Note 10 - Fair Value

12 Months Ended

Dec. 31, 2024

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note 10 - Fair Value

In accordance with fair value accounting guidance, the Company determines fair value based on the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

As disclosed in Note 8, SharpLink entered into a Settlement Agreement on January 19, 2024 for the 2023 Warrant for purposes of the Warrant Repurchase at $900,000. On March 6, 2024, SharpLink entered into an Exchange Agreement (the "Exchange Agreement”) with Alpha to change the Warrant Repurchase of $ 900,000. Pursuant to the terms set forth in the Exchange Agreement, the Company agreed to exchange the 2023 Warrant for (i) 156,207 shares of Common Stock (the "Shares”), (i) a pre-funded warrant in the amount of 469,560 shares of Common Stock (the "Pre-Funded Warrant”) and ( i) the remaining unexchanged balance of the 2023 Warrant Repurchase (the "Warrant Repurchase Balance”).

On June 30, 2024, SharpLink negotiated an Amendment to the Exchange Agreement (the "Amendment") to reduce the strike price per warrant of the unexchanged balance of the 2023 Warrants Repurchase Balance from $4.07 to $0.0001 and to remove the re-purchase option. The fair value of the warrant liability was zero as of December 31, 2024.

The following provides a summary of the Convertible Debenture recorded at fair value as of December 31, 2024:

Fair Value, December 31, 2023	$	4,395,753
Principle and interest convertible debenture repayments		(4,395,753	)
Issuance of warrant repurchase balance		900,000
Conversion of warrants to shares and pre-funded warrants		(498,029	)
Change in fair value of warrant repurchase balance		(231,589	)
Change in fair value of warrant amendment		(17,996	)
Settlement of warrant liability due to amendment		(152,386	)
Fair Value, December 31, 2024	$	-

As disclosed in Note 8, the Debenture and the Warrant were reported at fair value at issuance. The Debenture is adjusted to fair value on a recurring basis with changes in fair value recorded through the Company’s consolidated statements of operations as other income (expense) for the 12 months ended December 31, 2024.

The following table sets forth the Company’s consolidated financial assets and liabilities measured at fair value by level within the fair value hierarchy on December 31, 2023. 

	Convertible Debenture
Level I	$	-
Level II	$	-
Level III	$	4,395,753
Total	$	4,395,753

The following table presents a reconciliation of the beginning and ending balances of the Debenture measured at fair value on a recurring basis that uses significant unobservable inputs (Level 3) and the related expenses and losses recorded in the consolidated statement of operations during the 12 months ended December 31, 2023.

Fair Value, December 31, 2022	$	-
Issuance of convertible debenture		2,825,771
Accretion for discount for warrants		342,481
Accretion for discount for OID		116,667
Interest expense		299,648
Principle repayments		(419,048	)
Change in fair value		1,230,234
Fair Value, December 31, 2023	$	4,395,753

The fair value of the Debenture was determined using a Monte Carlo Simulation (“MCS”) which incorporates the probability and timing of the consummation of a Fundamental Transaction event and conversion of the Debenture as of the valuation date.

The MCS implied a discount rate at issuance that resulted in a total value to the debenture and warrants that equated to the transaction proceeds. This discount rate was 50.0% at issuance and was calibrated to the December 31, 2023 valuation date by comparing the B rated commercial paper credit spread at both dates. B spreads as follows:

Issuance - February 14, 2023	4.13	%
Fair Value - December 31, 2023	1.29	%

At inception, the Company valued the Debenture using a Monte Carlo Simulation model using the value of the underlying stock price of $3.50, exercise price of $8.75, expected dividend rate of 0%, risk-free interest rate of 3.96% and volatility of 40.0%. The Company estimated the term of the warrant to be 2.9 years. On December 31, 2023, the Company valued the Debenture using a Monte Carlo Simulation model using the expected dividend rate of 0% and the risk-free interest rate of 5.60%. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates and market factors.