Form 10-K Mass Hysteria Entertainment Company, Inc.

10-K - Annual report [Section 13 and 15(d), not S-K Item 405]

Published: 2013-07-16 16:22:46
Submitted: 2013-07-16
Period Ending In: 2012-11-30
f10k2012_masshysteria.htm ANNUAL REPORT


f10k2012_masshysteria.htm



U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-K
 
(Mark One)
 
x
           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended November 30, 2012
 
o
            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to _____________
 
Commission File Number
 333-146517

 
Mass Hysteria Entertainment Company, Inc.
 (Exact name of registrant as specified in its charter)

Nevada
 
20-3107499
State or other jurisdiction of incorporation or organization
 
(I.R.S. Employer Identification No.)

13331 Valley Vista Blvd.
Sherman Oaks, CA  91423
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:  
(310) 285-7800

Securities registered pursuant to Section 12(b) of the Act:   
None.

Securities registered pursuant to Section 12(g) of the Act:
  Common Stock, par value $0.00001 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 
o
Yes 
x
 No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act: 
o
Yes 
x
No
 
Indicate by check mark whether the registrant(1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 day. 
x
Yes 
o
No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
x
Yes 
o
No
 
 
 

 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy ir information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 if the Exchange Act.
 
Large accelerated filter
o
Accelerated filter
o
 
 
Non-accelerated filter
o
(Do not check if a smaller reporting company)
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.  Yes 
o
  No 
x
 
The aggregate market value of the voting stock held by non-affiliates of the registrant at May 31, 2012 was approximately $58,769,679.  The aggregate market value was computed by using the closing price of the common stock as of that date on the Over-the-Counter Bulletin Board (“OTCBB”) or the OTC Markets. (For purposes of calculating this amount only, all directors and executive officers of the registrant have been treated as affiliates.)

As of June 28, 2013, 716,645 shares of our common stock were issued and outstanding.

Documents Incorporated by Reference:      None.
 
 
 

 
 
 
TABLE OF CONTENTS
 
 
 
 
 
 
ITEM 1.
4
ITEM 1A.
 10
ITEM 1B.
 10
ITEM 2.
 10
ITEM 3.
 10
ITEM 4.
 10
 
 
 
 
 
 
 
 
ITEM 5.
 11
ITEM 6.
 12
ITEM 7.
12
ITEM 7A
 15
ITEM 8.
16
ITEM 9.
41
ITEM 9A.
41
ITEM 9B.
42
 
 
 
 
 
 
 
 
ITEM 10.
43
ITEM 11.
44
ITEM 12.
46
ITEM 13.
49
ITEM 14.
49
 
 
 
 
 
 
 
 
ITEM 15.
51
 
 
 
53

CERTIFICATION PURSUANT TO SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
 
 

 
 
 
 
Corporate History

We were incorporated in Nevada on November 2, 2005 under the name “Michael Lambert, Inc.”.  Until August 5, 2009 we manufactured handbags.

On August 5, 2009 (the “Effective Date”), pursuant to the terms of a Stock Purchase Agreement, Daniel Grodnik (our Chief Executive Officer) and affiliated parties purchased a total of 7,985 shares of our issued and outstanding common stock (the “Change of Control”). This constituted a majority control of the Company.  In addition to the shares purchased, the Company also issued 42,015 shares to Daniel Grodnik and certain affiliated parties in connection with the Change of Control.  The total of 50,000 shares issued to Daniel Grodnik and the affiliated parties represents 74.6% of the shares of outstanding common stock of the Company as of the Effective Date.  

In connection with the Change of Control, we changed our name to Mass Hysteria Entertainment Company, Inc. (“we”, “us“, the “Company”, or “Mass Hysteria”) and also changed our business plan.  We are now a development stage multi-media entertainment company created to produce feature films for theatrical, DVD, video on demand (VOD) and television distribution with an interactive component for commercial, documentary and educational film market.  Our plan is to eventually produce a minimum of two original interactive theatrical films
annually,
and also create a second screen (mobile) experience for non-Mass Hysteria films.  In addition, we intend to continue creating traditional film and television projects.

Address and Telephone Number
 
Our executive offices are located at
13331 Valley Vista Blvd., Sherman Oaks, CA 91423
. Our telephone number at our executive office is (310) 285-7800.

Industry Overview

Film Industry

Industry analysts hold that the film business has a high profile among consumers worldwide which can be leveraged for ancillary revenue, marketing and promotional activities.  While new technologies continue to expand the revenue and profit potential of motion pictures, the filmed entertainment industry has proven to be resistant to the economic cycles that adversely affect other businesses.  For example, during the last recession in the U.S. when annual GDP (Gross Domestic Product) growth was 0.8% and 1.6% in 2000 and 2001, respectively, the U.S. box office grew by 10% and 13%, respectively, in each of those years.  Despite the very difficult economic climate in 2009, U.S. box office increased 6.5% over the record year of 2008 to $10.5 billion.  PricewaterhouseCoopers projects U.S. box office to continue to grow by 5.2% through 2013 reaching $12.6 billion. Increase will be driven by the continued expansion of digital projection and the growth of 3-D technology.

International markets, accounting for 65% of worldwide revenue, were up 17% over 2004 figures, totaling $18.3 billion. Continuing the trend, industry analysts project worldwide box office to reach a projected market size of $37.7 billion, by 2013.

Production Process

The process begins with the development of a screenplay.  During the development phase, the studio engages writers to draft and revise the screenplay and begins to obtain tentative commitments from a director and principal cast before ultimately deciding to "greenlight" (i.e., approving) the film for production.  A proposed production schedule and budget may also be prepared during this phase.

At times, an independent film company can attract top-level talent as a more creative and friendly environment than the larger studio can.  In addition, independents typically can produce a film for substantially less than a studio, has lower development costs and overhead.   Finally, independents can take more creative risks than studios which rely on franchises, sequels and formulaic approaches.  This is a further attraction for fresh talent.
 
 
4

 

The production process starts with the acquisition and development of a screenplay and continues with i) pre-production, ii) principal photography, and iii) post-production as seen below.
Pre-production
includes the securing of necessary production facilities and personal, the finalization of motion picture budgets and production schedules, and the selection of motion picture shooting locations and the building of necessary sets.

Production
involves principal photography.

Post-production
includes picture editing, the creation of special visual effects and opticals, the composing and recording of the musical score, sound editing, synchronizing dialogue, sound effects and music insertion, and ultimately the “final cut” and completion of the elements necessary for distribution.
 
Distribution to traditional media

Films are distributed through several windows of exploitation.  Theatrical exhibition occurs first when release prints of the film are distributed to movie theaters worldwide in concert with extensive advertising (P&A, prints and advertising expense).  Typically, theater owners retain approximately 50-60% of consumer ticket prices which in the aggregate comprise box office gross.   Theatrical releases overseas occur at different times in each country and can be as much as 6 months after the U.S. release.

About 4-6 months after theatrical release is the DVD release.  Distributors receive wholesale prices on product that is sold directly to consumers from retail outlets such as Wal-Mart and Best Buy and earn a percentage of rental income from chains such as Blockbuster and Netflix.  Related costs for advertising, duplication, packaging, mastering and shipping typically run about 35% of distributor’s revenue.  Soon after DVD “street date” is the pay-per-view window.

The pay TV window (HBO, Showtime, Encore) begins approximately 18 months after theatrical release.  Prices received by distributors are based on contractual output arrangements and are tied to the film’s box office performance.  A year or two later, the distributor will sell the film to a network or major cable channel and then about 5 years later, the film will be sold into syndication or re-sold to pay or cable.

The major film studios perform all of these activities in the U.S. and through owned and operated offices in about 30 overseas markets that comprise the lion’s share of international revenue.  Producers often sell a film’s distribution rights through a sales agent to separate independent distributors in each overseas market.  These sales are referred to as “pre-sales”, “advances” or “minimum guarantees”.  These independent distributors, many of which are owned by major media companies and have considerable leverage in their home markets, will perform the above mentioned distribution functions.  For each unit of revenue earned, the local distributor deducts a distribution fee, local distribution costs, and the advance that it paid and remits the remainder to the producer.

New Media

Online content has established itself as an emerging powerhouse in the broader media market. With an increasing number of viewers incorporating online content into their established media intake, at times replacing older mediums, we believe the industry is poised to redefine media consumption.

Three industry trends: (1) Multi-screen engagements; (2) social networking; and (3) mobile commerce are merging to become what we believe will be a powerful force influencing consumer behavior   According to a July 2011 report from Pew Research Center, 35% of U.S. adults own and use smart phones, 8% use and own tablets, and 63% of online adults use social networking sites, of which 83% of these adults range from ages 18 – 29.  Furthermore, in Forrester’s Mobile Commerce Forecast, 2011 to 2016 published in June 2011, it was estimated that mobile online shopping would reach $6 billion in 2011.

Accordingly, we believe these consumer dynamics and mobile usage patterns have created a demand for multi-screen solutions at cinematic events to allow moviegoers to actively participate and share event experiences in real-time with friends instead of passively watching.

 
5

 
 
Our Business

We are a development stage multi-media entertainment company created to produce feature films for theatrical, DVD, VOD and television distribution with an interactive component for
the commercial, documentary and educational film market. Our mission is to bring multi-screen engagement to the theatrical motion picture venue.  Eventually, we plan to produce a minimum of two original interactive theatrical films annually,
and also create a second screen (mobile) experience for currently produced non-interactive films.
We may also license our IP to other film companies that wish to create interactive entertainment.
  In addition, we intend to continue creating traditional film and television projects.

While multiple screen engagement through mobile handsets is becoming more common, current usage at events has limited tools and interactivity (i.e. photo, text, single event usage).  We intend to deliver multi-platform technology solutions for audiences to enhance their entertainment experiences across cinema events.  Some of the features our solution offers will include, without limitation:  (i) interactive mobile application experience; (ii) unique event custom content, games and viewing angles; (iii) multiple social communication options (social media and live event based); (iv) mobile commerce and product discount offerings; (v) reward based point system and leaderboard across all Mass Hysteria events; (vi) event integration across venue touch points (video board, concessions); (vii) Interactive two-way event engagement; (viii) integration with friends event and social networking communications; and (ix) pre and post-event features and integration.

We believe our custom content and multiple viewing offerings will create a more engaged experience causing the audience to become more invested in the event.  Movies, in our opinion, become more communal in nature through real-time, social media based, interactive games and features accessible on a mobile device.  Users will be able to participate in event specific activities with friends and other Mass Hysteria event participants or share event details with their social networking community.  Users will also earn points or badges to attain social prestige and sponsor based rewards.    

Furthermore, Mass Hysteria members can personalize their offering and feature set to dictate their experience at each Mass Hysteria event and control the data delivered and shared across their mobile device. Our product is designed to multi-platform technology solutions for audiences to enhance their entertainment experiences across cinema events.

Our plan is to change the theatrical paradigm. In that regard, we intend to produce an experience that is more
 fun
 in the theater than on a laptop; to transform the theatrical experience from passive to engaged, by encouraging the audience to interact with the film by downloading applications on their smart phones which will offer a dynamic range of in-movie features including gaming, texting, contests and additional content. Our core business, which we call, “Mass Hysteria Cinema”, intends to introduce full-spectrum
interactivity and social networking
into the movie-going experience.  In ordinary movies the audience is ordered to turn off their handheld devices.  In our movies the audience will be encouraged to turn on their handhelds and participate in the presentation, creating
  a radical new form of entertainment
.  Our goal is to
fully immerse
  the audience in our movie, letting them
  interact
  with the content and, in some cases, even become
  collaborators
  in the Mass Hysteria brand.
 
We also intend to create a Mass Hysteria-branded website to extend the consumer’s Mass Hysteria experience outside of the theater. We hope this future site will not only be a content destination, but also be the source of our
proprietary software applications
enabling the integration of handheld devices into the movie narrative.

Beyond our unique cinema experience and destination website, our creative strategy also involves compiling an “Idea Database” from which we will draw
original content and interactive initiatives
. This will provide Mass Hysteria a cutting-edge blueprint for
success through
innovation
.

Additionally, our branded website will be the nexus of our three-phase content deployment plan designed to:

 
Virally market our movies
across all media platforms
 
 
 
 
Engage the audience
between theatrical releases
 
 
 
 
Build a loyal community
around the Mass Hysteria brand
 
Our three-phase plan will begin 3-4 months in advance of the first original Mass Hysteria theatrical release, and then our plan will repeat itself for each successive release:
 
 
6

 
 
Phase One
:  Pre-Launch

Using short form comically compelling video content modeled after public service announcements (i.e. “Friends don’t let Friends go to regular movies”), we intend to virally market our brand and movies, engage the audience with User-Gen contests and build a community around the Mass Hysteria brand. This phase will also see the
online distribution source
for our “Apps” to fully enable handheld devices for our Mass Hysteria Cinema experience.
 
Phase Two
:  In-Theatre

With the theatrical release of each Mass Hysteria movie we will also release exclusive “in-theatre” content.   This additional material will be of unlockable “easter eggs” (hidden content), movie contest rewards and other
exclusive downloadable content
in the form of pictures, music and ring tones.

Phase Three
:  Post-Launch

Immediately following the theatrical release of each movie, we intend that the Mass Hysteria website will make available select portions of the movie content.  Community members will be encouraged to create their own “mash-ups” (user-gen remixes) of our content for sponsored prizes and giveaways.  We expect this will generate
a fresh supply of no-cost user-generated content
on the Mass Hysteria site.
 
We intend to build a technology ecosystem that enables a range of interactions, via handset between theatre audience members and a cloud server.  The nature of the interaction involves social connectivity, conversation between audience members’ narrative extensions, in-experience gaming and content acquisition. The three core innovations are a mobile app, a mobile website and specially designed cloud architecture -- together these three technologies will create what we believe to be a unique immersive quality that can offer each theatrical audience member a customizable and sharable movie entertainment experience.
 
Revenue Streams

We expect to generate revenues in the following categories:  (i) licensing; (ii) premium content; (iii) e-commence solutions; (iv) advertising and (v) film and ancillary revenue.

Licensing Revenue

Licensing revenue will be generated through two distinct forms of service (A) customs solutions and (ii) plug-n-play software solution.

Custom Solutions
-
Mass Hysteria will design and produce custom content experiences for venues. A nominal service fee will be charged based on estimated attendance.  Fees will increase for individual users based on historic usage.

Plug-n-Play Software Solution
In the future, access to our system may be granted for a licensee to build it’s own experience using our API and a uniquely designed SDK (software development kit). Clients can pick and choose features to use through an online menu of feature options.

Premium Content.

While a majority of the developed content will be free at every event, certain “premium" content will be available based on the uniqueness of the content and the need to invest in additional venue systems/hardware, pay technical service fees or pay any potential league fees.

E-commerce Solutions

We intend to provide venues with solutions to improve sales of concessions and merchandise by allowing users to order products through the a mobile application which would allow users to order items through the mobile device and picked up multiple venue designated locations.  We expect to charge a 5% commission on all orders completed through the application.

 
7

 

Advertising

We also intend to offer a variety of advertising solutions focused on: (1) providing event-based ads targeted based on age, event type, location or usage behavior; and (2) sponsorship deals with brands cleverly integrated across events and content offerings.  Sponsors can be provided branding rights at venues, across categories or allowed to include products within the Mass Hysteria points/rewards program.

Film Revenue

Mass Hysteria will receive a licensing fee for all Mass Hysteria branded and enabled films.   Mass Hysteria will also secure production fees associated with the development of Mass Hysteria branded films. These production fees will come in the form of a production services payment and a percentage of film related revenue (box office revenue, DVD/blue-ray sales, VOD and digital streaming and distribution).  U.S. box office performance is the key variable that drives worldwide ancillary revenue (e.g., DVD, TV).   A film’s “first cycle” generally begins with a U.S. theatrical release.  The film’s performance at the box office will then drive its release into other domestic and international corridors.  We intend to use a third party distributor for DVD distribution and television sales.  We will receive royalty fees from distributors.

Government Regulation
 
Our business may be subjected to governmental regulation and required to comply in the following areas:

Distribution Arrangements
.  
We intend to release our films in the United States through existing distribution companies. We will retain the right for ourselves to market the films on a jurisdiction-by-jurisdiction basis throughout the rest of the world and to market television and other uses separately.  To the extent that we may engage in foreign distribution of our films, we will be subject to all of the governmental regulations of doing business abroad including, but not limited to, government censorship, exchange controls, and copying, and licensing or qualification.  At this point it is not possible to predict, with certainty, the nature of the distribution arrangements and extent of exact governmental regulations that may impact our business. 

Intellectual Property Rights
.
Rights to motion pictures are granted legal protection under the copyright laws of the United States and most foreign countries, including Canada.  These laws provide substantial civil and criminal penalties for unauthorized duplication and exhibition of motion pictures. Motion pictures, musical works, sound recordings, artwork, and still photography are separately subject to copyright under most copyright laws. The results of such investigations may warrant legal action, by the owner of the rights, and, depending on the scope of the piracy, investigation by the Federal Bureau of Investigation and/or the Royal Canadian Mounted Police with the possibility of criminal prosecution.  Under the copyright laws of Canada and the United States, copyright in a motion picture is automatically secured when the work is created and "fixed" in a copy. We intend to register our films for copyright with both the Canadian Copyright Office and the United States Copyright Office.  Both offices will register claims to copyright and issue certificates of registration but neither will "grant" or "issue" copyrights.  Only the expression (camera work, dialogue, sounds, etc.) fixed in a motion picture can be protected under copyright. Registration with the appropriate office establishes a public record of the copyright claim.

Censorship
.
An industry trade association, the Motion Picture Association of America, assigns ratings for age group suitability for domestic theatrical distribution of motion pictures under the auspices of its Code and Rating Administration. The film distributor generally submits its film to the Code and Rating Administration for a rating. We plan to follow the practice of submitting our motion pictures for ratings.  We intend that all Mass Hysteria branded content will carry a rating no greater than PG13
.
 
Labor Laws
.  Many of the screenplay writers, performers, directors and technical personnel in the entertainment industry who we intend to be involved in our productions are members of guilds or unions that bargain collectively on an industry-wide basis and may have state and governmental regulations that we must comply with.

Employees
 
As of November 30, 2012, we employed 2 people, our Chief Executive Officer and director, Daniel Grodnik, and our Chief Financial Officer, Alan Bailey. Mr. Bailey resigned from his position on May 31, 2013.  Accordingly, Mr. Grodnik is our sole officer, director and employee as of the date of this report. We believe that our employee and labor relations are good.
 
 
8

 

Fiscal 2012 and First Quarter 2013 Developments

Reverse Stock Split.
 
In February 1, 2013, we effectuated a 1,000 for 1 reverse split of our common stock.  All share-related data has been retroactively adjusted herein to reflect the reverse stock split.
 
Termination of Film Finance Agreement
.  On January 25, 2013, we received notification from Coral Ridge Capital Partners (“CRCP”) of the termination of our May 11, 2012 Film Finance Agreement with them.  They terminated the agreement due to our non-performance of certain milestones set forth in the original agreement and have demanded repayment of $100,000 production contribution previously made by CRCP plus 12% accrued interest.  CRCP had agreed to provide, subject to certain milestones being met, up to $300,000 in financing towards the production of the motion picture currently entitled “End of the Gun”.  The initial $100,000 was paid to the Company on June 12, 2012. The balance was due from CRCP within two weeks prior to the start of filming, provided that a completion bond was in place and we had received a commitment letter from a senior debt lender with respect to financing the balance of budgeted production costs. In consideration of CRCP’s investment, we agreed to pay CRCP a bonus of up to $50,000 and a minimum of 20% perpetual equity interest in the adjusted gross receipts of the subject motion picture. If the motion picture was abandoned, we were required to repay the CRCP for all funds actually paid to us, plus interest of 12% per annum.
 
Distribution Agreement
.  In January 2013, we entered into a definitive distribution agreement with the Megas Media Fund, who has an arrangement with Cinemavault, an international sales agent and Canadian distributor based in Toronto specializing in commercially viable and unique feature film and television projects, to distribute our next action/horror motion picture production entitled "Chomped 3D". The movie revolves around genetically enhanced alligators that invade the tiny island community of Grand Lafitte, Louisiana. Cinemavault began selling the movie in Berlin in March. The Company will recognize revenue from the sale of this film if and when it gets completed and sold.
 
Termination of Previously Announced Acquisition Memorandums of Understandings.  
In December 2012, we abandoned our previously announced potential acquisitions of two subsidiary businesses to provide revenue and cash flow – a real estate development company and an international air cargo company.  We announced execution of the Memorandums of Understandings related to these two potential acquisitions in August 2012.  After conducting due diligence, our board of directors decided to abandon these opportunities and instead to maintain our focus to enhancing and invigorating our core motion picture business.
 
Software Development Agreement
.  In November 2012, we entered into software development agreement with Patrick Greene and Alexander Hamilton for the development of technology that will allow theater audiences to engage with motion pictures in live-time using their Smart-phones. The technology will be exclusively and jointly owned by Mass Hysteria Entertainment and Greene and Harrington. The technology, called Side Flick(TM) is designed to allow audience members to engage with unique second screen content on their Smart phones in sync with the movie up on the big screen.
 
Amended and Restated Charter.
We filed amended and restated articles of incorporation effective February 17, 2012
, which amended and restated articles (i) increased our authorized common stock to two billion (2,000,000,000) shares; (ii) reduced the par value for its capital stock from $0.001 per share to $0.00001 per share; (iii) granted authority to our board of directors to effectuate a stock split or reverse stock split without stockholder approval; (iv) elected not to be governed by certain provisions pertaining to “resident domestic corporations” under the Nevada Revised Statutes; and (v) elected not to be governed by certain provisions relating to “issuing corporations” under the Nevada Revised Statutes
.  A copy of the amended and restated articles was filed as an exhibit to our Definitive Information Statement on Form 14C, filed with the Securities and Exchange Commission on January 13, 2012.

Technology Transfer and License
.  On February 6, 2012, we entered into two related agreements with Three Point Capital. (“3PC”)   In exchange for $65,000 in cash and five Class B Units in 3PC’s subsidiary FanCloud, LLC (representing a 5% interest), we transferred certain intellectual property related to our mobile application.  Concurrently with this transfer, 3PC granted us an exclusive, irrevocable, worldwide license to such transferred technology within the field of cinema.

Where You Can Find More Information
 
We are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). These filings are not deemed to be incorporated by reference into this report. You may read and copy any documents filed by us at the Public Reference Room of the SEC, 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings with the SEC are also available to the public through the SEC’s website at
http://sec.report
.
 
 
9

 
 
 
 
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.


We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.


Our business office is located at
13331 Valley Vista Blvd., Sherman Oaks, CA, 91423.  The office space is being provided by our Chief Executive Officer, free of charge.


To the best of our knowledge, there are no known or pending litigation proceedings against us.


Not applicable.
 
 
10

 

 

Our common stock is quoted on the Over-the-Counter Bulletin Board.  In August 2009, we changed our corporate name to Mass Hysteria Entertainment Company, Inc. and on August 5, 2009 our symbol changed from “MBER” to “MHYS” The following table shows the high and low bid prices for our common stock for each quarter since December 1, 2010 as reported by the
by the either the OTC Bulletin Board or the OTC Electronic Market. All share prices have been adjusted to provide for 1 for 1,000 reverse stock split effectuated on February 1, 2013.  
We consider our stock to be “thinly traded” and any reported sale prices may not be a true market-based valuation of the stock.  Some of the bid quotations from the OTC Bulletin Board set forth below may reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
 
2011 (OTC Bulletin Board)
 
High Closing Price
 
 
Low Closing Price
 
First quarter
 
$
35.50
 
 
$
20.00
 
Second quarter
 
 
30.00
 
 
 
14.00
 
Third quarter
 
 
23.00
 
 
 
4.00
 
Fourth quarter
 
 
6.50
 
 
 
1.20
 
 
 
 
 
 
 
 
 
 
2012 (OTC Bulletin Board)
 
High Closing Price
 
 
Low Closing Price
 
First quarter
 
$
4.00
 
 
$
0.50
 
Second quarter
 
 
2.30
 
 
 
0.70
 
Third quarter
 
 
1.90
 
 
 
0.50
 
Fourth quarter
 
 
0.80
 
 
 
0.10
 
 
 
 
 
 
 
 
 
 
2013 (OTC Bulletin Board)
 
High Closing Price
 
 
Low Closing Price
 
First quarter
 
$
0.34
 
 
$
0.03
 
Second quarter
 
 
0.29
 
 
 
0.03
 
Third quarter (from June 1, 2013 to June 28, 2013)
 
 
0.15
 
 
 
0.06
 
 
As of June 28, 2013, there were 94 holders of record of our common stock.

We have not paid any cash dividends since our inception and do not contemplate paying dividends in the foreseeable future.  It is anticipated that earnings, if any, will be retained to retire debt and for the operation of the business.

Shares eligible for future sale could depress the price of our common stock, thus lowering the value of a buyer’s investment.  Sales of substantial amounts of common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for shares of our common stock.

Our revenues and operating results may fluctuate significantly from quarter to quarter, which can lead to significant volatility in the price and volume of our stock.  In addition, stock markets have experienced extreme price and volume volatility in recent years.  This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons unrelated or disproportionate to the operating performance of the specific companies.  These broad market fluctuations may adversely affect the market price of our common stock.

RECENT SALES OF UNREGISTERED SECURITIES

On June 12, 2013, we issued an 8% convertible promissory note in the aggregate principal amount of $21,500 to an accredited investor.  The note has a maturity date of March 14, 2014.  Beginning December 9, 2013, the note is convertible into shares of our common stock at a conversion price of forty-five percent (45%) of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date.  The proceeds were used for working capital and general corporate purposes.  The issuance was exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended.
 
 
11

 
 
On January 13, 2013, we issued an 8% convertible promissory note in the aggregate principal amount of $55,000 to an accredited investor.  The note has a maturity date of October 17, 2013.  Beginning July 13, 2013, the note is convertible into shares of our common stock at a conversion price of fifty nine percent (59%) of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date.  The proceeds were used for working capital and general corporate purposes.  The issuance was exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended.

On December 21, 2012, we issued an 8% convertible promissory note in the aggregate principal amount of $40,000 to an accredited investor.  The note has a maturity date of September 21, 2013.  Beginning June 21, 2013, the note is convertible into shares of our common stock at a conversion price of fifty nine percent (59%) of the average of the three (3) lowest per share market values during the ten (10) trading days immediately preceding a conversion date.  The note was issued in consideration of accrued and unpaid legal fees.  The issuance was exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended.

On October 24, 2012, we consummated an exchange agreement with a third party investor, pursuant to which the investor exchanged a $30,000 15% promissory note due January 2013 for a $30,000 8% convertible promissory note due October 2013. The new note is convertible into shares of our common stock at a conversion price of sixty percent (60%) of the average of the three (3) per share market values immediately preceding a conversion date.  The holder may not convert any outstanding principal amount of this note or accrued and unpaid interest thereon to the extent such conversion would result in the holder beneficially owning in excess of 4.999% of our then issued and outstanding common shares.  The issuance was exempt pursuant to Section 3(a)(9) of the Securities Act as well as Section 4(2) of the Securities Act.
 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
 

CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K (THIS “FORM 10-K”), CONSTITUTE “FORWARD LOOKING STATEMENTS” WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (COLLECTIVELY, THE “REFORM ACT”). CERTAIN, BUT NOT NECESSARILY ALL, OF SUCH FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS “BELIEVES”, “EXPECTS”, “MAY”, “SHOULD”, OR “ANTICIPATES”, OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF MASS HYSTERIA ENTERTAINMENT COMPANY, INC. (“THE COMPANY”, “WE”, “US” OR “OUR”) TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-K, UNLESS ANOTHER DATE IS STATED, ARE TO NOVEMBER 30, 2012.

General

We were incorporated in Nevada on November 2, 2005 under the name “Michael Lambert, Inc.”.  Until August 5, 2009 we manufactured handbags.

On August 5, 2009 (the “Effective Date”), pursuant to the terms of a Stock Purchase Agreement, Daniel Grodnik (our Chief Executive Officer) and affiliated parties purchased a total of 7,985 shares of our issued and outstanding common stock (the “Change of Control”). This constituted a majority control of the Company.  In addition to the shares purchased, the Company also issued 42,015 shares to Daniel Grodnik and certain affiliated parties in connection with the Change of Control.  The total of 50,000 shares issued to Daniel Grodnik and the affiliated parties represents 74.6% of the shares of outstanding common stock of the Company as of the Effective Date.  
 
 
12

 

In connection with the Change of Control, we changed our name to Mass Hysteria Entertainment Company, Inc. (“we”, “us“, the “Company”, or “Mass Hysteria”) and also changed our business plan.  We are now a development stage multi-media entertainment company created to produce feature films for theatrical, DVD, video on demand (VOD) and television distribution with an interactive component for commercial, documentary and educational film market.  Our plan is to eventually produce a minimum of two original interactive theatrical films
annually,
and also create a second screen (mobile) experience for non-Mass Hysteria films.  In addition, we intend to continue creating traditional film and television projects.

Plan of Operations

The Company is in the development stage and consequently is subject to the risks associated with development stage companies, including the need for additional financing; the uncertainty of the Company’s technology and intellectual property resulting in successful commercial products or services as well as the marketing and customer acceptance of such products or services; competition from larger organizations and dependence on key personnel. To achieve successful operations, the Company will require additional capital to finance the acquisition of film properties and their attendant costs, further development of our interactive technology, marketing and the creation and rendering of second screen content for original and repurposed movies for interactivity. No assurance can be given as to the timing or ultimate success of obtaining future funding.

Over the next twelve months, Mass Hysteria intends to enable at least one short-film to be interactive from a custom built app and beta tested with a live audience.  We intend to outsource the building and testing of the App that will allow audiences to interact, via their handset, between the theatrical movies, other audience members and a cloud server. The nature of the interaction involves social connectivity, conversation between audience members narrative extensions, in-experience gaming and content acquisition. The three core innovations are a mobile app, a mobile website and specially designed cloud architecture -- together these three technologies will create what we believe to be a unique immersive quality that can offer each theatrical audience member a customizable and sharable movie entertainment experience.

COMPARISON OF OPERATING RESULTS

RESULTS OF OPERATION FOR THE YEAR ENDED NOVEMBER 30, 2012 COMPARED TO THE YEAR ENDED NOVEMBER 30, 2011

We had no revenue for the year ended November 30, 2012 as compared to $47,500 for the year ended November 30, 2011.  The lack of significant revenue in both periods is a directly related to the establishment of our business plan.  As the new Company meets its business plan goals, we expect to generate more revenue in the future. In the period from August 5, 2009 ("Inception") to date, the Company has assembled its new management team, developing its intellectual property and is fine-tuning its marketing and merchandising strategies.

For the year ended November 30, 2012, we had general and administrative expenses of $990,150; net interest expense of $205,478, excess fair value of derivative of $250,478, and gain in fair value of derivative liability of $143,242.  For the year ended November 30, 2011, we had general and administrative expenses of $1,000,578; net interest expense of $148,250.

We had a net loss of $1,531,108, for the year ended November 30, 2012, as compared to a net loss from continuing operations of $1,086,060, for the year ended November 30, 2011.   

LIQUIDITY AND CAPITAL RESOURCES

We had total assets of $8,058 as of November 30, 2012, consisting of $278 in cash, $519 in net intangible assets, $2,000 in capitalized film costs, and $5,261 in other assets. We had a working capital deficit of $1,288,812.

We had total liabilities of $2,155,715 as of November 30, 2012, consisting of current liabilities, which included $108,922 of accounts payable; accrued liabilities of $331,656, accrued payroll of $353,973; short term debt of $225,622; short term convertible debt of $50,541 in stand ready obligation of $250,000 and derivative liability of $223,637.  In addition, we had convertible long-term debt of $158,303 and related party convertible debt with a balance of $453,061 as of November 30, 2012.

We had a total stockholders’ deficit of $2,147,657 as of November 30, 2012, and an accumulated deficit as of November 30, 2012 of $8,630,500.
 
 
13

 
 
We had $319,362 in net cash used in operating activities for the year ended November 30, 2012, which included $1,531,108 in net loss, offset by $344,168  in share-based compensation, $147,282  in amortization of discount on short-term debt, $6,616 of bad debt expense, 143,242 of change in fair value of derivative liability and depreciation of $874. Cash flows used in operations were offset by changes in operating assets and liabilities totaling $312,320.
 
We had $318,122  of net cash provided by financing activities for the year ended November 30, 2012, which included $157,500 from the issuance of convertible debt, $155,622 in short term debt,  and $5,000 from the sale of stock.
 
During March 2012, the Company entered issued an 8 percent convertible promissory note to raise $10,000 in operating capital. The Note matures on December 1, 2012, and any unpaid principal or interest at that date accrues interest at the default rate of 22 percent annually.  The note may be converted into common stock, at 59 percent of market price, at any time after 180 days from the issuance date until the maturity date. On May 9, 2012, June 9, 2012, September 14, 2012, September 28, 2012, and October 24, 2012, the Company issued 8% convertible promissory notes to raise $32,500, $30,000, $22,500, $10,000, and $30,000 in operating capital, respectively. These Note mature on February 11, 2013, April 11, 2013, June 19, 2013, June 28, 2013, and October 24, 2013, respectively. These notes may be converted into common stock, at 59 percent of market price, at any time after 180 days from the issuance date until the maturity date.

Since we have no liquidity and have suffered losses, we depend to a great degree on the ability to attract external financing in order to conduct our business activities and expand our operations.   These factors raise substantial doubt about the Company’s ability to continue as a going concern.  If we are unable to raise additional capital from conventional sources, including increases in related party and non-related party loans and/or additional sales of stock, we may be forced to curtail or cease our operations. Even if we are able to continue our operations, the failure to obtain financing could have a substantial adverse effect on our business and financial results. We have no commitments to provide us with financing in the future, other than described above.  Our independent registered public accounting firm included an explanatory paragraph raising substantial doubt about the Company’s ability to continue as a going concern.
 
In the future, we may be required to seek additional capital by selling debt or equity securities, selling assets, or otherwise be required to bring cash flows in balance when it approaches a condition of cash insufficiency. The sale of additional equity securities, if accomplished, and the conversion of convertible debt, if converted, may result in dilution to our shareholders. We cannot provide assure, however, that financing will be available in amounts or on terms acceptable to us, or at all.

Critical Accounting Policies and Estimates

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
 
Use of Estimates:
 

In preparing financial statements in conformity with generally accepted accounting principles, management is required 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 and revenues and expenses during the reported period.  Actual results could differ from those estimates.

Revenue Recognition:  

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is assured.  We had $0 in revenue for the twelve months ended November 30, 2012 and $47,500 in revenues for the twelve months ended November 30, 2011 relating to continuing operations.
 
 
14

 
 
Stock-Based Compensation:

The Company accounts for its stock-based compensation under the provisions of ASC 718 “Compensation-Stock Compensation.”  Accounting for Stock Based Compensation. Under ASC 718, the Company is permitted to record expenses for stock options and other employee compensation plans based on their fair value at the date of grant. Any such compensation cost is charged to expense on a straight-line basis over the periods the options vest. If the options had cashless exercise provisions, the Company utilizes variable accounting.

Derivative Financial Instruments:

The provisions of ASC 815 “Derivatives and Hedging” applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined ASC 815 and to any freestanding financial instruments that are potentially settled in an entity's own common stock. The guidance impacts the Company's financial statements and position due to certain warrants and embedded conversion features in which the exercise or conversion price resets upon certain events.  See Note 5 for the impact of such transactions on the financial statements.

Our issued and outstanding common stock purchase warrants and embedded conversion features are recorded at their fair value upon issuance and at each reporting period. The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model. The value of the embedded conversion feature also determined using the Black-Scholes option pricing model. All future changes in the fair value of the embedded conversion feature will be recognized currently in earnings until the note is converted or redeemed.
 
Off-Balance Sheet Arrangements

None.
 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
 
 
15

 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Mass Hysteria Entertainment Company, Inc.
 
We have audited the accompanying balance sheets of Mass Hysteria Entertainment Company, Inc. (the "Company"), a development stage company, as of November 30, 2012 and 2011, and the related statements of operations, stockholders' deficit, and cash flows for the years then ended, and the period from August 5, 2009 ("Inception") to November 30, 2012. These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for  designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the  effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosure in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mass Hysteria Entertainment Company, Inc. as of November 30, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, and the period from August 5, 2009 ("Inception") to November 30, 2012, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Notes 2 and 3 of the financial statements, the Company is a development-stage company, has no liquidity, has incurred losses and used cash in operating activities. These factors raise substantial doubt about the Company's ability to continue as a going concern.  Management's plans with respect to these matters are discussed in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ dbb
mckennon
Newport Beach, California
July 16, 2013

 
16

 
 
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
(A Development-Stage Company)
Balance Sheets
 
 
 
November 30,
 2012
 
 
November 30,
2011
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
Cash
 
$
                278
 
 
$
             3,851
 
Prepaid expenses and deposits
 
 
             5,261
 
 
 
             5,855
 
Total current assets
 
 
             5,539
 
 
 
             9,706
 
 
 
 
 
 
 
 
 
 
Intangible assets, net
 
 
                519
 
 
 
             1,392
 
Film costs
 
 
             2,000
 
 
 
           95,250
 
Total Assets
 
$
              8,058
 
 
$
         106,348
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Deficit
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
Accounts payable
 
$
         108,922
 
 
$
           70,170
 
Accrued liabilities (Note 4)
 
 
          331,656
 
 
 
         246,538
 
Accrued payroll (Note 4)
 
 
         353,973
 
 
 
         172,181
 
Short-term debt (Note 5)
 
 
        225,622
 
 
 
70,000
 
Short-term convertible debt, net of discount of $70,489 and $41,486, respectively (Note 5)
 
 
         50,541
 
 
 
           78,014
 
Derivative liabilities
 
 
223,637
 
 
 
         116,635
 
Total current liabilities
 
 
      1,294,351
 
 
 
        753,538
 
 
 
 
 
 
 
 
 
 
Convertible long-term debt, net of discount of $41,697 and $61,711, respectively (Note 5)
 
 
         158,303
 
 
 
         138,289
 
Convertible long-term debt - related party
 
 
         453,061
 
 
 
 453,061
 
Stand-ready obligation
 
 
         250,000
 
 
 
           50,000
 
Total Liabilities
 
 
      2,155,715
 
 
 
      1,394,888
 
 
 
 
 
 
 
 
 
 
Commitments and contingencies (Note 6)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' Deficit
 
 
 
 
 
 
 
 
Series A Preferred stock, $0.00001 and $ 0.001par value, respectively; 10,000,000 shares authorized; 10 issued and outstanding
 
 
                  -
 
 
 
                 -
 
Common stock, $0.00001 par value and $ 0.001 par value, respectively; 2,000,000,000 and 300,000,000 shares authorized, respectively 599,872 and 108,432 shares issued and outstanding as of November 30, 2012 and 2011, respectively (Note 7)
 
 
            6
 
 
 
         1
 
Additional paid-in capital
 
 
6,482,837
 
 
 
      5,810,851
 
Deficit accumulated during the development stage
 
 
     (8,630,500
)
 
 
   (7,099,392
)
Total Stockholders' Deficit
 
 
      (2,147,657
)
 
 
    (1,288,540
)
Total Liabilities and Stockholders' Deficit
 
$
               8,058
 
 
$
         106,348
 
 
The accompanying notes are an integral part of the financial statements
 
 
17

 
 
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
(A Development-Stage Company)
Statements of Operations
 
 
 
For the years ended
November 30,
 
 
For the period from Inception to
November 30,
 
 
 
2012
 
 
2011
 
 
2012
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
-
 
 
$
47,500
 
 
$
72,500
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative
 
 
990,150
 
 
 
1,000,578
 
 
 
3,411,739
 
Selling Expense
 
 
-
 
 
 
-
 
 
 
30,573
 
Impairment of film costs
 
 
93,250
 
 
 
-
 
 
 
93,250
 
Total Operating expenses
 
 
1,083,400
 
 
 
1,000,578
 
 
 
3,535,562
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating loss
 
 
(1,083,400
)
 
 
(953,078
)
 
 
(3,463,062
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
Other Income
 
 
65,006
 
 
 
201
 
 
 
65,432
 
Interest expense
 
 
(205,478
)
 
 
(148,250
)
 
 
(383,823
)
Excess of fair value of derivative
 
 
(250,478
)
 
 
(27,091
)
 
 
(277,569
)
Gain on fair value of derivative liability
 
 
143,242
 
 
 
42,158
 
 
 
185,400
 
Loss on stand-ready guarantee
 
 
(200,000
)
 
 
-
 
 
 
(200,000
)
Total other income (expense)
 
 
(447,708
)
 
 
(132,982
)
 
 
(610,560
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Loss
 
$
(1,531,108
)
 
$
(1,086,060
)
 
$
(4,073,622
)
Basic and diluted weighted average share outstanding
 
 
312,837
 
 
 
84,112
 
 
 
 
 
Basic and diluted net loss per share
 
$
(0.01
)
 
$
(0,01
)
 
 
 
 
 
The accompanying notes are an integral part of the financial statements.

 
18

 

MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
 (A Development-Stage Company)
Statements of Stockholders’ Deficit
 
   
 
Preferred A
 
 
Common Stock
 
 
Additional
 
 
Deficit Accumulated
during the
 
 
Total
 
 
 
Number
of Shares
 
 
Amount
 
 
Number
of Shares
 
 
Amount
 
 
Paid-in
Capital
 
 
Development Stage
 
 
Stakeholders'
Deficit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at November 30, 2008
 
 
-
 
 
 
-
 
 
 
11,594
 
 
 
-
 
 
 
2,826,494
 
 
 
(2,915,639
)
 
 
(89,145
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common shares issued for services
 
 
-
 
 
 
-
 
 
 
1,620
 
 
 
-
 
 
 
270,000
 
 
 
-
 
 
 
270,000
 
Imputed rent expense
 
 
 
 
 
 
 
 
 
 
-
 
 
 
-
 
 
 
4,773
 
 
 
-
 
 
 
4,773
 
Common shares issued to extinguish debt of predecessors
 
 
-
 
 
 
-
 
 
 
10,800
 
 
 
-
 
 
 
1,152,000
 
 
 
-
 
 
 
1,152,000
 
Shares issued for services on August 5, 2009 at $240.00 per share
 
 
-
 
 
 
-
 
 
 
1,000
 
 
 
-
 
 
 
240,000
 
 
 
-
 
 
 
240,000
 
Shares issued in recapitalization
 
 
-
 
 
 
-
 
 
 
42,015
 
 
 
1
 
 
 
(1
 
 
-
 
 
 
-
 
Contribution to capital
 
 
 -
 
 
 
 -
 
 
 
-
 
 
 
-
 
 
 
7,500
 
 
 
-
 
 
 
7,500
 
Shares issued for services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 on August 24, 2009 at $310.00 per share
 
 
-
 
 
 
-
 
 
 
200
 
 
 
-
 
 
 
62,000
 
 
 
-
 
 
 
62,000
 
 on September 29, 2009 at $430.00 per share
 
 
-
 
 
 
-
 
 
 
100
 
 
 
-
 
 
 
43,000
 
 
 
-
 
 
 
43,000
 
 on October 6, 2009 at $420.00 per share
 
 
-
 
 
 
-
 
 
 
100
 
 
 
-
 
 
 
42,000
 
 
 
-
 
 
 
42,000
 
 on October 16, 2009 at $290.00 per share
 
 
-
 
 
 
-
 
 
 
2
 
 
 
-
 
 
 
580
 
 
 
-
 
 
 
580
 
 on November 29, 2009 at $100.00 per share
 
 
-
 
 
 
-
 
 
 
100
 
 
 
-
 
 
 
10,000
 
 
 
-
 
 
 
10,000
 
Stock issued for cash, November 30, 2009 at $200.00 per share
(Note 6)
 
 
-
 
 
 
-
 
 
 
1,000
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Net loss
 
 
 -
 
 
 
 -
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
(2,052,019
)
 
 
(2,052,019
)
Balances at November 30, 2009
 
 
-
 
 
 
-
 
 
 
68,531
 
 
$
1
 
 
$
4,658,346
 
 
$
(4,967,658
)
 
$
(309,311
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued for services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 on December 10, 2009 at $100.00 per share
 
 
-
 
 
 
-
 
 
 
152
 
 
 
-
 
 
 
15,200
 
 
 
-
 
 
 
15,200
 
 on January 10, 2010 at $70.00 per share
 
 
-
 
 
 
-
 
 
 
20
 
 
 
-
 
 
 
1,400
 
 
 
-
 
 
 
1,400
 
 on January 28, 2010 at $180.00 per share
 
 
-
 
 
 
-
 
 
 
50
 
 
 
-
 
 
 
9,000
 
 
 
-
 
 
 
9,000
 
 on February 22, 2010 at $110.00 per share
 
 
-
 
 
 
-
 
 
 
145
 
 
 
-
 
 
 
15,950
 
 
 
-
 
 
 
15,950
 
 on March 9, 2010 at $80.00 per share
 
 
-
 
 
 
-
 
 
 
375
 
 
 
-
 
 
 
30,000
 
 
 
-
 
 
 
30,000
 
 on May 27, 2010 at $32.00 per share
 
 
-
 
 
 
-
 
 
 
78
 
 
 
-
 
 
 
2,500
 
 
 
-
 
 
 
2,500
 
 on June 23, 2010 at $40.00 per share
 
 
-
 
 
 
-
 
 
 
600
 
 
 
-
 
 
 
24,000
 
 
 
-
 
 
 
24,000
 
 on September 1, 2010 at $30.00 per share
 
 
-
 
 
 
-
 
 
 
1,255
 
 
 
-
 
 
 
39,000
 
 
 
-
 
 
 
39,000
 
Share based compensation related to options issued granted during December 2009
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
228,667
 
 
 
-
 
 
 
228,667
 
Common shares issued to extinguish debt acquired from predecessors by Control Group member
 
 
-
 
 
 
-
 
 
 
5,900
 
 
 
-
 
 
 
55,268
 
 
 
-
 
 
 
55,268
 
On October 12, 2010, shares issued as committed on June 1, 2010
 
 
-
 
 
 
-
 
 
 
3,000
 
 
 
-
 
 
 
200,000
 
 
 
-
 
 
 
200,000
 
Contributed services
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
82,000
 
 
 
-
 
 
 
82,000
 
Net loss
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
(1,045,674
)
 
 
(1,045,674
)
Balances at November 30, 2010
 
 
-
 
 
 
-
 
 
 
80,106
 
 
$
1
 
 
$
5,361,331
 
 
$
(6,013,332
)
 
$
(652,000
)
 
The accompanying notes are an integral part of the financial statements
.

 
19

 
 
 
 
Preferred A
 
 
Common Stock
 
 
Additional
 
 
Deficit Accumulated
During the
 
 
Total
 
 
 
Number of
 
 
 
 
 
Number of
 
 
 
 
 
Paid
 
 
Development
 
 
Stakeholders'
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
in Capital
 
 
Stage
 
 
Deficit
 
Shares issued for legal services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
on February 18, 2011 at $21.00 per share
 
 
-
 
 
 
-
 
 
 
420
 
 
 
-
 
 
 
8,820
 
 
 
-
 
 
 
8,820
 
on May 5, 2011 at $20.00 per share
 
 
-
 
 
 
-
 
 
 
900
 
 
 
-
 
 
 
18,000
 
 
 
-
 
 
 
18,000
 
on June 15, 2011 at $20.00 per share
 
 
-
 
 
 
-
 
 
 
1,000
 
 
 
-
 
 
 
20,000
 
 
 
-
 
 
 
20,000
 
on June 17, 2011 at $20.00 per share
 
 
-
 
 
 
-
 
 
 
450
 
 
 
-
 
 
 
9,000
 
 
 
-
 
 
 
9,000
 
on July 14, 2011 at $20.00 per share
 
 
-
 
 
 
-
 
 
 
165
 
 
 
-
 
 
 
3,300
 
 
 
 -
 
 
 
3,300
 
on August 15, 2011 at $10.00 per share
 
 
-
 
 
 
-
 
 
 
225
 
 
 
-
 
 
 
2,250
 
 
 
-
 
 
 
2,250
 
on September 1, 2011 at $8.00 per share
 
 
-
 
 
 
-
 
 
 
2,400
 
 
 
-
 
 
 
19,200
 
 
 
-
 
 
 
19,200
 
on October 18, 2011 at $3.20 per share
 
 
-
 
 
 
-
 
 
 
3,500
 
 
 
-
 
 
 
11,200
 
 
 
-
 
 
 
11,200
 
on October 24, 2011 at $3.00 per share
 
 
-
 
 
 
-
 
 
 
250
 
 
 
-
 
 
 
750
 
 
 
-
 
 
 
750
 
on November 1, 2011 at $4.00 per share
 
 
-
 
 
 
-
 
 
 
1,000
 
 
 
-
 
 
 
4,000
 
 
 
-
 
 
 
4,000
 
Share based compensation related to options granted during December 2009
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
240,000
 
 
 
-
 
 
 
240,000
 
Preferred A shares issued to CEO
 
 
10
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
10,000
 
 
 
-
 
 
 
10,000
 
Beneficial conversion feature on convertible long term debt
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
75,000
 
 
 
-
 
 
 
75,000
 
Shares issued for cash
 
 
-
 
 
 
-
 
 
 
10,000
 
 
 
-
 
 
 
10,000
 
 
 
-
 
 
 
10,000
 
Conversion of short term convertible debt
 
 
-
 
 
 
-
 
 
 
3,571
 
 
 
-
 
 
 
10,000
 
 
 
-
 
 
 
10,000
 
Conversion of short term convertible debt
 
 
-
 
 
 
-
 
 
 
4,444
 
 
 
-
 
 
 
8,000
 
 
 
-
 
 
 
8,000
 
Net loss
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
(1,086,060
)
 
 
(1,086,060
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at November 30, 2011
 
 
10
 
 
$
-
 
 
 
108,431
 
 
$
1
 
 
$
5,810,851
 
 
$
(7,099,392
)
 
$
(1,288,540
)
Shares issued for legal services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
on December 10, 2011 at $4.70 per share
 
 
-
 
 
 
-
 
 
 
2,500
 
 
 
-
 
 
 
11,750
 
 
 
-
 
 
 
11,750
 
on January 3, 2012 at $1.00 per share
 
 
-
 
 
 
-
 
 
 
5,000
 
 
 
-
 
 
 
5,000
 
 
 
-
 
 
 
5,000
 
on February 6, 2012 at $4.70 per share
 
 
-
 
 
 
-
 
 
 
3,983
 
 
 
-
 
 
 
1,991
 
 
 
-
 
 
 
1,991
 
on February 14, 2012 at $0.80 per share
 
 
-
 
 
 
-
 
 
 
6,000
 
 
 
-
 
 
 
4,800
 
 
 
-
 
 
 
4,800
 
on December 21, 2012 at $0.70 per share
 
 
-
 
 
 
-
 
 
 
10,000
 
 
 
-
 
 
 
7,000
 
 
 
-
 
 
 
7,000
 
Issued to Indeglia against fees
 
 
-
 
 
 
-
 
 
 
75,941
 
 
 
-
 
 
 
78,627
 
 
 
-
 
 
 
78,627
 
Share based compensation related to options granted during December 2009
 
 
-
 
 
 
-
 
 
 
             -
 
 
 
-
 
 
 
240,000
 
 
 
-
 
 
 
240,000
 
Conversion of convertible note payable: Asher
 
 
-
 
 
 
-
 
 
 
342,992
 
 
 
4
 
 
 
144,696
 
 
 
-
 
 
 
144,700
 
Conversion of convertible note payable: Metacomet
 
 
-
 
 
 
-
 
 
 
31,136
 
 
 
1
 
 
 
15,991
 
 
 
-
 
 
 
15,992
 
Conversion of convertible note payable: Magna
 
 
-
 
 
 
-
 
 
 
13,889
 
 
 
-
 
 
 
2,500
 
 
 
-
 
 
 
2,500
 
Extinguished derivative liability
 
 
-
 
 
 
-
 
 
 
           -
 
 
 
-
-
 
 
 
159,631
 
 
 
-
 
 
 
159,631
 
Net loss
 
 
-
 
 
 
-
 
 
 
 
 
 
 
-
 
 
 
-
 
 
 
(1,531,108
 
 
(1,531,108
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at November 30, 2012
 
 
10
 
 
 
-
 
 
 
599,872
 
 
$
6
 
 
$
6,482,837
 
 
$
(8,630,500
)
 
$
(2,147,657
)
 
The accompanying notes are an integral part of the financial statements
.
 
 
20

 
 
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
 (A Development-Stage Company)
Statements of Cash Flows
 
 
 
For the year ended
November 30,
 
 
For the period from Inception to
November 30,
 
 
 
2012
 
 
2011
 
 
2012
 
 
 
 
 
 
 
 
 
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
Net loss
 
$
(1,531,108
)
 
$
(1,086,060
)
 
$
(4,073,622
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation
 
 
874
 
 
 
874
 
 
 
2,622
 
Bad debt expense
 
 
6,616
 
 
 
25,000
 
 
 
31,616
 
Share-based compensation
 
 
344,168
 
 
 
336,520
 
 
 
1,195,735
 
Loss on settlement of convertible notes
 
 
 
 
 
 
-
 
 
 
(14,000
           Impairment of scrip costs
 
 
93,250
 
 
 
-
 
 
 
93,250
 
Contributed services
 
 
-
 
 
 
-
 
 
 
89,500
 
Change in fair market value of derivative liability
 
 
(143,242
)
 
 
(42,158
)
 
 
(185,400
Loss on excess fair value of derivative liability
 
 
250,478
 
 
 
27,091
 
 
 
277,569
 
Amortization of discount on convertible debt
 
 
147,282
 
 
 
103,411
 
 
 
250,693
 
Provision for Stand Ready Obligation
 
 
200,000
 
 
 
-
 
 
 
200,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Accounts receivable
 
 
(9,414
)
 
 
-
 
 
 
(12,211
)
Prepaid expenses
 
 
 
 
 
 
 
 
 
 
(295
)
Accounts payable
 
 
41,550
 
 
 
27,777
 
 
 
125,085
 
Accrued liabilities
 
 
95,465
 
 
 
51,794
 
 
 
280,501
 
Accrued payroll
 
 
184,719
 
 
 
175,108
 
 
 
359,827
 
Bank credit line
 
 
-
 
 
 
-
 
 
 
(1,156
)
Net cash used in operating activities
 
 
(319,362
)
 
 
(380,643
)
 
 
(1,380,286
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
 
 
 
 
Film costs
 
 
-
 
 
 
-
 
 
 
(32,000
)
Other assets
 
 
(2,333
)
 
 
1,214
 
 
 
(1,119
)
Net cash provided by (used in) investing activities
 
 
(2,333
)
 
 
1,214
 
 
 
(33,119
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
 
 
 
 
Stand ready obligation
 
 
-
 
 
 
25,000
 
 
 
25,000
 
Proceeds from issuance of convertible debt
 
 
157,500
 
 
 
337,500
 
 
 
495,001
 
Proceeds from issuance of convertible debt to related parties
 
 
-
 
 
 
-
 
 
 
453,061
 
Proceeds from issuance of short-term debt
 
 
155,622
 
 
 
10,000
 
 
 
225,622
 
Proceeds from sale of common stock
 
 
5,000
 
 
 
10,000
 
 
 
214,999
 
Net cash from financing activities
 
 
318,122
 
 
 
382,500
 
 
 
1,413,683
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
 
(3,573
)
 
 
3,071
 
 
 
278
 
Cash and cash equivalents, beginning balance
 
 
3,851
 
 
 
780
 
 
 
-
 
Cash and cash equivalents, ending balance
 
$
278
 
 
$
3,851
 
 
$
278
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
 
 
 
 
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
 
 
 
 
 
 
Interest
 
$
-
 
 
$
-
 
 
$
-
 
Income taxes
 
$
-
 
 
$
-
 
 
$
800
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
Conversion of convertible debt
 
$
155,970
 
 
$
18,000
 
 
$
247,238
 
Cash received under subscription agreement
 
$
-
 
 
$
-
 
 
$
200,000
 
Stock-based compensation to be issued, included in accrued liabilities, for script development
 
 
-
 
 
 
40,000
 
 
 
40,000
 
Common stock issued in lieu of cash payment for script costs
 
 
-
 
 
 
23,250
 
 
 
23,250
 
 
The accompanying notes are an integral part of the financial statements
.
 
 
21

 

MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
 (A Development-Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
 
NOTE 1 – ORGANIZATION, BUSINESS AND CHANGE IN CONTROL
 
Michael Lambert, Inc. (“MLI”) was incorporated in Nevada on November 2, 2005.  MLI was in the business of manufacturing handbags, but ceased operations in June 2009.
 
On June 9, 2009, the Company entered into a material definitive agreement with Belmont Partners, LLC by which Belmont acquired 11,286 shares of the Company’s common stock in a private transaction. Following the transaction, Belmont Partners, LLC controlled approximately 85.41% of the Company’s outstanding capital stock.  

To better reflect the Company’s new business plan, on June 25, 2009, MLI changed their name to “Mass Hysteria Entertainment Company, Inc.” ("MHe", “Mass Hysteria” or the “Company”). MHe is an innovative motion picture production company that produces branded young adult film content for theatrical, DVD, and television distribution. MHe’s plan is to produce a minimum of three theatrical films a year that appeal specifically to the youth market.
 
On August 5, 2009 (date of “Inception” for financial reporting purposes), Daniel Grodnik was appointed as the Company's President, Chief Executive Officer, Chief Financial Officer, Chairman of the Board and Secretary. Mr. Grodnik has worked in the movie industry for almost thirty years. He has served as the Chairman and CEO of the National Lampoon, a publicly-traded entertainment company. On August 5, 2009, pursuant to the terms of a stock purchase agreement, an affiliate of Mr. Grodnik purchased a total of 7,985 shares of issued and outstanding common stock of MHe from Belmont Partners. At this time, Belmont Partners’ designee was the sole officer and director of the Company.  In addition to the shares sold by Belmont Partners, the Company also issued 42,015 shares to Mr. Grodnik and certain affiliated parties in connection with the change of control (the “Control Group”). The total of 50,000shares were issued to, or purchased by, Daniel Grodnik and the affiliated parties represents 74.6% of the shares of outstanding common stock of the Company at the time of transfer. For financial accounting purposes, this change in control by MHe was treated as a recapitalization with the assets contributed and liabilities assumed recorded at their historical basis. There were no assets significant acquired by MHe shareholders upon the change in control, which would have been recorded at fair value.  
 
The Company is entering a time of great change in the entertainment business. The motion picture business has had four significant revenue streams (theatrical, home video, cable and broadcast) since the early 1980's. Today, home video is in decline and new profit centers are opening up such as video-on-demand and internet portals that rely on micro-transactions.  The Company is endeavoring to be a company at the forefront of creating new revenue streams as they relate to the motion picture experience. Over the next twelve months, Mass Hysteria will be creating movies that will take advantage of traditional revenue streams that are still viable, and at the same time, identifying those revenue streams that will define new media's involvement in the film business such as downloading applications to smart phones that will allow the theater-goer to "participate" with the on-screen experience. Our plan is to combine these entertainment experiences into an alternative theatrical experience for young adults. Technology is evolving, too.  Interactive mobile applications are in development by third parties.  We expect to license or develop our own mobile applications in the near future, depending on our ability to raise capital and generate traditional sources of revenues.  There are technology and competitive risks associated with interactive mobile devices and theatrical films.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Development Stage Company
 
On August 5, 2009, the Company entered into the development stage with its intended new business, which currently has minimal revenues. Management expects to sustain losses from operations until such time it can generate sufficient revenues sufficient to meet its anticipated cost structure. The Company is considered a development-stage company in accordance with Accounting Standards Codification (“ASC”) 915 – “Development-Stage Entities.” Upon distribution of the Company’s products, it will exit the development stage. The nature of our operations is highly speculative, and there is consequently a risk of loss of your investment.  The success of our plan of operation will depend to a great extent on the operations, financial condition, and management of the identified business opportunity.  

 
22

 

Use of Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require the Company's most significant, difficult and subjective judgments include the valuation and recognition of share-based compensation, evaluation of the Company’s stand-ready obligation and values of derivative instruments.  We use the Black-Scholes valuation model for simplicity purposes.  Various valuation techniques render varying amounts.  We consistently use this model and use inputs that are appropriate.  As the Company develops its technologies, and capitalization of costs occurs, the carrying value of those long-lived assets will need to be evaluated for impairment.
 
We base our estimates and judgments on historical experience and on various other factors that are considered reasonable under the circumstances, the results of which form the basis for making judgments that are not readily apparent from other sources. Actual results could differ materially from these estimates.
 
Fair Value of Financial Instruments
 
The Company accounts for financial instruments under the guidance of ASC 820-10 – “Fair Value Measurements”.  ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
 
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
Level 2 - Other inputs that are directly or indirectly observable in the marketplace.
 
Level 3 - Unobservable inputs which are supported by little or no market activity.
 
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

As of November 30, 2012 and 2011, the Company’s derivatives which include the embedded conversion feature on the convertible note payable were considered level 2 financial instruments.  See Note 5 for valuation technique and assumptions used.

The Company's financial remaining instruments consisted primarily of (level 1), accounts payable, accrued liabilities, and short-term debt. The carrying amounts of the Company's financial instruments generally approximate their fair values as of November 30, 2012 and 2011 due to the short term nature of these instruments.

The Company did not have any level 3 instruments at November 30, 2012 and 2011.
 
Cash and Cash Equivalents
 
For financial statement presentation purposes, the Company considers time deposits, certificates of deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents.
 
The Company may maintain cash and cash equivalent balances at financial institutions that are insured by the Federal Deposit Insurance Corporation up to $250,000. Deposits with these banks may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk. The Company did not have any cash equivalents at November 30, 2012 and 2011.

Accounts Receivable

Accounts receivable are reported net of allowance for expected losses.  It represents the amount management expects to collect from outstanding balances. Differences between the amount due and the amount management expect to collect, are charged to operations in the year in which those differences are determined, with an offsetting entry to a valuation allowance. As of November 30, 2012 and 2011, the Company reserved $31,616 against accounts receivable.  
 
 
23

 
 
Film Costs
 
The Company capitalizes film production costs in accordance with ASC 926 – “Entertainment”. Film costs include costs to develop and produce films, which primarily consist of consulting fees, equipment and overhead costs, as well as the cost to acquire rights to films. Film costs include amounts for films still in development.  The Company began capitalizing script costs on March 1, 2010.  See Note 9 for additional disclosure. 

Website Development Costs
 
Website development costs are for the development of the Company's Internet website. These costs have been capitalized when acquired and installed, and are being amortized over its estimated useful life of three years on a straight line basis. The Company accounts for these costs in accordance with ASC 340, “Other Assets and Deferred Costs”, which specifies the appropriate accounting for costs incurred in connection with the development and maintenance of websites.  At November 30, 2012, the Company owned a website costing $3,140 which had an estimated useful life of three (3) years.  Amortization expenses related to website development costs during each of the years ended November 30, 2012 and 2011 were $874. 

Software Development Costs

Software development costs for internal use are capitalized and, once placed in service, amortized using the straight-line method over the estimated useful life, generally three years. The Company applies the principles of FASB ASC 985-20, 
Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed
 (“ASC 985-20”). ASC 985-20 requires that software development costs incurred in conjunction with product development be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, software development costs must be capitalized and reported at the lower of unamortized cost or net realizable value of the related product.

All other property and equipment is depreciated or amortized on a straight-line basis over the estimated useful lives of three to ten years.

Derivative Financial Instruments

The provisions of ASC 815 - “Derivatives and Hedging” applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined ASC 815 and to any freestanding financial instruments that are potentially settled in an entity's own common stock. The guidance impacts the Company's financial statements and position due to certain warrants and embedded conversion features in which the exercise or conversion price resets upon certain events.  See Note 5 for the impact of such transactions on the financial statements.

Our issued and outstanding common stock purchase warrants and embedded conversion features are recorded at their fair value upon issuance and at each reporting period. The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model. The value of the embedded conversion feature also determined using the Black-Scholes option pricing model. All future changes in the fair value of the embedded conversion feature will be recognized currently in earnings until the note is converted or redeemed.

Convertible Debt

If a conversion feature of conventional convertible debt is not accounted for as a derivative instrument and provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”).  A BCF is recorded by the Company as a debt discount.   In those circumstances, the convertible debt will be recorded net of the discount related to the BCF.  The Company amortizes the discount to interest expense over the life of the debt using the effective interest method.  
 
 
24

 

Guarantees

During the year ended November 30, 2011, the Company entered into an agreement to provide for a guarantee of indebtedness. The Company’s exposure to credit loss, in the event of nonperformance of the related film financed by the indebtedness, is represented by the amounts stipulated in the agreement, and is limited to a maximum of $250,000. The total guarantee accruals do not necessarily represent future cash requirements or cash reserves. As of November 30, 2012, management has evaluated the guarantee liability under ASC 460-10 – “Guarantees”
 
and ASC 450-20 – “Loss Contingencies” by reviewing the ability to repay the obligation under contract to determine if there is a probable chance of a default, and if so, provide a reasonable estimate for losses. At November 30, 2012 management determined that the full guarantee will be called. See Note 6 for Management’s determination.

Loss per Share
 
Loss per share is computed on the basis of the weighted average number of common shares outstanding. Diluted loss per share is computed on the basis of the weighted average number of common shares outstanding.  In loss periods, dilutive common equivalent shares are excluded as the effect would be anti-dilutive. At November 30, 2012, the Company’s dilutive securities outstanding consisted of (1) the CEO’s options to purchase shares of common stock (see Note 8), for which the exercise price is above the average closing price of the Company’s common stock and thus excluded under the treasury method; (2) ­­6,768 shares relative to convertible notes to a related party expected to be issued (post conversion) beginning in February 2015; (3) 692,959 shares relative to convertible notes (post conversion); and (4) 72 shares related to warrants issued with the $37,500 convertible note. At November 30, 2011, the Company’s dilutive securities outstanding consisted of (i) the CEO’s options to purchase shares of common stock (See Note 8) for which the exercise price is above the average closing price of the Company’s common stock and thus excluded under the treasury method; (2) 6,768 shares relative to convertible notes to a related party expected to be issued (post conversion) beginning in February 2015; (3) 131,643 shares relative to convertible notes (post conversion) beginning in September 2011; and (4) 944 shares related to warrants issued with the $37,500 convertible note. The preceding common equivalent was excluded from the diluted net loss per share as the effects would have been anti-dilutive.
 
Impairment of Long-Lived Assets
 
The Company has adopted ASC 360-10, - "Property, Plant and Equipment" which requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates its long-lived assets for impairment, annually, or more often, if events and circumstances warrant such.  At November 30, 2012 management considered that the value of $ 93,250 of script costs were impaired and they were accordingly expensed.
 
Recoupable Costs and Producer Advances
 
Recoupable costs and producer advances represent amounts paid by the Company that will be expected to be subsequently recouped through the collection of fees associated with the Company's licensing of content represented by third parties. In connection with the film production segment's content operations which may be represented by others, the Company will enter into sales agency agreements whereby the Company will act as a sales agent for a producer's film ("Sales Agency Agreements"). These Sales Agency Agreements typically include provisions whereby certain costs that are incurred for promotion related activities will be paid by the Company on behalf of the producer (such as movie trailer and ad material costs). The Company may also pay the producer an advance for the related film prior to the distribution of such film. As the Company subsequently licenses the producer's film and license fees are collected, the recoupable costs and producer advances will be recovered by the Company through these license fee collections. License fees typically are not paid to the producer of the related film until such recoupable costs and producer advances have been fully recovered by the Company.
 
Producers Fees
 
Producer fees will be recognized upon receipt of the fees and delivery of the related services.  If upon receipt of the fees all services have not been provided, the fees will be deferred and recognized as the services are performed.

Royalties
 
Royalty
 
and profit participation will be recognized when the amounts are known and the receipt of the royalties is reasonably assured.  Accordingly, recognition generally occurs upon receipt (usually quarterly or semi-annually)
.
 
 
25

 

Distribution Revenues
 
Distribution Revenues will be recognized when earned and appropriately reported by third (3rd) party distribution companies and recorded gross along with any distribution expenses charged by the Distributor and upon receipt of such revenues.
 
Producer Development, Production Service Fees and Film Distribution Fees
 
As these services are provided, these fees will be invoiced to the third party financiers and producers and recognized when the amount has been determined and receipt is reasonably assured. 
 
Stock Options
 
In accordance with the provisions of ASC 718 “Compensation-Stock Compensation,” the Company accounts for employee and non-employee director stock issuances and stock options under the fair value method which requires the use of an option pricing model for estimating fair value. Accordingly, share-based compensation is measured at grant date based on the estimated fair value of the award. The Company uses the straight-line attribution method to recognize share-based compensation costs over the requisite service period of the award.

Reverse Stock Split

On December 28, 2012, the Company’s board of directors approved, a 1-for-1000 reverse stock split pursuant to which all shareholders of record received one share of common stock for each one thousand shares of common stock owned (subject to minor adjustments as a result of fractional shares). GAAP requires that the reverse stock split be applied retrospectively to all periods presented. As a result, all common stock, warrant and option transactions described herein have been adjusted to reflect the 1-for-1000 reverse stock split.

Accounting for Non-Employee Stock-Based Compensation

The Company measures compensation expense for its non-employee stock-based compensation under ASC 505 - “Equity”. The fair value of the option issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company's common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty's performance is complete. The fair value of the equity instrument is charged directly to stock-based compensation expense and credited to additional paid-in capital.

Deferred Producer Liabilities
 
Deferred producer liabilities represent outstanding amounts due to the producer or to be retained by the Company upon the collection of license fee amounts related to the sale of content represented by the Film Production segment. In accordance with the Sales Agency Agreements entered into by the Company and represented content producers, when license fees associated with the Company's sale of represented content are collected, the amounts are paid to the producer and/or retained by the Company. Amounts are paid to the Company for its sales agency commission, recoupment of outstanding film costs and producer advances ("Recoupable Costs") or as market fee revenue. The terms of the Sales Agency Agreements provide that collected license fees will be distributed to the producer and/or retained by the Company based on a specific allocation order as defined by each agreement. The allocation order is dependent on certain criteria including total license fee collections, outstanding Recoupable Cost balances and certain other criteria as specified by the Sales Agency Agreements. Because these criteria cannot be reasonably determined until the license fees are collected, the appropriate allocation order of uncollected license fees cannot be established. Accordingly, the uncollected license fee amounts are recorded as deferred producer liabilities until such

Income Taxes
 
The Company makes certain estimates and judgments in determining its income tax provision expense. These estimates and judgments are used in the determination of tax credits, benefits and deductions, and the calculation of certain tax assets and liabilities which are a result of differences in the timing of the recognition of revenue and expense for tax and financial statement purposes. The Company also uses estimates and judgments in determining interest and penalties on uncertain tax positions. Significant changes to these estimates could result in a material change to the Company's tax provision in subsequent periods.
 
 
26

 

The Company is required to evaluate the likelihood that it will be able to recover its deferred tax assets. If the Company's evaluation determines that the recovery is unlikely, it would be required to increase the provision for taxes by recording a valuation allowance against the deferred tax assets equal to the amount that is not expected to be recoverable. The Company currently estimates that its deferred tax assets will be recoverable. If these estimates were to change and the Company's assessment indicated it would be unable to recover the deferred tax assets, the Company would be required to increase its income tax provision expense in the period of the change in estimate.
 
The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of tax regulations.  The Company adopted the provisions of ASC 740 “Income Taxes”. ASC 740 contains a two-step approach to recognizing and measuring uncertain tax position liabilities. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This process is based on various factors including, but not limited to, changes in facts and circumstances, changes in tax law, settlement of issues under audit, and new audit activity. Changes to these factors and the Company's estimates regarding these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. 
 
Recent Accounting Pronouncements

The FASB issues ASUs to amend the authoritative literature in ASC. There have been a number of ASUs to date that amend the original text of ASC. Those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.
 
NOTE 3 - GOING CONCERN
 
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplates continuation of the Company as a going concern. However, the Company is a development-stage company, has limited available capital, has limited revenues from intended operations, suffered losses since inception and used cash in operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. We are seeking debt or equity capital to meet our obligations and business needs. There is no assurance that future capital raising plans will be successful in obtaining sufficient funds to assure the eventual profitability of the Company. The financial statements do not include any adjustments that might result from these uncertainties.
 
NOTE 4 – ACCRUED LIABILITIES
 
Accrued liabilities by major classification are as follows: 

 
 
November 30, 
2012
 
 
November 30,
 2011
 
Accrued interest
 
$
         118,195
 
 
$
     75,973
 
Accrued consulting fees
 
 
91,000
 
 
 
     91,000
 
Accrued payroll taxes on CEO’s compensation
 
 
98,461
 
 
 
     63,800
 
Accrued auto allowances due CEO
 
 
           24,000
 
 
 
     12,000
 
Accrued other expenses
 
 
                     71,950
 
 
 
          3,765
 
Total accrued liabilities
 
$
         403,606
 
 
$
    246,538
 

Accrued interest represents interest on a long term loan from a related party, and the interest on a short term notes payable from external parties.  Accrued consulting fees are for scriptwriters and a film consultant.   Other accrued expenses consist of accrued rent and related office parking.  

Based on the CEO’s employment agreement, the Company accrues $30,000 per month for gross wages, while the CEO receives payments at various times only as capital becomes available. The CEO’s compensation is required to be reported on Internal Revenue Service (IRS) Form W-2; however, the Company has made no such reporting.  Payroll taxes are accrued for the CEO’s salary to properly reflect the amount of expense related to his compensation which includes the contemplation of penalties and interest.  In the event the IRS audits the Company, it will likely be liable for certain taxes, penalties and interest.  See Note 6 for details of the CEO’s employment agreement.
 
 
27

 

The Company entered into an employment agreement as of February 3, 2012 with our former Chief Financial Officer which provides for a base salary of $90,000 per year, payable monthly, on a month-to-month basis. The Company pays these wages only as capital becomes available. No wages have been paid to date.

Accrued payroll is as follows:

 
 
November 30,
 
 
November 30,
 
 
 
2012
 
 
2011
 
 
 
 
 
 
 
 
Accrued and unpaid compensation due CEO
 
$
280,848
 
 
$
171,181
 
Accrued and unpaid compensation due CFO
 
 
73,125
 
 
 
-
 
Total accrued payroll
 
$
353,973
 
 
$
171,181
 

NOTE 5 – BORROWINGS

Short-Term Debt

(A)  
Related Parties

On February 28, 2012, our former Chief Financial Officer made an interest free demand advance of $30,000 to the Company to provide working capital, which remains outstanding at November 30, 2012. The Note was recorded at its estimated fair value of $27,778 at the acquisition date, and imputed interest was being accreted to non-cash interest expense to the maturity date, using a 8% interest rate.  No demand for payment has been made as of June 28, 2013 and the note remains unpaid.

On July 13, 2010, March 22, 2012 and October 25, 2012, the Company borrowed $60,000, $ 50,000 and $10,000, respectively, from a shareholder for use as operating capital.  On September 12, 2012, the Company, the shareholder and an external party entered into an Assignment Agreement whereby the external party agreed to assume $30,000 of the $60,000 July 13, 2010 debt in exchange for a 8% convertible note maturing October 24, 2013 (see Short-term Convertible Debt with Ratchet Provisions noted in (ii) below).  The due date on the remaining balance of $30,000 of the $60,000 advance was extended to December 31, 2013 and bears interest at the rate of 15% per annum; the due date of the $50,000 advance is March 7,2013 and it bears interest at the rates of 15% per annum through March 7, 2013 and 18% per annum interest thereafter if the repayment date is extended; and the $10,000 advance is payable on demand at an interest rate of 15% per annum.

During the years ended November 30, 2012 and 2011, the Company incurred and accrued $14,802 and $9,000 in interest expense, respectively, related to this short-term debt. As of November 30, 2012 and 2011, the Company has accrued $29,003 and $11,416 of interest expense related to these notes respectively.  
 
(B)  
Film Finance Agreement
 
On May 11, 2012, we entered into an agreement with Coral Ridge Capital Partners, LLC (“CRCP”) under which CRCP agreed to provide up to $300,000 in equity financing towards the production of the motion picture currently entitled “End of the Gun” (the "Picture"). The initial $100,000 under this agreement was paid to us on June 12, 2012.   While it was the Company’s intent to commence filming of the Picture by September 1, 2012, certain casting delays have postponed the commencement date, to a date yet to be determined.  In the event that the motion picture is abandoned, we are required to repay CRCP all funds paid to us, plus interest of 12% per annum. On January 25, 2013 we received a written notice of termination of agreement from CRCP and we are currently negotiating a mutual settlement.  Accordingly, we have included the $100,000 advance within short-term debt until the status of the Picture has been better determined and we have accrued interest payable of $5,622 through November 30, 2012.

Through November 30, 2012, we have paid cumulative expenses totaling $13,688 in connection with the Picture, which have been recorded within operating expenses.

 
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Short-term Convertible Debt with Ratchet Provisions

(A)  
Short-term Convertible Debt

(i)      On January 11, 2012, March 1, 2012, May 9, 2012, July 9, 2012, September 14, 2012 and September 28, 2012 the Company borrowed $22,500, $10,000, $32,500, $30,000, $22,500 and $10,000   respectively, from external parties for use as operating capital. The parties entered into convertible notes payable agreements which make the Company liable for repayment of the principal and 8% annual interest by the agreements’ expiration dates ranging between October 6, 2012 and June 28, 2013. If a default is called by the lender after failure to repay principal or interest when due, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes’ inception date on the unpaid amount. As of November 30, 2012, none of the holders have held the Company in default for non-payment. However, on March 18, 2013 we received a notice of default from one of the external parties holding a total of $131,200 of short-term convertible debt at that date.  See Subsequent Events for additional details.

After 180 days, the notes are convertible into common stock at a 41% discount off the average of the lowest three (3) trading prices for the Company’s common stock within the ten (10) days preceding the conversion. These notes contain a “ratchet” provision, which protects the note holders in case the issuer sells stock during the term of the notes for a per-share price which is less than the effective conversion rate. Due to this ratchet provision, these notes are considered to contain a derivative instrument associated with the embedded conversion feature. This liability is recorded on the face of the financial statements as “derivative liability”, and must be revalued each reporting period.

(ii)      As discussed above, on September 12, 2012, the Company entered into an Assignment Agreement with an external party whereby $30,000 of 15% convertible short term debt due a shareholder was assigned effective October 24, 2012 to the external party in exchange for an 8% convertible note due October 24, 2013. The new note is convertible at any time, within a limit of 4.999% of our then issued and outstanding shares of common stock, into our common stock at a 40% discount off the average of the lowest three (3) trading prices for the Company’s common stock within the ten (10) days preceding the conversion. This note therefore also contain a “ratchet” provision, which protects the note holder in case the issuer sells stock during the term of the notes for a per-share price which is less than the effective conversion rate. Due to this ratchet provision, this note is considered to contain a derivative instrument associated with the embedded conversion feature. This liability is recorded on the face of the financial statements as “derivative liability”, and must be revalued each reporting period.

The Company discounts the notes by the fair market value of the derivative liability upon inception of each note. These discounts will be accreted back to the face value of the notes over the note term using the effective interest method.

(B)  
Warrants

Additionally, a $37,500 convertible note agreement entered into on August 9, 2011 contained an attached warrant to purchase one million shares of Company common stock at a fixed price of $1 per share. The warrant has a five year life, expiring on August 9, 2016. Using the Black-Scholes pricing model, along with the inputs listed directly below, we calculated the fair market value of this warrant to be $387 and $9,895 at November 30, 2012 and November 30, 2011. Because the warrant reflected a derivative liability, the entire value was recorded as a loss on derivative at the date of grant and the liability is recorded on the face of the financial statements. Additionally, this derivative liability will be revalued each quarterly reporting period.
 
          
 
November 30, 2012
 
 
November 30, 2011
 
Annual dividend yield
 
 
0.0
%
 
 
0.0
%
Expected life (years)
 
3.7 yrs.
 
 
5.0 yrs.
 
Risk-free interest rate
 
 
0.50
%
 
 
0.91
%
Expected volatility
 
 
237
%
 
 
269
%
 
(C)  
Determination of Derivative Liability
 
The Company calculated the derivative liability using the Black-Scholes pricing model for each note upon inception and recorded the fair market value of the derivative liability as a discount to the note. When a derivative liability associated with a convertible note is in excess of the face value of the convertible note, the excess of fair value of derivative is charged to the statement of operations.
 
 
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The derivative liabilities associated with these convertible notes were revalued during the period as principal was converted, using the Black-Scholes Model with the below range of inputs. Upon conversion of all or a portion of the convertible notes, the derivative liability associated with the principal converted is valued immediately before conversion using the Black-Scholes model. The change in fair value of the derivative liability associated with the principal converted is recorded as a gain/loss on fair value of derivative liability in the accompanying statement of operation, with the remaining value of that portion of the derivative liability written off with a corresponding credit to additional paid-in capital.

As of November 30, 2012 and November 30, 2011, the Company has outstanding principal amounts on convertible debt of $121,030 and $119,500, respectively. At the inception of these notes inception, they were fully discounted due to the associated derivative liabilities. Aggregate remaining discounts on convertible notes to be accreted over the life of each respective note on an effective interest method are $70,489 and $41,486 as of November 30, 2012 and November 30, 2011, respectively. For the year ended November 30, 2012, interest expense from accretion of the discount, including converted notes, was $128,497.
 
During the year ended November 30, 2012, lenders of convertible notes converted $163,191 of principal and interest thereon through the issuance of 388,017 shares. The remaining derivative liability written off from converted principal credited to additional paid-in capital was $127,568 for the year ended November 30, 2012. As part of these conversions, convertible notes from February 23, 2011, May 6, 2011, August 2, 2011, October 18, 2011 and January 11, 2012 were fully satisfied, and the note from March 1, 2012 was partially satisfied with a reduction of $2,170 to $7,830; the note from May 9, 2012 was partially satisfied with a reduction of $32,500 to $23,200 and the note from October 24, 2012 was partially satisfied with a reduction of $30,000 to $27,500.
 
Aggregate derivative liabilities associated with remaining convertible notes were $223,637 as of November 30, 2012 and $116,635 as of November 30, 2011. Based on this revaluation at year end and the revaluation of derivative liabilities measured during the period immediately before extinguishment of associated convertible notes, the Company recognized a net gain in fair value of derivative liability of $143,242 and $42,158 during the year ended November 30, 2012 and 2011, respectively.
    
During the year ended November 30, 2011, the Company borrowed a total of $137,500 in short-term convertible debt, of which $18,000 was converted into 8,016 shares of common stock by the applicable note holder.  

During years ended November 30, 2012 and 2011, the range of inputs used to calculate derivative liabilities noted above were as follows: 
 
 
 
November 30, 2012
 
 
November 30, 2011
 
Annual dividend rate
 
 
0.0
%
 
 
0.0
%
Expected life (years)
 
.01 - .92 years
 
 
.01 - .63 years
 
Risk-free interest rate
 
 
.03% - .18
%
 
 
.01% - .09
%
Expected volatility
 
 
71.35% - 350.90
%
 
 
51.60% - 235.00
%

Convertible Debt 
 
On March 31, 2011, the Company borrowed $200,000 from an external party for use as operating capital.  The parties entered into a long term convertible note agreement which makes the Company liable for repayment of the principal and 2% annual interest by the agreement’s expiration date of December 28, 2014.  Beginning September 27, 2011, the note is convertible into shares of our common stock at a fixed conversion price of $0.016 per share. As a result, the Company will be liable to issue up to 12,500 shares common stock upon conversion.  Based on a $22 closing price on the day of note agreement, we recorded a discount of $75,000 as a result of the beneficial conversion feature (“BCF”). As such, the Company discounted the note by the value of the BCF upon inception of the note.   During the year ended November 30, 2012 and 2011 interest expense from accretion of the discount was $20,014 and $13,289 respectively, leaving a remaining discount of $41,697 and $61,711 as of November 30, 2012 and 2011, respectively.  The discount being amortized approximates the effective interest method over the term of the note.
 
 
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Related Party
 
Since July 2009, a member of the Control Group of the Company has made advances on behalf of the Company and purchased predecessor convertible debt totaling $305,430, for the period ended November 30, 2009.  During the fiscal year ended November 30, 2010, $55,268 of convertible debt acquired by this related party, as part of the recapitalization and change in ownership, was converted into 5,900 shares of common stock for full satisfaction of the liability and the holder advanced the Company $88,199 in working capital for operations.  The note is convertible into 4,230 common shares, based on $80 share price.  The convertible note bears interest at 6% per annum, and is due February 28, 2015.  These advances totaled $453,061 at both November 30, 2012 and 2011.  The notes are to be immediately convertible on their respective due dates; no beneficial conversion feature was deemed applicable at the date of issuance.  As of November 30, 2012 and 2011, the Company has accrued $82,121 and $54,863 of interest expense related to these notes, respectively.

Future annual principal payments due on all of the above notes are as follows:

Years Ending
 
 
 
November 30,
 
 
 
2013
 
$
313,530
 
2014
 
 
-
 
2015
 
 
   653,061
 
 
 
 
 
 
Total
 
$
  966,591
 
 
Also see Note 12 for subsequent issuances of convertible debt.


NOTE 6 - COMMITMENTS AND CONTINGENCIES
 
Office Leases
 
On April 14, 2011, the Company entered into a lease for office space.  The lease was for one (1) year and required monthly payments of $2,927 in addition to a security deposit of $8,782 (equal to three month’s rent in advance). The security deposit was reduced after six months of on-time rent payments, with the reduction applied to against one month’s rent. Subsequent to the initial one year lease, the Company continued to rent the office space on a month-to-month basis until December 31, 2012 when it vacated the offices.  Office lease expense for the years ended November 30, 2012 and 2011 was $35,129 and $39,878, respectively.
 
Consulting Agreements
 
In August 2009, the Company entered into a one year engagement agreement with successful comedy writer Pat Proft to hire him as the Senior Vice President of Comedy.  His role was to create and write our movies.  Per the terms of his engagement, Mr. Proft received 200 shares of our common stock (see Note 7), and an initial monthly fee of $10,000 for a minimum of one year.  During March 2010, a new agreement was negotiated which reflected that Mr. Proft would be paid half of this monthly fee in the form of stock compensation – retroactive from January 2010.  As of the year ended November 30, 2012 and 2011, accrued cash and stock compensation totaling $15,000 and $40,000, respectively, was due to Mr. Proft and included in accrued liabilities on the accompanying balance sheet.  This agreement terminated in August 2010. 
 
Employment Agreement
 
On December 17, 2009, the Company entered into an employment agreement with our CEO which provides for a base salary of $360,000 per year, payable semi-monthly for a period of five years, expiring December 17, 2014.  Among other things, the employment agreement calls for periodic increases in the base salary and bonuses based upon performance.  The agreement also allows for the Company, at the discretion of the Board of Directors, to provide for medical insurance and a contribution to a retirement benefit plan.  Our CEO was also awarded options to purchase common stock.  See Note 8.  During fiscal 2010, our CEO voluntarily forgave $82,000 of accrued wages, which the Company recorded in equity as contributed services. 

Stand-Ready Obligation

During the production of the film
Carjacked,
the production company Carjacked Entertainment, LLC and Carjacked Investments, LLC (collectively “Carjacked LLC’s”) obtained financing from Wet Rose Productions, LLC (“Wet Rose”) in the amount of $850,000. Grodfilm Corp, owned by the Company's CEO, is the managing member of the LLC's and acts on behalf of 9207-8856 Quebec Inc., a Quebec company and owner of the copyright to the motion picture "Carjacked".
 
 
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On October 5, 2010, the Company entered into an indirect guarantee of the indebtedness in which the Company guaranteed any shortfalls in repayment of the $850,000 of debt related to the investment provided by Wet Rose up to an amount not to exceed $250,000. The financing from Wet Rose becomes due and payable at a date which is 30 months after first release of the film
Carjacked
. The film was released on November 22, 2011 and accordingly a payable may become due in approximately 21 months on May 22, 2014. As of August 31 2012 and November 30, 2011, management evaluated the guarantee liability under ASC 460-10 – “Guarantees” and ASC 450-20 – “Loss Contingencies” by reviewing the projected ability of the
Carjacked
film to repay the obligation under contract to determine if there is a probable chance of a default, and if so, provides a reasonable estimate for losses. As of November 30, 2012, management believed that past performance and current projections indicated that full repayment by the Company to Wet Rose was probable.  Accordingly, management recorded a provision for loss of $200,000 related to the stand-ready obligation during the year ended November 30, 2012, together with the $50,000 “guarantor fee” previously recorded as a stand-ready obligation in the prior year, a total of $250,000 is reflected as a stand-ready obligation as of November 30, 2012.
 
Film Costs and Movie Rights Option Contract

On November 1, 2010, the Company entered in to an “option/purchase” agreement with Richard Taylor (the “Writer”) in which the Company would be granted the exclusive right and option (“Option”) to acquire all motion picture, television and allied and ancillary rights to the Writer’s screenplay – “Bad Monday”. The initial term of this option agreement was for one year; however, the Company subsequently obtained an extension through October 31, 2013. As consideration, the Company paid the Writer $2,000 which is included in Film Costs. It is the intention of the Company to produce the motion picture and to either renew the option for an additional six month period through April 30, 2013 for the payment of $3,500 or to exercise the Option, at which point the Writer would be paid a purchase price of between $40,000 and $100,000, depending on the final production budget for the motion picture. Additionally, the Writer would be entitled to 5% of the net proceeds of the picture, and an additional 2.5% of net proceeds if the Writer received shared writing credit on the picture.

At November 30, 2011 there was an additional amount of $93,250 included in Film Costs relating to payments to Pat Proft, a related party, to deliver a finished script to a comedic motion picture which the Company had intended to be the first interactive "second screen" motion picture produced and distributed to help launch the Company's interactive technology. Management assessed this project at November 30, 2012 and determined that it was less likely that it now will be developed and accordingly, the entire amount was written off as other expense in the statement of operations for the year ended November 30, 2012.

NOTE 7 - STOCKHOLDERS’ DEFICIT

Capital Stock

The Company has two classes of stock:

Series A Preferred stock, $0.00001 and $ 0.001 par value, respectively; 10,000,000 shares authorized; 10,000 issued and outstanding; and,
Common stock, $0.00001 par value and $ 0.001 par value, respectively; 2,000,000,000 and 300,000,000 shares authorized, respectively; 599,872 and 108,432 shares issued and outstanding as of November 30, 2012 and 2011, respectively.

Amended and Restated Charter

We filed amended and restated articles of incorporation with the Nevada Secretary of State on each of December 16, 2011 and January 5, 2012, respectively (with the January 5, 2012 version superseding the previously filed version), which amended and restated articles (i) increased our authorized common stock to two billion (2,000,000,000) shares; (ii) reduced the par value for its capital stock from $0.001 per share to $0.00001 per share; (iii) granted authority to our board of directors to effectuate a stock split or reverse stock split without stockholder approval; (iv) elected not to be governed by certain provisions pertaining to “resident domestic corporations” under the Nevada Revised Statutes; and (v) elected not to be governed by certain provisions relating to “issuing corporations” under the Nevada Revised Statutes. A copy of the amended and restated articles was filed as an exhibit to our Definitive Information Statement on Form 14C, filed with the Securities and Exchange Commission on January 13, 2012. The amended and restated articles were effective on February 17, 2012, as stated therein.
 
 
32

 

Stock Incentive Plans

2012 Stock Incentive Plan

On March 13, 2012, our Board of Directors adopted the 2012 Stock Incentive Plan
.
The purpose of our 2012 Stock Incentive Plan is to advance the best interests of the Company by providing those persons who have a substantial responsibility for our management and growth with additional incentive and by increasing their proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with us. Further, the availability and offering of stock options and common stock under the plan supports and increases our ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which we depend. The total number of shares available for the grant of either common stock or stock options under the plan is 56,000 shares, subject to adjustment.  As of November 30, 2012, all shares have been granted under the plan.

Our Board of Directors administers our plan and has full power to grant stock options and common stock, construe and interpret the plan, establish rules and regulations and perform all other acts, including the delegation of administrative responsibilities, it believes reasonable and proper. Any decision made, or action taken, by our board of directors arising out of or in connection with the interpretation and administration of the plan is final and conclusive.

The Board of Directors, in its absolute discretion, may award common stock to employees of, consultants to, and directors of the Company, and such other persons as the board of directors or compensation committee may select, and permit holders of common stock options to exercise such options and hold the common stock issued. Stock options may also be granted by our board of directors or compensation committee to non-employee directors of the Company or other persons who are performing or who have been engaged to perform services of special importance to the management, operation or development of the Company.

In the event that our outstanding common stock is changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of merger, consolidation, other reorganization, recapitalization, combination of shares, stock split-up or stock dividend, prompt, proportionate, equitable, lawful and adequate adjustment shall be made of the aggregate number and kind of shares subject to stock options which may be granted under the plan.

Our Board of Directors may at any time, and from time to time, suspend or terminate the plan in whole or in part or amend it from time to time in such respects as our Board of Directors may deem appropriate and in our best interest.

2012 Stock Incentive Plan #2

On August 21, 2012, our Board of Directors adopted the 2012 Stock Incentive Plan #2. The purpose of our 2012 Stock Incentive Plan #2 is to advance the best interests of the Company by providing those persons who have a substantial responsibility for our management and growth with additional incentive and by increasing their proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with us. Further, the availability and offering of stock options and common stock under the plan supports and increases our ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which we depend.  The total number of shares available for the grant of either common stock or stock options under the plan is 132,800 shares, subject to adjustment.  As of November 30, 2012, 17,000 shares have been granted under the plan.

Our Board of Directors administers our plan and has full power to grant stock options and common stock, construe and interpret the plan, establish rules and regulations and perform all other acts, including the delegation of administrative responsibilities, it believes reasonable and proper. Any decision made, or action taken, by our board of directors arising out of or in connection with the interpretation and administration of the plan is final and conclusive.

The Board of Directors, in its absolute discretion, may award common stock to employees of, consultants to, and directors of the Company, and such other persons as the board of directors or compensation committee may select, and permit holders of common stock options to exercise such options and hold the common stock issued. Stock options may also be granted by our board of directors or compensation committee to non-employee directors of the Company or other persons who are performing or who have been engaged to perform services of special importance to the management, operation or development of the Company.
 
 
33

 

In the event that our outstanding common stock is changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of merger, consolidation, other reorganization, recapitalization, combination of shares, stock split-up or stock dividend, prompt, proportionate, equitable, lawful and adequate adjustment shall be made of the aggregate number and kind of shares subject to stock options which may be granted under the plan.

Our Board of Directors may at any time, and from time to time, suspend or terminate the plan in whole or in part or amend it from time to time in such respects as our Board of Directors may deem appropriate and in our best interest.
 
Common Stock

Stock Split
 
On June 23, 2009, the directors of the Company approved a three (3) for one (1) stock split (the “Forward Split”) of the Company’s issued and outstanding common stock by written consent in lieu of a special meeting in accordance with the Nevada Corporation Law.
 
On June 29, 2009, we notified The Financial Industries Regulatory Authority (“FINRA”), is the independent regulator for all securities firms doing business in the United States, of our name change and the forward split of our common shares.  On July 31, 2009, FINRA declared the name change effective and as a result of the effectiveness of the name change our symbol was changed to MHYS.   FINRA also declared our forward split effective with a record date of June 23, 2009 and a payable date of August 5, 2009.

On December 28, 2012, the Company’s board of directors approveda One (1) for One Thousand (1000) reverse stock split (see Note 12). All common stock, warrant and option transactions described herein have been adjusted to reflect the Reverse Split.

Issuance of Series A Preferred Shares
 
On April 5, 2011, our Board approved the issuance of 10,000 shares of Series A Preferred Stock to our CEO, Dan Grodnik, in consideration of $10,000 of accrued compensation due Mr. Grodnik.  The Board’s sole director determined and approved the fair market value of these shares to be $1.00 per share.  The shares were issued on April 13, 2011.
 
On April 13, 2011, pursuant to a resolution passed by our director under the authority of our certificate of incorporation, as amended, we filed a Certificate of Designation with the Nevada Secretary of State to create and set for the terms of a series of preferred stock of the Company known as Series A Preferred Stock, par value $0.001 per share. The Series A Preferred Stock is not convertible. Holders of the Series A Preferred Stock do not have any preferential dividend or liquidation rights. The shares of Series A Preferred Stock are not redeemable. Pursuant to the certificate of designation establishing the Series A Preferred Stock, on all matters submitted to a vote of the holders of the common stock, including, without limitation, the election of directors, a holder of shares of the Series A Preferred Stock shall be entitled to the number of votes on such matters equal to the product of (a) the number of shares of the Series A Preferred Stock held by such holder, (b) the number of issued and outstanding shares of our common stock, as of the record date for the vote, or, if no such record date is established, as of the date such vote is taken or any written consent of stockholders is solicited, and (c) 0.0002.
 
The issuance of the Series A Preferred Stock effectively transferred voting control of the Company to Mr. Grodnik.

 
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Reorganization and Settlement of Liabilities with Common Stock
 
In June 2009, the Company issued 4,800 shares of common stock upon conversion of notes with predecessors which resulted in an extinguishment charge of $1,124,957 based on the closing price of the Company’s common stock of $240 per share shortly after the extinguishment.
 
On August 5, 2009, the Control Group acquired or received 50,000 shares of common stock, as well as 6,000 shares of common stock from the conversion of $10,000 of notes acquired.  In connection with the recapitalization, the convertible notes totaling $55,238 acquired by a Control Group member were paid in full through the issuance of 5,900 shares of common stock during the quarter ended February 28, 2010.   Because this note was part of the recapitalization, the conversion of the shares was afforded such treatment.
 
Issuance of Common Stock Related to Employment Agreements and Services Rendered
 
On August 24, 2009, the Company issued 200 shares per the terms of the employment agreement with Pat Proft which were immediately vested.  These shares were valued at $62,000 based on the closing price per share on the date of issuance of $310.
 
On September 29, 2009, the Company issued 100 shares of common stock to one individual for Board of Director services rendered to the Company.  This issuance was expensed as share-based compensation at a cost of $43,000, or $430 per share based on the closing stock price on the date of issuance.
 
On October 6, 2009, the Company issued 100shares of common stock to one individual for services rendered to the Company as the Senior Vice President of Technology.  This issuance was expensed as share-based compensation at a cost of $42,000, or $420 per share based on the closing stock price on the date of issuance.

On October 16, 2009, the Company issued 2 shares of common stock to two individuals for consulting services rendered to the Company.  This issuance was expensed as share based compensation at a cost of $580, or $290 per share-based on the closing stock price on the date of issuance.

On November 25, 2009, the Company issued 100 shares of common stock to four individuals for legal services provided to the Company.  This issuance was expensed as share based compensation at a cost of $10,000, or $100 per share-based on the closing stock price on the date of issuance.

In December 2009, upon Board approval the Company issued 152 shares to four individuals for consulting and Board of Director services to the Company.  These shares were expensed to share-based compensation for $15,200, based on a closing stock price per share of $100 on the date of issuance. 
 
In January 2010, upon Board approval the Company issued 50 shares to one individual for consulting services rendered to the Company.  These shares were expensed by the Company at $9,000, based on a price per share of $180 on the date of issuance. 
 
Also during January 2010, upon Board approval, the Company issued 20 shares to an outside consulting firm for services rendered.  These shares were expensed by the Company at $1,400, based on a price per share of $70 on the date of issuance. 
 
On February 22, 2010, upon Board approval, the Company issued 145 shares to five individuals for various operational services rendered to the Company.  These shares vested immediately and were expensed by the Company at $15,950, based on a price per share of $110 on the date of issuance. 
 
On February 20, 2010, 1,000 shares of common stock issued to two prior shareholders during August 2009 were cancelled upon a request by the CEO and concurrence by the two shareholders. 
 
On March 9, 2010, upon Board approval, a revised employment agreement (retroactive to January 1, 2010) was negotiated between the Company and Pat Proft to reflect that half of his monthly $10,000 salary would be paid in the form of stock compensation.  Thus, on the date of the agreement, for the months of January, February and March 2010, $15,000 of accrued wages due Pat would be converted into 167 shares of common stock based on the market price on of the Company’s common stock on the preceding day of $90 per share.  As of August 31, 2010, accrued wages for shares yet to be issued are $40,000. The liability is included in accrued liabilities in the accompanying balance sheet. 
 
 
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On March 9, 2010, upon Board approval, the Company issued 375 shares to three individuals for operational consulting and advisory services rendered to the Company.  These shares were fully vested and expensed by the Company at $30,000, based on a price per share of $80 on the date of issuance. 
 
On May 27, 2010, upon Board approval, the Company issued 78 shares to an individual for accounting and advisory services rendered to the Company.  These shares were fully vested and expensed by the Company at $2,500 based on a price per share of $30 on the date of issuance. 
 
On June 23, 2010, upon Board approval, the Company issued 600 shares to five individuals / entities for consulting services rendered to the Company.  One consultant, who received 100 shares for services rendered, is a brother of the CEO. These shares were fully vested and expensed by the Company in the amount of $24,000 based on a price per share of $40 on the date of issuance.
 
On September 1, 2010, upon Board approval, the Company issued 1,255 shares to three individuals for consulting services rendered to the Company.  These shares were fully vested and expensed by the Company in the amount of $39,000 based on a price of $30 per share on the date of issuance. 
 
On February 18, May 5, June 17, July 14, and October 18, 2011, the Company’s Board approved the issuances of 420, 900, 450, 165, and 3,500 shares of common stock, respectively, to a professional services firm for legal services rendered.  Based on the closing market prices on the respective days ranging from $3.20 to $27.00 per share, the Company recorded stock compensation of $50,320 related to these transactions.

On June 15 and September 1, 2011, the Company’s Board approved the issuances of 1,000 and 900 shares, respectively to one individual for consulting services rendered to the Company.   Based on closing market prices on the respective days ranging from $8 to $20 per share, the Company recorded stock compensation of $27,200 related to these transactions.

On September 1, 2011, the Company’s Board approved the issuance of 1,500 shares to one individual for consulting and advisory services rendered to the Company.  These shares were fully vested and expensed by the Company in the amount of $12,000 based on a price of $8 per share on the date of issuance. 

On August 15 and October 24, 2011, the Company’s Board approved the issuances of 225 and 250 shares, respectively to two vendors for services rendered to the Company.  These shares were fully vested and expensed by the Company in the amount of $3,000 based on closing market prices on the respective days ranging from $3 to $10 per share on the date of issuance.
 
On November 1, 2011, the Company’s Board approved the issuance of 1,000 shares to one individual for employment services rendered to the Company.  These shares were fully vested and expensed by the Company in the amount of $4,000 based on a price of $4 per share on the date of issuance.

During the years ended November 30, 2011 and 2010 and the period from Inception to November 30, 2011, the Company recorded $96,520, $128,800 and $382,900 in stock-based compensation related to services in general and administrative expense in the accompanying statement of operations.  These expenses are exclusive of stock option expense in Note 8.

On February 8, 2011, the Company entered into a Fee Agreement pursuant to which the Company agreed to issue common stock to Indeglia & Carney, P.C. (“I&C”) for legal services rendered to the Company. During the year ended November 30, 2012, our Board of Directors approved the issuance of a total of 75,941, shares of common stock to I&C in consideration of legal services rendered and recorded a reduction of accrued legal fees of $78,627. For the year ended November 30, 2011, the Board of Directors approved the issuance of a total of 1,935 shares of common stock to I&C in consideration of legal services rendered and recorded a reduction of accrued legal fees of $39,120 during the period.
 
 
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In addition, our Board of Directors approved (a) the issuance of a total of 2,500 shares of common stock to a third party attorney in consideration of legal services rendered and an expense of $11,750 based on the stock’s closing market price of $4.70 on the date of the grant; and (b) the issuance of a total of 6,000 shares of common stock to a third party marketing consultant in consideration of services rendered and an expense of $ 4,800 based on the stock’s closing market price of $0.80 on the date of the grant.

On February 14, 2012 our Board of Directors approved the issuance of 5,000 shares to a relative of our CEO for $5,000 received on January 3, 2012 based on the stock’s closing market price on the date of the grant. The stock issuance was exempt under Section 4(2) of the Securities Act of 1933, as amended.

Technology Transfer and License.

On February 6, 2012, we entered into two related agreements with Three Point Capital (“3PC”). In exchange for $65,000 in cash and five Class B Units in 3PC’s subsidiary FanCloud, LLC (representing a 5% interest), we transferred certain of our intellectual property related to our mobile application. Concurrently with this transfer, 3PC granted us an exclusive, irrevocable, worldwide license to such transferred technology within the field of cinema. The $65,000 receipt was recorded as “other income” fiscal 2012.

On February 6, 2012, in connection with a Technology and Transfer License (above) with Three Point Capital (“3PC”) our Board of Directors approved the issuance of (i) 1,992 shares to three individuals for services, including the development of a long-term business plan and (ii) 1,992 shares to 3PC for services rendered, based on the combined fair market value totaling $1,992 of the Company’s common stock at that time.