecessor period of 2021. Due to the Company paying off all outstanding balances, as a condition for the TicketSmarter Acquisition, a balance of $0 and $0 at December 31, 2022 and December 31, 2021, respectively, were reported.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We reevaluate and update accruals as matters progress over time.
F-81
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. NET EARNINGS (LOSS) PER SHARE
The calculation of the weighted average number of shares outstanding and loss per share outstanding for the years ended December 31, 2022 and 2021 are as follows:
|
(Successor) |
(Successor) |
(Predecessor) |
||||||||
|
Numerator for basic and diluted income (loss) per share – Net income (loss) |
$ |
(7,401,115 |
) |
$ |
175,432 |
$ |
647,944 |
|||
|
Denominator for basic income (loss) per share – weighted average shares outstanding |
|
1,000 |
|
|
1,000 |
|
— |
|||
|
Dilutive effect of shares issuable upon conversion of convertible debt and the exercise of stock options and warrants outstanding |
|
— |
|
|
— |
|
— |
|||
|
Denominator for diluted income (loss) per share – adjusted weighted average shares outstanding |
|
1,000 |
|
|
1,000 |
|
— |
|||
|
Net income (loss) per share: |
|
|
|
|
||||||
|
Basic |
$ |
(7,401.12 |
) |
$ |
175.43 |
|
N/A |
|||
|
Diluted |
$ |
(7,401.12 |
) |
$ |
175.43 |
|
N/A |
|||
Basic income (loss) per share is based upon the weighted average number of shares of common stock outstanding during the period.
NOTE 12. TICKETSMARTER ACQUISITION
On September 1, 2021, Digital Ally, Inc. formed TicketSmarter, Inc. (“TicketSmarter”), through which the Company completed the acquisition of Goody Tickets, LLC, a Kansas limited liability company (“Goody Tickets”) and TicketSmarter, LLC, a Kansas limited liability company (“TicketSmarter LLC”) (such acquisitions, collectively, the “TicketSmarter Acquisition”). In accordance with the stock purchase agreement, the Company agreed to an initial payment (the “Initial Payment Amount”) of $9,403,600 through a combination of cash and common stock. Additionally, included in the agreement, the Company agreed to place $500,000 in escrow, subject to a working capital adjustment based on actual working capital amounts on the acquisition date as defined in the agreement. This amount was subject to disbursement 45 days following the close of the acquisition. The parties completed the working capital adjustment resulting in the Company retaining $297,726 of the escrow amount with the $202,274 released to the sellers. Lastly, the acquisition had an earn-out liability of $3.7 million, which was contingent on TicketSmarter achieving defined financial metrics during the agreed upon measurement period. Due to ASC 805’s push down accounting guidance, this earn-out liability and any associated gain related to it are not disclosed in these standalone financial statements.
The Company accounts for business combinations using the acquisition method and that the Company has early adopted the amendments of Regulation S-X dated May 21, 2020 and has concluded that this acquisition was not significant. Accordingly, the presentation of the assets acquired, historical financial statements under Rule 3-05 and related pro forma information under Article 11 of Regulation S-X, respectively, are not required to be presented. Under the acquisition method, the purchase price of the TicketSmarter Acquisition has been allocated to Goody Tickets’ and TicketSmarter LLC’s acquired tangible and identifiable intangible assets and assumed liabilities based on their estimated fair values at the time of the TicketSmarter Acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our financial statements. The TicketSmarter Acquisition was structured as a stock purchase; however the parties agreed to coordinate the election to invoke IRS Section 338(h)(10) relative to this transaction for tax purposes. Therefore, the excess purchase price over the fair value of net tangible assets acquired was recorded as goodwill, which will be amortized over 15 years
F-82
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. TICKETSMARTER ACQUISITION (cont.)
for income tax filing purposes. Likewise, the other acquired assets were stepped up to fair value and is deductible for income tax purposes. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
The purchase price of the TicketSmarter Acquisition was allocated to Goody Tickets’ and TicketSmarter LLC’s tangible assets, goodwill, identifiable intangible assets, and assumed liabilities based on their preliminary estimated fair values at the time of the TicketSmarter Acquisition. The Company retained the services of an independent valuation firm to determine the fair value of these identifiable intangible assets. The Company will continue to evaluate the fair value of the identified intangible assets. The preliminary and final estimated fair value of assets acquired, and liabilities assumed in the TicketSmarter Acquisition were as follows:
|
Preliminary purchase price |
||||||||
|
Description |
As allocated |
As allocated |
||||||
|
Assets acquired: |
|
|
|
|
||||
|
Tangible assets acquired, including $51,432 of cash acquired |
$ |
7,139,930 |
|
$ |
5,748,290 |
|
||
|
Identifiable intangible assets acquired |
|
— |
|
|
6,800,000 |
|
||
|
Goodwill |
|
7,594,908 |
|
|
2,186,548 |
|
||
|
Liabilities assumed |
|
(5,128,964 |
) |
|
(5,128,964 |
) |
||
|
Liabilities assumed pursuant to stock purchase agreement |
|
(5,128,964 |
) |
|
(5,128,964 |
) |
||
|
Net assets acquired and liabilities assumed |
$ |
9,605,874 |
|
$ |
9,605,874 |
|
||
|
Consideration: |
|
|
|
|
||||
|
Cash paid at TicketSmarter Acquisition date |
$ |
8,413,240 |
|
$ |
8,413,240 |
|
||
|
Common stock issued as consideration for TicketSmarter Acquisition at date of acquisition |
|
990,360 |
|
|
990,360 |
|
||
|
Cash paid at closing to escrow amount |
|
500,000 |
|
|
500,000 |
|
||
|
Cash retained from escrow amount pursuant to settlement of working capital target |
|
(297,726 |
) |
|
(297,726 |
) |
||
|
Total TicketSmarter Acquisition purchase price |
$ |
9,605,874 |
|
$ |
9,605,874 |
|
||
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives in years as of the date of acquisition:
|
Cost |
Amortization |
Estimated |
||||||
|
Identifiable intangible assets: |
|
|
||||||
|
Trademarks |
$ |
600,000 |
$ |
— |
indefinite |
|||
|
Sponsorship agreement network |
|
5,600,000 |
|
1,493,333 |
5 years |
|||
|
Search engine optimization/content |
|
600,000 |
|
200,000 |
4 years |
|||
|
$ |
6,800,000 |
$ |
1,693,333 |
|||||
For the period from the date of the TicketSmarter Acquisition to December 31, 2021, the Company adjusted its preliminary fair value estimates and estimated useful lives based upon information obtained through December 31, 2021, which resulted in adjustments to the preliminary allocation of the purchase price. These adjustments primarily related to estimated identifiable intangible asset fair values (primarily related to the sponsorship agreement network), the estimated fair value of the contingent earn-out agreement liability and goodwill. There were no adjustments to the allocation of the purchase price during the year ended December 31, 2022.
F-83
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. TICKETSMARTER ACQUISITION (cont.)
During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date.
NOTE 13. INCOME TAXES
The tax provision for the 2021 period reports the results of the post acquisition period of 9/1/2021 through 12/31/2021 for which period TicketSmarter was a member of and filed as part of the consolidated tax filing of Digital Ally Inc. Accordingly, the components of the income tax provision (benefit) for the years ended December 31, 2022, and 2021 are as follows:
|
(Successor) |
(Successor) |
(Predecessor) |
||||||||
|
Current taxes: |
|
|
|
|
||||||
|
Federal |
$ |
(49,000 |
) |
$ |
49,000 |
$ |
— |
|||
|
State |
|
(11,000 |
) |
|
11,000 |
|
— |
|||
|
Total current taxes |
|
(60,000 |
) |
|
60,000 |
|
— |
|||
|
Deferred tax provision (benefit) |
|
(190,000 |
) |
|
190,000 |
|
— |
|||
|
Income tax provision (benefit) |
$ |
— |
|
$ |
250,000 |
$ |
— |
|||
A reconciliation of the income tax (provision) benefit at the statutory rate of 21% for the years ended December 31, 2022, and 2021 to the Company’s effective tax rate is as follows:
|
(Successor) |
(Successor) |
(Predecessor) |
|||||||
|
U.S. Statutory tax rate |
21.0 |
% |
21.0 |
% |
21.0 |
% |
|||
|
State taxes, net of Federal benefit |
6.0 |
% |
5.1 |
% |
5.1 |
% |
|||
|
Change in valuation reserve on deferred tax assets |
(100.0 |
)% |
— |
% |
— |
% |
|||
|
Change in valuation reserve on deferred tax assets |
(100.0 |
)% |
— |
% |
— |
% |
|||
|
Income tax (provision) benefit |
— |
% |
26.1 |
% |
— |
% |
|||
The effective tax rate for the years ended December 31, 2022, and 2021 varied from the expected statutory rate due to the Company continuing to provide a 100% valuation allowance on net deferred tax assets. The Company determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of December 31, 2022, primarily because of the current year operating losses.
F-84
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. INCOME TAXES (cont.)
Significant components of the Company’s deferred tax assets (liabilities) as of December 31, 2022 and 2021 are as follows:
|
2022 |
2021 |
|||||||
|
Deferred tax assets: |
|
|
|
|
||||
|
Inventory reserves |
$ |
147,000 |
|
$ |
147,000 |
|
||
|
Allowance for doubtful accounts receivable |
|
7,000 |
|
|
7,000 |
|
||
|
Depreciation and amortization |
|
333,000 |
|
|
111,000 |
|
||
|
Accruals and other |
|
(175,000 |
) |
|
(75,000 |
) |
||
|
Total deferred tax assets |
|
312,000 |
|
|
190,000 |
|
||
|
Valuation reserve |
|
(312,000 |
) |
|
— |
|
||
|
Total deferred tax assets |
|
— |
|
|
190,000 |
|
||
|
Deferred tax liabilities: |
|
|
|
|
||||
|
Intangible assets |
|
— |
|
|
— |
|
||
|
Total deferred tax liabilities |
|
— |
|
|
— |
|
||
|
Net deferred tax assets (liability) |
$ |
— |
|
$ |
190,000 |
|
||
The valuation allowance on deferred tax assets totaled $312,000 and $-0- as of December 31, 2022, and 2021, respectively. The Company records the benefit it will derive in future accounting periods from tax losses and credits and deductible temporary differences as “deferred tax assets.” In accordance with ASC 740, “Income Taxes,” the Company records a valuation allowance to reduce the carrying value of our deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company’s federal and state income tax returns are closed for examination purposes by relevant statute and by examination for 2018 and all prior tax years.
NOTE 14. RELATED PARTY TRANSACTIONS
Transactions with Digital Ally, Inc.
On June 6, 2022, the Company drew $1,500,000 of their line of credit with Digital Ally, Inc., the Company’s current parent company until completion of the Agreement and Plan of Merger described below, which was included in the stock purchase agreement dated September 1, 2021. Additionally, the Company drew another $2,500,000 during the month of September 2022. The line of credit carries an interest rate coincides with prime rate. The balance of the line of credit was $2,689,131 and $0 at December 31, 2022 and December 31, 2021, respectively. The interest expense related to the line of credit was $90,791 and $0 for the years ended December 31, 2022 and December 31, 2021. The Company repaid $1,401,660 and $0 for the years ended December 31, 2022 and December 31, 2021, respectively.
Additionally, the Company owed Digital Ally, Inc. $265,125 and $62,349 at December 31, 2022 and December 31, 2021, respectively, related to operating expenses paid by Digital Ally, Inc. on behalf of the Company. No interest is accrued related to these transactions.
Transactions with Owner’s in Predecessor Period of 2021
On December 29, 2020 the Company received a loan from the owners of TicketSmarter in the amount of $500,000, with an interest rate of 6% and maturity date of December 31, 2021. The Company paid off the entirety of these loans during the predecessor period of 2021. The interest expense on this loan was $13,333 and $0 for the years ended December 31, 2021 and December 31, 2022, respectively. This resulted in a balance of $0 and $0 at December 31, 2022 and December 31, 2021, respectively.
F-85
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. EQUITY
Successor
As of September 1, 2021, TicketSmarter LLC and Goody Tickets LLC was owned by TicketSmarter. The September 1, 2021 Operating Agreement establishes certain rights and privileges of the Company’s members. The September 1, 2021 Operating Agreement was in effect during the entirety of the Successor Periods. The September 1, 2021 Operating Agreement does not explicitly designate specific classes of units.
As of September 1, 2021 and through the end of 2022 Successor Period, 100% of TicketSmarter LLC and Goody Tickets LLC outstanding membership units or ownership interests were held by TicketSmarter, a wholly owned subsidiary of Kustom Entertainment, Inc.
Under the September 1, 2021 Unit Purchase Agreement, ownership of the Seller’s units generally provides the holder with (a) the acquired companies’ capital, (b) the acquired companies’ net profits and net losses and the right to receive distributions from the acquired companies, and (c) the right to participate in the management of the acquired companies.
At the Transaction date, the total consideration of $9,605,875, discussed in Note 12, relative to the Transaction was recorded as additional paid in capital in the Company as contributions from the Transaction. Additionally, pursuant to Transaction agreements, the $1,500,000 in working capital contributions from the Company was also recorded as additional paid in capital.
During 2022 the parent company contributed $1,209,727 in property, plant, and equipment to the Company, which was recorded as additional paid in capital in the Company.
The consolidated statement of operations, changes in stockholder’s equity and cash flows for the period from January 1, 2021 through August 31, 2021 (the “2021 Predecessor Period”) reflect the pre-Transaction activity of the Company. The consolidated statement of operations, changes in stockholder’s equity and cash flows for the period September 1, 2021 through December 31, 2021 (the “2021 Successor Period”) and January 1, 2022 through December 31, 2022 (the “2022 Successor Period”) reflect the post-Transaction activity of the Company. Collectively, the 2022 Successor Period and the 2021 Successor Period are referred to as the “Successor Periods.” Due to the application of pushdown accounting, the Successor Periods are not comparable to the 2021 Predecessor Period.
NOTE 16. SUBSEQUENT EVENTS
2023 Commercial Extension of Credit
On February 23, 2023, TicketSmarter, Inc. (“borrower”) entered into an extension of credit in the form of a loan to use in marketing and operating its business in accordance with the Private Label Agreement previously entered into with the Lender. The Lender agreed to extend, subject to the conditions hereof, and Borrower agreed to take, a Loan for Principal Sum of $1,000,000.
Lender shall retain 25% of each remittance owed to Borrower under the terms of the Private Label Agreement. Such remittances shall include regular weekly remittances and any additional incentive payments to which the Borrower may be entitled. The 25% withholding of the Borrower’s applicable remittance shall be deemed a “Payment” under the terms of this Note, and Payments shall continue until the earlier of (i) repayment of the Principal Sum, accrued Interest, and a fee of $35,000.00 or (ii) expiration of the Private Label Agreement on December 31, 2023.
As of the six months ended June 30, 2023, the Company’s had repaid $766,390 towards the principal on the loan through remittances and had an outstanding balance of $233,610.
F-86
KUSTOM ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. SUBSEQUENT EVENTS (cont.)
Agreement and Plan of Merger
On June 1, 2023, Digital Ally, Inc., a Nevada corporation (the “Company Stockholder”), and the sole stockholder of the Company (as defined below), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Clover Leaf Capital Corp., a Delaware corporation (together with its successors, “Clover Leaf”), CL Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of Clover Leaf (“Merger Sub”), Yntegra Capital Investments LLC, a Delaware limited liability company, in the capacity as the representative from and after the Effective Time (as defined in the Merger Agreement) for the stockholders of Clover Leaf (other than the Company Stockholder as of immediately prior to the Effective Time and its successors and assignees) in accordance with the terms and conditions of the Merger Agreement (the “Sponsor” or the “Purchaser Representative”), and Kustom Entertainment, Inc., a Nevada corporation with a focus and mission to own and produce events, festivals, and entertainment alongside its evolving primary and secondary ticketing technologies (the “Company”).
Pursuant to the Merger Agreement, subject to the terms and conditions set forth therein upon the consummation of the transactions contemplated by the Merger Agreement (the “Closing”), Merger Sub will merge with and into the Company (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Transactions”), with the Company continuing as the surviving corporation in the Merger and a wholly-owned subsidiary of Clover Leaf. In the Merger, all of the issued and outstanding capital stock of the Company immediately prior to the Effective Time shall no longer be outstanding and shall automatically be cancelled and shall cease to exist in exchange for the right for the Company Stockholder to receive the Merger Consideration (as defined herein). Upon consummation of the Transactions, Clover Leaf will change its name to “Kustom Entertainment, Inc.”
The aggregate merger consideration to be paid pursuant to the Merger Agreement to the Company Stockholder as of immediately prior to the Effective Time will be an amount equal to (the “Merger Consideration”) (i) $125 million, minus (ii) the estimated consolidated indebtedness of the Company as of the Closing (“Closing Indebtedness”). The Merger Consideration to be paid to the Company Stockholder will be paid solely by the delivery of new shares of Clover Leaf Class A Common Stock, each valued at $11.14 per share. The Closing Indebtedness (and the resulting Merger Consideration) is based solely on estimates determined shortly prior to the Closing and is not subject to any post-Closing true-up or adjustment. For more information on the transaction, please refer to the Company Stockholder’s current report filed on Form 8-K on June 1, 2023 with the Securities and Exchange Commission.
F-87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the DGCL authorizes a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act.
Clover Leaf’s amended and restated certificate of incorporation provides for indemnification of its directors, officers, employees and other agents to the maximum extent permitted by the DGCL, and Clover Leaf’s bylaws provide for indemnification of its directors, officers, employees and other agents to the maximum extent permitted by the DGCL.
In addition, effective upon the consummation of the Business Combination, as defined in Part I of this registration statement, Clover Leaf has entered or will enter into indemnification agreements with directors, officers, and some employees containing provisions which are in some respects broader than the specific indemnification provisions contained in the DGCL. The indemnification agreements will require Clover Leaf, among other things, to indemnify its directors against certain liabilities that may arise by reason of their status or service as directors and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified.
Item 21. Exhibits and Financial Statements Schedules.
(a) The following exhibits are filed as part of this Registration Statement:
|
Exhibit Number |
Description of Exhibit |
|
|
2.1 |
||
|
3.1 |
||
|
3.2** |
Form of Amended and Restated Certificate of Incorporation of the Combined Company, to be effective immediately after the closing of the Business Combination (included in Annex B). |
|
|
3.3 |
||
|
3.4** |
Form of Amended and Restated Bylaws of the Combined Company, to be effective upon the completion of the Business Combination (included in Annex C). |
|
|
4.1 |
||
|
4.2 |
||
|
4.3 |
||
|
4.4 |
||
|
5.1** |
Opinion of Ellenoff Grossman & Schole LLP. |
|
|
8.1** |
Federal Tax Opinion of Ellenoff Grossman & Schole LLP. |
|
|
10.1 |
||
|
10.2 |
II-1
|
Exhibit Number |
Description of Exhibit |
|
|
10.3 |
||
|
10.4 |
||
|
10.5†** |
2023 Stock Incentive Plan (included as Annex D). |
|
|
10.6 |
||
|
10.7 |
||
|
10.8 |
||
|
21.1** |
List of Subsidiaries |
|
|
23.1* |
Consent of Marcum LLP, independent registered public accounting firm of Clover Leaf. |
|
|
23.2* |
Consent of RBSM LLP, independent registered public accounting firm of Kustom Entertainment. |
|
|
23.3** |
Consent of Ellenoff Grossman & Schole LLP (included in Exhibit 5.1 and Exhibit 8.1). |
|
|
24.1* |
Power of Attorney (included on the signature page of this registration statement). |
|
|
99.1* |
||
|
99.2* |
||
|
99.3** |
Preliminary Proxy Card. |
|
|
101.INS |
Inline XBRL Instance Document. |
|
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document. |
|
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
|
101.LAB |
Inline XBRL Taxonomy Extension Labels Linkbase Document. |
|
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
|
104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
|
|
107* |
____________
† Indicates management contract or compensatory plan or arrangement.
# Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601. The Registrant agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request.
* Filed herewith.
** To be filed by amendment.
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the Securities Act;
ii. To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in
II-2
the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining any liability under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
i. Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
ii. Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
iii. The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
iv. Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(6) That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.
(7) That every prospectus: (i) that is filed pursuant to the immediately preceding paragraph, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the
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registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(8) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the undersigned pursuant to the foregoing provisions, or otherwise, the undersigned has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the undersigned of expenses incurred or paid by a director, officer or controlling person of the undersigned in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the undersigned will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Miami, Florida, on the 3rd day of October, 2023.
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CLOVER LEAF CAPITAL CORP. |
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By: |
/s/ Felipe MacLean |
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Felipe MacLean |
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Chief Executive Officer and Chairman |
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POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned constitutes and appoints each of Felipe MacLean and Luis A. Guerra, each acting alone, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in his or her name, place and stead, in any and all capacities, to sign this Registration Statement on Form S-4 (including all pre-effective and post-effective amendments and registration statements filed pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that any such attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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Name |
Position |
Date |
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/s/ Felipe MacLean |
Chief Executive Officer, President and Chairman of the Board |
October 3, 2023 |
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Felipe MacLean |
(Principal Executive Officer) |
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/s/ Luis A. Guerra |
Chief Financial Officer and Treasurer |
October 3, 2023 |
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Luis A. Guerra |
(Principal Financial and Accounting Officer) |
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/s/ Per Bjorkman |
Director |
October 3, 2023 |
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Per Bjorkman |
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/s/ Marcos Angelini |
Director |
October 3, 2023 |
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|
Marcos Angelini |
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/s/ Ambassador Manuel Rocha |
Director |
October 3, 2023 |
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|
Ambassador Manuel Rocha |
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