SRM Entertainment(SRM) - 2023 Q4 - Annual Report

Part I Business SRM Entertainment designs and sells toys and souvenirs to theme parks, completed its IPO in August 2023, and operates on a low-fixed-cost model - The company specializes in designing and developing toys and souvenirs for major theme parks including Walt Disney Parks and Resorts and Universal Studios[19][23] - SRM Entertainment became a separate entity from Jupiter Wellness, Inc. following a Share Exchange on August 14, 2023, treated as a Reverse Acquisition[16][17][18] - The company completed its IPO on August 14, 2023, raising approximately $5.3 million in net proceeds from selling 1,250,000 shares at $5.00 per share[28] - SRM utilizes a nimble, low-fixed-cost production model by leveraging third-party manufacturers to respond to pop culture trends effectively[25] Risk Factors The company faces diverse risks including operational fluctuations, reliance on third-party manufacturers, intense competition, and business seasonality Risks Related to Our Business Key business risks include fluctuating results, reliance on third-party manufacturers, high seasonality, and intellectual property challenges - The company's results are expected to fluctuate quarterly and annually due to changes in pricing, consumer preferences, and supply constraints[29][30] - SRM relies entirely on third-party manufacturers, primarily in China, exposing the business to production loss, delays, and compliance failures[35][38] - The business is highly seasonal, with significant sales during the traditional holiday season, making it vulnerable to peak period disruptions[48][49] - The company depends on large, recurring purchases from a few significant retailers without binding long-term commitments, leading to potentially volatile revenue streams[60][61] - SRM faces risks protecting its intellectual property and is subject to potential third-party infringement claims, which could be costly[63][64] Risks Related to Our Securities and Other Risks Risks related to the company's securities include reduced disclosure requirements as an 'emerging growth company,' potentially impacting investor attractiveness - As an 'emerging growth company' under the JOBS Act, SRM's reduced disclosure requirements may make its common stock less attractive to some investors[85][86] Unresolved Staff Comments This section is not applicable as the company has no unresolved comments from the SEC staff - Not applicable Cybersecurity SRM maintains a cybersecurity risk management program with Board oversight, and has not identified any material threats to date - The company maintains a cybersecurity risk management methodology including risk assessments, security measures, and an incident response plan, often engaging third-party providers[90][91] - The Board of Directors, through its Audit Committee, provides strategic oversight on cybersecurity matters and receives periodic management updates[92][93] - The company has not identified any known cybersecurity threats that have materially affected its business, operations, or financial condition[91] Properties The company does not own real estate, leasing its principal executive office in Jupiter, Florida on a month-to-month basis - SRM's principal executive office is located in Jupiter, Florida[94] - The office space is leased on a month-to-month basis and is considered adequate for current needs[94] Legal Proceedings The company is not currently involved in any material legal proceedings that could significantly affect its business or financial condition - There are no pending or threatened legal actions that could have a material adverse effect on the Company[95] Mine Safety Disclosures This section is not applicable to the company's business - Not applicable Part II Market for Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities SRM's common stock began trading on Nasdaq in August 2023, with no anticipated cash dividends and an authorized 2023 Equity Incentive Plan - The company's common stock trades on the Nasdaq Capital Market under the symbol 'SRM'[98] - SRM does not anticipate paying cash dividends on its common stock, intending to retain earnings for growth[101] - The 2023 Equity Incentive Plan authorizes issuing up to 1,500,000 shares of common stock for equity awards[104] - No issuer purchases of equity securities were made during the year ended December 31, 2023[103] Reserved This item is not applicable as SRM is a smaller reporting company - Not applicable to a smaller reporting company Management's Discussion and Analysis of Financial Condition and Results of Operations SRM reported a net loss of $2.05 million in 2023, primarily due to increased operating expenses, with cash significantly improving from IPO proceeds Results of Operations The company experienced a slight revenue decrease in 2023, while operating expenses significantly increased, leading to a net loss Financial Performance Comparison (2023 vs. 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Sales | $5,760,533 | $6,076,116 | | Gross Profit | $1,317,450 | $1,230,899 | | Total Expenses | $3,371,309 | $902,198 | | Net Income (Loss) | $(2,053,859) | $328,701 | - Revenues decreased slightly in 2023, attributed to milder summer season conditions in Orlando, though attendance remains in line with pre-pandemic levels[147] - Operating expenses increased significantly in 2023 primarily due to IPO costs, public company expenses, and increased marketing efforts[148][151] Liquidity and Capital Resources The company's cash position significantly improved in 2023, primarily due to net proceeds from its IPO, despite cash used in operating activities - As of December 31, 2023, cash and cash equivalents significantly increased to $2,980,741 from $453,516 at year-end 2022[156] - Net cash provided by financing activities was $3,679,359 in 2023, primarily from IPO net proceeds of $5,168,325, offset by promissory note repayment[158] - Net cash used in operating activities was $769,764 for the year ended December 31, 2023[157] Quantitative and Qualitative Disclosures About Market Risk This item is not applicable as SRM is a smaller reporting company - Not applicable to a smaller reporting company Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2023 and 2022, including balance sheets, statements of operations, and cash flows Consolidated Balance Sheets This section provides a summary of the company's consolidated balance sheet data as of December 31, 2023, and 2022 Consolidated Balance Sheet Data (as of Dec 31) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total Assets | $4,543,074 | $2,079,564 | | Total Current Assets | $4,497,612 | $2,070,231 | | Total Liabilities | $418,876 | $2,082,158 | | Total Shareholders' Equity | $4,124,198 | $(2,594) | Condensed Consolidated Statement of Operations This section presents the company's condensed consolidated statement of operations for the years ended December 31, 2023, and 2022 Consolidated Statement of Operations (for the year ended Dec 31) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Sales | $5,760,533 | $6,076,116 | | Gross Profit | $1,317,450 | $1,230,899 | | Net Income (Loss) | $(2,053,859) | $328,701 | | Basic and Diluted EPS | $(0.27) | $0.05 | Condensed Consolidated Statement of Cash Flows This section provides the company's condensed consolidated statement of cash flows for the years ended December 31, 2023, and 2022 Consolidated Statement of Cash Flows (for the year ended Dec 31) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash (Used in) Operating Activities | $(766,877) | $(29,925) | | Net Cash (Used in) Investing Activities | $(392,956) | $(4,285) | | Net Cash Provided by (Used in) Financing Activities | $3,687,058 | $(27,647) | | Net Increase (Decrease) in Cash | $2,527,225 | $(61,857) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures The company reports no changes or disagreements with its accountants regarding accounting principles, financial disclosures, or auditing scope - None Controls and Procedures Management concluded that disclosure controls were ineffective due to team size, but internal control over financial reporting remained effective as of December 31, 2023 - Management concluded that disclosure controls and procedures were ineffective due to the small size of the assessment and control team[165] - Despite ineffective disclosure controls, management believes the company maintained effective internal control over financial reporting as of December 31, 2023[167] - No material changes occurred in the company's internal controls over financial reporting during the fiscal year[170] Other Information There is no other information to report in this section - None Part III Directors and Executive Officers and Corporate Governance This section details the company's directors and executive officers, Board composition, and established governance committees and code of ethics - The company's executive team includes Richard Miller as CEO and Douglas O. McKinnon as CFO[175] - The Board has determined that Christopher Marc Melton, Gary Herman, and Hans Haywood are independent directors under Nasdaq rules[189] - The Board has established an Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee[192] - The company has adopted a code of ethics and conduct applicable to all directors, officers, and employees[198] Executive Compensation This section details compensation for named executive officers and directors for fiscal years 2023 and 2022, including employment agreement terms Summary Executive Compensation (2023) | Name and Principal Position | Salary ($) | Bonus ($) | All Other Comp. ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Richard Miller, CEO | 175,000 | 50,000 | 25,000 | 250,000 | | Douglas O. McKinnon, CFO | 61,875 | 25,000 | 12,500 | 99,375 | | Taft Flitner, President | 100,000 | 68,717 | - | 168,617 | - CEO Richard Miller's employment agreement provides for an annual base salary of $175,000 with annual 10% increases for the next two years[207] Director Compensation (2023) | Director | Compensation ($) | | :--- | :--- | | Richard Miller | 25,000 | | Douglas O. McKinnon | 12,500 | | Christopher Marc Melton | 25,000 | | Gary Herman | 25,000 | | Hans Haywood | 25,000 | Security Ownership of Certain Beneficial Owners and Management This section details beneficial ownership of common stock as of March 29, 2024, for directors, executive officers, and the group collectively - As of March 29, 2024, all officers and directors as a group beneficially owned 2,196,388 shares, representing 19.6% of common stock[220] - CEO Richard Miller beneficially owned 900,000 shares (8.2%), and CFO Douglas McKinnon owned 436,388 shares (4.0%)[220] Certain Relationships and Related Transactions, and Director Independence The company reports no material related party transactions since 2023 and has established procedures for reviewing such potential transactions - The company did not have any related party transactions exceeding $120,000 during fiscal year 2023[228] - Disinterested Board members are responsible for reviewing and approving potential related person transactions[227] Principal Accountant Fees and Services This section discloses audit fees paid to M&K CPAS for fiscal years 2023 and 2022, totaling $65,000 and $90,000 respectively Audit Fees Paid to M&K CPAS | Year | Audit Fees ($) | | :--- | :--- | | 2023 | 65,000 | | 2022 | 90,000 | Part IV Exhibits, Financial Statement Schedules This section provides a comprehensive index of all exhibits filed with the Form 10-K, including corporate documents and material contracts - The exhibit index lists key corporate documents, including Articles of Incorporation (Exhibit 3.1) and the 2023 Equity Incentive Plan (Exhibit 10.9)[232] - Material contracts, such as employment agreements and license agreements with LAFIG Belgium (Smurfs) and Zoonicorn, LLC, are included as exhibits[232]