Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward- looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Our unaudited financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles. The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this quarterly report.

In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “common shares” refer to the common shares in our capital stock.

As used in this quarterly report and unless otherwise indicated, the terms “we”, “us”, “our”, “SRM” and the “Company” mean SRM Entertainment, Inc.

General Overview

SRM Entertainment, Inc. (“SRM Inc”) is a Nevada corporation, listed and traded on NASDAQ, headquartered in Florida and was incorporated on April 22, 2022. SRM. Entertainment Limited (“SRM Ltd”), a wholly-owned subsidiary, is a limited company incorporated in Hong Kong, on January 23, 1981. The combined SRM Inc and SRM Ltd are collectively referred to as the Company.

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”).

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, SeaWorld, Cedar Fair, 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

CEO and CFO Employment Agreements

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 with 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.

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 with 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.

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.

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.

Emerging Growth Company Status

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart our Business Startups Act of 2012, (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

Significant Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited financial statements for the three months ended March 31, 2025 and 2024 and audited financial statements for the year ended December 31, 2024, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, and the rules and regulations of the Securities and Exchange Commission. The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenue generated, and expenses incurred during the reporting periods. Our estimates are based on our 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. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Cash and Cash Equivalents

The Company considers all short-term investments with a maturity of three months or less when purchased to be cash and equivalents for purposes of the statement of cash flows. There were no cash equivalents as of March 31, 2025 or December 31, 2024.

Net Loss per Common Share

Net income (loss) per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. If applicable, diluted earnings per share assume the conversion, exercise or issuance of all common stock instruments such as options, warrants, convertible securities and preferred stock, unless the effect is to reduce a loss or increase earnings per share. As such, options, warrants, convertible securities and preferred stock are not considered in the calculations, as the impact of the potential common shares would be to decrease the loss per share.

Revenue Recognition

The Company generates its revenue from the sale of its products directly to the end user or distributor (collectively the “customer”).

The Company recognizes revenues by applying the following steps in accordance with FASB Accounting Standards Codification 606 “Revenue from Contracts with Customers” (“ASC 606”). Under ASC 606, revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:

The Company’s performance obligations are satisfied when goods or products are shipped on an FOB shipping point basis as title passes when shipped. Our product is generally paid in advance of shipment or standard net 30 days and we offer no specific right of return, refund or warranty related to our products except for cases of defective products of which there have been none to date.

Inventory

Inventories are stated at the lower of cost or market. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold. Inventory is based upon the average cost method of accounting.

Income Taxes

We account for income taxes under ASC 740 Income Taxes (“ASC 740”). ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statement and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards. ASC 740 additionally requires a valuation allowance to be established when it is more likely than not that all or a portion of deferred tax assets will not be realized.

ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure and transition. Based on our evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Since we were incorporated on October 24, 2018, the evaluation was performed for 2018 tax year, which would be the only period subject to examination. We believe that our income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to our financial position. Our policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense.

The Company’s deferred tax asset at March 31, 2025 and December 31, 2024 consisted of net operating loss carry forwards calculated using effective tax rates (20.6% average of China and US rates) equating to approximately $1,504,698 and $1,377,232 respectively, less a valuation allowance in the amount of approximately $1,504,698 fully offset by a valuation allowance in the three months ended March 31, 2025 and years ended December 31, 2024.

Related parties

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

Pursuant to Section 850-10-20 the related parties include a. affiliates of the Company; b. Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d. principal owners of the Company; e. management of the Company; f. other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g. Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of combined financial statements is not required in those statements. The disclosures shall include: a. the nature of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

Related Party Loans

As of December 31, 2021, the Company had an outstanding unsecured, non-interest bearing loan balance of $1,502,621 to Jupiter Wellness, Inc., its Parent. On September 1, 2022, the loan was converted to a six percent (6%) interest-bearing promissory note (the “Note”) due on the earlier of: (i) September 30, 2023 or (ii) the date on which Maker consummates an initial public offering of its securities. During 2022, the Company paid $50,000 to Jupiter related to the Note consisting of $19,948 principal reduction and $30,052 interest, leaving a Note balance of $1,482,673 at December 31, 2022. The total balance of $1,538,520 ($1,482,673 Note and $55,847 interest) due Jupiter was paid from proceeds of the Company’s Initial Public Offering (“IPO”) on August 14, 2023.

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07, enhancing segment reporting requirements under ASC 280. This ASU aims to provide investors with more detailed information about a public entity’s reportable segments, including those with a single reportable segment. The Key Provisions include:

These amendments are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. The Company adopted the ASU for the year ended December 31, 2024.

The company evaluated issued pronouncements and did not identify any additional recent pronouncements that apply to the company.

Results of Operations

For the three months ended March 31, 2025 and 2024

The following table provides selected financial data about us for the three months ended March 31, 2025 and 2024, respectively.

Revenues and Cost of Sales

We generated $1,089,634 in revenues for the three months ended March 31, 2025 compared to $1,006,357 revenues for the three months ended March 31, 2024. The increase is primarily due to the expansion of a major theme park opening in Orlando in 2025, Our business should benefit from the publicity and enthusiasm that typically surrounds new theme park openings. Additionally we have been able to increase our margins

Operating Expenses and Other Income (Expense)

Operating expenses for the three months ended March 31, 2025 and 2024 were $913,910 and $1,878,553, respectively. The operating expenses for the three months ended March 31, 2025, consisted of (i) marketing expense of $23,122, (ii) legal and professional fees of $198,070, (iii) amortization and depreciation of $81,571, (iv) rent and utilities of $20,323, (v) general and administrative expense of $443,044 and (vi) $147,780 of stock based compensation, versus the operating expenses for the three months ended March 31, 2024, consisting of (i) marketing expense of $20,403, (ii) legal and professional fees of $443,637, (iii) amortization and depreciation of $2,887, (iv) rent and utilities of $9,646, (v) general and administrative expense of $379,525 and (vi) $1,022,455 of stock based compensation.

The Company had interest income of $6,295 and interest expense of $5,506 (net $789) for the three months ended March 31, 2025 compared to $5,002 interest income for the three months ended March 31, 2024.

Income/Losses

Net losses were $646,586 and $1,710,004 for the three months March 31, 2025 and 2024.

Impact of Inflation

We believe that inflation has had a negligible effect on operations since inception. We believe that we can offset inflationary increases in the cost of operations by increasing sales and improving operating efficiency.

Off Balance Sheet Arrangements

We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “variable interest entities.”

Liquidity and Capital Resources

As of March 31, 2025, we had approximately $895,930 in cash and cash equivalents, a decrease of $456,443 from the $1,352,373 we had as of December 31, 2024. At March 31, 2025, we had approximately $2,202,541 in working capital, a decrease of $243.564 from the $2,446,105 we had at December 31, 2024.

Operating Activities:

Net cash used in our operating activities during the three months ended March 31, 2025 totaled $206,514 compared to $1,170,367 used during the three months ended March 31, 2025.

Financing Activities:

During the three months ended March 31, 2025, we paid $250,000 on a promissory note to a related party issued in connection with our purchase of the movie entitled “The Kid” leaving a balance of $250,000 at March 31, 2025, on the original principal of $1,500,000.