UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Amendment No. 1)
(Mark One)
For
the fiscal year ended
OR
For the transition period from _______ to ________
Commission
file number:
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “emerging growth company” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that require a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D(b). ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
The
aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which
the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was
$
As of March 31, 2023, there were Ordinary Shares, par value $0.02 per share, issued and outstanding.
EXPLANATORY NOTE
| 1. | Emphasize the Company’s going concern status in the forefront of the MD&A and in Liquidity and Capital Resources discussion; | |
| 2. | Include the unaudited financial statements of SportsHub Games Network, Inc. and Subsidiaries for the six months ended June 30, 2022 and 2021, and audited financial statements of SportsHub Games Network, Inc. and Subsidiaries for the years ended December 31, 2021 and 2020. |
As previously disclosed, on September 7, 2022, SharpLink, SHGN Acquisition Corp., a Delaware corporation and wholly owned subsidiary of SharpLink (“Merger Subsidiary”), SportsHub Games Network Inc. (“SportsHub”) and Christian Peterson, an individual acting as the SportsHub stockholders’ representative entered into a Merger Agreement in which SharpLink acquired SportsHub. The Merger Agreement, as amended, contained the terms and conditions of the proposed acquisition by SharpLink of SportsHub.
On November 8, 2022, the Company furnished a Current Report on Form 6-K (the “6-K”) to the SEC to include, among other exhibits, Exhibit 99.2 for the Notice of and Proxy Statement for SharpLink Gaming Ltd. Extraordinary General Meeting of Shareholders to be held on December 14, 2022, to solicit its shareholders’ approval on the Merger Agreement. Exhibit 99.2 encompasses (i) the unaudited financial statements of SportsHub Games Network, Inc. and Subsidiaries for the six months ended June 30, 2022 and 2021, as Annex C, and (ii) the audited financial statements of SportsHub Games Network, Inc. and Subsidiaries for the years ended December 31, 2021 2020, as Annex D.
On December 14, 2022, The Company’s shareholders approved the Merger Agreement and the merger transaction was closed on December 22, 2022. To make it more convenient for the investors and shareholders to locate and access to the above-mentioned financial statements of SportsHub, the Company is including them at the end of SharpLink’s audited financial statements for the years ended December 31, 2022 and 2021 of this Amendment.
Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), this Amendment also contains new certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, which are attached hereto.
No other changes have been made to the Original 10-K. This Amendment does not reflect subsequent events occurring after the filing date of the Original 10-K or modify or update in any way disclosures made in the Original 10-K. This Amendment should be read in conjunction with the Original 10-K.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion should be read in conjunction with our Consolidated Financial Statements and the related notes included in Item 8 of this Form 10-K. This discussion contains forward-looking statements. Please see the explanatory note concerning “Forward-Looking Statements” in Part I of this Annual Report on Form 10-K and Item 1A. Risk Factors for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The operating results for the periods presented were not materially affected by inflation.
Overview
Founded in 2019 and headquartered in Minneapolis, Minnesota, SharpLink is a leading business-to-business provider of performance marketing and advanced technology-enabled fan engagement and conversion solutions for the fast emerging U.S. sports betting and iGaming industries. Our base of marquis customers and trusted business partners comprise many of the nation’s leading sports media publishers, leagues, teams, sportsbook operators, casinos and sports technology companies, including Turner Sports, NASCAR, PGA TOUR, National Basketball Association (“NBA”), National Collegiate Athletic Association (“NCAA”), NBC Sports, BetMGM, Party Poker, World Poker Tour and Tipico, among numerous others.
We continue to make deliberate and substantial investments in support of our mission and long-term growth objectives. Our primary growth strategy is centered on cost effectively monetizing our own and our customers’ respective online audiences of U.S. fantasy sports and casual sports fans and casino gaming enthusiasts by converting them into loyal online sports and iGaming bettors. We are endeavoring to achieve this through deployment of our proprietary conversion technologies, branded as our “C4” solutions, which are seamlessly integrated with fun, highly engaging fan experiences. Purpose built from the ground-up specifically for the U.S. market, SharpLink’s C4 innovations are designed to help unlock the lifetime value of sports bettors and online casino players. More specifically, C4:
| ● | COLLECTS, analyzes and leverages deep learning of behavioral data relating to individual fans; | |
| ● | CONNECTS and controls fan engagement with real-time, personalized betting offers sourced from U.S. sportsbooks and casinos in states where online betting has been legalized; | |
| ● | CONVERTS passive fantasy sports and casual sports fans into sports bettors on a fully automated basis; and | |
| ● | readily enables gaming operators and publishers to CAPITALIZE on acquiring and scaling sports betting and iGaming depositors, resulting in higher revenue generation and greatly enhanced user experiences. |
We reach fans and cultivate audience growth and activation through our four primary operating segments: 1) Sports Gaming Client Services; 2) SportsHub Games Network/Fantasy Sports; 3) Direct to Player (“D2P”)/Affiliate Marketing Services – International; and 4) D2P/Affiliate Marketing Services – United States.
The Company previously owned and operated an enterprise telecom expense management business (“Enterprise TEM”) acquired in July 2021 in connection with SharpLink’s go-public merger with Mer Telemanagement Solutions. Beginning in 2022, we discontinued operations for this business unit and sought a buyer for the business. On December 31, 2022, we completed the sale of this business to Israel-based Entrypoint South Ltd.
SharpLink is guided by an accomplished, entrepreneurial leadership team of industry veterans and pioneers encompassing decades of experience in delivering innovative sports solutions to partners that have included Turner Sports, Google, Facebook, the National Football League (“NFL”), NCAA and NBA, among many other iconic organizations, with executive experience at companies which include ESPN, NBC, Sportradar, AOL, Cantor Gaming, Betfair and others.
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As of March 2023, the Company’s state regulatory initiatives have resulted in SharpLink being licensed and/or authorized to operate in 24 U.S. states, the District of Columbia and Ontario, Canada, or nearly 100% of the legal online betting market in North America.
By leveraging our technology and building on our current client and industry relationships, SharpLink believes we are well positioned to earn a leadership position in the rapidly evolving sports betting and iGaming markets by driving down customer acquisition costs, materially increasing and enhancing player engagement and delivering users with high lifetime value to our proprietary web properties and to those of our gaming partners.
Going Concern
We will require additional capital to support our growth plans. If we do not raise sufficient capital, there is substantial doubt about our ability to continue as a going concern. In the pursuit of our long-term growth strategy and the development of our sports betting conversion, affiliate marketing services and related businesses, we have sustained continued operating losses. During the years ended December 31, 2022 and 2021, we had a net loss from continuing operations of $15,303,402 and $33,469,830, respectively, and cash used in operating activities from continuing operations of $6,510,965 and $5,854,995. To help fund our operations, we raised capital from banks and outside investors in the aggregate amounts of $2,675,343 and $15,678,085 for the years ended December 31, 2022 and 2021, respectively, in the form of a term loan in 2022 and the sale of Ordinary Shares and conversion of preferred stock and prefunded and regular warrants during 2021. Based on continued expected cash needs to fund our ongoing technology development initiatives and grow our Affiliate Marketing Services–United States operations, we may require additional liquidity to continue our operations for the next year. Subsequent to the end of 2022, in February 2023 we closed on a $4.4 million convertible debenture and signed a two-year $7.0 million revolving loan agreement with our commercial lender.
Until we can generate a sufficient amount of revenue to finance our capital needs, which we may never achieve, we expect to finance our cash needs primarily through public or private equity financings or conventional debt financings. We cannot be certain that additional funding will be available on acceptable terms or at all. If we are not able to secure additional funding when needed to support our business growth and to respond to business challenges, track and comply with applicable laws and regulations, develop new technology and services or enhance our existing offering, improve our operating infrastructure, enhance our information security systems to combat changing cyber threats and expand personnel to support our business, we may have to delay or reduce the scope of planned strategic growth initiatives. Moreover, any additional equity financing that we obtain may dilute the ownership held by our existing shareholders. The economic dilution to our shareholders will be significant if our stock price does not materially increase, or if the effective price of any sale is below the price paid by a particular shareholder. Any debt financing could involve substantial restrictions on activities and creditors could seek additional pledges of some or all of our assets. If we fail to obtain additional funding as needed, we may be forced to cease or scale back operations, and our results, financial conditions and stock price would be adversely affected.
Impact of COVID-19 On Our Business Operations
The worldwide outbreak of COVID-19 in early 2020 negatively affected economic conditions regionally as well as globally and caused a reduction in consumer spending. Efforts to contain the effect of the virus included business closures, travel restrictions, and restrictions on public gatherings and events. Many businesses eliminated non-essential travel and canceled in-person events to reduce instances of employees and others being exposed to public gatherings. Governments around the world, including governments in Europe and state and local governments in the U.S., restricted business activities and strongly encouraged, instituted orders or otherwise restricted individuals from leaving their home. To date, governmental authorities imposed or recommended various measures, including social distancing, quarantine, limitations on the size of gatherings, closures of work facilities, schools, public buildings and businesses, and cancellation of events, including sporting events, concerts, conferences and meetings. The suspension, postponement and cancellation of sporting events affected by COVID-19 had an adverse impact on the progression of SharpLink’s overall business plan and our revenue and the revenue of our clients.
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Although many sports seasons and sporting events recommenced in 2021, the fluidity of this situation, potential for virus variants and potential setbacks associated therewith precludes any prediction as to the ultimate impact of COVID-19 and any emerging variants of coronavirus, which remains a material uncertainty and risk with respect to SharpLink’s business, performance, and financial results. The revenue of our clients, and our own revenue, continue to depend on sports events taking place and consumer participation and spending on entertainment and leisure activities, and any further setbacks with respect to COVID-19 and its variants could have a material adverse effect on our business, financial condition, results of operations and prospects.
Recent Developments
Merger with SportsHub Games Network Inc. (the “SportsHub Merger”)
SharpLink, SharpLink, SHGN Acquisition Corp., a Delaware corporation and wholly owned subsidiary of SharpLink (“Merger Subsidiary”), SportsHub and Christian Peterson, an individual acting as the SportsHub stockholders’ representative entered into the Merger Agreement on September 7, 2022. The Merger Agreement, as amended on November 2, 2022 by the Merger Agreement Amendment, contained the terms and conditions of the proposed business combination of SharpLink and SportsHub. Pursuant to the Merger Agreement, as amended, on December 22, 2022, SportsHub merged with and into Merger Subsidiary in accordance with the provisions of Delaware’s General Corporation Law, as amended, with Merger Subsidiary surviving as a wholly owned subsidiary of SharpLink. In association with the transaction, SharpLink issued, in aggregate, 4,319,263 ordinary shares to common and preferred stockholders of SportsHub, on a fully diluted basis. An additional aggregate amount of 405,862 ordinary shares are being held in escrow for SportsHub shareholders who have yet to provide the applicable documentation required in connection with the SportsHub Merger, as well as shares held in escrow for indemnifiable losses and for the reimbursement of expenses incurred by the Stockholder Representative in performing his duties pursuant to the Merger Agreement.
NASDAQ Notice
On November 4, 2022, we received a deficiency notice from NASDAQ stating that we no longer comply with NASDAQ Marketplace Rule 5550(a)(2) because the bid price of our Ordinary Shares closed below the required minimum $1.00 per share for the previous 30 consecutive business days. The notice also indicated that, in accordance with Marketplace Rule 5810(c)(3)(A), we have a period of 180 calendar days, until May 3, 2023, to regain compliance with Rule 5550(a)(2). If at any time before May 3, 2023 the bid price of our Ordinary Shares closes at $1.00 per share or more for a minimum of 10 consecutive business days, NASDAQ will notify us that we have regained compliance with Rule 5550(a)(2). In the event we do not regain compliance with Rule 5550(a)(2) prior to the expiration of the 180-day period, we may then be eligible for additional time if we meet the continued listing requirements for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will be required to provide written notice of our intention to cure the deficiency during the second compliance period equal to an additional 180 calendar days. If we cannot demonstrate compliance by the end of the second compliance period, Nasdaq will notify us that our Ordinary Shares are subject to delisting.
On January 20, 2023, our shareholders authorized a reverse share split in a ratio of up to and including 20:1, which if effected, would increase the per share price of our Ordinary Shares to regain compliance with the minimum bid price requirements. The ratio and date of such reverse split, if effected, will be determined by our Board of Directors.
Sale of Legacy MTS Business
On December 31, 2022, SharpLink closed on the sale of its legacy MTS business (“Legacy MTS”) to Israel-based Entrypoint South Ltd., a subsidiary of Entrypoint Systems 2004 Ltd. In consideration of Entrypoint South Ltd. acquiring all rights, title, interests and benefits to Legacy MTS, including 100% of the shares of MTS Integratrak Inc., one of the Company’s U.S. subsidiaries, it will pay SharpLink an earn-out payment equal to three times Legacy MTS’ Earnings Before Interest, Taxes and Depreciation for the year ending December 31, 2023, up to a maximum earn-out payment of $1 million (adjusted to reflect net working capital as of the closing date).
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2023 $7 Million Revolving Credit Line
On February 13, 2023, SharpLink, Inc., a Minnesota corporation and wholly owned subsidiary of the Company, entered into a Revolving Credit Agreement with Platinum Bank, a Minnesota banking corporation and executed a revolving promissory note of $7,000,000.
Assumption of Loans as a Result of Merger to SportsHub Games Network, Inc.
In connection with the SportsHub Merger that closed on December 22, 2022, on February 13, 2023, SharpLink, Inc (the “New Borrower”), as successor by merger to SportsHub (the “Existing Borrower”), LeagueSafe Management, LLC, a Minnesota limited liability company (“LeagueSafe”), and Virtual Fantasy Games Acquisition, LLC, a Minnesota limited liability company (“Virtual Fantasy”) entered into a consent, assumption and second amendment agreement with the Lender, to assume a term loan in the principal amount of up to $2,000,000 as set forth by the term loan agreement dated June 9, 2020, as amended. LeagueSafe and Virtual Fantasy were the Existing Borrower’s subsidiaries, and as a result of the merger, became the New Borrower’s subsidiaries.
In connection with the SportsHub Merger that closed on December 22, 2022, on February 13, 2023, the New Borrower, LeagueSafe and Virtual Fantasy entered into a consent, assumption and third amendment agreement with the Lender, to assume a revolving line of credit in the principal amount of up to $5,000,000 as set forth by the revolving credit loan agreement dated March 27, 2020, as amended.
2023 Convertible Debenture and Warrant Financing
On February 14, 2023, the Company entered into the SPA with Alpha, a current shareholder of the Company, pursuant to which the Company issued to Alpha, an 8% Interest Rate, 10% Original Issue Discount, Senior Convertible Debenture in the aggregate principal amount of $4,400,000 for a purchase price of $4,000,000 on February 15, 2023. The Debenture will be convertible, at any time, and from time to time, at Alpha’s option, into Conversion Shares, at an initial conversion price equal to $0.70 per share, subject to adjustment as described in the Debenture. In addition, the Conversion Price of the Debenture is subject to an initial reset immediately prior to the Company’s filing of a registration statement covering the resale of the Underlying Shares to the lower of $0.70 and the average of the five Nasdaq Official Closing Prices immediately preceding such date, provided there shall be no Reset Price below $0.30 per share, the Floor Price, unless waived in writing by the Company by notice to Alpha. If the Reset Price is below the Floor Price and the Company chooses not to waive the Floor Price, the Debenture shall be repayable in cash within 10 business days of such reset date. As part of the SPA, the Regular Warrants exercisable to purchase an aggregate of 2,666,667 ordinary shares have an exercise price of $4.50 per share were reduced from $4.50 per share to $.06 per share. (See Notes 10 and 18 to the Consolidated Financial Statements.)
On February 15, 2023, the Company also issued to Alpha the Warrant to purchase 8,800,000 ordinary shares of the Company at an initial exercise price of $0.875. The Warrant is exercisable in whole or in part, at any time on or after February 15, 2023 and before February 15, 2028. The Exercise Price of the Warrant is subject to an initial reset immediately prior to the Company’s filing of a proxy statement that includes the Shareholder Approval Proposal to the lower of $0.875 and the average of the five Nasdaq Official Closing Prices immediately preceding such date the. The Warrant includes a beneficial ownership blocker of 9.99%. The Warrant provides for adjustments to the Exercise Price, in connection with stock dividends and splits, subsequent equity sales and rights offerings, pro rata distributions, and certain fundamental transactions. In the event the Company, at any time while the Warrants are still outstanding, issues or grants any right to re-price, ordinary shares or any type of securities giving rights to obtain ordinary shares at a price below Exercise Price, Alpha shall be extended full-ratchet anti-dilution protection on the Warrants (reduction in price, only, no increase in number of Warrant Shares, and subject to customary Exempt Transaction issuances), and such reset shall not be limited by the Floor Price.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Our most critical estimates include those related to purchase accounting, intangibles and long-lived assets, goodwill and impairment, stock-based compensation, discontinued operations and revenue recognition. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
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We believe the following critical accounting estimates affect the more significant judgments and estimates used in preparing our consolidated financial statements. Please see Note 1 to our consolidated financial statements, which are included in Item 8 “Financial Statements and Supplementary Data” of this Annual Report, for our Summary of Significant Accounting Policies. There have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements.
Purchase Accounting
The purchase price of an acquired business is allocated to the assets acquired and liabilities assumed at their estimated fair values on the date of acquisition. Any unallocated purchase price amount is recognized as goodwill on the consolidated balance sheet if it exceeds the estimated fair value or as a bargain purchase gain on the consolidated statement of operations if it is below the estimated fair value. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment, and the utilization of independent valuation experts as well as the use of historical information and significant estimates and assumptions with respect to the timing and amounts of future cash inflows and outflows, discount rates, market prices and asset lives, among other items. The judgments made in the determination of the estimated fair value assigned to the assets acquired and liabilities assumed, as well as the estimated useful life of each asset and the duration of each liability, can materially impact the financial statements in periods after acquisition, especially depreciation and amortization expense. Acquisition-related costs are expensed as incurred and changes in deferred tax asset valuation allowances and income tax uncertainties after the measurement period are recorded in Provision for Income Taxes.
Intangible and Long-Lived Assets
Intangible assets consist of internally developed software, customer relationships, trade names and acquired technology and are carried at cost less accumulated amortization. The Company amortizes the cost of identifiable intangible assets on a straight-line basis over the expected period of benefit, which ranges from three to ten years.
Costs associated with internally developed software are expensed as incurred unless they meet generally accepted accounting criteria for deferral and subsequent amortization. Software development costs incurred prior to the application development stage are expensed as incurred. For costs that are capitalized, the subsequent amortization is the straight-line method over the remaining economic life of the product, which is estimated to be five years.
The Company begins amortizing the asset and subsequent enhancements once the software is ready for its intended use. The Company reassesses whether it has met the relevant criteria for deferral and amortization at each reporting date.
The Company reviews the carrying value of its long-lived assets, including equipment and finite-lived intangible assets, for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimate future cash flows expected to result from its use and eventual disposition. In cases where undiscounted cash flows are less than the carrying value of an asset group, an impairment loss is recognized equal to an amount by which the asset group’s carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of customer loss, obsolescence, demand, competition, and other economic factors.
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Goodwill and Impairment
The Company evaluates the carrying amount of goodwill annually or more frequently if events or circumstances indicate that the goodwill may be impaired. Factors that could trigger an impairment review include significant underperformance relative to historical or forecasted operating results, a significant decrease in the market value of an asset or significant negative industry or economic trends. The Company completes impairment reviews for its reporting units using a fair-value method based on management’s judgments and assumptions. When performing its annual impairment assessment, the Company evaluates the recoverability of goodwill assigned to each of its reporting units by comparing the estimated fair value of the respective reporting unit to the carrying value, including goodwill. The Company estimates fair value utilizing the income approach and the market approach or a combination of both income and market approaches.
The income approach requires management to make assumptions and estimates for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows, working capital levels, income tax rates, and a weighted-average cost of capital reflecting the specific risk profile of the respective reporting unit. The key assumptions used in the income approach include revenue growth, operating income margin, discount rate and terminal growth rate. These assumptions are the most sensitive and susceptible to change as they require significant management judgment. Discount rates are determined by using market and industry data as well as Company-specific risk factors for each reporting unit. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business.
The market approach estimates fair value using performance multiples of comparable publicly-traded companies. In the event the fair value of a reporting unit is less than the carrying value, including goodwill, an impairment loss is recognized for the difference between the implied fair value and the carrying value of the reporting unit.
There is inherent uncertainty included in the assumptions used in goodwill impairment testing. A change to any of the assumptions could lead to a future impairment that could be material.
Stock-Based Compensation
The fair value of each option award is estimated on the date of grant using a Black Scholes option-pricing model. The Company uses historical option exercise and termination data to estimate the expected term the options are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is calculated using historical dividend amounts and the stock price at the option issue date. The expected volatility is determined using the volatility of peer companies. The Company’s underlying stock has been publicly traded since the date of the MTS Merger. All option grants during the year ended December 31, 2022 and 2021 were granted under the 2021 plan subsequent to the MTS Merger. All option grants made under the SharpLink, Inc. 2020 plan were prior to the MTS Merger. SharpLink, Inc.’s underlying stock was not publicly traded, but was estimated on the date of the grants using valuation methods that consider valuations from recent equity financings as well as future planned transactions.
Discontinued Operations
In June 2022, the Company’s Board of Directors approved management to enter into negotiations to sell MTS. The Company negotiated a Share and Asset Purchase Agreement with the transaction completed on December 31, 2022. In accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major impact on an entity’s operations and financial results when the components of an entity meets the criteria in ASC paragraph 205-20-45-10. In the period in which the component meets the held for sale or discontinued operations criteria the major assets, other assets, current liabilities and non-current liabilities shall be reported as a component of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the income (loss) of continuing operations.
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Revenue Recognition
The Company follows a five-step model to assess each sale to a customer; identify the legally binding contract, identify the performance obligations, determine the transaction price, allocate the transaction price, and determine whether revenue will be recognized at a point in time or over time. Revenue is recognized upon transfer of control of promised products or services (i.e., performance obligations) to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. Management judgment is required in determining whether the performance obligations will be recognized at a point in time or overtime and when the transfer of control of goods and services are made to entitle the Company to receive payment. The exercise of management judgment has a material impact on when revenue is recognized.
The Affiliate Marketing Services – United States and the Affiliate Marketing Services – International operating segments generate revenue by earning commissions from sportsbooks and casino operators when a new depositor is directed to them by our affiliate marketing websites.
The Sports Gaming Client Services operating segments’ performance obligations are satisfied over time (software licenses). Software license revenue is recognized when the customer has access to the license and the right to use and benefit from the license. Other items relating to charges collected from customers include reimbursable expenses. Charges collected from customers as part of the Company’s sales transactions are included in revenues and the associated costs are included in cost of revenues. In addition, this segment provides sports betting data (e.g., betting lines) to sports media publishers in exchange for a fixed fee.
The Company’s SportsHub operating segment collects fees from customers for daily and season-long online fantasy sports games in advance and recognizes the related fees over the term of the online fantasy game. It also collects various forms of fee revenue from customers using its wallet system platform. Its performance obligation is to provide these customers with an online platform to collect entry fees, provide transparency into league transactions, encourage timely payment of entry fees, safeguard funds during the season and facilitate end-of-season prize payouts. Fee revenue related to payment transactions is deferred until the end of the specific season (a single performance obligation recognized at the end of the respective season). Other types of fee revenue are recognized on a transactional basis when users complete transactions or when a customer’s account becomes inactive under the terms of the user agreement. SportsHub also provides sports simulation software that customers pay a fee to access over a period of time. SportsHub provides and maintains the software throughout the duration of the season, which constitutes a single performance obligation and revenue is recognized over the term of the service. SportsHub also collects subscription fees from users of its Fantasy National Golf Club. Its performance obligation under these contracts is to provide subscribers with access to SportsHub’s intellectual property. Revenue is initially deferred and recognized ratably over the subscription period. Any discounts, promotional incentives or waived entry fees are treated as a reduction in revenue.
The Company’s Enterprise TEM operating segment entered into contracts with customers to license the rights to use its software products and to provide maintenance, hosting and managed services, support and training to customers. Certain software licenses require customization. The Company sells its products directly to end-users and indirectly through resellers and operating equipment managers, who are considered end users.
The Enterprise TEM operating segment’s performance obligations are satisfied either overtime (managed services and maintenance) or at a point in time (software licenses). Professional services rendered after implementation are recognized as performed. Software license revenue is recognized when the customer has access to the license and the right to use and benefit from the license. Many of the Enterprise TEM operating segment’s agreements include software license bundled with maintenance and supports. The Company allocates the transaction price for each contract to each performance obligation identified in the contract based on the relative standalone selling price (“SSP”). The Company determines SSP for the purposes of allocating the transaction price to each performance obligation by considering several external and internal factors including, but not limited to, transactions where the specific element sold separately, historical actual pricing practices in accordance with ASC 606, Revenues from Contracts with Customers. The determination of SSP requires the exercise of judgement. For maintenance and support, the Company determines the SSP based on the price at which the Company sells a renewal contract.
Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Going Concern
In the pursuit of SharpLink’s long-term growth strategy and the development of its fan activation and conversion software and related businesses, the Company has sustained continued operating losses. During the year ending December 31, 2022, the Company had a net loss from continuing operations as of December 31, 2022 and 2021 of $15,303,402 and $33,469,830, respectively; and $6,490,519 and $5,854,995 of cash used in operating activities as of December 31, 2022 and 2021, respectively. To fund these planned losses from operations, the Company secured additional financing through a $3,250,000 term loan in January 2022, as described in Note 8 - Debt. To fund future operations, as described in Note 19, on February 13, 2023, the Company entered into a Revolving Credit Agreement with Platinum Bank and executed a revolving promissory note of $7,000,000. Moreover, on February 14, 2023, the Company entered into a Securities Purchase Agreement (the “SPA”) with Alpha Capital Anstalt (“Alpha”), a current shareholder of the Company, pursuant to which the Company issued to Alpha an 8% Interest Rate, 10% Original Issue Discount, Senior Convertible Debenture (the “Debenture”) in the aggregate principal amount of $4,400,000 for a purchase price of $4,000,000.
The Company is continually evaluating strategies to obtain the required additional funding for future operations. These strategies may include, but are not limited to, obtaining equity financing, issuing, or restructuring debt, entering into other financing arrangements, and restructuring of operations to grow revenues and decrease expenses. The Company may be unable to access further equity or debt financing when needed. As such, these factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period.
Results of Operations
The following table provides certain selected financial information for the periods presented:
December 31, 2022 | December 31, 2021 | Change | % Change | |||||||||||||
| Revenues | $ | 7,288,029 | $ | 2,635,757 | $ | 4,652,272 | 176.51 | % | ||||||||
| Cost of Revenues | 6,154,434 | 2,935,119 | 3,219,315 | 109.68 | % | |||||||||||
| Gross profit | 1,133,595 | (299,362 | ) | 1,432,957 | 478.67 | % | ||||||||||
| Gross profit percentage | 15.55 | % | -11.35 | % | ||||||||||||
| Total operating expenses | 16,610,112 | 33,195,352 | (16,585,240 | ) | -49.96 | % | ||||||||||
| Operating loss from continuing operations | (15,476,517 | ) | (33,494,714 | ) | (18,018,197 | ) | -53.79 | % | ||||||||
| Total other income (expenses) | 184,481 | 29,055 | 155,426 | 534.94 | % | |||||||||||
| Net loss before income taxes | (15,292,036 | ) | (33,465,659 | ) | 18,173,623 | -54.31 | % | |||||||||
| Provision for income taxes | 11,366 | 4,171 | 7,195 | 172.50 | % | |||||||||||
| Net loss from continuing operations | (15,303,402 | ) | (33,469,830 | ) | 18,166,428 | -54.28 | % | |||||||||
| Net income (loss) from discontinued ops, net of tax | 70,024 | (22,174,305 | ) | 22,244,329 | -100.32 | % | ||||||||||
| Net loss | $ | (15,233,378 | ) | $ | (55,644,135 | ) | $ | 40,410,757 | -72.62 | % | ||||||
Year Ended December 31, 2022 as Compared to Year Ended December 31, 2021
Revenues
For the year ended December 31, 2022, our revenues climbed 177% to $7,288,029 when compared to revenues of $2,635,757 reported for the year ended December 31, 2021. The improvement was largely attributed to additional revenue resulting from the Company’s merger and acquisition activities, namely the acquisition of FourCubed, which closed on December 31, 2021, and the merger with SportsHub, which closed on December 22, 2022.
On a segmented basis, revenues from SharpLink’s Sports Gaming Client Services division totaled $2,493,685, increased 3% from $2,424,229 on a comparable year-over-year basis. The SportsHub/Fantasy Sports group contributed $951,196 compared to $0 in the prior year due to the timing of the closing of its acquisition on December 22, 2022. The Affiliate Marketing Services – International segment, representing revenue contribution from the acquisition of FourCubed at December 31, 2021, was $3,427,698 compared to $0 in the prior year. The Affiliate Marketing – U.S. increased 96% to $415,450 for the year ended December 31, 2022, which compared to $211,528 for the same period in 2021. This increase was due to the addition of revenues generated by our new state-specific affiliate marketing sites, which were launched in November 2022 as part of our strategy to deliver unique fan activation solutions to our sportsbook and casino partners.
Gross Profit
Gross profit totaled $1,133,595 for the year ended December 31, 2022, which compared to a negative gross profit of $299,362 in the previous year – reflecting a 479% improvement. As a result, gross profit margin also improved, rising to 16% from a negative 11% on a comparable year-over-year basis. The increase was primarily attributable to higher revenues and the mix of higher margin products and services sold in 2022 as a direct result of our acquisition of FourCubed and merger with SportsHub.
Total Operating Expenses
For the year ended December 31, 2022, total operating expenses declined 50% to $16,610,112 compared to total operating expenses of $33,195,352 for the year ended December 31, 2021. The decrease was largely due to the commitment fee expense of $23,301,206 recorded in 2021. The non-cash commitment fee expense recorded in 2021 represented the change in fair value of the commitment fee associated with our go-public reverse acquisition of Mer Telemanagement Solutions Ltd., whereby SharpLink, Inc. sold to the holder of the Company’s preferred shares approximately 2.8 million shares of Series B Preferred Stock for $6.0 million and issued Series A-1 Preferred Stock equal to 3% of the Company’s issued and outstanding capital; this, in turn, required SharpLink, Inc. to transfer a variable number of shares outside of its control and classifying it as a liability. The decrease in the commitment fee expense was offset by a non-cash goodwill impairment of $4,726,000 recorded in 2022, which related to our client Entain plc’s loss of access to customers in Russia.
| 10 |
Operating Loss from Continuing Operations
Operating loss totaled $15,476,517 and $33,494,714 for the years ended December 31, 2022 and 2021, respectively, reflecting a 53% reduction in operating loss on a year-over-year basis. Operating losses declined in 2022 due to a combination of higher revenues and lower operating expenses recorded during the year for the aforementioned reasons.
Net Loss from Continuing Operations
For the reasons detailed above, after factoring total other income and expenses, net of $184,481 and income tax expense of $11,366, the net loss from continuing operations for the year ended December 31, 2022 totaled $15,303,402. This represented a 54% reduction from a net loss from continuing operations of $33,469,830 for the prior year after other income and expense, net of $29,055 and income tax expenses of $4,171.
Net Income (Loss) from Discontinued Operations
Net income from discontinued operations of SharpLink’s legacy MTS business totaled $70,024 for the year ended December 31, 2022, which compared to a net loss from discontinued operations of $22,174,305 for the prior year. The primary reason for the change was that the legacy MTS business recorded a goodwill impairment charge of $1,224,671 and $21,722,213 for the years ended December 31, 2022 and 2021, respectively.
Net Loss
For all of the aforementioned reasons, net loss declined 73% to $15,233,378, or $0.62 loss per basic and diluted share for continuing and discontinued operations for the year ended December 31, 2022, compared to a net loss of $55,644,135, or $3.94 loss per basic and diluted share for continuing and discontinued operations for the year ended December 31, 2021.
Cash Flows
Year ended December 31, 2022 as Compared to the Year ended December 31, 2021
As of December 31, 2022, cash on hand was $39,324,529, a 548% increase when compared to cash on hand of $6,065,461 as of December 31, 2021. For the years ended December 31, 2022 and 2021, restricted cash totaled $11,132,957 and $0, respectively. The increase in restricted cash resulted from the merger with SportsHub on December 22, 2022.
For the year ended December 31, 2022, cash used in operations totaled $5,937,385, as compared to net cash used in operations of $6,070,874 in the prior year. The increase in cash used in operating activities was primarily attributable to an increase in the accounting for depreciation and amortization, higher stock-based compensation expense, offset by a decline in goodwill and intangible asset impairment expenses.
For the year ended December 31, 2022, cash provided by the Company’s investing activities totaled $48,302,068 an increase of 1,095% when compared to cash used for investing activities of $4,411,720 for the previous year. The increase in cash generated in our investing activities resulted from cash and restricted cash acquired from the merger with SportsHub in December 2022 offset by payments made relating to the acquisition of FourCubed in 2021.
For the year ended December 31, 2022, cash provided by financing activities was $2,675,343, an 83% decrease from net cash provided by financing activities of $15,678,085 provided from financing activities during the year ended December 31, 2021. The year-over-year decrease was largely due to placement of Series B preferred stock, ordinary shares, prefunded warrants and regular warrants issued in connection with equity fundings during the year ended December 31, 2021. During 2022, the Company’s capital raising activities were limited to raising $3,250,000 through a term loan secured from our commercial lender, Platinum Bank, offset by debt repayments and debt issue costs.
| 11 |
Liquidity and Capital Resources
We will require additional capital to support our growth plans and such capital may not be available on reasonable terms or at all. If we do not raise sufficient capital, there is substantial doubt about our ability to continue as a going concern.
In the pursuit of our long-term growth strategy and the development of our sports betting conversion software, affiliate marketing services and related businesses, we have sustained continued operating losses. As of December 31, 2022, we had negative working capital of $5,000,468. For the year ended December 31, 2022, we incurred a loss from continuing operations of $15,303,402, inclusive of $4,726,000 for goodwill and intangible asset impairment charges. and cash used in operating activities from continuing operations of $6,490,519. To help fund our operations, we raised capital from banks and outside investors in the aggregate amounts of $2,675,343 and $15,678,085 for the years ended December 31, 2022 and 2021, respectively, in the form of a term loan in 2022 and the sale of Ordinary Shares and conversion of preferred stock and prefunded and regular warrants during 2021. Based on continued expected cash needs to fund our ongoing technology development initiatives and grow our Affiliate Marketing Services–United States operations, we may require additional liquidity to continue our operations for the next year. Subsequent to the end of 2022, in February 2023 we closed on a $4.4 million convertible debenture and signed a two-year $7.0 million revolving loan agreement with our commercial lender.
We have continued to realize losses from operations. However, with the revenue generated from our customers and our capital raise efforts, we believe that we will have sufficient access to cash to meet our anticipated operating costs and capital expenditure requirements through the end of 2023. Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, acquisitions, debt service, and for general corporate purposes. Our primary source of liquidity is funds generated by financing activities and from private placements. Our ability to fund our operations, to make planned capital expenditures and acquisitions, to service debt payments, and to repay or refinance indebtedness depends on our future operating performance and cash flows. Our future operating performance and cash flows are subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control.
If the Company is unable to generate significant sales growth in the near term and raise additional capital, there is a risk that the Company could default on its obligations; and could be required to discontinue or significantly curtail the scope of its operations if no other means of financing operations are available. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.
Off-Balance Sheet Arrangements
On December 31, 2022, we did not have any off-balance sheet arrangements. Additionally, we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Contractual Obligations
Material contractual obligations arising in the normal course of business primarily consist of purchase obligations in the normal course of business, principal and interest payment obligations to our commercial lender and payments for lease obligations.
Inflation
Our opinion is that inflation did not have a material effect on our operations for 2022.
Climate Change
Our opinion is that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASC 326, Financial Instruments – Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments (“ASC 326”), which replaces the existing incurred loss model with a current expected credit loss (“CECL”) model that requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company would be required to use a forward looking CECL model for accounts receivables, guarantees and other financial instruments. The Company adopted ASC 326 on January 1, 2023. ASC 326 did not have a material impact on its consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”), which clarifies the guidance in Accounting Standards Codification Topic 820, Fair Value Measurement (“Topic 820”), when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. While the Company is continuing to assess the timing of adoption and the potential impacts of ASU 2022-03, it does not expect ASU 2022-03 to have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.
| 12 |
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
| * | Incorporated by reference to the Annual Report on Form 10-K filed with the SEC on April 5, 2023. |
| ** | Filed herewith |
| 13 |
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SHARPLINK GAMING LTD. | ||
| Dated: July 14, 2023 | By: | /s/ Rob Phythian |
| Rob Phythian | ||
| Chief Executive Officer and Director | ||
| Dated: July 14, 2023 | By: | /s/ Robert DeLucia |
| Robert DeLucia | ||
| Chief Financial Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signatures | Title | Date | ||
| /s/ Rob Phythian | Chief Executive Officer and Director | July 14, 2023 | ||
| Rob Phythian | (Principal Executive Officer) | |||
| /s/ Robert DeLucia | Chief Financial Officer | July 14, 2023 | ||
| Robert DeLucia | (Principal Financial Officer) | |||
| /s/ Chris Nicholas | Chief Operator Officer and Director | July 14, 2023 | ||
| Chris Nicholas | ||||
| /s/ Joseph Housman | Chairman of the Board | July 14, 2023 | ||
| Joseph Housman | ||||
| /s/ Paul Abdo | Director | July 14, 2023 | ||
| Paul Abdo | ||||
| /s/ Thomas Doering | Director | July 14, 2023 | ||
| Thomas Doering | ||||
| /s/ Adrienne Anderson | Outside Director | July 14, 2023 | ||
| Adrienne Anderson | ||||
| /s/ Scott Pollei | Outside Director | July 14, 2023 | ||
| Scott Pollei |
| 14 |
INDEX TO FINANCIAL STATEMENTS
| F-1 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
SharpLink Gaming, Ltd. and Subsidiaries
Minneapolis, Minnesota
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of SharpLink Gaming, Ltd. and Subsidiaries (the “Company”) as of December 31, 2022, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has recurring losses and negative cash flows from operations that raise substantial doubt about their ability to continue as a going concern. Management’s evaluations of the events and conditions and management’s plans regarding those matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Retrospective Adjustments
We also have audited the adjustments to the consolidated financial statements as of December 31, 2021 and for the year then ended to retrospectively apply the change in accounting for discontinued operations, as described in Note 16. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2021 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2021 consolidated financial statements taken as a whole.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. 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 audit 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 consolidated 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 audit, 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 audit included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| F-2 |
Revenue from Contracts with Customers
Critical Audit Matter Description
As described in Note 1 to the consolidated financial statements, a significant portion of the Company’s revenue recognized is for commission and fee revenue and software license contracts that include multiple performance obligations including but not limited to the following: development, hosting, operations, maintenance and service of games and contests.
Due to the nature of the Company’s revenue sources including multiple performance obligations, management exercises significant judgment in the following areas in determining appropriate revenue recognition:
| ● | Determination of which products and services are considered to be a distinct performance obligation that should be accounted for separately or combined. | |
| ● | Determination of the pattern of delivery for each distinct performance obligation. | |
| ● | Determination of which products and services are recognized over time or point in time. |
As a result, a high degree of auditor judgment was required in performing audit procedures to evaluate the reasonableness of management’s judgments. Changes in these judgements can have a material effect on the amount of revenue recognized on these contracts.
How We Addressed the Matter in Our Audit
Based on our knowledge of the Company, we determined the nature and extent of procedures to be performed over revenue, including determination of revenue streams over which those procedures were performed. Our audit procedures included the following for each revenue stream where procedures were performed:
| ● | Obtained an understanding of the internal controls and processes in place over the Company’s revenue recognition processes. | |
| ● | Analyzed the significant assumptions and estimates made by management as discussed above. | |
| ● | Selected a sample of revenue transactions and assessed the recorded revenue, analyzed the related contract, assessed likelihood of collection, tested management’s identification of distinct performance obligations, and compared amounts recognized for consistency within underlying documentation. |
Valuation of Acquired Intangible Assets
Critical Audit Matter Description
As described in Note 3 to the consolidated financial statements, on December 22, 2022, the Company acquired SportsHub Games Network, (“SHGN”), for total consideration of $6,758,137 including the assumption of $5,387,850 in debt. The transaction was accounted for as a business combination in accordance with Accounting Standards Codification (“ASC”) 805.
The acquisition resulted in the recording of $7,358,703 of intangible assets, including developed technology, customer lists, goodwill, and tradenames. Significant estimation was required due to the application of the valuation models and assumptions used by management to measure the fair value of the intangible assets. Management estimated the fair value of these assets using valuation techniques, including income-based models and relief from royalty rate models, which required the use of significant estimates and assumptions related to cash flow forecasts, economic life analysis, discount rates, royalty rates, and customer attrition rates. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
| F-3 |
As discussed in Note 3, the Company’s purchase price allocation is disclosed as preliminary as of December 31, 2022.
How We Addressed the Matter in Our Audit
The determination of the acquisition date fair value of the intangible assets required the Company to make significant estimates and assumptions. As a result, testing these assumptions, which were used to calculate the fair values, involved a high degree of auditor judgment and effort, including involving the use of our valuation specialist. In addition, the fair values of these intangible assets were challenging to audit due to the sensitivity of the fair value determination to changes in these assumptions.
Our audit procedures included the following:
| ● | Obtained an understanding of the internal controls and processes over the valuation of the intangible assets, including management’s controls over forecasts of future cash flows and selection of other significant assumptions. | |
| ● | Evaluated the reasonableness of management’s forecasts by comparing the forecasts to actual historical results and trends. | |
| ● | We compared the forecasts to internal forecasts and other information obtained while performing the audit. | |
| ● | We reviewed the purchase agreement to ensure that all acquired assets and assumed liabilities were appropriately identified. | |
| ● | We compared the revenue growth rates and profit margins to available external information. | |
| ● | With the assistance of our fair value specialists, we performed the following: |
| ○ | We evaluated the reasonableness of the valuation methodologies selected and the mathematical accuracy of the calculation.We tested the source information underlying the determination of the discount rates, tested the mathematical accuracy of the calculations and compared those to the amounts selected by management. |
/s/ Cherry Bekaert LLP
We have served as the Company’s auditor since 2022.
Raleigh, North Carolina
April 4, 2023
| F-4 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
SharpLink Gaming Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of SharpLink Gaming Ltd. (the Company) as of December 31, 2021, the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the period ended December 31, 2021, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, except for effects of the adjustments, if any, as might have been determined necessary had we been engaged to audit the Company’s restatement to retrospectively apply discontinued operations, as described below, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Restatement for 2022 transactions requiring retrospective accounting treatment in 2021 financial statements
We were not engaged to audit the restatement of the 2021 financial statements and disclosures for discontinued operations, as discussed in Note 16 to the 2022 financial statements.
Emphasis of a Matter—Going Concern
The accompanying 2021 financial statements have been prepared assuming that the Company will continue as a going concern. As discussed at Note 2 to the 2021 financial statements, the Company has suffered recurring losses from operations and has negative cash flows from operations. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 2 to the 2021 financial statements. The 2021 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 U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
Except as discussed above, we conducted our audits in accordance with the auditing 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. Our audit 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 audit 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 audit provide a reasonable basis for our opinion.
/s/
We have served as the Company’s auditor from 2021 to 2022.
May 16, 2022
| F-5 |
SHARPLINK GAMING LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2022 AND 2021
| December 31, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net of allowance | ||||||||
| Contract assets | ||||||||
| Prepaid expenses and other current asset | ||||||||
| Current assets from discontinued operations | ||||||||
| Total current assets | ||||||||
| Investment, cost | ||||||||
| Equipment, net | ||||||||
| Right-of-use asset - operating lease | ||||||||
| Intangibles | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Non-current assets from discontinued operations | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Contract liabilities | ||||||||
| Prize liability | ||||||||
| Due to Seller | ||||||||
| Customer deposits | ||||||||
| Line of credit | ||||||||
| Current portion of long-term debt | ||||||||
| Current portion of lease liability | ||||||||
| Current liabilities from discontinued operations | ||||||||
| Total current liabilities | ||||||||
| Long-Term Liabilities | ||||||||
| Deferred tax liability | ||||||||
| Debt, less current portion | ||||||||
| Lease liability, less current portion | ||||||||
| Non-current liabilities from discontinued operations | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Ordinary shares, $ par value; authorized shares issued and outstanding shares: and , respectively | ||||||||
| Series A-1 preferred stock, $ par value; authorized shares: issued and outstanding shares: and , respectively liquidation preference: $ | ||||||||
| Series B preferred stock, $ par value; authorized shares: ; issued and outstanding shares: and , respectively; liquidation preference: $ | ||||||||
| Treasury stock, 900 ordinary shares at cost | ( | ) | ( | ) | ||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See Accompanying Notes to Consolidated Financial Statements.
| F-6 |
SHARPLINK GAMING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ( | ) | ||||||
| Operating expenses | ||||||||
| Selling, general, and administrative expenses | ||||||||
| Commitment fee expense | ||||||||
| Goodwill and intangible asset impairment expenses | ||||||||
| Total operating expenses | ||||||||
| Operating loss from continuing operations | ( | ) | ( | ) | ||||
| Other income and (expense) | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ||||||
| Other Income | ||||||||
| Total other income and expense | ||||||||
| Net loss before income taxes from continuing operations | ( | ) | ( | ) | ||||
| Provision for income tax expenses | ||||||||
| Loss from continuing operations | ( | ) | ( | ) | ||||
| Income (loss) from discontinued operations, net of tax | ( | ) | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Numerator for basic and diluted net loss per share: | ||||||||
| Net loss from continuing operations available to ordinary shareholders | $ | ( | ) | $ | ( | ) | ||
| Net income (loss) from discontinued operations available to ordinary shareholders | $ | ( | ) | |||||
| $ | ( | ) | $ | ( | ) | |||
| Denominator for basic and diluted net loss per share: | ||||||||
| Weighted average shares outstanding | ||||||||
| Net loss per share - Basic and diluted | ||||||||
| Net loss from continuing operations per share | $ | ( | ) | $ | ( | ) | ||
| Net income (loss) from discontinued operations per share | ( | ) | ||||||
| Net loss per share | $ | ( | ) | $ | ( | ) | ||
See Accompanying Notes to Consolidated Financial Statements.
| F-7 |
SHARPLINK GAMING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| Ordinary shares | Series A-1 preferred stock | Series B preferred stock | Additional Paid-In | Treasury | Stock | Accumulated | Total shareholders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | stock | subscription | deficit | equity | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 1 | $ | | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | - | |||||||||||||||||||||||||||||||||||||||||||
| Collection of stock subscription | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock discount accretion | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock dividend accretion | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Dividends on Series A Preferred Stock in common stock | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series A-1 preferred stock in exchange for Series A preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of series A-1 preferred stock in exchange for commitment fee | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series B preferred stock in Series A-1 preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Vesting of warrant upon Go Public Transaction | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series A-1 preferred stock into ordinary shares | ( | ) | ( | ) | - | |||||||||||||||||||||||||||||||||||||||
| Conversion of Series B preferred stock into ordinary shares | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Dividends on Series B preferred stock in Series A-1 preferred stock | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares in MTS Merger | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares in FourCubed Acquisition | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares, prefunded warrants and regular warrants to institutional investor | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Dividends on Series B preferred stock in Series A-1 preferred stock | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares for services | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares in SportsHub Gaming Network Acquisition | - | - | ||||||||||||||||||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||
| 1 |
See Accompanying Notes to Consolidated Financial Statements.
| F-8 |
SHARPLINK GAMING LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| 2022 | 2021 | |||||||
| Includes cash flow activities from both continuing and discontinued operations | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Net income (loss) from discontinued operations, net of tax | $ | $ | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used for operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of loan costs | ||||||||
| Amortization of prepaid stock issued for services | ||||||||
| Deferred tax expense | ||||||||
| Stock-based compensation expense | ||||||||
| Commitment fee expense | ||||||||
| Gain on disposal of equipment | ||||||||
| Goodwill and intangible asset impairment expenses | ||||||||
| Write off of amounts related to acquisition of FourCubed | ( | ) | ||||||
| Advisory expenses in exchange for warrant | ||||||||
| Changes in assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ||||||
| Contract assets | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other long-term assets | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Other long-term liabilities | ( | ) | ||||||
| Contract liabilities | ( | ) | ||||||
| Net cash used for operating activities - continuing operations | ( | ) | ( | ) | ||||
| Net cash used for operating activities - discontinued operations | ( | ) | ||||||
| Net cash used for operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Capital expenditures for equipment | ( | ) | ( | ) | ||||
| Capital expenditures for internally developed software | ( | ) | ( | ) | ||||
| Investment in Quintar | ( | ) | ||||||
| Proceeds from the sale of equipment | ||||||||
| Cash and restricted cash acquired in SportsHub Gaming Network Merger | ||||||||
| Payments relating to the acquisition of FourCubed | ( | ) | ( | ) | ||||
| Net cash generated by/(used) for investing activities - continuing operations | ( | ) | ||||||
| Net cash generated by (used) for investing activities - discontinued operations | ( | ) | ||||||
| Net cash generated by/(used) for investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Collection of stock subscription | ||||||||
| Proceeds from debt | ||||||||
| Repayments of debt | ( | ) | ||||||
| Payments of debt issue costs | ( | ) | ||||||
| Net advances to and proceeds from Affiliate | ( | ) | ||||||
| Proceeds from issuance of Series B preferred stock | ||||||||
| Proceeds from issuance of ordinary shares, prefunded warrants and regular warrants, net of issuance costs | ||||||||
| Proceeds from the exercise of stock options | ||||||||
| Net cash generated by financing activities - continuing operations | ||||||||
| Net cash generated by financing activities - discontinued operations | ||||||||
| Net cash generated by financing activities | ||||||||
| Net change in cash and restricted cash | ||||||||
| Cash and restricted cash, beginning of year | ||||||||
| Less cash from discontinued operations | ||||||||
| Cash and restricted cash, end of year | $ | $ | ||||||
| $ | $ | |||||||
| Restricted cash | ||||||||
| Total cash and restricted cash | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | ||||||||
| Cash paid for taxes | ||||||||
| NON-CASH INVESTING ACTIVITIES: | ||||||||
| Issuance of ordinary shares in MTS Merger | ||||||||
| Issuance of ordinary shares in FourCubed Acquisition | ||||||||
| Issuance of ordinary shares in SportsHub Gaming Network Merger | ||||||||
| Issuance of ordinary shares for advisory services | ||||||||
| Consideration due for FourCubed Acquisition | ||||||||
| NON-CASH FINANCING ACTIVITIES: | ||||||||
| Series A Preferred Stock discount accretion | ||||||||
| Series A Preferred Stock dividend accretion | ||||||||
| Dividends on Series A Preferred Stock in common stock | ||||||||
| Issuance of Series A-1 preferred stock in ordinary shares | ||||||||
| Issuance of Series A-1 preferred stock in exchange for commitment fee | ||||||||
| Issuance of Series B preferred stock in exchange for commitment fee | ||||||||
| Dividends on Series B preferred stock in Series A-1 preferred stock | ||||||||
| Conversion of Series A-1 preferred stock into ordinary shares | ||||||||
| Conversion of Series B preferred stock into ordinary shares | ||||||||
| Dividend due to forgiveness of MTS intercompany loan | ||||||||
NET ASSETS AND LIABILITIES ACQUIRED IN ACQUISITION OF SPORTSHUB GAMES NETWORK:
| Cash and Restricted Cash | $ | |||
| Accounts receivable | ||||
| Prepaids and other assets | ||||
| Operating right-of-use asset | ||||
| Equipment | ||||
| Goodwill and intangible assets | ||||
| Accounts payable and accrued liabilities | ( | ) | ||
| Customer obligations | ( | ) | ||
| Prize liabilities | ( | ) | ||
| Note payable | ( | ) | ||
| Other long-term liabilities | ( | ) | ||
| Deferred revenue | ( | ) | ||
| Deferred tax liability | ( | ) | ||
| Net assets acquired | $ |
See Accompanying Notes to Consolidated Financial Statement
| F-9 |
SHARPLINK GAMING LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED DECEMBER 31, 2022 AND 2021
Note 1 – Summary of Significant Accounting Policies
Nature of Business
SharpLink Gaming Ltd. (the “Company” or “SharpLink,” formerly Mer Telemanagement Services or “MTS”), is an Israeli-based corporation. SharpLink is a leading online technology company that connects sports fans, leagues and sports websites to relevant and timely sports betting and iGaming content. SharpLink uses proprietary, intelligent, online conversion technology and direct-to-player (“D2P”) performance marketing strategies to convert sports fans into sports bettors and online casino game players for licensed, online sportsbook and casino operators. Further, SharpLink, through its SportsHub Gaming Network (“SportsHub”) reporting unit, owns and operates an online gaming business that primarily facilitates daily and seasonal peer-to-peer fantasy contests for its end users. The Company also operates a website that provides a variety of services to private fantasy league commissioners, including secure online payment options, transparent tracking and reporting of transactions, payment reminders, in-season security of league funds, and facilitation of prize payouts.
On
July 26, 2021, SharpLink, Inc. completed its merger with Mer Telemanagement Solutions Ltd. (the “MTS Merger”), which changed
its name to SharpLink Gaming Ltd. and commenced trading on NASDAQ under the ticker symbol “SBET.” As a result of the MTS
Merger, SharpLink, Inc. shareholders own
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of SharpLink Gaming Ltd. and its wholly owned subsidiaries. All intercompany accounts and transactions between consolidated subsidiaries have been eliminated in consolidation.
We operate in four reportable segments. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker (“CODM”), our Chief Executive Officer, allocates resources and assesses performance based upon discrete financial information at the segment level.
Reclassifications
Certain amounts in prior periods have been reclassified to reflect the impact of the discontinued operations treatment in order to conform to the current period presentation. See Note 16.
Functional Currency
The Company’s functional and reporting currency is the U.S. dollar. Transactions in foreign currencies are recorded at the exchange rate prevailing on the date of the transaction. The resulting monetary assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the subsequent balance sheet date. Revenue and expense components are translated to U.S. dollars at weighted-average exchange rates in effect during the period. Foreign currency transaction gains and losses resulting from remeasurement are recognized in other income, net within the consolidated statements of operations.
| F-10 |
Purchase Accounting
The purchase price of an acquired business is allocated to the assets acquired and liabilities assumed at their estimated fair values on the date of acquisition. Any unallocated purchase price amount is recognized as goodwill on the consolidated balance sheet if it exceeds the estimated fair value and as a bargain purchase gain on the consolidated statement of operations if it is below the estimated fair value. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment, and the utilization of independent valuation experts as well as the use of significant estimates and assumptions with respect to the timing and amounts of future cash inflows and outflows, discount rates, market prices and asset lives, among other items. The judgments made in the determination of the estimated fair value assigned to the assets acquired and liabilities assumed, as well as the estimated useful life of each asset and the duration of each liability, can materially impact the financial statements in periods after acquisition, such as through depreciation and amortization expense. Acquisition-related costs are expensed as incurred and changes in deferred tax asset valuation allowances and income tax uncertainties after the measurement period are recorded in Provision for Income Taxes.
Discontinued Operations
In June 2022, the Company’s Board of Directors approved management to enter into negotiations to sell MTS. The Company completed the sale of MTS on December 31, 2022. Accordingly, the assets and liabilities of the MTS business are separately reported as assets and liabilities from discontinued operations as of December 31, 2022 and 2021. The results of operations and cash flows of MTS for all periods are separately reported as discontinued operations.
Restricted Cash
Restricted cash consists of funds held for payment of prize liabilities for its various daily and seasonal peer-to-peer fantasy games, as well as private fantasy league dues from customers who utilize the services offered via the Company’s secure online payment and league dues management website. The Company maintains separate accounts to segregate users’ funds from operational funds.
Concentrations of Credit Risk
Cash
and restricted cash are deposited with major banks in the United States, Israel and Hong Kong. Such deposits in the United States may
be in excess of insured limits and are not insured in other jurisdictions. Generally, the FDIC limit per bank is $
The
following represents the cash and restricted cash on hand at December 31, 2022 by banking institution and does not include any reduction
for the FDIC insured limit of $
| Bank | December 31, 2022 | |||
| Platinum Bank | $ | |||
| Bank Vista | ||||
| Silicon Valley Bank | ||||
| Other | ||||
| $ | ||||
The Company performs ongoing credit evaluations of its customers. In certain circumstances, the Company may require letters of credit, other collateral or additional guarantees.
| F-11 |
Accounts Receivable
The
Company’s policy for estimating the allowance for credit losses on accounts receivables considers several factors including historical
loss experience, the age of delinquent receivable balances due, and economic conditions. Specific customer reserves are made during review
of significant outstanding balances due, in which customer creditworthiness and current economic trends may indicate that it is probable
the receivable will not be recovered. Accounts receivables are written off after collection efforts occur and the receivable is deemed
uncollectible. Adjustments to the allowance for credit losses are recorded in selling, general and administrative expense. Allowance
for credit losses as of December 31, 2022 and 2021 were $
Investment, cost
During
the year ended December 31, 2021, the Company invested $
Equipment
Equipment
is recorded at cost. Expenditures for renewals and improvements that significantly add to the productivity capacity or extend the useful
life of an asset are capitalized. Expenditures for maintenance and repairs are expensed. When equipment is retired or sold, the cost
and related accumulated depreciation are eliminated from the accounts and the resultant gain or loss is reflected in income. Depreciation
is provided using the straight-line method, based on useful lives of the assets which ranges from three to seven years. Depreciation
expense for the years ended December 31, 2022 and 2021, was $
Leases
The Company determines if an arrangement is or contains a lease at inception or modification of the arrangement. An arrangement is or contains a lease if there are identified assets and the right to control the use of an identified asset is conveyed for a period of time in exchange for consideration. Control over the use of the identified asset means the lessee has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset.
For a lease with terms greater than year, a right-of-use (ROU) asset and lease liability is recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The initial measurement of the operating lease ROU asset also includes any prepaid lease payments and are reduced by any previously accrued deferred rent. The Company’s operating lease does not provide a readily determinable implicit rate; therefore, the Company uses its incremental borrowing rate to discount the lease payments based on the information available at commencement date. The Company’s operating lease does not include a fixed rental escalation clause. Lease terms include optional renewal periods when it is reasonably certain that such option will be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease term.
Intangible and Long-Lived Assets
Intangible
assets consist of internally developed software, customer relationships, trade names and acquired technology and are carried at cost
less accumulated amortization. The Company amortizes the cost of identifiable intangible assets on a straight-line basis over the expected
period of benefit, which ranges from to
| F-12 |
Costs
associated with internally developed software are expensed as incurred unless they meet generally accepted accounting criteria for deferral
and subsequent amortization. Software development costs incurred prior to the application development stage are expensed as incurred.
For costs that are capitalized, the subsequent amortization is the straight-line method over the remaining economic life of the product,
which is estimated to be
The
Company begins amortizing the asset and subsequent enhancements once the software is ready for its intended use. The Company reassesses
whether it has met the relevant criteria for deferral and amortization at each reporting date. The Company capitalized $
The Company reviews the carrying value of its long-lived assets, including equipment and finite-lived intangible assets, for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimate future cash flows expected to result from its use and eventual disposition. In cases where undiscounted cash flows are less than the carrying value of an asset group, an impairment loss is recognized equal to an amount by which the asset group’s carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of customer loss, obsolescence, demand, competition, and other economic factors.
In
accordance with the approval by the Company’s Board of Directors to sell MTS in June 2022, management concluded that the intangible
assets of customer relationships and developed technology and its goodwill were impaired and recorded an impairment charge for $
Goodwill and Impairment
The Company evaluates the carrying amount of goodwill annually or more frequently if events or circumstances indicate that the goodwill may be impaired. Factors that could trigger an impairment review include significant underperformance relative to historical or forecasted operating results, a significant decrease in the market value of an asset or significant negative industry or economic trends. The Company completes impairment reviews for its reporting units using a fair-value method based on management’s judgments and assumptions. When performing its annual impairment assessment, the Company evaluates the recoverability of goodwill assigned to each of its reporting units by comparing the estimated fair value of the respective reporting unit to the carrying value, including goodwill. The Company estimates fair value utilizing the income approach and the market approach or a combination of both income and market approaches.
The income approach requires management to make assumptions and estimates for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows, working capital levels, income tax rates, and a weighted-average cost of capital reflecting the specific risk profile of the respective reporting unit. The key assumptions used in the income approach include revenue growth, operating income margin, discount rate and terminal growth rate. These assumptions are the most sensitive and susceptible to change as they require significant management judgment. Discount rates are determined by using market and industry data as well as Company-specific risk factors for each reporting unit. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business.
The market approach estimates fair value using performance multiples of comparable publicly-traded companies. In the event the fair value of a reporting unit is less than the carrying value, including goodwill, an impairment loss is recognized for the difference between the implied fair value and the carrying value of the reporting unit.
The
Company recorded goodwill impairment of $
| F-13 |
During
the year ended December 31, 2021, the Company recorded goodwill impairment of $
Accounts Payable
The composition of accounts payable and accrued expenses are as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued wages and payroll expenses | ||||||||
| Accrued bonus | ||||||||
| Accrued interest | ||||||||
| Other accrued expenses | ||||||||
| $ | $ | |||||||
Prize Liability
The Company’s prize liability consists of funds to be paid to participants of the various fantasy games hosted by the Company. These prizes are paid to the participants once a fantasy game has concluded and final winners have been determined.
Customer Deposits
The Company’s liability for customer obligations is in wallet accounts and accounts on the SportsHub platform. Cash related to these accounts may be drawn at the customer’s request.
Severance Pay
Certain
of the Company’s employees in Israel have subscribed to Section 14 of Israel’s Severance Pay Law, 5723-1963 (“Section
14”). Pursuant to Section 14, the Company’s employees, covered by this section, are entitled to monthly deposits, at a rate
of
With
regards to employees in Israel that are not subject to Section 14, the Company’s liability for severance pay is calculated pursuant
to the local Severance Pay Law, based on the most recent salary of the relevant employees multiplied by the number of years of employment
as of the balance sheet date. These employees are entitled to one-month salary for each year of employment or a portion thereof. The
Company’s liability for these employees is fully provided for via monthly deposits with severance pay funds, insurance policies
and an accrual. The value of the liability of $
The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to the Severance Pay Law or labor agreements.
| F-14 |
Transactions with SportsHub
Prior
to December 22, 2022 (see Note 3 – Acquisitions – SportsHub Games Network, Inc.), SportsHub owned approximately 40% of the
outstanding ordinary shares of the Company. SportsHub has historically paid direct expenses incurred by the Company’s Sports Gaming
Client Services business unit (“STI”), which includes salaries and related expenses for the employees of STI. SportsHub collects
cash on behalf of STI’s revenue generating activities. The Company was allocated cost of revenue and selling, general, and administrative
expenses totaling $
Redeemable Preferred Stock Issued with a Commitment Fee
The Company considers guidance within ASC 470-20, Debt (ASC 470), ASC 480, and ASC 815 when accounting for a redeemable equity instrument issued with a freestanding-instruments (e.g. commitment fee), such as in the issuance upon the date the SharpLink stock is listed or quoted on any trading market (Going Public Transaction). In circumstances in which redeemable convertible preferred stock is issued with a commitment fee, the proceeds from the issuance of the convertible preferred stock are first allocated to the commitment fee at its full estimated fair value.
The Company accounts for the commitment fee as either equity instrument, liability, or derivative liability in accordance with ASC 480, Distinguishing Liabilities from Equity (ASC 480) and/or ASC 815, Derivatives and Hedging (ASC 815), depending on the specific terms of the agreement. The commitment fee, which required the Company to issue ordinary shares equal to 3% of the Company’s issued and outstanding capital immediately following the Going Public Transaction, required the Company to transfer a variable number of shares outside of its control, which is classified as a liability. Liability-classified instruments are recorded at their estimated fair values at each reporting period until they are exercised, terminated, reclassified, or otherwise settled. Changes in the estimated fair value of the commitment fee were recorded in Commitment Fee Expense in the consolidated statement of operations for the year ended December 31, 2021.
Treasury Stock
Company shares held as treasury shares are recognized at cost, and as a deduction from equity. Any gain or loss arising from a purchase, sale, issuance or cancellation of treasury shares is recognized directly in equity at the time of such event.
Warrants
The Company accounts for a warrant as an equity instrument, liability or share-based compensation in accordance with ASC 480, Distinguishing Liabilities from Equity, and/or ASC 718, Compensation – Stock Compensation, depending on the specific terms of the agreement.
In February 2021, the Company issued a warrant in exchange for advisory services, which vested upon the completion of the Going Public Transaction. The warrant was in the scope of ASC 718 and was recognized at its grant date fair value when the performance condition became probable of occurrence, which in the Company’s case was the completion of the Going Public Transaction. The grant date fair value was determined using a Black Scholes option-pricing model.
Through
the MTS Merger, the Company assumed
| F-15 |
In November 2021, the Company issued warrants concurrent with a sale of ordinary shares to an institutional investor. Based on the terms of the agreements, the warrants were freestanding, equity-linked instruments that represented separate units of account. The Company allocated the value of net proceeds from the offering to the ordinary shares and warrants based on relative fair value on the grant date. The warrants’ grant date fair values were determined using Black Scholes option-pricing models. The value allocated to the warrants was recorded in Additional Paid-In Capital in the consolidated balance sheet.
Revenue
The Company follows a five-step model to assess each sale to a customer; identify the legally binding contract, identify the performance obligations, determine the transaction price, allocate the transaction price, and determine whether revenue will be recognized at a point in time or over time. Revenue is recognized upon transfer of control of promised products or services (i.e., performance obligations) to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services.
Advertising and Marketing Expenses
The
Company incurred $
The Affiliate Marketing Services – United States and the Affiliate Marketing Services – International operating segments generate revenue by earning commissions from sportsbooks and casino operators when a new depositor is directed to them by our affiliate marketing websites. In addition, this segment provides sports betting data (e.g., betting lines) to sports media publishers in exchange for a fixed fee.
The Sports Gaming Client Services operating segments’ performance obligations are satisfied over time (software licenses). Software license revenue is recognized when the customer has access to the license and the right to use and benefit from the license. Other items relating to charges collected from customers include reimbursable expenses. Charges collected from customers as part of the Company’s sales transactions are included in revenues and the associated costs are included in cost of revenues.
The Company’s SportsHub operating segment collects fees from customers for daily and season-long online fantasy sports games in advance and recognizes the related fees over the term of the online fantasy game. It also collects various forms of fee revenue from customers using its wallet system platform. Its performance obligation is to provide these customers with an online platform to collect entry fees, provide transparency into league transactions, encourage timely payment of entry fees, safeguard funds during the season and facilitate end-of-season prize payouts. Fee revenue related to payment transactions is deferred until the end of the specific season. Other types of fee revenue are recognized on a transactional basis when users complete transactions or when a customer’s account becomes inactive under the terms of the user agreement. SportsHub also provides sports simulation software that customers pay a fee to access over a period of time. SportsHub provides and maintains the software throughout the duration of the season, which constitutes a single performance obligation and revenue is recognized over the term of the service. SportsHub also collects subscription fees from users of its Fantasy National Golf Club. Its performance obligation under these contracts is to provide subscribers with access to SportsHub’s intellectual property. Revenue is initially deferred and recognized ratably over the subscription period. Any discounts, promotional incentives or waived entry fees are treated as a reduction in revenue. Any promotions where funds are issued to a user’s wallet account are recognized as marketing expenses, included in selling, general, and administrative expenses.
Stock-Based Compensation
Stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date and recognized over the requisite service period. The Company estimates the fair value of each stock-based award on the measurement date using the Black-Scholes option valuation model which incorporates assumptions as to stock price volatility, the expected life of the options, risk-free interest rate, and dividend yield.
| F-16 |
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes, under which deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities, net operating losses, and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company uses a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A tax position is recognized when it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. The standard also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition.
Basic
net loss per share is calculated by dividing net loss available to ordinary shareholders, adjusted for preferred stock discount accretion
and dividends accrued on preferred stock, by the weighted-average number of ordinary shares outstanding during the period excluding the
effects of any potentially dilutive securities. Diluted net loss per share is computed similar to basic loss per share, except that the
denominator is increased to include the number of additional ordinary shares that would have been outstanding if potential ordinary shares
(also known as common) had been issued if such additional ordinary shares were dilutive. Since the Company had net losses for all
the periods presented, basic and diluted loss per share are the same, and additional potential ordinary shares have been excluded, as
their effect would be anti-dilutive. At December 31, 2022, dividend accrued in Preferred Series A-1 stock of shares, total
issuable shares of Series B preferred stock of , total stock options of and warrants of
Fair Value Measurements
The Company has determined the fair value of certain assets and liabilities in accordance with generally accepted accounting principles, which provides a framework for measuring fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.
A fair value hierarchy has been established, which prioritizes the valuation inputs into three broad levels. Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the related asset or liability. Level 3 inputs are unobservable inputs related to the asset or liability.
Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our most critical estimates include those related to purchase accounting, intangibles and long-lived assets, goodwill and impairment, stock based compensation, discontinued operations and revenue recognition. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
| F-17 |
Contingencies
From time to time, we may become involved in lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Although we currently maintain liability insurance coverage intended to cover professional liability and certain other claims, we cannot assure that our insurance coverage will be adequate to cover liabilities arising out of claims asserted against us in the future where the outcomes of such claims are unfavorable to us. Liabilities in excess of our insurance coverage, including coverage for professional liability and certain other claims, could have a material adverse effect on our business, financial condition and results of operations.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASC 326, Financial Instruments – Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments (“ASC 326”), which replaces the existing incurred loss model with a current expected credit loss (“CECL”) model that requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company would be required to use a forward looking CECL model for accounts receivables, guarantees, and other financial instruments. The Company will adopt ASC 326 on January 1, 2023 and does not expect ASC 326 to have a material impact on its consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”), which clarifies the guidance in Accounting Standards Codification Topic 820, Fair Value Measurement (“Topic 820”), when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. While the Company is continuing to assess the timing of adoption and the potential impacts of ASU 2022-03, it does not expect ASU 2022-03 to have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.
Note 2 – Going Concern
In
the pursuit of SharpLink’s long-term growth strategy and the development of its fan activation and conversion software and related
businesses, the Company has sustained continued operating losses. During the year ending December 31, 2022, the Company had a net loss
from continuing operations as of December 31, 2022 and 2021 of $
The Company is continually evaluating strategies to obtain the required additional funding for future operations. These strategies may include, but are not limited to, obtaining equity financing, issuing, or restructuring debt, entering into other financing arrangements, and restructuring of operations to grow revenues and decrease expenses. The Company may be unable to access further equity or debt financing when needed. As such, these factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period.
The consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.
| F-18 |
Note 3 – Acquisitions
Mer Telemanagement Solutions Ltd. (“MTS”)
Description of the Transaction
On
July 26, 2021, Mer Telemanagement Solutions Ltd. (“MTS”), New SL Acquisition Corp., a wholly owned subsidiary of MTS (“Merger
Sub”) and privately held SharpLink, Inc. (“SharpLink, Inc.”) entered into an Agreement and Plan of Merger (the “Merger
Agreement”). Pursuant to the Merger Agreement, Merger Sub merged with and into SharpLink, Inc., with SharpLink, Inc. surviving
as a wholly-owned subsidiary of legacy MTS (the “Reverse Merger” or “MTS Merger”). Following the MTS Merger,
the Company changed its name from Mer Telemanagement Solutions Ltd. to SharpLink Gaming Ltd. (the “Company”). On a pro forma
and fully-diluted basis for the Company, SharpLink, Inc. shareholders own approximately
As a result of the MTS Merger, each outstanding share of SharpLink, Inc. common stock was converted into the right to receive SharpLink Gaming Ltd. ordinary shares as calculated pursuant to the Exchange Ratio, as defined in the Merger Agreement. Each outstanding share of SharpLink, Inc. Series A preferred stock was converted into the right to receive SharpLink Gaming Ltd. Series A-1 preferred stock, calculated pursuant to the Exchange Ratio. Each outstanding share of SharpLink, Inc. Series A-1 preferred stock was converted into the right to receive SharpLink Gaming Ltd. Series A-1 preferred stock, calculated pursuant to the Exchange Ratio. Each outstanding share of SharpLink, Inc. Series B preferred stock was converted into the right to receive SharpLink Gaming Ltd. Series B preferred stock, calculated pursuant to the Exchange Ratio.
In
connection with a closing condition of the Merger Agreement, a major shareholder of both legacy MTS and SharpLink, Inc., invested $
Identification of Accounting Acquirer
As
a result of the MTS Merger, SharpLink, Inc. shareholders owned
Purchase Price
The purchase price was based on the legacy MTS closing share price of $ on July 26, 2021 and and of Ordinary Shares and Preferred Shares, respectively, outstanding as of July 26, 2021, as well as the fair value of share options and warrants outstanding as of July 26, 2021. The following table represents the purchase consideration paid in the MTS Merger.
| MTS issued and outstanding ordinary shares immediately prior to Merger | ||||
| MTS share price on July 26, 2021 | $ | |||
| MTS ordinary shares fair value | ||||
| MTS warrants and options fair value | $ | |||
| Purchase consideration for accounting acquiree | $ |
| F-19 |
The fair values of the MTS warrants and options, which are further disclosed in Notes 10 and 12, respectively, were determined using a Black Scholes option-pricing model with the following assumptions:
| MTS Warrants - $2.642 strike price | ||||
| Fair value of ordinary shares | $ | |||
| Exercise price | $ | |||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Expected term (in years) | ||||
| Risk-free rate | % | |||
| Fair value per warrant | $ | |||
| Warrants | ||||
| Fair value | $ | |||
| MTS Warrants - $0 strike price | ||||
| Fair value of ordinary shares | $ | |||
| Exercise price | $ | |||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Expected term (in years) | ||||
| Risk-free rate | % | |||
| Fair value per warrant | $ | |||
| Warrants | ||||
| Fair value | $ | |||
| MTS Options - $0 strike price | ||||
| Fair value of ordinary shares | $ | |||
| Exercise price | $ | |||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Expected term (in years) | ||||
| Risk-free rate | % | |||
| Fair value per warrant | $ | |||
| Warrants | ||||
| Fair value | $ | |||
Purchase Price Allocation
The MTS assets and liabilities were measured at estimated fair values at July 26, 2021, primarily using Level 3 inputs. Estimates of fair value represent management’s best estimate of assumptions about future events and uncertainties, including significant judgments related to future cash flows, discount rates, competitive trends, margin and revenue growth assumptions including royalty rates and customer attrition rates and others. Inputs used were generally obtained from historical data supplemented by current and anticipated market conditions and growth rates expected as of the acquisition date.
| F-20 |
The fair value of the assets acquired and liabilities assumed as of July 26, 2021 were as follows:
| Assets: | ||||
| Cash | ||||
| Restricted cash | ||||
| Accounts receivable | ||||
| Prepaid expenses and other current assets | ||||
| Equipment | ||||
| Other long-term assets | ||||
| Intangible assets | ||||
| Total Assets | $ | |||
| Liabilities: | ||||
| Accrued expenses | ||||
| Deferred revenue | ||||
| Other current liabilities | ||||
| Other long-term liabilities | ||||
| Total liabilities | $ | |||
| Net assets acquired, excluding goodwill | $ | ( | ) | |
| Goodwill | ||||
| Purchase consideration for accounting acquiree | $ |
The fair value, as determined by assumptions that market participants would use in pricing the assets, and weighted average useful life of the identifiable intangible assets are as follows:
| Weighted Average | ||||||||
| Fair Value | Useful Life (Years) | |||||||
| Customer relationships | $ | |||||||
| Developed technology | ||||||||
| $ | ||||||||
The
excess of the consideration for the acquisition over the fair value of net assets acquired was recorded as goodwill and derived from
the market price of the shares at the time of the MTS Merger in the go-public transaction. During the year ended December 31, 2021, $
The allocation of purchase price is subject to finalization during a period not to exceed one year from the acquisition date. Adjustments to the preliminary allocation of purchase price may occur related to finalization of income taxes.
Transaction Costs
SharpLink’s
transaction costs incurred in connection with the MTS Merger were $
| F-21 |
Results of the Legacy MTS Business Subsequent to the Acquisition
For
the year ended December 31, 2021, the legacy MTS business had revenues and net loss of $
FourCubed
Description of the Transaction
On
December 31, 2021, SharpLink Gaming Ltd., through its wholly owned subsidiary FourCubed Acquisition Company, LLC, acquired certain business
assets of FourCubed (“FourCubed Acquisition”) for total consideration of $
Earnout
The Company accounts for an earnout as business combination consideration or compensation in accordance with ASC 805, Business Combinations, and/or ASC 718, Compensation – Stock Compensation, depending on the specific terms of the agreement.
Based on the terms of the agreement, the number of ordinary shares to be paid is fixed as of the agreement date and is paid in the form of ordinary shares in multiple tranches, contingent on continued employment and the achievement of performance milestones, such as business activities, revenue targets and gross margin targets.
In March 2022, the seller’s employment was terminated. No performance-based milestones were achieved prior to termination. As the earnout is contingent upon achieving specified milestones and continued employment, the Company does not expect to recognize compensation cost related to the earnout.
Purchase Price
The purchase price was based on the cash consideration paid and ordinary shares issued and valued at the closing share price of $ on December 31, 2021. The following table represents the purchase consideration to be paid in the FourCubed Acquisition.
| Ordinary shares issued to seller | ||||
| Ordinary share price on December 31, 2021 | $ | |||
| Consideration in ordinary shares | ||||
| Cash paid to Seller | ||||
| Due to Seller | ||||
| Purchase consideration | $ |
Purchase Price Allocation
The FourCubed assets and liabilities were measured at estimated fair values at December 31, 2021, primarily using Level 3 inputs. Estimates of fair value represent management’s best estimate of assumptions about future events and uncertainties, including significant judgments related to future cash flows, discount rates, competitive trends, margin and revenue growth assumptions including customer attrition rates, cost to recreate intellectual property and others. Inputs used were generally obtained from historical data supplemented by current and anticipated market conditions and growth rates expected as of the acquisition date.
| F-22 |
The fair value of the assets acquired and liabilities assumed as of December 31, 2021 were as follows:
| Assets: | ||||
| Cash | $ | |||
| Accounts receivable | ||||
| Prepaid expenses and other current assets | ||||
| Intangible assets | ||||
| Total assets | $ | |||
| Liabilities: | ||||
| Accrued expenses | $ | |||
| Total liabilities | ||||
| Net assets acquired, excluding goodwill | $ | |||
| Goodwill | ||||
| Purchase consideration for accounting acquiree | $ |
The fair value, as determined by assumptions that market participants would use in pricing the assets, and weighted average useful life of the identifiable intangible assets are as follows:
| Weighted Average | ||||||||
| Fair Value | Useful Life (Years) | |||||||
| Customer relationships | $ | |||||||
| Developed technology | ||||||||
| $ | ||||||||
The excess of the consideration for the acquisition over the fair value of net assets acquired was recorded as goodwill, which is attributed to expected synergies and expanded market opportunities from combining the Company’s operations with FourCubed. The goodwill created in the acquisition is expected to be deductible for tax purposes.
FourCubed earns advertising commissions from online gambling sites for connecting individuals to the sites. FourCubed has one performance obligation: to make the connection between the individual and the online gambling site. FourCubed is compensated for that delivery through a cost per acquisition model (CPA) or revenue share model.
In
February 2022, FourCubed was notified by Entain plc, a gaming operator from which FourCubed earned over 85 percent of its revenues, that
it intends to exit the Russian market. FourCubed estimates that approximately 40 percent of its annual revenue, with an estimated operating
income margin of 25 percent, is earned from players in the Russian market. The Company recorded $
| F-23 |
Transaction Costs
Transaction
costs incurred in connection with the FourCubed Acquisition were $
SportsHub Games Network, Inc. (“SportsHub”)
Description of the Transaction
On December 22, 2022 (the “Close Date”), SharpLink, through its wholly owned subsidiary, SHGN Acquisition Corp (“Acquirer” or the “Merger Subsidiary) acquired all of the outstanding capital stock of SportsHub, via an Agreement and Plan of Merger, dated as of September 6, 2022 (“Merger Agreement”). In accordance with the terms of the Equity Purchase Agreement between the Acquirer, the Acquiree and an individual acting as the SportsHub stockholders’ representative (“the Stockholder Representative”):
| ● | SharpLink issued an aggregate of ordinary shares to the equity holders of SportsHub, on a fully diluted basis. An additional aggregate of ordinary shares are being held in escrow for SportsHub shareholders who have yet to provide the applicable documentation required in connection with the SportsHub Merger, as well as shares held in escrow for indemnifiable losses and for the reimbursement of expenses incurred by the Stockholder Representative in performing his duties pursuant to the Merger Agreement. | |
| ● | SportsHub has merged with and into the Merger Subsidiary, with the Merger Subsidiary remaining as the surviving corporation and wholly owned subsidiary of SharpLink. | |
| ● | SportsHub, which owned ordinary shares of SharpLink prior to the merger, distributed those shares to SportsHub’s stockholders immediately prior to the consummation of the Merger. These shares were not part of the purchase consideration. | |
| ● | SharpLink
assumed $ |
Identification of Accounting Acquirer
The transaction was accomplished through a direct acquisition, whereby SHGN Acquisition Corp effectively acquired all of the outstanding capital stock of SportsHub, as a result of which SHGN Acquisition Corp obtained control over SportsHub. Therefore, SHGN Acquisition Corp has been determined to be the acquirer in the transaction, and SportsHub the acquiree.
Determining the Acquisition Date
The Acquirer obtained control of Acquiree following the exchange of consideration on December 22, 2022. Thus, the closing date of December 22, 2022 was the acquisition date.
Purchase Price
The
purchase price is based on SharpLink’s closing share price of $ on December 22, 2022 and of Ordinary Shares as well
as the fair value of Seller’s term loan of $
| Description | Amount | |||
| Fair Value of Equity Consideration | $ | |||
| Fair Value of Seller Platinum Line of Credit and Loan | ||||
| Total Purchase Price | $ | |||
| F-24 |
Purchase Price Allocation
The SportsHub Acquisition assets and liabilities were measured at fair values as of December 22, 2022, primarily based on the valuation determined by an independent valuation, which were based on income-based method and relief from royalty method. Estimates of fair value represent management’s best estimate of assumptions about future events and uncertainties, including significant judgments related to future cash flows, discount rates, competitive trends, margin and revenue growth assumptions, including royalty rates and customer attrition rates and others. Inputs used were generally obtained from historical data supplemented by current and anticipated market conditions and growth rates expected as of the acquisition date.
The fair value of the assets acquired and liabilities assumed as of December 22, 2022 were as follows:
| Assets: | ||||
| Cash | $ | |||
| Restricted cash | ||||
| Accounts receivable | ||||
| Prepaid expenses and other current assets | ||||
| Equipment | ||||
| Other long-term assets | ||||
| Intangible assets | ||||
| Total Assets | $ | |||
| Liabilities: | ||||
| Accrued expenses | $ | |||
| Deferred tax liabilities | ||||
| Deferred revenue | ||||
| Other current liabilities | ||||
| Other long-term liabilities | ||||
| Total liabilities | $ | |||
| Net assets acquired, excluding goodwill | $ | |||
| Goodwill | ||||
| Purchase consideration for accounting acquiree | $ |
The fair value, as determined by assumptions that market participants would use in pricing the assets, and weighted average useful life of the identifiable intangible assets are as follows:
| Weighted Average | ||||||||
| Fair Value | Useful Life (Years) | |||||||
| Customer relationships | $ | |||||||
| Trade names | ||||||||
| Acquired technology | ||||||||
| $ | ||||||||
| F-25 |
The excess of consideration for the acquisition over the fair value of net assets acquired was recorded as goodwill and derived from the market price of the shares at the time of the SportsHub Acquisition. The goodwill created in the acquisition is not expected to be deductible for tax purposes.
As of December 31, 2022, the calculation and allocation of the purchase price to tangible and intangible assets and liabilities is preliminary, as the Company is still in the process of accumulating all of the required information to finalize the opening balance sheet and calculations of intangible assets.
Transaction Costs
SharpLink’s
transaction costs incurred in connection with the SportsHub Acquisition were $
Results of the SportsHub Subsequent to the Acquisition
The
SportsHub Acquisition had revenues and net income of $
Unaudited Pro Forma Information
The
following unaudited supplemental pro forma financial information presents the financial results for the years ended December 31, 2022
and 2021 as if the MTS Merger, FourCubed and SportsHub Acquisition had occurred on January 1, 2021. The pro forma financial information
includes, where applicable, adjustments for: (i) additional amortization expense of $
The pro forma financial information excludes adjustments for estimated cost synergies or other effects of the integration of MTS, FourCubed and SportsHub:
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Loss from continuing operations | ( | ) | ( | ) | ||||
| Less: dividends accrued on series B preferred stock | ( | ) | ||||||
| Net loss from continuing operations available to ordinary shareholders | ( | ) | ( | ) | ||||
| Net income (loss) from discontinued operations, net of tax, available to ordinary shareholders | ( | ) | ||||||
| Net loss available to ordinary shareholders | ( | ) | ( | ) | ||||
| Basic and diluted: | ||||||||
| Net loss from continuing operations per share | $ | ( | ) | $ | ( | ) | ||
| Net loss from discontinued operations per share | ||||||||
| Net loss per share | $ | ( | ) | $ | ( | ) | ||
| F-26 |
The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the SportsHub, MTS Merger and FourCubed Acquisition been completed as of the date indicated or the results that may be obtained in the future.
Note 4 – Leases
The Company leases certain office space under a long-term, non-cancelable operating lease agreement. The contract provides the Company the right to substantially all of the economic benefits from the use of the office space and the right to direct the use of the office space, thus it is considered to be or contain a lease. An operating right-of-use (“ROU”) asset and lease liability were recognized based on the present value of the future lease payments over the expected lease term.
The weighted-average discount rate is based on the discount rate implicit in the lease, or if the implicit rate is not readily determinable from the lease, then the Company estimates an applicable incremental borrowing rate. The Company determined the incremental borrowing rate based on the Company’s applicable borrowing rates under its current financing agreements as of the commencement date of the standard adoption.
Operating
lease costs are recognized in the results of operations as a single lease cost in selling, general and administrative expenses. Total
lease costs for the years ended December 31, 2022 and 2021 was $
The following summarizes the weighted-average remaining lease term and weighted-average discount rate:
| 2022 | 2021 | |||||||
| Weighted-average remaining lease term | ||||||||
| Operating leases | ||||||||
| Weighted-average discount rate | ||||||||
| Operating leases | % | % | ||||||
Maturity of noncancelable operating leases with terms greater than one year as of December 31, 2022 are as follows:
| Year Ending December 31, | Operating leases | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total lease payments | $ | |||
| Less: interest | ||||
| Present value of lease liability | $ | |||
| F-27 |
Note 5 – Intangible Assets
Intangible assets as of December 31, 2022 and 2021 consist of the following:
| Weighted-average | ||||||||||||||
| amortization period | Accumulated | |||||||||||||
| (years) | Cost | Amortization | Net | |||||||||||
| Balance, December 31, 2022 | ||||||||||||||
| Customer relationships | $ | $ | $ | |||||||||||
| Acquired technology | ||||||||||||||
| Internally developed software | ||||||||||||||
| Trade names | ||||||||||||||
| Software in development | N/A | |||||||||||||
| $ | $ | $ | ||||||||||||
| Balance, December 31, 2021 | ||||||||||||||
| Customer relationships | $ | $ | $ | |||||||||||
| Acquired technology | ||||||||||||||
| Internally developed software | ||||||||||||||
| Software in development | N/A | |||||||||||||
| $ | $ | $ | ||||||||||||
The
change in the gross carrying amount of intangible assets as of December 31, 2022 compared to December 31, 2021 was due to acquisition
of intangible assets of $
| Amount | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| $ | ||||
| F-28 |
Note 6 – Goodwill
Changes in the carrying amount of goodwill for the years ended December 31, 2022 and 2021 were as follows:
| SportsHub Gaming | Sports Gaming Client Services | Affiliate Marketing Services - International | Total | |||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ||||||||||||
| Goodwill | ||||||||||||||||
| Less: Impairment charges | ( | ) | ( | ) | ||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | ||||||||||||
| Cumulative goodwill impairment charges | $ | $ | $ | $ | ||||||||||||
For
the year ending December 31, 2022, the Company recorded goodwill impairment of $
Note 7 – Line of Credit
The
Company, through the SportsHub Acquisition, has available a variable rate (
Note 8 – Debt
On
January 31, 2022, FourCubed Acquisition Company, LLC (“FCAC”), a wholly owned subsidiary of the Company, entered into a $
For
the year ended December 31, 2022, FCAC paid $
| F-29 |
Included
in the SportsHub liabilities was a $
A summary of the term loan agreements is noted below:
| 2022 | ||||
| Note Payable – Bank, $ | $ | |||
| Note Payable – Bank, $ | ||||
| Less unamortized debt issuance costs | ||||
| Less current portion | ||||
| Long-term debt | $ | |||
The outstanding amount of debt as of December 31, 2022 matures by year as follows:
| Year | Amount | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total | $ | |||
The term loan contains a parent company guaranty, which states that the Company will enter into a guaranty agreement in favor of FCAC, pursuant to which the Company will guarantee the repayment of the loan, not later than 30 days following the Company’s redomicile to the United States.
Note 9 – Convertible Preferred Stock
On
December 23, 2020, the SharpLink, Inc. board authorized the establishment and designation of shares of
Terms of the Series A preferred stock are as follows:
Voting – Series A preferred stock shall have no voting rights, however, without the affirmative vote of the majority of the outstanding shares of Series A preferred stock, SharpLink, Inc. cannot (a) alter or change adversely the powers, preferences or rights given to the Series A preferred stock, (b) authorize or create any class of stock ranking in priority to as to dividends, redemption or distribution of assets upon a liquidation, (c) amend its articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders, (d) increase the number of authorized shares of Series A preferred stock, or € enter into any agreement with respect to any of the above.
Dividends
– Holders of each share of Series A preferred stock shall be entitled to receive cumulative dividends at the rate per share
(as a percentage of the stated value per share) of
| F-30 |
Liquidation – Upon any liquidation, dissolution or winding-up of SharpLink, Inc., whether voluntary or involuntary, Series A preferred stock holders shall be entitled to receive out of the assets an amount equal to the Stated Value of $ per share, plus any accrued and unpaid dividends thereon and any other fees or liquidated damages then due (the preferred liquidation preference), for each share of Series A preferred stock before any distribution or payment shall be made to the holders of any Junior Securities.
Conversion
– Each share of Series A preferred stock shall be convertible, at any time and from time to time from and after the original
issue date at the option of the holder, into that number of shares of common stock determined by dividing the stated value of such share
of Series A preferred stock by the conversion price, $
Second
Tranche – Immediately prior to completing the Going Public Transaction, SharpLink, Inc. shall sell to the current Series A
preferred stock shareholder not less than $
Commitment
Fee –Immediately following the Second Tranche, SharpLink, Inc.
Redemption
– SharpLink, Inc. shall redeem all of the outstanding shares of Series A preferred stock if SharpLink, Inc. has not completed
the Going Public Transaction by December 23, 2021. SharpLink, Inc. would be required to redeem at the aggregate stated value, plus accrued
but unpaid dividends, all liquidated damages. Interest shall accrue at the lesser of
On June 15, 2021, SharpLink, Inc. entered into the first amendment to the securities purchase agreement, which amended the following terms:
Second
Tranche – Amended to provide that immediately prior to completing the Going Public Transaction, SharpLink, Inc. shall sell
to the current Series A preferred stock shareholder Series B preferred stock for $
Commitment
Fee – Amended to provide that immediately following the Second Tranche, SharpLink, Inc. shall issue Series A-1 preferred stock
equal to
On July 23, 2021, SharpLink, Inc. entered into the second amendment to the securities purchase agreement, which amended the following terms:
Second Tranche – Amended to provide that immediately prior to completing the Going Public Transaction, SharpLink, Inc. shall sell to the current Series A preferred stock shareholder shares of Series B preferred stock for $.
On July 26, 2021, the Company’s board authorized the establishment and designation of shares of Series A-1 Convertible preferred stock (“Series A-1 preferred stock”) at $ par value.
| F-31 |
Terms of the Series A-1 preferred stock are as follows:
Voting – Series A-1 preferred stock shall have no voting rights, however, without the affirmative vote of the majority of the outstanding shares of Series A-1 preferred stock, the Company cannot (a) alter or change adversely the powers, preferences or rights given to the Series A-1 preferred stock, (b) authorize or create any class of stock ranking in priority to as to dividends, redemption or distribution of assets upon a liquidation, (c) amend its articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders, (d) increase the number of authorized shares of Series A-1 preferred stock, €(e) enter into any agreement with respect to any of the above.
Liquidation
– Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, Series A-1 preferred stock
holders shall be entitled to receive out of the assets an amount equal to the Stated Value of $
Conversion
– Each share of Series A-1 preferred stock shall be convertible, at any time and from time to time from and after the original
issue date at the option of the holder, into that number of shares of common stock determined by dividing the stated value of such share
of Series A-1 preferred stock by the conversion price, $
Redemption
– The Company shall redeem all of the outstanding shares of Series A-1 preferred stock if the Company has not completed the
Going Public Transaction by July 26, 2022. The Company would be required to redeem at the aggregate stated value, plus accrued but unpaid
dividends, all liquidated damages. Interest shall accrue at the lesser of
On July 26, 2021, the Company’s board authorized the establishment and designation of shares of Series B convertible preferred stock (“Series B preferred stock”) at $ par value.
Terms of the Series B preferred stock are as follows:
Voting – Series B preferred stock shall have no voting rights, however, without the affirmative vote of the majority of the outstanding shares of Series B preferred stock, the Company cannot (a) alter or change adversely the powers, preferences or rights given to the Series B preferred stock, (b) authorize or create any class of stock ranking in priority to as to dividends, redemption or distribution of assets upon a liquidation, (c) amend its articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders, (d) increase the number of authorized shares of Series B preferred stock, or (e) enter into any agreement with respect to any of the above.
Dividends
– Holders of each share of Series B preferred stock shall be entitled to receive cumulative dividends until the second anniversary
of the Original Issue date of July 26, 2021 at the rate per share (as a percentage of the stated value per share) of
Liquidation
– Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, Series B preferred stock
holders shall be entitled to receive out of the assets an amount equal to the Stated Value of $
| F-32 |
Conversion
– Each share of Series B preferred stock shall be convertible, at any time and from time to time from and after the original
issue date at the option of the holder, into that number of shares of common stock determined by dividing the stated value of such share
of Series B preferred stock by the conversion price. The conversion price would be reduced if the Company issues common stock at a price
lower than the conversion price or issues an instrument granting the holder rights to purchase common stock at a price lower than the
conversion price. Upon the closing of the Going Public Transaction all outstanding shares of Series B preferred stock shall automatically
be converted into that number of shares of common stock, subject to a beneficial ownership limitation of
Redemption
– The Company shall redeem all of the outstanding shares of Series B preferred stock if the Company has not completed the Going
Public Transaction by July 26, 2021. The Company would be required to redeem at the aggregate December 31, 2022, and 2021 stated value,
plus accrued but unpaid dividends, all liquidated damages. Interest shall accrue at the lesser of
On
July 26, 2021, SharpLink, Inc. completed its merger with Mer Telemanagement Solutions Ltd. (“MTS”) (the “MTS Merger”)
and changed its name to SharpLink Gaming Ltd. and commenced trading on NASDAQ under the ticker symbol “SBET.” The MTS Merger
was effectuated by a share exchange in which MTS issued shares to SharpLink, Inc. shareholders, resulting in SharpLink, Inc. shareholders
owning approximately 86% of the capital stock of SharpLink Gaming Ltd., on a fully-diluted, as-converted basis. The exchange ratio used
to determine the number of shares issued to SharpLink, Inc. shareholders was
At the Company’s Extraordinary General Meeting of Shareholders held on July 21, 2021, the Company’s shareholders approved an Amended and Restated Articles of Association, which was effected upon consummation of the MTS Merger. The Amended and Restated Articles of Association increased the registered share capital to ordinary shares, shares of Series A preferred stock, shares of Series A-1 preferred stock and shares of Series B preferred stock, each at a par value of $, reflecting the reverse stock split at a ratio of 1-to-2, which became effective on July 26, 2021 immediately prior to the effectiveness of the MTS Transaction.
The terms of the Series A preferred stock, Series A-1 preferred stock and Series B preferred stock authorized by the Company are consistent with the terms of the SharpLink, Inc. Series A preferred stock, Series A-1 preferred stock and Series B preferred stock.
The Company’s equity structure was adjusted for all periods presented in the consolidated statements of shareholders’ equity using the exchange ratio established in the Merger Agreement to reflect the number of shares of the legal parent (the accounting acquiree) issued in the reverse acquisition. Ordinary share par value and additional paid-in capital was adjusted for all periods presented in the consolidated statements of shareholders’ equity to reflect the new par value of ordinary shares after the 1-to-2 reverse stock split.
The
MTS Merger represented a Going Public Transaction. Immediately prior to the MTS Merger, the outstanding shares of the SharpLink, Inc.
Series A preferred stock were exchanged for shares of Series A-1 preferred stock in the Company. Additionally, the holder of
the Series A preferred stock received
Subsequent to the July 2021 MTS Merger, the holder of the Series A-1 preferred stock and Series B preferred stock converted and shares, respectively, to ordinary shares of the Company, each at a 1:1 ratio. Subsequent to the conversion, the holder maintained shares of Series B preferred stock through the year ended December 31, 2021, which accrued dividends in Series A-1 preferred stock amounting to outstanding as of December 31, 2021. During 2022, the Series B preferred stock accrued additional dividends in Series A-1 preferred stock of , for total shares outstanding of Preferred Series A-1 and shares of Series B Preferred Stock as of December 31 2022.
| F-33 |
Note 10 – Warrants
Warrant – Advisory Services
On
February 1, 2021, SharpLink, Inc. issued a common stock purchase warrant (“warrant”) in exchange for advisory services, which
gave the holder the right to purchase up to
The terms of the warrant are as follows:
Voting and Dividends – This warrant does not entitle the holder to any voting rights, dividends or other rights as a shareholder of SharpLink, Inc. prior to the exercise of the warrant.
Exercisability and Termination Dates – The warrant will vest and become exercisable by the holder immediately prior to the Going Public Transaction. If the Going Public Transaction does not occur by August 1, 2022, the warrant will terminate and shall no longer be exercisable by the holder. In the instance that a Going Public Transaction is consummated prior to the initial termination date, the warrant shall be vested, fully exercisable and the termination date shall be extended 5 years from the exercisability date.
Exercise
Price – The exercise price per share of common stock under this warrant shall be $
The
warrant is in the scope of ASC 718, Compensation – Stock Compensation, as a share-based payment issued to nonemployees in exchange
for services. Compensation costs for a nonemployee share-based payment award with a performance condition, such as the Going Public Transaction,
is recognized when the performance condition becomes probable of occurrence, which in SharpLink, Inc.’s case is when the Going
Public Transaction is completed. On July 26, 2021, SharpLink, Inc. completed its merger with Mer Telemanagement Solutions Ltd. The warrant
vested and became fully exercisable into ordinary shares in the Company immediately prior to the MTS Merger. The warrant’s
grant date fair value of $
| Fair value of ordinary shares on grant date | $ | |||
| Exercise price | $ | |||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Expected term (in years) | ||||
| Risk-free rate | % |
SharpLink,
Inc.’s underlying stock was not publicly traded on the issuance date of the warrant but its fair value was estimated using a straight-line
calculation, with the benefit of hindsight, between the fair values determined as of December 31, 2021 and July 26, 2021 of $
The Company estimates the volatility of its underlying stock by using an average of the calculated historical volatility of a group of comparable publicly traded stock. The expected dividend yield is calculated using historical dividend amounts and the stock price at the warrant issuance date. The risk-free rate is based on the United States Treasury yield curve in effect at the time of the grant. The expected term is estimated based on contractual terms.
| F-34 |
Warrants - MTS
Prior
to the MTS Merger, the MTS shareholders approved the issuance of a warrant to the former MTS CEO to acquire ordinary shares, at
an exercise price of $
Prior
to the MTS Merger, the MTS shareholders approved the issuance of a warrant to the former MTS CEO to acquire ordinary shares, with
a $
Prefunded Warrants and Regular Warrants
On
November 16, 2021, the Company entered into a Securities Purchase Agreement with an existing institutional investor pursuant to which
the Company agreed to issue and sell, in a registered direct offering, an aggregate of of the Company’s ordinary shares
at an offering price of $
The terms of the Prefunded Warrants are as follows:
Voting and Dividends – This warrant does not entitle the holder to any voting rights, dividends or other rights as a shareholder of the Company prior to the exercise of the warrant.
Vesting Date – November 19, 2021
Termination Date – When the warrant is exercised in full.
The terms of the Regular Warrants are as follows:
Voting and Dividends – This warrant does not entitle the holder to any voting rights, dividends or other rights as a shareholder of the Company prior to the exercise of the warrant.
Vesting Date – May 19, 2022
Termination Date – November 19, 2025
The Prefunded Warrants and Regular Warrants do not require a cash settlement for the warrants. Based on the terms of the agreements, the warrants were freestanding, equity-linked instruments that represented separate units of account. The Company allocated the value of net proceeds from the offering to the ordinary shares and warrants based on relative fair value. The value allocated to the warrants was recorded in Additional Paid-In Capital in the consolidated balance sheets.
| F-35 |
The fair value of the Prefunded Warrants and Regular Warrants was determined using a Black Scholes option-pricing model with the following assumptions:
| Prefunded Warrants | ||||
| Fair value of ordinary shares | $ | |||
| Exercise price | $ | |||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Expected term (in years) | ||||
| Risk-free rate | % | |||
| Schedule of assumptions | ||||
| Regular Warrants | ||||
| Fair value of ordinary shares | $ | |||
| Exercise price | $ | |||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Expected term (in years) | ||||
| Risk-free rate | % | |||
The fair value of ordinary shares was based on the Company’s publicly traded ordinary share price. The Company estimates the volatility of its underlying stock by using an average of the calculated historical volatility of a group of comparable publicly traded stock and the Company’s publicly traded ordinary shares. The expected dividend yield is calculated using historical dividend amounts and the stock price at the warrant issuance date. The risk-free rate is based on the United States Treasury yield curve in effect at the time of the grant. The expected term is estimated based on contractual terms.
For the year ended December 31, 2022, there have been no issuances of new warrants, no conversion of outstanding warrants, and all warrants outstanding are fully vested:
| Warrant - advisory services | Warrants - MTS | Prefunded warrants | Regular warrants | |||||||||||||||||||||||||||||
| Outstanding | Vested | Outstanding | Vested | Outstanding | Vested | Outstanding | Vested | |||||||||||||||||||||||||
| Beginning balance, December 31, 2021 | ||||||||||||||||||||||||||||||||
| Issued and vested | ||||||||||||||||||||||||||||||||
| Acquired | ||||||||||||||||||||||||||||||||
| Converted to ordinary shares | ||||||||||||||||||||||||||||||||
| Ending balance, December 31, 2022 | ||||||||||||||||||||||||||||||||
| Beginning balance, December 31, 2020 | ||||||||||||||||||||||||||||||||
| Issued and vested | ||||||||||||||||||||||||||||||||
| Acquired | ||||||||||||||||||||||||||||||||
| Converted to ordinary shares | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Ending balance, December 31, 2021 | ||||||||||||||||||||||||||||||||
| F-36 |
Note 11 – Fair Value
In accordance with fair value accounting guidance, the Company determines fair value based on the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The inputs used to measure fair value are classified into the following hierarchy:
Level 1: Unadjusted quoted prices in active markets for identical instruments that are accessible as of the measurement date
Level 2: Other significant pricing inputs that are either directly or indirectly observable
Level 3: Significant unobservable pricing inputs, which result in the use of management’s own assumptions
Assumptions Used in Determining Fair Value of the Commitment Fee at December 31, 2021
The
commitment fee, which required the Company to sell to the Series A preferred stock shareholder shares of Series B preferred
stock for $
| F-37 |
Significant inputs and assumptions used in the valuation model as of December 31, 2021, were as follows:
| Probability of a Going Public Transaction | % | |||
| Volatility | % | |||
| Stock price of public company at the time of measurement | $ | |||
| Date of a Going Public Transaction | ||||
| Pro-forma common shares outstanding at Going Public Transaction date |
The change in the commitment fee between December 31, 2020 and 2021 consisted of the following:
| Beginning balance, December 31, 2020 | $ | |||
| Commitment fee expense | ||||
| Issuance of Series A-1 and B preferred stock in exchange for commitment fee | ( | ) | ||
| Ending balance, December 31, 2021 | $ | |||
Note 12 – Stock Compensation
During 2020, SharpLink, Inc. approved and adopted the 2020 Stock Incentive Plan (the “2020 plan”), which permits the grant of stock options to its employees, directors and consultants for up to shares of SharpLink, Inc. common stock. In connection with the MTS Merger, the Company adopted the 2021 Equity Incentive Plan (the “2021 plan”) and reserved ordinary shares of the Company for issuance. The Company believes that awards under the 2020 and 2021 plans better align the interests of its employees with those of its stockholders. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those options generally vest based on three years of continuous service and have ten-year contractual terms. Certain option and share awards provide for accelerated vesting if there is a change in control, as defined in the plan.
The
Company granted options under the 2020 plan for the year ended December 31, 2021. In connection with the MTS Merger, the outstanding
options were adjusted by the Exchange Ratio of
The fair value of each option award is estimated on the date of grant using a Black Scholes option-pricing model. The Company uses historical option exercise and termination data to estimate the expected term the options are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is calculated using historical dividend amounts and the stock price at the option issue date. The expected volatility is determined using the volatility of peer companies. The Company’s underlying stock has been publicly traded since the date of the MTS Merger. All option grants during the year ended December 31, 2022 and 2021 were granted under the 2021 plan subsequent to the MTS Merger. All option grants made under the SharpLink, Inc. 2020 plan were prior to the MTS Merger. SharpLink, Inc.’s underlying stock was not publicly traded, but was estimated on the date of the grants using valuation methods that consider valuations from recent equity financings as well as future planned transactions.
| 2022 | 2021 | |||||||
| Expected volatility | - | % | - | % | ||||
| Expected dividends | % | % | ||||||
| Expected term (years) | - | - | ||||||
| Risk-free rate | - | % | - | % | ||||
| Fair value of Ordinary Shares on grant date | $ - $ | $ - $ | ||||||
| F-38 |
| Options | Shares | Weighted average exercise price | Weighted average grant date fair value | Weighted average remaining contractual term | Aggregate intrinsic value | |||||||||||||||
| Outstanding as of December 31, 2021 1 | $ | $ | - | $ | ||||||||||||||||
| Granted 2 | $ | $ | - | $ | - | |||||||||||||||
| Exercised | $ | $ | - | - | $ | - | ||||||||||||||
| Forfeited | ( | ) | $ | $ | - | $ | - | |||||||||||||
| Expired | ( | ) | $ | $ | - | - | $ | - | ||||||||||||
| Outstanding as of December 31, 2022 | $ | $ | $ | |||||||||||||||||
| Exercisable as of December 31, 2022 | $ | $ | $ | |||||||||||||||||
| 1 |
Unamortized
stock compensation expense of $, and $, as of December 31, 2022 and 2021 will be amortized through 2025 for
The summary of activity under the plans as of December 31, 2021, and change during the year ended December 31, 2021 is as follows:
| Options | Shares | Weighted average exercise price | Weighted average remaining contractual term | Aggregate intrinsic value | ||||||||||||
| Outstanding as of December 31, 2020 | $ | - | $ | - | ||||||||||||
| Granted | $ | - | $ | - | ||||||||||||
| Exercised | ( | ) | $ | - | $ | - | ||||||||||
| Forfeited | ( | ) | $ | - | $ | - | ||||||||||
| Outstanding as of December 31, 2021 | $ | $ | ||||||||||||||
| Exercisable as of December 31, 2021 | $ | $ | ||||||||||||||
| F-39 |
Note 13 – Revenue Recognition
During the year ended December 31, 2022, the Company combined its revenue into the following categories:
| Affiliate Marketing Services - U.S. | Affiliate Marketing Services - International | Sports Gaming Client Services | SportsHub Gaming Network | Total | ||||||||||||||||
| Software-as-a-service | $ | $ | $ | $ | $ | |||||||||||||||
| Fee revenue | ||||||||||||||||||||
| Services and other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
During the twelve months ended December 31, 2021, the Company combined its revenue into the following categories:
| Affiliate Marketing Services - U.S. | Affiliate Marketing Services -International | Sports Gaming Client Services | SportsHub Gaming Network | Total | ||||||||||||||||
| Software-as-a-service | $ | $ | $ | $ | $ | |||||||||||||||
| Services and other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
The Company’s license contracts contain promises to transfer multiple products to the customer. Judgment is required to determine whether each product is considered to be a distinct performance obligation that should be accounted for separately under the contract. We have elected to utilize the “Right to invoice” practical expedient under ASC 606 which allows us to recognize revenue for our performance under the contract for the value which we have provided to the customer during a period of time in our contract with them.
Determining whether licenses are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. In some arrangements, such as the Company’s license arrangements, the Company has concluded that the individual licenses are distinct from each other. In others, like the Company’s SaaS arrangements, the software development and final product are not distinct from each other because they are highly integrated and therefore the Company has concluded that these promised goods are a single, combined performance obligation.
The Company is required to estimate the total consideration expected to be received from contracts with customers. In certain circumstances, the consideration expected to be received is fixed based on the specific terms of the contract or based on the Company’s expectations of the term of the contract. Generally, the Company has not experienced significant returns from or refunds to customers. These estimates require significant judgment and the change in these estimates could have an effect on its results of operations during the periods involved.
The Company follows a five-step model to assess each sale to a customer; identify the legally binding contract, identify the performance obligations, determine the transaction price, allocate the transaction price, and determine whether revenue will be recognized at a point in time or over time. Revenue recognized point in time and over time is presented by period below:
| F-40 |
For the year ended December 31, 2022:
| Affiliate Marketing Services - U.S. | Affiliate Marketing Services - International | Sports Gaming Client Services | SportsHub Gaming Network | Total | ||||||||||||||||
| Point in time | $ | $ | $ | $ | $ | |||||||||||||||
| Over time | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
For the year ended December 31, 2021:
| Affiliate Marketing Services - U.S. | Affiliate Marketing Services - International | Sports Gaming Client Services | SportsHub Gaming Network | Total | ||||||||||||||||
| Over time | $ | |||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in contract advanced billings on the Company’s consolidated balance sheet. The Company has an enforceable right to payment upon invoicing and records contract liabilities when revenue is recognized subsequent to invoicing. The Company recognized unbilled revenue when revenue is recognized prior to invoicing.
The Company recognized contract assets related to direct costs incurred to fulfill the contracts. These costs are primarily labor costs associated with the development of the software. The Company defers these costs and amortizes them into cost of revenues over the period revenues are recognized.
The activity in the contract assets for the years ending December 31, 2022 and 2021 are as follows:
| Amount | ||||
| Balance as of December 31, 2021 | $ | |||
| Labor costs expensed | ( | ) | ||
| Labor costs deferred | ||||
| Balance as of December 31, 2022 | $ | |||
The Company’s assets and liabilities related to its contracts with customers were as follows:
| 2022 | 2021 | |||||||
| Accounts receivable | $ | $ | ||||||
| Unbilled revenue (reported in accounts receivable) | ||||||||
| Contract assets | ||||||||
| Contract liabilities | ( | ) | ( | ) | ||||
The activity in the contract liabilities for the years ending December 31, 2022 and 2021 are as follows:
| Amount | ||||
| Balance as of December 31, 2021 | $ | ( | ) | |
| SportsHub acquired balance | ( | ) | ||
| Revenue recognized or reclassified | ||||
| Deferred revenue | ( | ) | ||
| Balance as of December 31, 2022 | $ | ( | ) | |
| F-41 |
All contract liabilities at December 31, 2022 and 2021 were recognized as revenue or expected to be recognized within the next fiscal year. All other activity in contract liabilities is due to the timing of invoice in relation to the timing of revenue as described above.
Contracted
but unsatisfied performance obligations were approximately $
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company’s products and services, and not to facilitate financing arrangements.
The
Company had two customers that accounted for approximately
The
Company had four customers that accounted for approximately
Note 14 – Segment Information
The Company has four operating segments: Affiliate Marketing Services – United States, Affiliate Marketing Services – International, Sports Gaming Client Services and SportsHub Games Network. Each operating segment is also a reportable segment. The Enterprise Telecom Expense Management (“Enterprise TEM”) business unit is reflected in discontinued operations (see Note 16). The Enterprise TEM and Affiliate Marketing Services – International segments are a result of the MTS Merger and FourCubed Acquisition, respectively, in 2021. The Enterprise TEM segment will not be presented going forward due to its sale on December 31, 2022.
The Affiliate Marketing Services – United States segment operates a performance marketing platform which owns and operates state-specific web domains designed to attract, acquire and drive local sports betting and casino traffic directly to the Company’s sportsbook and casino partners which are licensed to operate in each respective state. The Company earns a commission from sportsbooks and casino operators on new depositors directed to them via our proprietary D2P websites in America. In addition, this segment provides sports betting data (e.g., betting lines) to sports media publishers in exchange for a fixed fee.
The Affiliate Marketing Services – International segment is an iGaming and affiliate marketing network, focused on delivering quality traffic and player acquisitions, retention and conversions to global iGaming operator partners worldwide in exchange for a commission (cost per acquisition or portion of net gaming revenues) paid to the Company by the partners for the new players referred to them.
The Sports Gaming Client Services segment provides its clients with development, hosting, operations, maintenance, and service of free-to-play games and contests. These relationships can be either software-as-service (“SaaS”) arrangements that are hosted by SharpLink and accessed through its clients’ websites or other electronic media; or software licenses that allow the client to take the software on premise.
The SportsHub Games Network segment owns and operates a variety of real-money fantasy sports and sports simulation games and mobile apps on its platform; and is licensed or authorized to operate in every state in the United States where fantasy sports play is legal and in which SportsHub has elected to operate based on the financial viability of operating there.
The Enterprise TEM segment is a global provider of solutions for telecommunications expense management, enterprise mobility management, call usage and accounting software. The segment’s TEM solutions allow enterprises and organizations to make smarter choices with their telecommunications spending at each stage of the service lifecycle, including allocation of cost, proactive budget control, fraud detection, processing of payments and spending forecasting. The Enterprise TEM segment is reflected as discontinued operations in 2022 and 2021 and was sold in December 2022. (See Note 16.)
| F-42 |
Any intercompany revenues or expenses are eliminated in consolidation. All of the Company’s operating revenues and expenses, other than those excluded from Adjusted EBITDA as detailed below, are allocated to the Company’s reportable segments. The Company defines and calculates Adjusted EBITDA as net loss before the impact of interest income or expense, income tax provision, and depreciation and amortization, and further adjusted for stock compensation expense, transaction expenses, commitment fee expense and impairment expense, as described in the reconciliation below.
A measure of segment assets and liabilities has not been currently provided to the Company’s chief operating decision maker and is therefore not presented below.
Summarized financial information for the Company’s reportable segments as of and for the years ended December 31, 2022 and 2021 is shown below:
| 2022 | ||||||||||||||||||||||||
Affiliate Marketing Services - United States | Affiliate Marketing Services - International | Sports Gaming Client Services | SportsHub Gaming Network | Enterprise TEM | Total | |||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Income from discontinued operations | ||||||||||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | ||||||||||
| 2021 | ||||||||||||||||||||||||
Affiliate Marketing Services - United States | Affiliate Marketing Services - International | Sports Gaming Client Services | SportsHub Gaming Network | Enterprise TEM | Total | |||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Loss from discontinued operations | ( | ) | ( | ) | ||||||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||
| F-43 |
Summarized revenues by country in which the Company operated for the years ended December 31, 2022 and 2021 is shown below:
| December 31, 2022 | Affiliate Marketing Services - United States | Affiliate Marketing Services - International | Sports Gaming Client Services | SportsHub Gaming Network | Enterprise TEM | Total | ||||||||||||||||||
| United States | $ | $ | $ | | $ | $ | $ | |||||||||||||||||
| Rest of World | ||||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Rest of World | ||||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The Company does not have material tangible long-lived assets in foreign jurisdictions.
The Company’s Affiliate Marketing Services International and Sports Gaming Client Services segment derives a significant portion of its revenues from several large customers. The table below presents the percentage of consolidated revenues derived from the two segments:
| 2022 | 2021 | |||||||
| Customer A | % | % | ||||||
| Customer B | % | % | ||||||
| Customer C | * | % | % | |||||
| Customer D | * | % | % | |||||
| * |
Note 15 – Income Taxes
Deferred tax assets and liabilities from continuing operations as of December 31, 2022 and 2021 consist of the following:
| 2022 | 2021 | |||||||
| Deferred tax assets | ||||||||
| Net operating losses | $ | $ | ||||||
| Research and development tax credit | ||||||||
| Nonqualified stock options | ||||||||
| Equipment | ||||||||
| Goodwill | ||||||||
| Bad debts | ||||||||
| Intangible Assets | ||||||||
| Accrued expenses and other | ||||||||
| Business interest expense | ||||||||
| Gross deferred tax assets | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets | $ | ( | ) | $ | ||||
| Deferred tax liabilities | ||||||||
| Intangible assets | ( | ) | ||||||
| Goodwill | ||||||||
| Deferred tax liabilities | ( | ) | ||||||
| Net deferred tax liability | $ | ( | ) | $ | ( | ) | ||
| F-44 |
As of December 31, 2022, the Company maintained a valuation allowance against certain deferred tax assets to reduce the total to an amount management believed was appropriate. Realization of deferred tax assets is dependent upon sufficient future taxable income during the periods when deductible temporary differences and carryforwards are expected to be available to reduce taxable income.
As
of December 31, 2022, the Company has a federal tax net operating loss carryforward of $
The
foreign net operating losses related to operations in Israel and Hong Kong that can be carried forward indefinitely. The Company has
US federal and state research and development tax credits of $
The provision for (benefit from) income taxes charged to income for the years ended December 31, 2022 and 2021 consist of the following:
| 2022 | 2021 | |||||||
| US current tax expense | $ | $ | ||||||
| Foreign current tax expense | ||||||||
| US deferred tax expense (benefit) | ||||||||
| Provision for income tax expenses (benefit) | $ | $ | ||||||
A reconciliation between the effective tax rate on income from continuing operations and the statutory tax rate is as follows:
| 2022 | 2021 | |||||||||||||||
| Income tax benefit at federal statutory rate | $ | ( | ) | % | $ | ( | ) | % | ||||||||
| State and local income taxes net of federal tax benefit | ( | ) | % | ( | ) | % | ||||||||||
| Rate differentials | % | ( | ) | % | ||||||||||||
| Meals and entertainment, non-deductible expenses and tax-exempt income | ( | ) | - | % | - | % | ||||||||||
| Incentive stock option expense | - | % | - | % | ||||||||||||
| Nondeductible goodwill impairment | - | % | - | % | ||||||||||||
| Nondeductible commitment fee | - | % | - | % | ||||||||||||
| PPP loan forgiveness income | % | % | ||||||||||||||
| NQO Cancellations | % | % | ||||||||||||||
| Financial Statement True Up | ( | ) | % | % | ||||||||||||
| Change in provision for uncertain tax positions | % | % | ||||||||||||||
| Change in valuation allowance | - | % | - | % | ||||||||||||
| Provision for income tax expenses (benefit) | $ | % | $ | % | ||||||||||||
| F-45 |
The Company has not provided any additional U.S. federal or state income taxes or foreign withholding taxes on the undistributed foreign earnings or basis differences as such differences have been considered indefinitely reinvested in the business. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation.
The Company files income tax returns in the U.S. federal jurisdiction, Minnesota, and various other states. The Company is not subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2018. The Company also files in Israel, Hong Kong and other foreign jurisdictions. The Company is not subject to audit in periods prior to 2018 in Israel and 2016, in Hong Kong The other foreign jurisdictions have various tax examination periods. It is difficult to predict the final timing and resolution of any particular uncertain tax position. Based on the Company’s assessment of many factors, including past experience and complex judgements about future events, the Company does not currently anticipate significant changes in its uncertain tax positions over the next 12 months.
The following presents the change in accrued uncertain tax positions:
| Beginning balance, December 31, 2021 | $ | |||
| Uncertain tax position additions | ||||
| Removal for amount related to discontinued operations | ( | ) | ||
| Ending balance, December 31, 2022 | $ | |||
The
Company recognizes interest and penalties accrued related to unrecognized tax benefits as additional income tax expense. During the years
ended December 31, 2022 and 2021, the Company did not recognize material income tax expense related to interest and penalties. The Company’s
uncertain tax position balance from continuing operations was $
Note 16 – Discontinued Operation
In accordance with ASC 205-20 Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major impact on an entity’s operations and financial results when the components of an entity meets the criteria in ASC paragraph 205-20-45-10. In the period in which the component meets the held for sale or discontinued operations criteria the major assets, other assets, current liabilities and non-current liabilities shall be reported as a component of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the income (loss) of continuing operations.
| F-46 |
In June 2022, the Company’s Board of Directors approved management to enter into negotiations to sell MTS. The Company negotiated a Share and Asset Purchase Agreement with the transaction completed on December 31, 2022. The majority of the assets of the primary reporting unit within MTS were sold. The assets and liabilities remaining post transaction are in the process of winding down subsequent to the year ended December 31, 2022. Accordingly, the assets and liabilities of the MTS business are separately reported as assets and liabilities from discontinued operations as of December 31, 2022 and December 31, 2021. The results of operations and cash flows of MTS for all periods are separately reported as discontinued operations.
The Company’s Enterprise TEM operating segment entered into contracts with customers to license the rights to use its software products and to provide maintenance, hosting and managed services, support and training to customers. Certain software licenses require customization. The Company sells its products directly to end-users and indirectly through resellers and operating equipment managers, who are considered end users. In June 2022, the Company’s Board of Directors approved management to enter into negotiations to sell MTS. The Company negotiated a Share and Asset Purchase Agreement with the transaction completed on December 31, 2022.
The Enterprise TEM operating segment’s performance obligations are satisfied either overtime (managed services and maintenance) or at a point in time (software licenses). Professional services rendered after implementation are recognized as performed. Software license revenue is recognized when the customer has access to the license and the right to use and benefit from the license. Many of the Enterprise TEM operating segment’s agreements include software license bundled with maintenance and supports. The Company allocates the transaction price for each contract to each performance obligation identified in the contract based on the relative standalone selling price (SSP). The Company determines SSP for the purposes of allocating the transaction price to each performance obligation by considering several external and internal factors including, but not limited to, transactions where the specific element sold separately, historical actual pricing practices in accordance with ASC 606, Revenues from Contracts with Customers. The determination of SSP requires the exercise of judgement. For maintenance and support, the Company determines the SSP based on the price at which the Company sells a renewal contract.
In
accordance with the approval by the Company’s Board of Directors to sell MTS, management undertook an impairment assessment of
MTS’ intangible assets and goodwill. Management concluded that the intangible assets of customer relationships and developed technology
and its goodwill were impaired and recorded an impairment charge of $
A reconciliation of the major classes of line items constituting the loss from discontinued operations, net of income taxes as presented in the consolidated statements of operations for the twelve months ended December 31, 2022 and 2021 is summarized in the table below.
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Cost of Revenues | ||||||||
| Gross Profit | ||||||||
| Operating Expenses | ||||||||
| Selling, general, and administrative expenses | ||||||||
| Goodwill and intangible asset impairment expenses | ||||||||
| Total operating expenses | ||||||||
| Operating Loss from Discontinued Operations | ( | ) | ( | ) | ||||
| Other Income and Expense | ||||||||
| Interest income | ||||||||
| Gain on disposal of subsidiary | ||||||||
| Total other income and expense | ||||||||
| Net Income Before Income Taxes from discontinued operations | ( | ) | ||||||
| Provision for income tax expenses for discontinued operations | ||||||||
| Net Income (Loss) | $ | $ | ( | ) | ||||
| F-47 |
The
following table presents a reconciliation of the carrying amounts of major classes of assets and liabilities of the Company classified
as discontinued operations as of December 31, 2022 and December 31, 2021. Included in total assets as of December 31, 2022 and 2021 is
a deferred tax asset of $
| Carrying amounts of major classes of assets included as part of discontinued operations: | ||||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net of allowance | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Equipment, net | ||||||||
| Other assets | ||||||||
| Total current assets | $ | $ | ||||||
| Non-current assets | ||||||||
| Equipment, net | $ | |||||||
| Other assets | ||||||||
| Intangibles and goodwill | ||||||||
| Total non-current assets | $ | $ | ||||||
| Carrying amounts of major classes of liability included as part of discontinued operations | ||||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Current liabilities | ||||||||
| Accrued expenses | $ | $ | ||||||
| Contract liabilities | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | $ | $ | ||||||
| Non-current liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | $ | $ | ||||||
Total
assets and liabilities of discontinued operations are presented as current assets from discontinued operations and current liabilities
from discontinued operations as of December 31, 2022 on the consolidated balance sheets. Included in the consolidated statement of cash
flows for the years ended December 31, 2022 and 2021 were the following, respectively: net cash generated by (used for) operating
activities – discontinued operations of $
| F-48 |
| December 31, 2022 | December 31, 2021 | |||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Less: discount accretion on series A preferred stock | ( | ) | ||||||
| Less: dividend accretion on series A preferred stock | ( | ) | ||||||
| Less: dividends on series B preferred stock | ( | ) | ( | ) | ||||
| Net loss from continuing operations available to ordinary shareholders | ( | ) | ( | ) | ||||
| Net income (loss) from discontinued operations, net of tax, available to ordinary shareholders | ( | ) | ||||||
| Net loss available to ordinary shareholders | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted weighted-average shares outstanding | ||||||||
| Basic and diluted: | ||||||||
| Net loss from continuing operations per share | $ | ( | ) | $ | ( | ) | ||
| Net income (loss) from discontinued operations per share | ( | ) | ||||||
| Net loss per share | $ | ( | ) | $ | ( | ) | ||
The MTS Merger was accounted for as a reverse acquisition. In accordance with ASC 805, Business Combinations, the equity structure in the consolidated financial statements following a reverse acquisition reflects the equity structure of the legal acquirer (MTS), including the equity interests issued by the legal acquirer to effect the business combination. For periods prior to the MTS Merger date, the weighted-average number of ordinary shares outstanding represents the legal acquiree’s (SharpLink, Inc.) historical weighted-average number of ordinary shares multiplied by the exchange ratio calculated pursuant to the MTS Merger Agreement of 1.3352.
The redeemable convertible preferred stock is a participating security, whereby if a dividend is declared to the holders of ordinary shares, the holders of preferred stock would participate to the same extent as if they had converted the preferred stock to ordinary shares.
| 2022 | 2021 | |||||||
| Stock options | ||||||||
| Series A-1 preferred stock | ||||||||
| Series B preferred stock | ||||||||
| Earnout | ||||||||
| MTS warrants | ||||||||
| Prefunded warrants | ||||||||
| Regular warrants | ||||||||
| Total | ||||||||
| F-49 |
Note 18 – Related Party Transactions
Through
December 21, 2022, SportsHub Games Network (“Affiliate”) owned approximately
Alpha
Capital Anstalt (“Alpha”) is an investor in the Company, which owns ordinary shares, Series A-1 preferred stock, Series B
preferred stock, regular warrants and prefunded warrants.
The
Company uses Hays Companies (“Hays”) as an insurance broker. Hays is considered a related party as an executive of Hays serves
on the board of directors for the Company. The Company paid $
The
Company leases office space in Canton, Connecticut from CJEM, LLC (CJEM), which is owned by an executive of the Company. The Company
paid rent expense of $
Note 19 – Subsequent Events
On
January 20, 2023,
On
February 13, 2023, SharpLink, Inc. (the “Borrower”), a Minnesota corporation and wholly owned subsidiary of the Company,
entered into a Revolving Credit Agreement (the “2023 Revolving Credit Agreement”) with Platinum Bank, a Minnesota banking
corporation (the “Lender”) and executed a revolving promissory note of $
The
2023 Revolving Credit Agreement provides for a two-year revolving line of credit (the “2023 Credit Line”) in the original
principal amount of $
As previously disclosed, on December 22, 2022, the Company consummated a transaction with SHGN Acquisition Corp., a Delaware corporation and wholly owned subsidiary of the Company, and SportsHub Games Network, Inc., a Delaware corporation. As a result, SportsHub Games Network, Inc. merged with and into SHGN Acquisition Corp., with SHGN Acquisition Corp. remaining as the surviving corporation and wholly owned subsidiary of the Company. After the merger, SHGN Acquisition Corp. (“New Borrower”) entered the following agreements with the Lender to assume the loans of SportsHub Games Network, Inc. (“Existing Borrower”).
| ● | On February 13, 2023, the New Borrower as successor by merger to Existing Borrower, LeagueSafe Management, LLC, a Minnesota limited liability company (“LeagueSafe”), Virtual Fantasy Games Acquisition, LLC, a Minnesota limited liability company (“Virtual Fantasy,” and together with LeagueSafe, collectively, the “Guarantors”) entered into a consent, assumption and second amendment agreement with the Lender. LeagueSafe and Virtual Fantasy were the Existing Borrower’s subsidiaries, and as a result of the merger, became the New Borrower’s subsidiaries. |
| F-50 |
| ● | On
February 13, 2023, the New Borrower also executed an amended and restated term promissory note payable to the Lender in the principal
amount of $ | |
| ● | On February 13, 2023, the New Borrower, LeagueSafe and Virtual Fantasy (together with LeagueSafe, the “Pledgors”) entered into a consent, assumption and third amendment agreement with the Lender. | |
| ● | On
February 13, 2023, the New Borrower also executed an amended and restated revolving promissory note payable to the Lender in the
principal amount of $ |
On
February 15, 2023, the Company also issued to Alpha the Warrant to purchase
On
March 10, 2023, Silicon Valley Bank (“SVB”) was placed into the hands of receivers at the FDIC. On this date, SharpLink had
approximately $
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