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.
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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.
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.
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.
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.
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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).
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.
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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.
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.
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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.
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.
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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.
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.
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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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Results of Operations
The following table provides certain selected financial information for
the periods presented:
December 31, December 31,
2022 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 (15,476,517
continuing operations ) (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.
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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.
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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.
Liquidity and Capital Resources
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. While there can be no guarantees, we believe the cash on
hand, coupled with cash generated from revenue and additional equity and debt
capital of $11.0 million raised in the first quarter of 2023, will be sufficient
to fund the Company through the end of 2023. In addition, we intend to pursue
other opportunities of raising capital with outside investors.
For the year ended December 31, 2022, we raised capital of $3,250,000 from our
commercial lender, Platinum Bank, pursuant to a term note issued in connection
with our acquisition of FourCubed. On February 13, 2023, we signed a two-year
$7.0 million revolving loan agreement with Platinum Bank. On February 14, 2023,
we closed on a $4.4 million convertible debenture through a non-brokered private
placement with an existing institutional shareholder of the Company.
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.
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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.
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SHARPLINK GAMING, INC. 