Item 1. Business
ITEM
1. BUSINESS
General
Overview
SRM
Entertainment, Inc. (“SRM Inc”) is a Nevada corporation and was incorporated on April 22, 2022. SRM. Entertainment Limited
(“SRM Ltd”), is a limited company incorporated in the Hong Kong, now a Special Administrative Region of the People’s
Republic of China, on January 23, 1981 and formerly owned by Jupiter Wellness, Inc.. Effective August 14, 2023, SRM Inc acquired SRM
Ltd. The acquisition of SRM Ltd by SRM Inc has been accounted for as a Reverse Acquisition (see Basis of Presentation below). The combined
SRM Inc and SRM Ltd are collectively referred to as the Company or SRM.
On
December 9, 2022, we entered into a stock exchange agreement (the “Exchange Agreement”) with Safety Shot, Inc. (formerly
Jupiter Wellness, Inc.)(“Safety Shot”) to govern the separation of our business from Safety Shot. On May 26, 2023, we amended and restated
the Exchange Agreement (the “Share Exchange”) to include additional information regarding the distribution and the separation
of our business from SHOT. The separation as set forth in the Share Exchange with Safety Shot closed August 14, 2023. Pursuant to the Share
Exchange, on May 31, 2023, we issued 6,500,000 shares of our common stock (representing 79.3% of our outstanding shares of common stock)
to Safety Shot in exchange for 2 ordinary shares of SRM Ltd (representing all of the issued and outstanding ordinary shares of SRM Ltd).
As of March 6, 2025, Safety Shot owns 13.6% of our issued and outstanding shares of common stock.
Basis
of Presentation
The
accompanying financial statements are presented in conformity with accounting principles generally accepted in the United States of America
(“GAAP”) and pursuant to the rules and regulations of US Securities and Exchange Commission (“SEC”). The acquisition
of SRM Ltd and SRM Inc occurred on August 14, 2023. The financial statements are prepared using Reverse Acquisition Accounting and as
such, for legal purposes SRM Inc was the acquiring company and for GAAP accounting, SRM Ltd was the acquiring company. Therefore, the
financial statements are presented using the historical financial statements of SRM Ltd. The combined SRM Inc and SRM Ltd are collectively
referred to as the “Company” or “SRM.”
Business
The
Company is a trusted toy and souvenir designer and developer, selling into the world’s largest theme parks and entertainment venues.
Our
business is built on the principle that almost everyone is a fan of something and the evolution of pop culture is leading to increasing
opportunities for fan loyalty. We create whimsical, fun and unique products that enable fans to express their affinity for their favorite
“something”—whether it is a movie, TV show, favorite celebrity, or favorite restaurant. We infuse our distinct designs
and aesthetic sensibility into a wide variety of product categories, including figures, plush, accessories, apparel, and homewares. With
our unique style, expertise in pop culture, broad product distribution and highly accessible price points, we have developed a passionate
following for our products that has underpinned our growth. We believe we sit at the nexus of pop culture—content providers value
us for our broad network of retail customers, retailers value us for our portfolio of pop culture products and pop culture insights,
and consumers value us for our distinct, stylized products and the content they represent.
Pop
culture pervades modern life and almost everyone is a fan of something. Today, more quality content is available and technology innovation
has made content accessible anytime, anywhere. As a result, the breadth and depth of pop culture fandom resembles, and in many cases
exceeds, the type of fandom previously associated only with sports. Everyday interactions at home, work or with friends are increasingly
influenced by pop culture.
We
have invested strategically in our relationships with key constituents in pop culture. Content providers value us for our broad network
of retail customers and retailers value us for our pop culture products, pop culture insights and ability to drive consumer traffic.
Consumers, who value us for our distinct, stylized products, remain at the center of everything we do.
Content
Providers : We have licensing relationships with many established content providers, and our products appear in venues
such as Walt Disney Parks and Resorts, Universal Studios, United Parks and Resorts (f/k/a SeaWorld), Cedar Fair, Six Flags and
Herschend Family Entertainment and Merlin Entertainment. We currently have licenses with Smurfs, The ICEE Company and Zoonicorn LLC,
from which we can create multiple products based on each character within. Content providers trust us to design, create and
manufacture unique, stylized extensions of their intellectual property that extend the relevance of their content with consumers
through ongoing engagement, helping to maximize the lifetime value of their content.
Consumers :
Fans are increasingly looking for ways to express their affinity for and engage with their favorite pop culture content. Over time, many
of our consumers evolve from occasional buyers to more frequent purchasers, whom we categorize as enthusiasts or collectors. We create
innovative products to appeal to a broad array of fans across consumer demographic groups—men, women, boys and girls—not
a single, narrow demographic. We currently offer an array of products that sell across several categories. Our products are generally
priced between $2.50 and $50.00, which allows our diverse consumer base to express their fandom frequently and impulsively. We continue
to introduce innovative products designed to facilitate fan engagement at different price points and styles.
We
have developed a nimble and low-fixed cost production model. The strength of our management team and relationships with content providers,
retailers and third-party manufacturers allows us to move from product concept to a new product tactfully. As a result, we can dynamically
manage our business to balance current content releases and pop culture trends with timeless content based on classic movies, such as
Harry Potter or Star Wars. This has allowed us to deliver significant growth while lessening our dependence on individual content releases.
Recent
Developments
CFO Employment Agreement
On January 13, 2025, the Compensation Committee of
the Board of Directors (the “Board”) of the Company reviewed and recommended approval that the Company enter into a new Employment
Agreement (the “CFO Employment Agreement”) with Douglas McKinnon as Chief Financial Officer (the “CFO”). Following
approval from the Compensation Committee and the Board, the Company entered into the CFO Employment Agreement on January 22, 2025 with
an effective date of January 1, 2024, which cancels and supersedes Mr. McKinnon’s previous employment agreement with the Company
as of the Effective Date. The CFO Employment Agreement is for an initial term of 3 years from the date thereof and automatically renews
for successive 1-year periods. Pursuant to the Employment Agreement, the Company will compensate Mr. McKinnon a base salary of $215,000.
Thereafter, his base salary shall increase at the rate of at least ten percent (10%) on January 1 of each following year.
4
Table of Contents
CEO and CFO Stock Options Issuance
On January 6, 2025, the Board approved to issued 75,000
stock options (the “Options”) to each of Richard Miller (the Company’s Chief Executive Officer) and Douglas McKinnon
(the Company’s Chief Financial Officer). The Options were issued as compensation for the service of Messrs. Miller and McKinnon
on the Board. The Options were issued pursuant to the Company’s 2024 Equity Incentive Plan. The Options have a purchase price per
share of $0.65 (the closing price of the common stock on January 3, 2025), vested and become exercisable immediately, and will expire
on January 6, 2030.
December Registered Direct Offering
On December 5, 2024, the Company entered into a securities
purchase agreement (the “Purchase Agreement”) with the institutional investors named on the signature page thereto (the “Purchasers”),
pursuant to which the Company agreed to sell and issue, in a registered direct offering, an aggregate of (i) 1,580,000 shares of the Company’s
common stock, at a purchase price of $0.7385 per share, and (ii) 712,133 pre-funded warrants (the “Pre-Funded Warrants”) to
purchase up to an aggregate of 712,133 shares of common stock (the “Pre-Funded Warrant Shares”) at a purchase price of $0.7384
per Pre-Funded Warrant, for aggregate gross proceeds to the Company of approximately $1.7 million, before deducting the placement agent
fees and estimated offering expenses payable by the Company (the “December Registered Offering”).
Pursuant to a placement agency agreement dated as
of December 5, 2024 (the “Placement Agency Agreement”), the Company engaged D. Boral Capital LLC (the “Placement Agent”)
to act as the sole placement agent in connection with the offering. The Company agreed to (i)
pay the Placement Agent a cash fee equal to 8.0% of the aggregate gross proceeds
of the December Registered Offering, and (ii) reimburse the Placement Agent for
all reasonable and documented out-of-pocket expenses, including the reasonable fees, costs, and disbursements of its legal counsel of
$50,000.
The shares of common stock, the Pre-Funded Warrants
and the Pre-Funded Warrant Shares were offered pursuant to a shelf registration statement on Form S-3 (File No. 333-282028), which was
declared effective by the U.S. Securities and Exchange Commission on September 19, 2024, and a related prospectus supplement, dated December
5, 2024, related to the December Registered Offering. The December
Registered Offering closed on December 6, 2024.
Nasdaq
Listing Deficiency
On
October 21, 2024, the Company received a deficiency letter (from the Listing Qualifications Department of The Nasdaq Stock Market LLC
(“Nasdaq”) notifying the Company that, based upon the closing bid price of the Company’s common stock, par value
$0.0001 per share, for the last 30 consecutive business days, the Company is not currently in compliance with the requirement to maintain
a minimum bid price of $1.00 per share for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2)
(the “Minimum Bid Requirement”).
The
Notice has no immediate effect on the continued listing status of the common stock on The Nasdaq Capital Market, and, therefore, the
Company’s listing remains fully effective.
In
accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company is provided a compliance period of 180 calendar days from the date of
the Notice, or until April 21, 2025, to regain compliance with the Minimum Bid Requirement. To regain compliance, the closing bid price
of the common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days prior to April 21, 2025.
If
the Company is not in compliance with the Minimum Bid Requirement by April 21, 2025, the Company may be afforded a second 180 calendar
day compliance period. To qualify for this additional compliance period, the Company will be required to meet the continued listing requirement
for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of
the Minimum Bid Price requirement.
The
Company intends to actively monitor the closing bid price of the common stock and will evaluate available options to regain compliance
with the Minimum Bid Requirement. However, there can be no assurance that the Company will regain compliance with the Minimum Bid Requirement
during the 180-day compliance period, secure a second period of 180 days to regain compliance, or maintain compliance with the other
Nasdaq listing requirements. If the Company does not regain compliance within the allotted compliance period, including any extensions
that Nasdaq grants, Nasdaq will provide notice that the common stock will be subject to delisting. The Company would then be entitled
to appeal that determination to a Nasdaq hearings panel.
October Registered Direct Offering
On October 18, 2024, and October 19, 2024, the Company
entered into four Securities Purchase Agreements (each an “SPA”) with four accredited investors (the “Investors”),
for the purchase and sale in a registered direct offering of 1,711,477 shares of the Company’s common stock at a price of $0.61
per share, generating gross proceeds from the offering of approximately $1,044,000 (the “October Registered Direct Offering”).
Three SPAs, each dated as of October 18, 2024, were entered into with three investors, and one SPA, dated as of October 19, 2024, was
entered into with a single investor. The Company did not utilize a placement agent or underwriter in connection with the October Registered
Direct Offering.
CEO Employment Agreement
On September 10, 2024, the Compensation Committee
of the Board reviewed and recommended approval that the Company enter into a new Employment Agreement (the “CEO Employment Agreement”)
with Richard Miller as Chief Executive Officer (the “CEO”). Following approval from the Compensation Committee and the Board,
the Company entered into the CEO Employment Agreement effective January 1, 2024 (the “Effective Date”), which cancels
and supersedes Mr. Miller’s previous employment agreement with the Company as of the Effective Date. The CEO Employment Agreement
is for an initial term of 3 years from the date thereof and automatically renews for successive 1-year periods. Pursuant to the CEO Employment
Agreement, the Company will compensate Mr. Miller a base salary of $225,000. Thereafter, his base salary shall increase at the rate of
at least ten percent (10%) on January 1 of each following year.
Asset Purchase Agreement with Suretone Entertainment
On
September 3, 2024, the Company (or “Buyer”) entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”)with
Suretone Entertainment, Inc. (“Suretone” or “Seller”) pursuant to which the Buyer has agreed to acquire certain
assets related to the movie with the title The Kid(directed by Vincent D’Onofrio) from the Seller, for an aggregate purchase price
of $3,000,000 (the “Purchase Price”). Jordan Schur, the owner and Chief Executive Officer of Suretone, is a board member
and President of Safety Shot. As of March 6, 2025, Safety Shot holds 13.6% of the Company’s common stock.
In
consideration for the acquired assets, the Buyer paid the Purchase Price by: (i) paying $250,000 in cash on September 3, 2024); (ii)
issuing 1,500,000 restricted shares of the Company’s common stock, par value $0.001 per share (valued at $0.8333 per share);
and (iii) issuing a secured promissory note in the original amount of $1,500,000 (the “Secured Note”). The Secured Note
will bear interest at the rate of 8%per annum and will mature on September 3,2025 (the “Maturity Date”), calculated on a
365-day year, and is due along with the principal on the Maturity Date. The Secured Note is secured by the assets purchased pursuant
to the Asset Purchase Agreement. If the Company secures financing of at least $5 million during the term of the Secured Note, it
must use the proceeds to repay the Secured Note. The Company can prepay the Secured Note at any time without penalty but must
provide 15 days’ notice to Suretone. The Secured Note is subject to immediate acceleration if the Company commences bankruptcy
proceedings, if it winds down its operations, if the Company fails to stay current in its SEC reporting obligations, or if the
Company’s common stock is delisted from the Nasdaq Stock Market. At December 31, 2024, the Company owed $500,000 on the
principal balance of the Secured Note.