ITEM 1A. RISK FACTORS 14
ITEM 1B. UNRESOLVED STAFF COMMENTS 28
ITEM 2. PROPERTIES 29
ITEM 3. LEGAL PROCEEDINGS 29
ITEM 4. MINE SAFETY DISCLOSURES 29
ITEM 6. [RESERVED] 31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 42
ITEM 9A. CONTROLS AND PROCEDURES 42
ITEM 9B. OTHER INFORMATION 43
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 43
PART III 44
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 44
ITEM 11. EXECUTIVE COMPENSATION 51
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 65
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES 66
INDEX TO FINANCIAL STATEMENTS F-1
PART
I
This
Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements within the meaning of the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that such forward-looking statements are based on our management’s beliefs and assumptions
and on information currently available to our management and involve risks and uncertainties. Forward-looking statements include statements
regarding our plans, strategies, objectives, expectations and intentions, which are subject to change at any time at our discretion.
Forward-looking statements include our assessment, from time to time of our competitive position, the industry environment, potential
growth opportunities, the effects of regulation and events outside of our control, such as natural disasters, wars or health epidemics.
Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,”
“believes,” “could,” “estimates,” “expects,” “hopes,” “intends,”
“may,” “plans,” “potential,” “predicts,” “projects,” “should,”
“will,” “would” or similar expressions.
Forward-looking
statements are merely predictions and therefore inherently subject to uncertainties and other factors which could cause the actual results
to differ materially from the forward-looking statement. These uncertainties and other factors include, among other things:
● our ability to attract and retain skilled employees;
● unexpected changes in significant operating expenses;
● changes in the supply, demand and/or prices for our products and services;
● unfavorable results in legal proceedings to which we may be subject;
Set
forth below in Item 1A, “Risk Factors” are additional significant uncertainties and other factors affecting forward-looking
statements. The reader should understand that the uncertainties and other factors identified in this Annual Report are not a comprehensive
list of all the uncertainties and other factors that may affect forward-looking statements. We do not undertake any obligation to update
or revise any forward-looking statements or the list of uncertainties and other factors that could affect those statements.
Our
consolidated financial statements appearing in this annual report are prepared in U.S. dollars and in accordance with generally accepted
accounting principles in the United States, or U.S. GAAP. All references in this Annual Report on Form 10-K to “dollars”
or “$” are to U.S. dollars and all references in this Annual Report to “NIS” are to New Israeli Shekels.
In
this Annual Report on Form 10-K, unless the context indicates otherwise, references to “SharpLink Gaming,” “SharpLink,”
“SharpLink US,” “our Company,” “the Company,” “we,” “our,” “ours”
and “us” refer to SharpLink Gaming, Inc., a Delaware corporation, and its wholly owned subsidiaries. References to
“SharpLink Israel” refer to SharpLink Gaming, Ltd., an Israel limited liability company, with which SharpLink US completed
a domestication merger in February 2024.
ITEM
1. BUSINESS
Overview
Headquartered
in Minneapolis, Minnesota, SharpLink Gaming is an online performance-based marketing company that leverages our unique fan activation
solutions to generate and deliver high quality leads to our U.S. sportsbook and global casino gaming partners.
In
December 2023, the Company discontinued investments into and operation of its C4 sports betting conversion technology (“C4”)
due to the lack of market acceptance. C4 centered on cost effectively monetizing our own proprietary audiences and our customers’
audiences of U.S. fantasy sports and casual sports fans and casino gaming enthusiasts by converting them into loyal online sports and
iGaming bettors.
SharpLink
also 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.
Continuing
Operations
In
December 2021, SharpLink acquired certain assets of FourCubed, including FourCubed’s online casino gaming-focused affiliate marketing
network, known as PAS.net (“PAS”). For more than 18 years, PAS has focused on delivering quality traffic and player acquisitions,
retention and conversions to regulated and global casino gaming operator partners worldwide. In fact, PAS won industry recognition as
the European online gambling industry’s Top Affiliate Manager, Top Affiliate Website and Top Affiliate Program for four consecutive
years by both igambingbusiness.com and igamingaffiliate.com. The strategic acquisition of FourCubed brought SharpLink talent with proven
experience in affiliate marketing services and recurring net gaming revenue (“NGR”) contracts with many of the world’s
leading online casino gambling companies, including Party Poker, bwin, UNIBET, GG Poker, 888 poker, betfair, World Poker Tour and others.
As
part of our strategy to expand our affiliate marketing services to the emerging American sports betting market, in November 2022, we
began a systematic roll-out of our U.S.-focused performance-based marketing business with the launch of 15 state-specific,
content-rich affiliate marketing websites. Our user-friendly, state-specific domains are designed to attract, acquire and drive
local sports betting and casino traffic directly to our sportsbook and casino partners’ which are licensed to operate in each
respective state. As of January 2024, we are licensed to operate in 18 jurisdictions and own and operate sites serving 17 U.S.
states (Arizona, Colorado, Iowa, Illinois, Indiana, Kansas, Louisiana, Maryland, Michigan, New Jersey, New York, Ohio, Pennsylvania,
Tennessee, Virginia, West Virginia and Wyoming). As more states legalize sports betting, our portfolio of
state-specific affiliate marketing properties may expand to include them. We largely utilize search engine optimization and
programmatic advertising campaigns to drive traffic to our direct-to-player (“D2P”) sites.
In
the first quarter of 2023, we unveiled SharpBetting.com, a U.S. sports betting education hub for experienced and novice sports fans.
SharpBetting.com is a robust educational website dedicated to teaching new sports betting enthusiasts the fundamentals of, and winning
strategies for, navigating the legal sports betting landscape responsibly.
Today,
our vision is to power a targeted and personalized online sports betting and casino gaming environment that organically introduces fans
to our operator partners through relevant tools and rich content – all in a safe, credible and responsible environment.
During
the fiscal years ended December 31, 2023 and 2022, our continuing operations generated revenues of $4,952,725 and $3,489,948 respectively,
representing an increase of 42% on a comparative year-over-year basis.
Discontinued
Operations
SharpLink’s business-building platform also included the provision of Free-To-Play (“F2P”) sports
game and mobile app development services to a marquis list of customers, which included several of the biggest names in sports and sports
betting, including Turner Sports, NBA, NFL, PGA TOUR, NASCAR and BetMGM, among others. In addition, we previously owned and operated
a variety of proprietary real-money fantasy sports and sports simulation games and mobile apps through our SportsHub/fantasy sports business
unit, which also owned and operated LeagueSafe, one of the fantasy sports industry’s most trusted sources for collecting and protecting
private fantasy league dues.
On
January 18, 2024, SharpLink sold all of the issued and outstanding shares of common stock or membership interests, as applicable, in
our Sports Gaming Client Services and SportsHub Gaming Network business units to RSports Interactive, Inc. (“RSports”)
for $22.5 million in an all-cash transaction (the “Equity Sale”), pursuant to the signing of a Purchase Agreement and other
related agreements. Nearly all of the employees of these acquired business units also moved to RSports to help ensure a seamless transaction.
The
historical results of our Sports Gaming Client Services and SportsHub Gaming Network businesses have been reflected as discontinued operations in
our consolidated financial statements for all periods prior to the Equity Sale. Additional disclosures relating to the Equity Sale are
provided in NOTE 18 – SUBSEQUENT EVENTS included in the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER
31, 2023 AND 2022.
Organizational
History
Go-Public
Merger with Mer Telemanagement Solutions Ltd.
Formerly
known as Mer Telemanagement Solutions Ltd. (“MTS”), the Company was incorporated as a public limited liability company under
the laws of the State of Israel in December 1995. In July 2021, MTS completed a merger between New SL Acquisition Corp., its wholly owned
subsidiary, and SharpLink, Inc. (the “MTS Merger”). In the MTS Merger, SharpLink, Inc. was treated as the acquirer for accounting
purposes because, among other reasons, its pre-merger shareholders held a majority of the outstanding shares of the Company immediately
following the merger. After the merger, the Company changed its name from Mer Telemanagement Solutions Ltd. to SharpLink Gaming Ltd.
(“SharpLink Israel”) and its Nasdaq ticker symbol from MTSL to SBET.
FourCubed
Acquisition
On
December 31, 2021, in a combination of cash and stock transaction, we acquired certain assets of 6t4 Company, a Minnesota corporation
and FourCubed Management, LLC, a Delaware limited liability company (collectively “FourCubed”), including FourCubed’s
iGaming and affiliate marketing network, known as PAS.net. For more than 18 years, FourCubed has provided its global iGaming operating
partners with affiliate marketing services. The strategic acquisition of FourCubed brought SharpLink an industry respected operating
team with decades of combined experience in conversion through affiliate marketing services and in securing highly profitable, recurring
net gaming revenue contracts with many of the world’s leading iGaming companies, including Party Poker, bwin, UNIBET, GG Poker,
888 poker, betfair and others. Originally established in 2005, FourCubed’s international iGaming affiliate network, Poker Affiliate
Solutions (“PAS”), is currently comprised of over 12,400 sub-affiliates and has delivered over 2.5 million referred players
since it was launched in 2008 at www.pas.net.
Merger
with SportsHub Games Network Inc. (the “SportsHub Merger”)
SharpLink
Israel, SHGN Acquisition Corp., a Delaware corporation and wholly owned subsidiary of SharpLink Israel (“Merger Subsidiary”),
SportsHub Games Network Inc. (“SportsHub”) and Christian Peterson, an individual acting as the SportsHub stockholders’
representative entered into a Merger Agreement on September 7, 2022. The Merger Agreement, as amended, contained the terms and conditions
of the proposed business combination of SharpLink Israel and SportsHub. Pursuant to the Merger Agreement, as amended, on December 22,
2022, SportsHub merged with and into Merger Subsidiary with Merger Subsidiary surviving as a wholly owned subsidiary of SharpLink Israel.
In association with the transaction, SharpLink Israel issued, in the aggregate, 431,926 ordinary shares to common and preferred stockholders
of SportsHub, on a fully diluted basis. An additional aggregate of 40,585 ordinary shares were held in escrow for SportsHub shareholders
who had not yet provided 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. On December 28, 2023, the escrow shares were disbursed to the SportsHub shareholders in accordance with the
Merger Agreement.
Sale
of Legacy MTS Business
On
December 31, 2022, SharpLink Israel 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, Entrypoint
South Ltd. will pay SharpLink an earn-out payment (an “Earn-Out Payment”) equal to three times Legacy MTS’ Earnings
Before Interest, Taxes Depreciation and Amortization (“EBITDA”) 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). Within ten (10) calendar days of the approval
by the board of directors of the Buyer of the audited annual financial statements of the Business as at December 31, 2023, and for the
12-month period ending on such date (as applicable, the “Earn-Out Schedule Delivery Date”), which shall occur no later than
May 31, 2024, Buyer shall deliver to the Seller a schedule certified by its Chief Executive Officer and Chief Financial Officer (an “Earn-Out
Schedule”) setting forth the computation of the Earn-Out Payment (as applicable), if any, together with the calculation thereof
in an agreed Excel table format (including, but not limiting to all relevant details of the EBITDA calculations for the year 2023).
Change
from Foreign Private Issuer to Domestic Issuer
Prior
to January 1, 2023, SharpLink Israel qualified as a foreign private issuer. There are two tests to determine whether a foreign company
qualifies as a foreign private issuer: the U.S. shareholder test and U.S. business contacts test. Under the U.S. shareholder test, a
foreign company will qualify as a foreign private issuer if 50% or less of its outstanding voting securities are held by U.S. residents.
If a foreign company fails this shareholder test, it will still be considered a foreign private issuer unless it fails any one part of
the U.S. business contacts test. The U.S. business contacts test includes the following three parts: 1) the majority of the company’s
executive officers or directors are U.S. citizens or residents; 2) more than 50% of the issuer’s assets are located in the United
States; or 3) the issuer’s business is administered principally in the United States. Because we failed these tests, we ceased
being a foreign private issuer and effective January 1, 2023, we began complying with the reporting requirements under the rules and
regulations of the Exchange Act, applicable to U.S. domestic companies.
Change
in Share Capital
On
October 24, 2023, SharpLink Israel held an Extraordinary General Meeting of Shareholders (the “Meeting”) at which shareholders
approved the adoption of an amendment to SharpLink Israel’s amended and restated articles of association to increase authorized
share capital of SharpLink Israel from 9,290,000 ordinary shares, nominal value NIS 0.60 per share, to 100,000,000 ordinary shares, nominal
value NIS 0.60 per share, and a corresponding amendment to SharpLink Israel’s memorandum of association.
Recent
Equity Sale of Sports Gaming Client Services and SportsHub Gaming Network Operating Segments
On
January 18, 2024, SharpLink Israel (“Parent Seller”) and SLG1 Holdings, LLC, a Delaware limited liability company and wholly
owned subsidiary of SharpLink (“Subsidiary Seller”), SHGN Acquisition Corp. (“SHGN”) and together with Parent
Seller and Subsidiary Seller, the (“Seller”), a Delaware corporation and wholly owned subsidiary of SharpLink, entered into
a Purchase Agreement (the “PA”) with RSports Interactive, Inc., a Minnesota corporation (“Buyer”). The Subsidiary
Seller owned all of the issued and outstanding membership interests of Sports Technologies, LLC, a Minnesota limited liability company,
SHGN and Holdings Quinn, LLC, a Delaware limited liability company (collectively referred to as the “Targets”). The PA contemplated
the sale of the Company’s Sports Gaming Client Services and SportsHub Gaming Network business units to the Buyer, by selling all of the issued
and outstanding shares of common stock or membership interests of the Targets and the Acquired Subsidiaries for $22,500,000 in an all
cash transaction.
SHGN
owns all of the membership interests in Virtual Fantasy Games Acquisitions, LLC , a Minnesota limited liability company; LeagueSafe Management,
LLC , a Minnesota limited liability company; SportsHub Reserve, LLC, a Minnesota limited liability company; SportsHub PA, LLC, a Pennsylvania
limited liability company; SportsHub Operations, LLC, a Minnesota limited liability company; SportsHub Holdings, LLC, a Minnesota limited
liability company; SportsHub Regulatory, LLC, a Minnesota limited liability company; and SportsHub Player Reserve, LLC, a Minnesota limited
liability company (collectively, the “Acquired Subsidiaries”).
As
a result of the Equity Sale, we have ceased our Sports Gaming Client Services and SportsHub Gaming Network operations. The historical results
of these business segments have been reflected as discontinued operations in our consolidated financial statements for all periods prior
to the closing date of the Equity Sale on January 18, 2024. See NOTE 18 – SUBSEQUENT EVENTS included in the NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022.
Nasdaq
Notice
On
May 23, 2023, SharpLink received a notice (the “Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market
(“Nasdaq”) stating that SharpLink did not comply with the equity standard for continued listing on The Nasdaq Capital Market.
Nasdaq Listing Rule 5550(b)(1) (the “Rule”) requires listed companies to maintain stockholders’ equity of at least
$2.5 million under the net equity standard. As of the SharpLink Quarterly Report on Form 10-Q for the three and nine-month periods ended
September 30, 2023, SharpLink reported total stockholders’ deficit of $4,463,917. SharpLink did not meet the alternative standards
for market value of listed securities or net income from continuing operations, thus SharpLink was not in compliance with Nasdaq’s
Listing Rule.
As
reported on a Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on December 12, 2023, SharpLink submitted
a hearing request with the Nasdaq Hearings Panel (the “Panel”) on November 28, 2023, relating to the Staff’s determination
to delist the Company’s securities from Nasdaq due to the Company’s failure to meet the minimum $2.5 million shareholders’
equity requirement for continued listing as defined by the Rule. On November 28, 2023, the Company was notified by Nasdaq that an oral
hearing (the “Hearing”) had been scheduled for February 20, 2024; and, the delisting action referenced in the Staff’s
determination letter, dated November 21, 2023, had been stayed, pending a final determination by the Panel.
On
January 25, 2024, SharpLink filed a Current Report on Form 8-K with the SEC, disclosing details of the sale of its Sports Gaming Client Services and SportsHub Gaming Network business units to RSports Interactive, Inc. for $22.5 million in an all-cash transaction
(the “Equity Sale”). As a result of the Equity Sale, the Company’s total stockholders’ equity exceeded $2.5 million
as of the date of the above referenced Form 8-K filing. As a result of the Equity Sale, the Company believed that it had regained compliance
with all applicable continued listing requirements and had requested that the Staff determine whether the Hearing should be cancelled.
On
February 7, 2024, SharpLink received formal notification from Nasdaq that the Company’s previously announced deficiency under the
Rule had been cured, and the Company had regained compliance with all applicable continued listing standards. Therefore, the Hearing
before the Nasdaq Hearings Panel, originally scheduled for February 20, 2024, was cancelled. SharpLink’s Common Stock continues
to be listed and traded on Nasdaq. See NOTE 18 – SUBSEQUENT EVENTS included in the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022.
Redomestication
from Israel to Delaware
On
February 13, 2024, SharpLink Israel completed its previously announced domestication merger (“Domestication Merger”), pursuant
to the terms and conditions set forth in an Agreement and Plan of Merger (the “Domestication Merger Agreement”), dated June
14, 2023 and amended July 24, 2023, among SharpLink Israel, SharpLink Merger Sub Ltd., an Israeli company and a wholly owned subsidiary
of SharpLink US (“Domestication Merger Sub”) and SharpLink Gaming, Inc. (“SharpLink US”). The Domestication Merger
was achieved through a merger of SharpLink Merger Sub with and into SharpLink Israel, with SharpLink Israel surviving the merger and
becoming a wholly owned subsidiary of SharpLink US. The Domestication Merger was approved by the shareholders of SharpLink Israel at
an extraordinary special meeting of shareholders held on December 6, 2023. SharpLink US’s Common Stock commenced trading on the
Nasdaq Capital Market under the same ticker symbol, SBET, on February 14, 2024. See NOTE 18 – SUBSEQUENT EVENTS included in the
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022.
Operating
Segments
The
table below reflects our revenue by operating segment for the years indicated below:
For the Year Ended December 31,
Affiliate Marketing Services – United States 754,446 62,250
Affiliate
Marketing Services – International
On
December 31, 2021, in a combination of cash and stock transaction, SharpLink acquired certain assets of FourCubed, including FourCubed’s
iGaming and affiliate marketing network, known as PAS.net (“PAS”). For more than 18 years, PAS has focused on delivering
quality traffic and player acquisitions, retention and conversions to U.S. regulated and global iGaming operator partners worldwide.
In fact, PAS won industry recognition as the European online gambling industry’s Top Affiliate Manager, Top Affiliate Website and
Top Affiliate Program for four consecutive years by both igambingbusiness.com and igamingaffiliate.com. The strategic acquisition of
FourCubed brought SharpLink an industry respected operating team with decades of combined experience in conversion through affiliate
marketing services and in securing recurring net gaming revenue (“NGR”) contracts with many of the world’s leading
iGaming companies, including Party Poker, bwin, UNIBET, GG Poker, 888 poker, betfair and World Poker Tour (WPT Global), among others.
The
PAS affiliate network is comprised of more than 12,400 referred sub-affiliates and has delivered over 2.5 million referred players since
the network’s launch in 2008.
Affiliate
Marketing Services – United States
As
part of our strategy to deliver unique fan activation solutions to our sportsbook and casino partners, in November 2022, we executed
the first phase of a planned multi-phase roll-out of our U.S.-focused direct to player (“D2P”) business with the launch
of state-specific affiliate marketing websites. These state-specific domains are designed to attract, acquire and drive local sports
betting and casino traffic directly to the Company’s sportsbook and casino partners’ which are licensed to operate in
each respective state. As of March 29, 2024, we are licensed to operate in 18 jurisdictions and own and operate D2P sites serving 17
U.S. states.
Specifically,
the following proprietary affiliate marketing web properties are in operation:
● Arizona – sharpbettingaz.com
● Colorado – sharpbettingco.com
● Iowa – sharpbettingia.com
● Illinois – sharpbettingil.com
● Indiana – sharpbettingin.com
● Kansas – sharpbettingks.com
● Louisiana – sharpbettingla.com
● Maryland – sharpbettingmd.com
● Michigan – sharpbettingmi.com
● New Jersey – sharpbettingnj.com
● New York – sharpbettingny.com
● Ohio – sharpbettingoh.com
● Pennsylvania – sharpbettingpa.com
● Tennessee – sharpbettingtn.com
● Virginia – sharpbettingva.com
● West Virginia – sharpbettingwv.com
● Wyoming – sharpbettingwy.com
All
17 websites feature key highlights, sports betting offers and special promo codes for partner sportsbooks operating in each state. In
addition, four of the 17 state sites – Michigan, New Jersey, Pennsylvania and West Virginia where iGaming has been legalized –
feature similar content relating directly to SharpLink’s online casino partners. As more states legalize sports betting, our portfolio
of state-specific affiliate marketing properties may expand to include them. We largely utilize search engine optimization and programmatic
advertising campaigns to drive traffic to our D2P sites.
In
the first quarter of 2023, we announced that in connection with our national audience aggregation and phased D2P revenue growth initiatives,
phase two of our plan was implemented when we launched SharpBetting.com, a sports betting education hub for experienced and novice sports
fans. SharpBetting.com is a robust educational website dedicated to teaching new sports betting enthusiasts the fundamentals of, and
winning strategies for, navigating the legal sports betting landscape.
Affiliate
Marketing Services Revenue Models
SharpLink
generates revenue from both our Affiliate Marketing Services International and United States segments by earning a commission from sportsbooks
and casino operators on new depositors directed to them via our PAS affiliate marketing network in international markets and from our
proprietary D2P websites in America. Depending on the terms of our marketing agreement with each operator and the type of license SharpLink
has been granted in a particular state by its regulator, commissions may be paid in the form of cost per acquisition (“CPA”)
or by sharing in NGR generated by the referred depositor.
Market
Opportunity
Search
for odds or lines on any given match-up, and the vast majority of search results will spring from affiliate marketing sites. Affiliates
play a critical role in the online sports betting and casino gaming ecosystems, especially in newly regulated states in the United States.
The
affiliate market has a long history of operating in tandem with sports betting, reaching back to much-more-mature markets like the United
Kingdom and countries throughout Europe – or even beyond locally regulated online betting – and into the early annals of
U.S. sports betting upon the 2018 repeal of the Professional and Amateur Sports Protection Act (“PASPA”). However, today,
the value of a modern affiliate marketer goes far beyond the number of first-time depositors they generate in a month. Rather, they also
provide expert feedback, educate new players on betting responsibly and offer a low-risk marketing alternative to traditional advertising,
as they are paid on performance.
Virtually
every online gambling operator in the Unites States and in Europe utilizes affiliate marketing to get their brand in front of the most
valuable customers — the high intent customers who are well-aware, well-informed and already interested players that generate more
revenue. In fact, many of the end-users that browse an affiliate marketing website have already decided that they are going to open an
account with a sportsbook or online poker room and wager online; however, they have not yet decided where they want to do that.
Due
to technical tools and features like digital marketing, analytics and the extended usage of cookies, affiliate marketing in sports betting
and online casino gaming has become extremely cost effective to implement and measure, making it a billion dollar industry. According
to data analysts at Demand Sage, the global affiliate marketing industry is growing at a “very handsome rate,” with a current
market size of $27.8 billion that is projected to reach $48 billion by 2027. Affiliate marketing has been a critical strategy in ecommerce
for nearly a decade. In fact, Influencer Marketing Hub projects that affiliate marketing spend will reach $15.7 billion globally in 2024.
That’s up from $8.6 billion in 2017.
Competition
A
number of businesses exist in the market for performance marketing solutions for the sports betting and casino gaming industries. These
businesses generally fall into three categories: small companies with some similar products but with minimal distribution; companies
that acknowledge official rights but lack meaningful scale; and genuine competitors that offer similar products and services to the same
target clients. SharpLink considers its most direct and relevant competitors to be Gambling.com, Catena Media and Bettor Collective.
The
specific industries in which we operate are characterized by dynamic customer demand and technological advances, and there is significant
competition among sports betting and casino gaming affiliate marketers. A number of established, well-financed companies producing online
gaming and/or sports betting fan activation solutions compete with our service offerings, and other well-capitalized companies may introduce
competitive services. There has also been consolidation among competitors in the sports betting and casino gaming industries and such
consolidation and future consolidation could result in the formation of larger competitors with increased financial resources and altered
cost structures, which may enable them to offer more competitive products and services, gain a larger market share, expand their product
and service offerings and broaden their geographic scope of operations.
Our
Competitive Strengths
SharpLink
believes that the principal differentiating factors that set us apart from our competition include our market-centric portfolio of fan
activation solutions, comprised of our proprietary affiliate marketing network, owned and operated U.S. state-specific D2P web properties,
long-standing relationships with sportsbooks and casino gaming operators, ease of integration with our operating partners and scalability
of our growth platform. SharpLink’s products, services, experience, industry relationships and corporate culture allow it to compete
effectively across all these factors.
Key
Growth Strategies
Government
Regulation
We
operate in various jurisdictions and our business is subject to extensive regulation under the laws, rules and regulations of the jurisdictions
in which we operate. Violations of laws or regulations in one jurisdiction could result in disciplinary action in that and other jurisdictions.
We
have a progressive U.S. licensing strategy. We are currently licensed or authorized to provide affiliate marketing services to sports
betting and online casino gaming operators in 17 U.S. states. State gaming authorities may, subject to certain administrative procedural
requirements, (i) deny an application, or limit, condition, revoke or suspend any license issued by them; (ii) impose fines, either
on a mandatory basis or as a consensual settlement of regulatory action; (iii) demand that named individuals or stockholders be
disassociated from a gaming business; and (iv) in serious cases, liaise with local prosecutors to pursue legal action, which may
result in civil or criminal penalties.
Among
others, applicable laws include those regulating privacy, data/cyber security, data collection and use, cross-border data transfers,
advertising regulations and/or sports betting and online gaming laws and regulations. These laws impact, among other things, data collection,
usage, storage, security and breach, dissemination (including transfer to third parties and cross-border), retention and destruction.
Certain of these laws provide for civil and criminal penalties for violations.
The
data privacy and collection laws and regulations that affect SharpLink’s business include, but are not limited to:
Other
regulations that affect SharpLink’s business include:
For
more detailed information regarding government regulations that has historically affected or may affect our business in the foreseeable
future, please refer to Item 1a. Risk Factors – Risks Related to Legal Matters and Regulations Affecting SharpLink’s Business.
Compliance
SharpLink
has implemented (and is committed to continually refining and enhancing) a holistic internal compliance program to help ensure that
we remain in full compliance with state regulatory licensing requirements imposed on us in connection with our business operations. Compliance
is an important cornerstone of our growth strategy and we are committed to building our business and our reputation by adhering to the
highest compliance standards.
Our
Headquarters
Our
principal executive offices are located at 333 Washington Avenue North, Suite 104, Minneapolis, Minnesota and our telephone number is
612-293-0619. Our website address is www.sharplink.com. The information contained on, or that can be accessed through, our website is
not a part of this Annual Report. We have included our website address in this Annual Report solely as an inactive textual reference.
Human
Capital Resources
As
of December 31, 2023, SharpLink employed a total of 51 full-time employees. However, upon closing of the Equity Sale of our Sports Gaming Services and SportsHub Gaming Network businesses to RSports on January 18, 2024, 46 people previously employed by us moved to
RSports in connection with the Equity Sale. SharpLink outsources certain employment benefits and other employee-related administrative
functions to a third party service provider, which serves as a co-employer of its employees for these purposes. None of SharpLink’s
employees are currently represented by a labor union or covered by a collective bargaining agreement, and SharpLink’s management
believes that the company’s relations with its employees are good.
We
acknowledge that our employees are our most valued asset and the driving force behind our success. For this reason, we aspire to be an
employer that is known for cultivating a positive and welcoming work environment and one that fosters growth, provides a safe place to
work, supports diversity and embraces inclusion. To support these objectives, our human resources programs are designed to develop talent
to prepare them for critical roles and leadership positions for the future; reward and support employees through competitive pay, benefit
and perquisite programs; enhance our culture through efforts aimed at making the workplace more engaging and inclusive; acquire talent
and facilitate internal talent mobility to create a high performing, diverse workforce; engage employees as brand ambassadors of our
products; and evolve and invest in technology, tools and resources to enable employees at work.
Intellectual
Property
Intellectual
property rights are important to the success of SharpLink’s business. SharpLink relies on a combination of database, trademark,
trade secret, confidentiality and other intellectual property protection laws in the United States and other jurisdictions, as well as
license agreements, confidentiality procedures, non-disclosure agreements with third parties and other contractual protections, to protect
its intellectual property rights, including its databases, know-how and brand. In the United States, SharpLink currently hold several
domain names and, in the future, it may acquire patents, additional trademarks and domain names. As of March 29, 2024, SharpLink owns
294 domain name registrations.
It
has not always been, and in the future may not be, possible or commercially desirable to obtain registered protection for SharpLink’s
products, software, databases or other technology. In such situations, SharpLink relies on laws governing protection of unregistered
intellectual property rights, confidentiality and/or contractual exclusivity of and to underlying data and technology to prevent unauthorized
use by third parties. SharpLink uses Open Source Software in its services and periodically reviews its use of Open Source Software to
attempt to avoid subjecting its services and product offerings to conditions SharpLink does not intend to impose on them.
SharpLink
controls access to and use of its data, databases, and other confidential information through the use of internal and external controls,
including contractual protections with employees, contractors, clients and partners. SharpLink requires its employees, consultants and
other third parties to enter into confidentiality and proprietary rights agreements, and it controls and monitors access to its data,
database, software, documentation, proprietary technology and other confidential information. SharpLink’s policy is to require
all of its employees and independent contractors to sign agreements assigning to it any inventions, trade secrets, works of authorship,
developments, processes and other intellectual property generated by them on its behalf and under which they agree to protect its confidential
information. In addition, SharpLink generally enters into confidentiality agreements with its business partners.
Where
You Can Find Additional Information
The
Company currently files with the U.S. Securities and Exchange Commission (the “SEC”) current reports on Form 8-K, and amendments
to those reports and will furnish its proxy statement. Further, all filings made by SharpLink when it qualified as a foreign private
issuer are also maintained with the SEC. These filings are available free of charge on the Company’s website, www.sharplink.com,
shortly after they are filed with the SEC, including filings made by SharpLink and SharpLink Israel. The SEC maintains an Internet website,
www.sec.gov, which contains reports and information statements and other information regarding issuers.
ITEM
1A. RISK FACTORS
The
risk factors discussed below could cause our actual results to differ materially from those expressed in any forward-looking statements.
Although we have attempted to list comprehensively these important factors, we caution you that other factors may in the future prove
to be important in affecting our results of operations. New factors emerge from time to time and it is not possible for us to predict
all of these factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained in any forward-looking statement.
Risks
Related to Our Business and the Industries We Serve
SharpLink
has a history of losses and may not be able to achieve or sustain profitability in the future.
We
have a history of incurring net losses and we may not achieve or maintain profitability in the future. We experienced net losses of $14,243,182
and $15,233,378 for the years ended December 31, 2023 and 2022, respectively, after factoring a net loss from discontinued operations
of $2,994,584 and $1,137,732 for the same comparable periods, respectively. As of December 31, 2023, we had an
accumulated deficit of $87,857,456. We cannot predict when or whether we will reach or maintain profitability.
If
we are unable to increase our revenues or our operating costs are higher than expected, we may not be able to achieve profitability and
our operating results may fluctuate significantly.
We
may not be able to accurately forecast our revenues or future revenue growth rate. Many of our expenses, particularly personnel costs
and monthly IT and insurance costs, are relatively fixed, but we may experience higher than expected operating costs, including increased
selling and marketing costs, communications costs, travel costs, third-party technology licensing fees, audit and legal fees, professional
fees and other costs. As a result, we may not be able to adjust spending quickly enough to offset any unexpected increase in expenses
or revenue shortfall. Increased competition could lead to significant price pressure for the services we provide, which could make profitability
even more challenging.
If
operating costs exceed our expectations and cannot be adjusted accordingly, our results of operations and financial position could be
materially and adversely affected. Additionally, we may not be able to sustain our current revenue and any revenue growth. Reduced demand,
whether due to a weakening of the global economy, reduction in consumer spending, competition or other reasons, may result in decreased
revenues and growth, and a material adverse effect on our operating results.
We
will require additional capital to support our growth plans and such capital may not be available on reasonable terms or at all. If we
do not raise sufficient capital, there is substantial doubt about our ability to continue as a going concern.
In
the pursuit of SharpLink’s long-term growth strategy and the development of its affiliate marketing services and related businesses,
the Company has sustained continued operating losses. During the years ended December 31, 2023 and December 31, 2022, the Company had
a net loss from continuing operations of $11,248,598 and $14,095,646, respectively; and cash used in operating activities from continuing
operations of $7,910,996 for the year ended December 31, 2023 and cash used for operating activities from continuing operations of $8,047,278
for the prior year.
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 increase 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 audited 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.
Until
we can generate a sufficient amount of revenue to finance our capital needs, which we may never achieve, we expect to finance our cash
needs primarily through public or private equity financings or conventional debt financings. We cannot be certain that additional funding
will be available on acceptable terms, or at all. If we are not able to secure additional funding when needed to support our business
growth and to respond to business challenges, track and comply with applicable laws and regulations, develop new technology and services
or enhance our existing offering, improve our operating infrastructure, enhance our information security systems to combat changing cyber
threats and expand personnel to support our business, we may have to delay or reduce the scope of future growth initiatives. Moreover,
any additional equity financing that we obtain may dilute the ownership held by our existing shareholders. The economic dilution to our
shareholders will be significant if our stock price does not materially increase, or if the effective price of any sale is below the
price paid by a particular shareholder. Any debt financing could involve substantial restrictions on activities and creditors could seek
additional pledges of some or all of our assets. If we fail to obtain additional funding as needed, we may be forced to cease or scale
back operations, and our results, financial conditions and stock price would be adversely affected.
SharpLink
relies on our relationships with sportsbooks and online casino gaming operators and loss of existing relationships or failure to renew
or expand existing relationships may cause loss of a competitive advantage or require SharpLink to modify, limit or discontinue certain
offerings, which could materially and adversely affect our business, financial condition, results of operations and prospects.
SharpLink
relies on relationships with online sports betting bookmakers and casino gaming operators, and the future success of our business may
depend, in part, on our ability to obtain, retain and expand such relationships. SharpLink’s arrangements with these partners may
not continue to be available to us on commercially reasonable terms, or at all. In addition, the industries we operate in are highly
competitive. It is common for multiple competitors to provide services to clients simultaneously and we expect this to continue. In the
event we lose existing arrangements or cannot renew and expand existing arrangements, we may be required to discontinue or limit our
offerings or services, which could materially and adversely affect our financial condition and business operation.
SharpLink
operates in a competitive market and may lose clients and relationships to both existing and future competitors.
The
market for performance marketing services is competitive and rapidly changing. The online sports betting and casino gaming industries
are particularly competitive and fast growing. Competition in these markets may increase further if economic conditions or other circumstances
cause consumer bases and consumer spending to decrease and service providers to compete for fewer consumer resources. Our existing and
future competitors have, or may in the future have or obtain, greater name recognition, larger customer bases, better technology or data,
lower prices, exclusive or better access to data, greater user traffic or greater financial, technical or marketing resources than we
have. Our competitors may be able to undertake more effective marketing campaigns, obtain more data, adopt more aggressive pricing policies,
make more attractive offers to potential employees, subscribers, sports betting and casino gaming operators, sub-affiliate partners and
content providers or may be able to respond more quickly to new or emerging technologies or changes in user requirements. If our competitors
develop more advanced and effective performance marketing solutions before we do, our business and profitability could be materially
and adversely affected. If we are unable to maintain or develop relationships with sportsbooks and online casino gaming operators, our
revenues will fail to grow or may even decline, in each case having a material adverse effect on our business, financial condition, results
of operations and prospects.
SharpLink’s
business may be materially and adversely affected if we are unable to keep pace with or adapt to rapidly changing technology, evolving
industry standards and changing regulatory requirements, or if we do not invest in product development and provide services that are
attractive to our partners.
Our
future business and financial success will depend on our ability to continue to anticipate the needs of our partners or potential clients
in order to successfully introduce new and upgraded performance marketing products and services. To be successful, SharpLink must be
able to quickly adapt to changes in technology, industry standards and regulatory requirements by continually enhancing our technology,
services and solutions. Developing new services and upgrades to services, as well as integrating and coordinating current services, imposes
burdens on our staff and management. These processes are costly and time intensive, and our efforts to develop, integrate and enhance
our products and services may not be successful. In addition, successfully scaling up and launching and selling a new or upgraded product
or service puts additional strain on our sales and marketing resources. Investing resources towards increasing the depth of our coverage
within existing markets imposes additional burdens on our personnel and capital resources. If we are unable to manage our expansion efforts
effectively, in obtaining greater market share or in obtaining widespread adoption of our current or future products and services, we
may not be able to offset the expenses associated with the launch and marketing of the new or upgraded services, which could have a material
adverse effect on our financial results.
If
we are unable to develop new or upgraded products and services or decide to combine, shift focus from, or phase out a product or service,
then our clients may choose a competitive product or service over us, our revenues may decline, and our ability to achieve or maintain
profitability may be reduced. If we incur significant costs in developing new or upgraded services or combining and coordinating existing
services, if we are not successful in marketing and selling these new services or upgrades, or if our partners fail to accept these new
or combined and coordinating services, then there could be a material adverse effect on our results of operations, and we may never achieve
profitability. If we eliminate or phase out a product or service and we are not able to offer and successfully market and sell alternative
products or services, our revenues may decrease, which could have a material adverse effect on our results of operations.
Our
ability to effectively monitor and respond to the rapid and ongoing developments and expectations relating to the environmental, social
and governance matters, including related social expectations and concerns, may impose unexpected costs or results in reputational or
other harm that could have a material adverse effect on our business.
There
is an increasing focus from certain investors, employees, regulators, listing exchanges and other stakeholders concerning corporate responsibility
and sustainability matters, specifically related to environmental, social and governance (“ESG”) factors. Some investors
and investor advocacy groups may use these factors to guide investment strategies and, in some cases, investors may choose not to invest
in us if they believe our policies relating to corporate responsibility are inadequate. Third-party providers of corporate responsibility
ratings and reports on companies have increased to meet growing investor demand for measurement of corporate responsibility performance,
and a variety of organizations currently measure the performance of companies on such ESG
topics, and the results of these assessments are widely publicized. Investors, particularly institutional investors, use these ratings
to benchmark companies against their peers, and major institutional investors have publicly emphasized the importance of ESG measures
to their investment decisions. Topics taken into account in such assessments include, among others, companies’ efforts and impacts
on climate change and human rights, ethics and compliance with law, diversity and the role of companies’ board of directors in
supervising various sustainability issues. In light of investors’ increased focus on ESG matters, if we are perceived as lagging
with respect to ESG initiatives, these investors may engage with us to improve ESG disclosures or performance and may also make voting
decisions, or take other actions, to hold us and our Board accountable.
In
addition, there are rapid and ongoing developments and changing expectations relating to ESG matters, and the criteria by which our corporate
responsibility practices are assessed may change, which could result in greater expectations of us and cause us to undertake costly initiatives
to satisfy such new criteria. If we elect not to or are unable to adequately recognize and respond to such developments and governmental,
societal, investor and consumer expectations relating to such ESG matters, we may miss corporate opportunities, become subject to additional
scrutiny or incur unexpected costs. We may face risk of litigation or reputational damage in the event that our corporate responsibility
procedures or standards do not meet the standards set by various constituencies.
We
may also face reputational damage if we are unable to achieve an acceptable ESG or sustainability rating from third-party rating services.
A low ESG or sustainability rating by a third-party rating service could also result in the exclusion of our Common Stock from consideration
by certain investors who may elect to invest with our competitors instead. Ongoing focus on corporate responsibility matters by investors
and other parties as described above may impose additional costs or expose us to new risks. Any failure or perceived failure by us in
this regard could have a material adverse effect on our reputation and on our business, financial condition or results of operations,
including the sustainability of our business over time, and could cause the market value of our Common Stock to decline.
Further,
our emphasis on ESG issues may not maximize short-term financial results and may yield financial results that conflict with the market’s
expectations. We may in the future make business decisions that may reduce our short-term financial results if we believe that the decisions
are consistent with our ESG goals, which we believe will improve our financial results over the long term. These decisions may not be
consistent with the short-term expectations of our stockholders and may not produce the long-term benefits that we expect, in which case
our business, financial condition and results of operations could be harmed.
The
loss or significant reduction in business from one or more of our large partners could materially and adversely affect our business,
financial condition and results of operations.