NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022
Note
1 - Basis of Presentation
The
unaudited condensed consolidated financial statements included herein have been prepared by SharpLink Gaming Ltd. (the
“Company,” “SharpLink,” “we,” or “our”), pursuant to the rules and regulations of
the Securities and Exchange Commission (“SEC”). In the opinion of the Company, the foregoing statements contain all
adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial position of the Company as of
March 31, 2023 and December 31, 2022, its results of operations and cash flows for the three months ended March 31, 2023 and 2022.
The condensed consolidated balance sheet as of December 31, 2022, has been derived from the audited consolidated financial
statements as of that date. The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported
amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from the
estimates.
Certain
information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant
to rules and regulations of the SEC. Accordingly, the condensed consolidated financial statements do not include all information and
footnotes required by GAAP for complete financial statement presentation. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2022,
which are included in SharpLink’s Annual Report on Form 10-K filed with the SEC on April 5, 2023.
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. SportsHub was acquired by the Company on December 22, 2022.
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 owned 86% of the Company, on a fully diluted and as-converted basis, which represented a majority
of the voting shares. Additionally, immediately following the closing of the MTS Merger, legacy MTS directors and officers agreed to
resign, pursuant to an Agreement and Plan of Merger, dated as of July 26, 2021 (“MTS Merger Agreement”). SharpLink, Inc.’s
executives became officers of the Company and new members were appointed to the board of directors. The MTS Merger represented a reverse
acquisition in which SharpLink, Inc. was the accounting acquirer and legacy MTS was the accounting acquiree. The Company applied the
acquisition method of accounting to the identifiable assets and liabilities of legacy MTS, which were measured at estimated fair value
as of the date of the business combination.
Reverse
Stock Split
On April 23, 2023, the Company effected a one-for-ten (1:10) reverse share
split of all the Company’s share capital and adopted amendments to its Memorandum of Association and Second Amended and Restated
Articles of Association (“M&AA”) whereby the Company (i) decreased the number of issued and outstanding ordinary shares,
nominal value NIS 0.60 per share, from 26,881,244 to 2,688,541; (ii) reduced the total number of the Company’s authorized shares
under its M&AA from 92,900,000 ordinary shares, nominal value NIS 0.06 per share, to 9,290,000 ordinary shares, nominal value NIS
0.60 per share; and (ii) decreased by a ratio of one-for-ten (1:10) the number of retrospectively issued and outstanding ordinary shares.
Proportional adjustments for the reverse stock split were made to the Company’s outstanding stock options, warrants and equity incentive
plans. All share and per-share data and amounts have been retrospectively adjusted as of the earliest period presented in the financial
statements to reflect the reverse stock split.
Reclassifications
Certain reclassifications were made to the unaudited condensed consolidated
balance sheet for the period ended December 31, 2022 to conform to the March 31, 2023 method of presentation. These reclassifications
had no effect on reported total current assets, total assets, total current liabilities, total liabilities or total stockholder’s
equity.
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 three months ending March 31, 2023 and March
31, 2022, the Company had a net loss from continuing operations of $2,678,746
and $6,936,529,
respectively; and cash used in operating activities of $14,885,057
and $1,468,457, respectively. To
fund anticipated future planned losses from operations, on February 13, 2023, the Company entered into a Securities Purchase
Agreement (the “SPA”) with Alpha Capital Anstalt (“Alpha”), a current shareholder of the Company, on
February 14, 2023, 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.
In addition, 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.
The
Company is continually evaluating strategies to obtain the required additional funding for future operations. These strategies may include,
but are not limited to, equity financing, issuing, or restructuring debt, entering into other financing arrangements, and restructuring
operations to grow revenues and decrease expenses. The Company may be unable to access further equity or debt financing when needed or
obtain additional liquidity under acceptable terms, if at all. 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
condensed 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.
Note
3 - New Accounting Pronouncements
Recently
Adopted Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06,
Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s
Own Equity (Subtopic 815-40). ASU 2020-06 simplifies the accounting for convertible debt and convertible preferred stock by removing
the requirements to separately present certain conversion features in equity. In addition, the amendments in the ASU also simplify
the guidance in ASC 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity, by removing certain criteria that must
be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and
embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the guidance on calculating earnings per
share, requiring use of the if-converted method for all convertible instruments and rescinding an entity’s ability to rebut
the presumption of share settlement for instruments that may be settled in cash or other assets. The Company adopted ASU 2020-06 on
January 1, 2023 and was applied to the Company’s accounting for its convertible debenture and warrants (see Note 8).
In
June 2016 and subsequently amended in March 2022, 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 and ASC 326 did not have a material impact on its consolidated
financial statements as the Company has not had any historical credit losses.
Note
4 - Additional Balance Sheet Information
Equipment,
net
Equipment,
net is presented net of accumulated depreciation in the amount of $110,761 and $83,194 as of March 31, 2023 and December 31, 2022, respectively.
Intangible
assets, net
Intangible
assets, net as of March 31, 2023 and December 31, 2022 consisted of the following:
Schedule
of Intangible Assets
| |
Weighted-average | | |
| | |
| | |
| |
| |
amortization period | | |
Cost, Net of | | |
Accumulated | | |
| |
| |
(years) | | |
Impairment | | |
Amortization | | |
Net | |
Balance, March 31, 2023 | |
| | |
| | | |
| | | |
| | |
Customer relationships | |
5 - 10 | | |
$ | 2,643,000 | | |
$ | 386,312 | | |
$ | 2,256,688 | |
Acquired technology | |
3 - 5 | | |
| 1,435,832 | | |
| 1,225,667 | | |
| 210,165 | |
Tradenames | |
6 | | |
| 640,000 | | |
| 30,072 | | |
| 609,928 | |
Internally developed software | |
5 | | |
| 774,791 | | |
| 316,282 | | |
| 458,509 | |
Software in development | |
N/A | | |
| 247,914 | | |
| - | | |
| 247,914 | |
| |
| | |
$ | 5,741,537 | | |
$ | 1,958,333 | | |
$ | 3,783,204 | |
| |
| | |
| | | |
| | | |
| | |
Balance, December 31, 2022 | |
| | |
| | | |
| | | |
| | |
Customer relationships | |
5 – 10 | | |
$ | 2,643,000 | | |
$ | 280,636 | | |
$ | 2,362,364 | |
Acquired technology | |
3 - 5 | | |
| 1,437,050 | | |
| 1,201,739 | | |
| 235,311 | |
Tradenames | |
6 | | |
| 640,000 | | |
| 3,405 | | |
| 636,595 | |
Internally developed software | |
5 | | |
| 749,147 | | |
| 288,530 | | |
| 460,617 | |
Software in development | |
N/A | | |
| 33,046 | | |
| - | | |
| 33,046 | |
| |
| | |
$ | 5,502,243 | | |
$ | 1,774,310 | | |
$ | 3,727,933 | |
Amortization
expense on intangible assets was $184,024
and $298,444
for the three months ended March 31, 2023 and
2022, respectively.
Goodwill
Goodwill
as of March 31, 2023 and December 31, 2022 consisted of the following:
Schedule of Goodwill
| |
Sports
Gaming Client Services | | |
Sports Hub Gaming | | |
Affiliate Marketing Services - International | | |
Total | |
Balance as of December 31, 2022 | |
$ | 381,000 | | |
$ | 4,919,928 | | |
$ | 1,615,167 | | |
$ | 6,916,095 | |
Goodwill | |
| - | | |
| - | | |
| - | | |
| - | |
Less: Impairment charges | |
| - | | |
| - | | |
| - | | |
| - | |
Balance as of March 31, 2023 | |
$ | 381,000 | | |
$ | 4,919,928 | | |
$ | 1,615,167 | | |
$ | 6,916,095 | |
| |
| | | |
| | | |
| | | |
| | |
Cumulative goodwill impairment charges | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Note
5 - Acquisitions
SportsHub
Games Network, Inc. (“SportsHub”)
Description
of the Transaction
On December 22, 2022, SharpLink, through its wholly owned subsidiary, SHGN
Acquisition Corp (“Acquirer” or the “Merger Subsidiary) acquired all of the outstanding capital stock of SportsHub (the
“SportsHub Acquisition”), via an Agreement and Plan of Merger, dated as of September 6, 2022 (the “SportsHub Merger
Agreement”). In accordance with the terms of the SportsHub Merger Agreement between the Acquirer, SportsHub and an individual acting
as the SportsHub stockholders’ representative (the “Stockholder Representative”):
|
● |
SharpLink issued an aggregate of 431,926 ordinary shares to
the equity holders of SportsHub, on a fully diluted basis. An additional aggregate of 40,586 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 SportsHub Merger Agreement. |
|
|
|
● |
SportsHub 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 889,380 ordinary shares of SharpLink
prior to the merger, distributed those shares to its stockholders immediately prior to the consummation of the Merger.
These shares were not part of the purchase consideration. |
|
|
|
● |
SharpLink assumed $5,387,850 of SportsHub’s debt as purchase
consideration. |
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 SportsHub 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 $2.90 on December 22, 2022 and 472,513 of ordinary shares as well
as the fair value of Seller’s term loan of $1,267,199 and line of credit of $4,120,651. The following table represents the purchase
consideration paid in the SportsHub Acquisition:
Schedule
of Purchase Consideration
Description | |
Amount | |
Fair Value of Equity Consideration | |
$ | 1,370,287 | |
Fair Value of Seller Platinum Line of Credit and Loan | |
| 5,387,850 | |
Total Purchase Price | |
$ | 6,758,137 | |
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:
Schedule of fair value of assets acquired and liabilities assumed |
|
Schedule Of fair value of Assets Acquired and Liabilities Assumed
| |
| December 22, 2022 | |
Assets: | |
| |
Cash | |
$ | 38,255,266 | |
Restricted cash | |
| 10,604,004 | |
Accounts receivable | |
| 186,712 | |
Prepaid expenses and other current assets | |
| 1,916,932 | |
Equipment | |
| 11,953 | |
Other long-term assets | |
| 95,793 | |
Intangible assets | |
| 2,390,000 | |
Total Assets | |
$ | 53,460,660 | |
| |
| | |
Liabilities: | |
| | |
Accrued expenses | |
$ | 284,345 | |
Deferred tax liabilities | |
| 48,775 | |
Deferred revenue | |
| 3,574,285 | |
Other current liabilities | |
| 47,657,117 | |
Other long-term liabilities | |
| 106,705 | |
Total liabilities | |
$ | 51,671,227 | |
| |
| | |
Net assets acquired, excluding goodwill | |
$ | 1,789,433 | |
| |
| | |
Goodwill | |
| 4,968,703 | |
| |
| | |
Purchase consideration for accounting acquiree | |
$ | 6,758,137 | |
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:
Schedule
of Fair Value Assumption Asset
| |
| | |
Weighted Average | |
| |
Fair Value | | |
Useful Life (Years) | |
Customer relationships | |
$ | 1,550,000 | | |
| 5 | |
Trade names | |
| 640,000 | | |
| 6 | |
Acquired technology | |
| 200,000 | | |
| 5 | |
| |
$ | 2,390,000 | | |
| | |
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 March 31, 2023, 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 $83,866 for the year ended December 31, 2022. These costs
were primarily comprised of professional fees, recorded in selling, general and administrative expenses in the consolidated statement
of operations. The transaction costs are not expected to be deductible for tax purposes.
Unaudited
Pro Forma Information
The
following unaudited supplemental pro forma financial information presents the financial results for the three months ended March 31,
2022 as if the SportsHub Acquisition had occurred on January 1, 2022. The pro forma financial information includes, where applicable,
adjustments for: (i) additional amortization expense of $36,667
would have been recognized related to the acquired
intangible assets in 2022 and (ii) transaction costs and other one-time non-recurring costs which reduced expenses by $83,866
in 2022.
The
pro forma financial information excludes adjustments for estimated cost synergies or other effects of the integration of SportsHub:
Schedule
of Business Acquisition Pro Forma Information
| |
March 31, 2022 | |
| |
| |
Revenues | |
$ | 2,853,636 | |
| |
| | |
Loss from continuing operations | |
| (7,397,148 | ) |
Less: dividends accrued on series B preferred stock | |
| (3,595 | ) |
Net loss from continuing operations available to ordinary shareholders | |
| (7,400,743 | ) |
| |
| | |
Net income (loss) from discontinued operations, net of tax, available to
ordinary shareholders | |
| (108,000 | ) |
Net loss available to ordinary shareholders | |
| (7,508,743 | ) |
| |
| | |
Basic and diluted: | |
| | |
Net loss from continuing operations per share | |
$ | (3.18 | ) |
Net loss from discontinued operations per share | |
| (0.05 | ) |
Net loss per share | |
$ | (3.23 | ) |
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 Acquisition been completed as of the date indicated or the results that may be obtained
in the future.
Note
6 – Line of Credit
The
Company, through the SportsHub Acquisition, has available a variable rate (8.75% as of March 31, 2023) bank line of credit for $5,000,000,
expiring June 15, 2023. There was $4,613,151 outstanding as of March 31, 2023.
On
February 13, 2023, the Company entered into a Revolving Credit Agreement with Platinum Bank (“Lender”) and executed a
variable rate (8.50%
as of March 31, 2023) revolving promissory note of $7,000,000,
expiring January 26, 2025. As collateral, the Company granted a security interest in and to all of the Company’s right, title
and interest in certain assets on account at Platinum Bank, together with all financial assets, security entitlements with respect
to such financial assets, investment property, securities and other property, to secure the payment and performance of the revolving
credit agreement. The Company incurred $7,500
in debt issuance costs to be amortized over the term of the revolving note. There were no borrowings under the line of credit as of
March 31, 2023.
Note
7 - Debt
On January 31, 2022, FourCubed Acquisition Company, LLC (“FCAC”),
a wholly owned subsidiary of the Company, entered into a $3,250,000 term loan agreement with Platinum Bank. The agreement bears annual
interest at a rate of 4% and requires a fixed monthly payment of $59,854, consisting of principal and interest, through the term loan’s
maturity, which is January 31, 2027. The Company capitalized $25,431 of loan initiation fees associated with the agreement which are presented
net within debt on the consolidated balance sheet and amortized on a method which approximates the effective interest method to interest
expense on the consolidated statement of operations.
For
the three months ended March 31, 2023 and 2022, FCAC paid $179,561 and $119,707 in principal and interest, respectively. The remaining
principal balance outstanding on the term loan is $2,549,710 as of March 31, 2023, of which $626,549 is due within the next year. In
addition to customary non-financial covenants, the term loan requires FCAC to maintain a minimum quarterly debt service coverage ratio,
defined as adjusted EBITDA divided by debt service (interest expense and mandatory debt principal repayment) of 1.20. The Company was
in compliance with the debt service coverage ratio as of March 31, 2023.
Included
in the SportsHub Acquisition was a $2,000,000 term loan agreement with a financial institution. The agreement bears annual interest at
a rate of 5.50% percent and requires a fixed monthly payment of $38,202, consisting of principal and interest, through the term loan’s
maturity, which is December 9, 2025. Included in the term loan liability is $29,975 of loan initiation fees associated with the agreement
which are presented net within debt on the consolidated balance sheet and amortized on a method which approximates the effective interest
method to interest expense on the consolidated statement of operations. For the three months ended March 31, 2023, SportsHub paid $97,644
and $16,962 in principal and interest. The remaining principal balance outstanding on the term loan is $1,169,629 as of March 31,
2023, of which $404,253 is due within the next year.
A
summary of the debt agreements is noted below:
Schedule
of Debt
| |
March 31, 2023 | |
| |
| |
Note Payable – Bank, $2,000,000 principle, secured by assets of SportsHub | |
$ | 1,169,629 | |
Note Payable – Bank, $3,250,000 principle, secured by assets of FCAC | |
| 2,549,710 | |
Total | |
| 3,719,339 | |
Less unamortized debt issuance costs | |
| 17,375 | |
Less current portion | |
| 1,030,802 | |
Long-term debt | |
$ | 2,671,162 | |
The
outstanding amount of debt as of March 31, 2023, matures by year as follows:
Schedule
of Outstanding amount Of debt
Year | |
Amount | |
2023 | |
| 768,231 | |
2024 | |
| 1,070,034 | |
2025 | |
| 1,118,514 | |
2026 | |
| 700,256 | |
2027 | |
| 62,304 | |
| |
| 3,719,339 | |
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
anticipated redomicile to the United States.
Note
8 - Convertible Debenture and Warrant
Convertible
Debenture, at Fair Value
The Company accounts for convertible
debentures using an amortized cost model. The discount for warrants, the Original Issuance Discount (“OID”) and the initial
allocation of fair value of compound derivatives reduce the initial carrying amount of the convertible notes. The carrying value is accreted
to the stated principal amount at contractual maturity using the effective-interest method with a corresponding charge to interest expense.
Debt discounts are presented on the consolidated balance sheets as a direct deduction from the carrying amount of that related debt.
The Company made an irrevocable election at the time of issuance of the
Debenture to record the Debenture at its fair value (the “Fair Value Option”) with changes in fair value recorded through
the Company’s consolidated statements of operations within other income (expense) at each reporting period. The Fair Value Option
provides the Company a measurement basis election for financial instruments on an instrument-by-instrument basis.
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 (the “Debenture”) in the aggregate
principal amount of $4,400,000 for a purchase price of $4,000,000 on February 15, 2023. The Debenture is convertible, at any time,
and from time to time, at Alpha’s option, into ordinary shares of the Company (the “Conversion Shares”), at an initial
conversion price equal to $7.00 per share, subject to adjustment as described below and in the Debenture (the “Conversion Price”).
In addition, the Conversion Price of the Debenture was 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 $7.00 and the average of the five Nasdaq Official
Closing Prices immediately preceding such date (the “Reset Price”). The registration statement on Form S-1 (file No.: 333-271396)
was filed on April 21, 2023, and as a result, the Reset Price is now $4.1772.
Commencing
November 1, 2023 and continuing on the first day of each month thereafter until the earlier of (i) February 15, 2026 (the “Maturity
Date”) and (ii) the full redemption of the Debenture (each such date, a “Monthly Redemption Date”), the Company will
redeem $209,524 plus accrued but unpaid interest, and any amounts then owing under the Debenture (the “Monthly Redemption Amount”).
The Monthly Redemption Amount will be paid in cash; provided, that the Company may elect to pay all or a portion of a Monthly Redemption
Amount in ordinary shares of the Company, based on a conversion price equal to the lesser of (i) the then Conversion Price of the Debenture
and (ii) 80% of the average of the VWAPs (as defined in the Debenture) for the five consecutive trading days ending on the trading day
that is immediately prior to the applicable Monthly Redemption Date. The Company may also redeem some or all of the then outstanding
principal amount of the Debenture at any time for cash in an amount equal to the then outstanding principal amount of the Debenture being
redeemed plus accrued but unpaid interest, liquidated damages and any amounts then owing under the Debenture. These monthly redemption
and optional redemptions are subject to the satisfaction of the Equity Conditions (as defined in the Debenture).
The
Debenture initially accrues interest at the rate of 8% per annum for the first 12 months from the February 15, 2023, at the rate of 10%
per annum for the ensuing 12 months, and thereafter until Maturity, at the rate of 12%, Interest may be paid in cash or ordinary shares
of the Company or a combination thereof at the option of the Company; provided that interest may only be paid in shares if the Equity
Conditions (as defined in the Debenture) have been satisfied, including Shareholder Approval. The Debenture includes a beneficial ownership
blocker of 9.99%. The Debenture provides for adjustments to the Conversion 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 Debentures is 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 the Conversion Price, Alpha shall be extended full-ratchet anti-dilution protection (subject
to customary Exempt Transaction issuances), and such reset shall not be limited by the Floor Price.
At
the time of execution, on February 14, 2023, the Company recorded an initial debt discount of $383,333 based on the allocation of
fair value for the Debenture, which will be amortized into interest expense over term of the Debenture. For the period from February
14, through March 31, 2023, the Company recognized ($255,229) change in fair value of the convertible Debenture which is reflected in
Other income and expense in the condensed consolidated statement of operations.
The
following provides a summary of the Convertible Debenture recorded at fair value as of March 31, 2023 is presented below:
Summary of the Convertible Debenture recorded at fair value
| |
| | |
Principle amount of convertible debenture at issuance: | |
$ | 4,400,000 | |
Less: | |
| | |
Unamortized discount for warrants | |
| 1,125,303 | |
Unamortized discount for OID | |
| 383,333 | |
Change in fair value | |
| (255,229 | ) |
Balance of convertible debenture as of March 31, 2023: | |
| 3,146,593 | |
| |
| | |
Accrued interest on convertible debenture included in Accounts payable and accrued expenses as of March 31, 2023: | |
$ | 43,362 | |
Purchase
Warrant
On February 15, 2023, the Company also issued to Alpha a warrant (the “Warrant”)
to purchase 880,000 ordinary shares of the Company at an initial exercise price of $8.75 (the “Warrant Shares,” and, together
with the Conversion Shares, and any other ordinary shares of the Company that may otherwise become issuable pursuant to the terms of the
Debenture and Warrant, the “Underlying Shares”). 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 was subject to an initial reset immediately prior to the Company’s
filing of a proxy statement that included a shareholder proposal to approve the issuance of Underlying Share in excess of 19.99% of the
issued and outstanding ordinary shares on the Closing Date (the “Shareholder Proposal”) to the lower of $8.75 and the average
of the five Nasdaq Official Closing Prices immediately preceding such date the. As a result, the exercise price has been reset to $4.1772,
the average of the five Nasdaq Official Closing Prices immediately preceding April 14, 2023, the date the Company filed its preliminary
proxy statement which included the Shareholder Proposal. 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 Warrant is 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 Warrant (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.
At
the time of execution, the Company classified the Warrant as an equity contract and performed an initial fair value measurement. As
the Warrant was issued with the sale of the Debenture, the value assigned to the Warrant was based on an allocation of proceeds,
subject to the allocation to the Debenture. The Company recorded a debt discount for the Warrant of $1,174,229, based on the Black
Scholes option-pricing model which was calculated independently of the fair value of the Debenture, and recorded the Warrant as
additional paid in capital in the condensed consolidated balance sheet as of March 31, 2023. Amortization of the debt discount amounted to $65,592 for the period ended March 31, 2023 and is included in interest
expense on the condensed consolidated statements of operations.
Note
9 - 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
As
disclosed in Note 8, the Debenture and Purchase Warrants were reported at fair value, with changes in fair value of the Debenture
recorded through the Company’s condensed consolidated statements of operations as other income (expense) for the three months
ended March 31, 2023.
The
following table sets forth the Company’s consolidated financial assets and liabilities measured at fair value by level within the
fair value hierarchy at March 31, 2023:
Schedule
of consolidated financial assets and liabilities measured at fair value
|
|
|
|
| |
| | |
|
|
Convertible Debenture |
| |
Purchase
Warrants | |
Level I |
|
$ |
- |
| |
$ | - | |
Level II |
|
$ |
- |
| |
$ | - | |
Level III |
|
$ |
2,825,771 |
| |
$ | 1,174,229 | |
Total |
|
$ |
2,825,771 |
| |
$ | 1,174,229 | |
The
following table presents a reconciliation of the beginning and ending balances of the Debenture measured at fair value on a recurring
basis that uses significant unobservable inputs (Level 3) and the related expenses and losses recorded in the consolidated statement
of operations during the three months ended March 31, 2023.
Significant Unobservable Inputs (level 3) and the Related Expenses and Losses
| |
| | |
Fair Value, December 31, 2022 | |
$ | - | |
Issuance of convertible debenture | |
$ | 2,825,771 | |
Accretion for discount for warrants | |
| 48,926 | |
Accretion for discount for OID | |
| 16,667 | |
Change in fair value | |
$ | 255,229 | |
Fair Value, March 31, 2023 | |
$ | 3,146,593 | |
The fair value of the Debenture was determined using a Monte
Carlo Simulation (“MCS”) which incorporates the probability and timing of the consummation of a Fundamental Transaction event
and conversion of the Debenture as of the valuation date.
The
MCS implied a discount rate at issuance that resulted in a total value to the debenture and warrants that equated to the transaction
proceeds. This discount rate was 75.28% at issuance, and was calibrated to the March 31, 2023 valuation date by comparing the B rated
commercial paper credit spread at both dates. B spreads as follows:
Schedule
of CCC Spreads
| |
| | |
Issuance February 14, 2023 | |
| 4.13 | % |
Fair Value March 31, 2023 | |
| 2.29 | % |
The
Company valued the Debenture using a Monte Carlo Simulation model using the value of the underlying stock price of $3.80,
exercise price of $8.75,
expected dividend rate of 0%,
risk-free interest rate of 3.77%
and volatility of 52.6%.
The Company estimated the term of the warrant to be 2.9
years.
Note
10 - Convertible Preferred Stock
On
December 23, 2020, the SharpLink, Inc. board authorized the establishment and designation of 900 shares of 8% convertible preferred stock
(“Series A preferred stock”) at $0.10 par value. Additionally, the SharpLink, Inc. board reserved 415,000 shares of common
stock issuable upon the conversion of the shares of Series A preferred stock. On December 23, 2020, SharpLink, Inc. entered into a securities
purchase agreement with an investor to issue 200 shares of Series A preferred stock for $2,000,000 (“First Tranche”).
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 (e) 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 8% per annum, payable quarterly on January 1, April 1, July 1 and October 1, beginning
on the first such date after the issuance of such share of Series A preferred stock and on each conversion date in cash, or at SharpLink,
Inc.’s option, in duly authorized, validly issued, fully paid and non-assessable shares of common stock, or a combination thereof.
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, $21.1693 per share. The conversion price would be reduced if SharpLink, Inc. 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. As defined in the certificate of designations of the Series A preferred stock and upon the date
the SharpLink common stock is listed or quoted on any trading market (the “Going Public Transaction,”), all outstanding shares
of Series A preferred stock shall automatically be converted into that number of shares of common stock, subject to a beneficial ownership
limitation of 9.99%, 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 $5,000,000 of preferred stock.
Commitment
Fee – Immediately following the Second Tranche, SharpLink, Inc. shall issue preferred stock equal to the greater of either
15% of the aggregate of the First and Second Tranche or 3% of the Company’s issued and outstanding capital.
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 12% per annum or the maximum rate permitted by applicable
law until the amount is paid in full. SharpLink, Inc. accretes the carrying value of the Series A preferred stock to the full redemption
value ratably until December 23, 2021.
On
June 15, 2021, the Company 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 $6,000,000.
Commitment
Fee – Amended to provide that immediately following the Second Tranche, SharpLink, Inc. shall issue Series A-1 Preferred Stock
equal to 3% of the issued and outstanding capital of the Company.
On
July 23, 2021, the Company 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 276,582 shares of Series B preferred stock for $6,000,000.
On
July 26, 2021, the Company’s board authorized the establishment and designation of 52,502 shares of Series A-1 Preferred Stock
at $0.10 par value.
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, 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, or (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 $21.693 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-1 Preferred Stock before any distribution or payment shall be made to the holders of any Junior Securities.
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, $21.693 per share. 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 A-1 preferred
stock shall automatically be converted into that number of shares of common stock, subject to a beneficial ownership limitation of 9.99%,
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 12% per annum or the maximum rate permitted by applicable law
until the amount is paid in full.
On
July 26, 2021, the Company’s board authorized the establishment and designation of 276,582 shares of Series B Convertible Preferred
Stock (“Series B Preferred Stock”) at $0.10 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 at the rate per share
(as a percentage of the stated value per share) of 8% per annum, payable quarterly on January 1, April 1, July 1 and October 1, beginning
on the first such date after the issuance of such share of Series B Preferred Stock and on each conversion date in cash, or at the Company’s
option, in duly authorized, validly issued, fully paid and non-assessable shares of common stock, or a combination thereof.
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 $21.693 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 B Preferred Stock before any distribution or payment shall be made to the holders of any Junior Securities.
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, $21.693 per share. 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 9.99%, determined
by dividing the stated value of such share of Series B Preferred Stock by the conversion price.
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, 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 12% per annum or the maximum rate permitted by applicable law until the
amount is paid in full.
On
July 26, 2021, SharpLink, Inc. completed the MTS Merger, 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.
stockholders, resulting in SharpLink, Inc. stockholders owning approximately 86% of the capital stock of SharpLink on a fully diluted,
as-converted basis. The exchange ratio used to determine the number of shares issued to SharpLink, Inc. shareholders was 13.352, which
was calculated pursuant to the terms of the MTS Merger Agreement.
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 effective upon consummation of the MTS Merger reflecting the reverse stock
split at a ratio of one-to-two (1:2), which became effective on July 26, 2021 immediately prior to the effectiveness of the MTS
Merger.
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 123,096 shares of SharpLink,
Inc. Series A-1 Preferred Stock. Additionally, the holder of the Series A Preferred Stock received 70,099 shares of SharpLink, Inc. Series
A-1 Preferred Stock to settle the commitment fee and 369,286 shares of SharpLink, Inc. Series B Preferred Stock in exchange for $6,000,000
to settle the second tranche commitment.
Subsequent
to the MTS Merger, the holder of the Series A-1 Preferred Stock and Series B Preferred Stock converted 193,195 and 356,805 shares, respectively,
to ordinary shares of the Company, each at a 1:1 ratio. The Company had total shares outstanding of 6,880 and 6,630 Preferred Series
A-1 and 12,481 and 12,481 shares of Series B Preferred Stock as of March 31, 2023 and 2022, respectively.
Note
11 - Warrants
In conjunction with the Convertible Debenture and Warrant issuance on February
14, 2023, warrants that were previously issued to Alpha on November 19, 2021 were revalued on February 14, 2023, reducing the exercise
price from $45.00 per warrant share to $0.60 per warrant share. The Company performed a Black Scholes model for the re-pricing of the
warrants using the value of the underlying stock price of $5.10 stock price, exercise price of $0.60, expected dividend rate of 0%, risk-free
interest rate of 4.04% and volatility of 52.57% and remaining term of 2.9 years. These same assumptions were applied to the Purchase Warrants as discussed
in Note 9. The value allocated to the warrants on November 19, 2021
was $11,435 and recorded in Additional Paid-In Capital. The fair value of the re-priced warrants on February 15, 2023 was $1,218,205,
an increase of $1,206,771. The revaluation of the warrants is also recorded in Additional Paid-In Capital as of March 31, 2023 as a deemed
dividend.
Following
is a summary of the Company’s warrant activity for the three-month period ended March 31, 2023:
Schedule
of Warrant Activity
| |
Number of
Shares | | |
Weighted
Average
Exercise
Price per
Share | | |
Weighted
Average
Remaining
Life (Years) | |
Outstanding as of December 31, 2022 | |
| 464,046 | | |
$ | 0.72 | | |
| 2.96 | |
Previously issued regular warrants | |
| (266,667 | ) | |
| (8.93 | ) | |
| 0.52 | |
Revalued regular warrants | |
| 266,667 | | |
| 0.12 | | |
| 0.52 | |
Issued and vested | |
| 880,000 | | |
| 2.68 | | |
| 3.20 | |
Outstanding as of March 31, 2023 | |
| 1,344,046 | | |
$ | 2.93 | | |
| 4.13 | |
Note
12 - Stock Compensation
Option awards are generally granted with an exercise price equal to the
market price of the Company’s ordinary shares 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 plans.
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 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 made under 2020 Plan were prior to the
MTS Merger. The SharpLink, Inc. 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.
The
fair value of each stock option grant is estimated on the date of grant using the Black Scholes option pricing model with the following
assumptions:
Schedule of Fair Values of Stock Options Granted Using Black-scholes Valuation Model Assumptions
| |
March 31, 2023 | |
| |
| |
Expected volatility | |
| 53.6-53.6 | % |
Expected dividends | |
| 0.0 | % |
Expected term (years) | |
| 5.8 – 5.9 | |
Risk-free rate | |
| 3.9 – 4.1 | % |
Fair value of ordinary shares on grant date | |
| $1.70 – $2.70 | |
The
Company granted 152,250 options during the period ended March 31, 2023.
The
summary of activity under the plans as of March 31, 2023, and change during the three months ended March 31, 2023 is as follows: