Form 10-Q Mass Hysteria Entertainment Company, Inc.

10-Q - Quarterly report [Sections 13 or 15(d)]

Published: 2015-08-25 14:56:27
Submitted: 2015-08-25
Period Ending In: 2015-05-31
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended May 31, 2015


o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from _________________ to _________________

[f10q53115mhys001.jpg]

 

Commission File No.: 000-53739

 

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.)

2920 W. Olive Avenue, Suite 208

Burbank, CA  91505

 (Address of principal executive offices)

 

Issuer

s telephone number:  (818) 459-8200

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 days.

Yes

x
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 than the registrant was required to submit and post such files).



Yes

x
No
¨




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 filed,
accelerated filer
and
smaller reporting company
in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

¨


Accelerated filer

¨




Non-accelerated filer

¨

(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 Act).

¨

Yes
x
No


Indicate the number of shares outstanding of each of the issuer

s classes of common stock, as of the latest practicable date. As of August 21, 2015, the number of shares of the registrant
s common stock outstanding was 8,505,686,562.




































 



 




 

  TABLE OF CONTENTS

 

Part I - Financial Information

Page numbers

 

 

Item 1.  Financial Statements

1

Condensed Balance Sheets as of May 31, 2015 (Unaudited) and November 30, 2014 (Audited)

1

Condensed Statements of Operations for the Three and Six Months ended May 31, 2015 and 2014 (Unaudited)

2

Condensed Statements of Cash Flow for the Six Months ended May 31, 2015 and 2014 (Unaudited)

3

Notes to Unaudited Condensed Financial Statements

4

Item 2.  Management

s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.  Controls and Procedures

22

 

 

Part II

Other Information

23

Item 1.  Legal Proceedings

23

Item 1A Risk Factors

23

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

23

Item 3.  Defaults Upon Senior Securities

23

Item 4.  Mine Safety Disclosures

23

Item 5.  Other Information

24

Item 6.  Exhibits

24

 

 

              Signatures

24

 






















i


 





PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

Condensed Balance Sheets





May 31, 2015


November 30, 2014


(Unaudited)



ASSETS




CURRENT ASSETS





 Cash

 $                12,161


 $            16,480








 Total current assets

                   12,161


               16,480

OTHER ASSETS





 Deposits

                     1,200


                 1,200


 Prepaid expenses

                     5,000


                 5,000


 Investment in movie

                 500,000


             500,000


 Film costs

                     5,150


                 5,150



 Total assets

 $              523,511


 $          527,830

LIABILITIES AND STOCKHOLDERS' DEFICIT




CURRENT LIABILITIES





 Accounts payable

 $              225,220


 $          217,970


 Accrued liabilities

                 515,750


             427,562


 Accrued payroll

                 720,743


             639,529


 Short-term debt, related party

                 285,756


             249,523


 Short-term convertible debt, net of discount of $211,510 and $859,483, respectively

                 1,051,822


             515,025


 Derivative liability

              1,989,938


          4,263,200


 Deferred revenue

                     1,000


                 1,000


 Stand ready obligation

                 250,000


             250,000



 Total current liabilities

              5,040,229


          6,563,809

LONG-TERM LIABILITIES





 Convertible long-term debt, net of discount of $0 and $2,087, respectively

                 108,000


             105,913



 Total liabilities

              5,148,229


          6,669,722

STOCKHOLDERS' DEFICIT





Series A preferred stock, $0.00001 par value; 10,000 shares authorized; 10,000 issued and outstanding

                           -   


                       -   


Common stock, $0.00001 par value; 14,999,990,000 shares authorized, 7,180,600,489 and 1,879,895,992 shares issued and outstanding

                   71,806


               18,799


Additional paid in capital

              10,057,788


          9,355,188


Accumulated deficit

           (14,754,312)


       (15,515,879)



Total stockholders' deficit

             (4,624,718)


         (6,141,892)



Total liabilities and stockholders' deficit

 $              523,511


 $          527,830


The accompanying notes are an integral part of the unaudited condensed financial statements.

 

1



MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

Condensed Statements of Operations

(Unaudited)



For the Three Months Ended

For the Six Months Ended



May 31, 2015

May 31, 2014

May 31, 2015

May 31, 2014

Production Revenues

 $                    12,500

 $                   -   

 $                  12,500

 $                     -   







Operating expenses:






General and administrative

                     148,706

            212,690

                   306,097

              465,777


Total operating expenses

                     148,706

            212,690

                   306,097

              465,777







Operating loss

                   (136,206)

           (212,690)

                 (293,597)

             (465,777)







Other income (expense)






Interest expense

                   (262,326)

           (120,436)

                 (705,070)

             (155,364)


Derivative expense

                   (138,994)

        (3,029,106)

                 (220,549)

          (3,029,106)


Gain on fair value of derivative liability

                  2,654,740

         2,241,594

                1,980,783

           1,419,798


Gain on extinguishment of convertible note

                               -   

            665,983

                             -   

              665,983








Total other income (expense)

                  2,253,420

           (241,965)

                1,055,165

          (1,098,689)







Net income (loss)

 $               2,117,214

 $        (454,655)

 $                761,567

 $       (1,564,466)



 

 

 

 

Net loss per share (basic and diluted)

 $                        0.00

 $              (0.01)

 $                      0.00

 $                (0.04)

Weighted average number of shares outstanding during the period-basic

           6,518,155,202

       49,974,480

4,321,294,746

         36,204,286







Weighted average number of shares outstanding during the period- diluted

           33,624,926,060

       49,974,480

31,428,065,604

         36,204,286



The accompanying notes are an integral part of the unaudited condensed financial statements.


 

2





MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

Condensed Statements of Cash Flows

(Unaudited)





For the Six Months Ended





May 31, 2015

May 31, 2014

CASH FLOWS FROM OPERATING ACTIVITIES




Net income (loss)

 $          761,567

 $     (1,564,466)


Adjustments to reconcile net income (loss) to net cash used in operations:





Share-based compensation

                         -

             176,000



Change in fair value of derivative liability

        (1,980,783)

        (1,419,798)



Derivative expense

             220,549

          3,029,106



Amortization of discount on convertible debt

             625,026

             101,286



Gain on extinguishment of convertible notes

                         -

           (665,983)


Changes in operating assets and liabilities:





Deposits

                         -

               (1,200)



Prepaid expenses

                         -

               (5,000)



Accounts payable

               37,249

               32,766



Accrued liabilities

             104,044

               86,911



Accrued payroll

               81,214

             180,000

Net cash used in operating activities

           (151,134)

             (50,378)

CASH FLOWS FROM INVESTING ACTIVITIES





Film costs

                         -

               (2,500)

Net cash used in financing activities

                         -

               (2,500)

CASH FLOWS FROM FINANCING ACTIVITIES





Proceeds from short term debt

               30,315




Proceeds from issuance of convertible debt

             116,500

             101,500

Net cash provided by financing activities

             146,815

             101,500

Net increase (decrease) in cash

               (4,319)

               48,622

Cash and equivalents, beginning of period

               16,480

                        9

Cash and equivalents, end of period

 $            12,161

 $            48,631

Supplemental disclosures of cash flow information:




Cash paid for interest

 $                      -

 $                      -


Cash paid for income taxes

 $                      -

 $                      -

Supplemental schedule of non-cash investing and financing activities:




Conversion of convertible debt

 $          290,313

 $            55,884



Accounts payable converted to convertible notes

 $            30,000

 $            30,000



Extinguishment of derivative liability

 $          465,294

 $                      -


The accompanying notes are an integral part of the unaudited condensed financial statements.  

 

3





MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)

 

NOTE 1 - ORGANIZATION AND BUSINESS

 

The Company was incorporated as Michael Lambert, Inc. (

MLI
) in Nevada on November 2, 2005.  MLI was in the business of manufacturing handbags, but ceased operations in June 2009. To better reflect the Company
s new business plan, on June 25, 2009, MLI changed its name to Mass Hysteria Entertainment Company, Inc. (
Mass Hysteria
or the
Company
). The Company is an innovative motion picture production company that produces branded young adult film content for theatrical, DVD, and television distribution.

 

On August 5, 2009, 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 more than 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 The Company 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 50,000 shares 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 the Company was treated as a recapitalization with the assets contributed and liabilities assumed recorded at their historical basis. There were no significant assets acquired by the Company 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.   Mass Hysteria plans to create movies that will take advantage of traditional revenue streams that are still viable, and at the same time, avail itself of those revenue streams that will define new media's involvement in the film business. The Company has developed a mobile application that allows the user to interact with the film in live time. This could be a revenue source for the Company depending on our ability to raise capital and generate interest in the experience.  There are technology and competitive risks associated with interactive mobile devices and theatrical films.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation


The financial statements of the Company are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission.  Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year 2014 as reported in the Company's Form 10-K have been omitted.  The results of operations for the three and six months ended May 31, 2015 and 2014 are not necessarily indicative of the results to be expected for the full year.


In the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary to present fairly the Company's financial position, results of operations and cash flows.  These statements should be read in conjunction with the financial statements and related notes which are part of the Company's Annual Report on Form 10-K for the year ended November 30, 2014.


4





MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


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 May 31, 2015, the Company

s dilutive securities outstanding consisted of (1) the CEO
s options to purchase shares of common stock, 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) 7,751,709,330 shares relative to convertible notes (post conversion); and (3) 1,170,034,580 shares related to warrants issued with the two convertible notes. At May 31, 2014, the Company
s dilutive securities outstanding consisted of (i) the CEO
s options to purchase shares of common stock 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) 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.


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.  

 

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.


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 $12,500 and $0 in revenue for the six months ended May 31, 2015 and 2014, respectively.


Deferred Revenue


Deferred revenue is recognized when a fee is collected but services have not been completed by the Company.  We had $1,000 in deferred revenue for the six months ended May 31, 2015 and 2014 related to advanced fees collected.



5



MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


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 May 31, 2015 and November 30, 2014, 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 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 May 31, 2015 and November 30, 2014 due to the short term nature of these instruments.


The Company did not have any level 3 instruments at May 31, 2015 and November 30, 2014.


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.


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.

 


6



MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


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. 


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. 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 May 31, 2015 and November 30, 2014.

 

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.  


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 by 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.

7



MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


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 fixed and 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.  


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. 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.


Recent Accounting Pronouncements


In May 2014, ASU No. 2014-09,

Revenue from Contracts with Customers
was issued. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. The guidance will also require that certain contract costs incurred to obtain or fulfill a contract, such as sales commissions, be capitalized as an asset and amortized as revenue is recognized. Adoption of the new rules could affect the timing of both revenue recognition and the incurrence of contract costs for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The new standard is effective for reporting periods beginning after December 15, 2016 and early adoption is not permitted. The Company is currently evaluating the impact of adoption and the implementation approach to be used.


In June 2014, ASU 2014-15,

Presentation of Financial Statements
Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity
s Ability to Continue as a Going Concern
(
ASU No. 2014-15
) was issued.  Before the issuance of ASU 2014-15, there was no guidance in U.S. GAAP about management
s responsibility to evaluate whether there is substantial doubt about an entity
s ability to continue as a going concern or to provide related footnote disclosures. This guidance is expected to reduce the diversity in the timing and content of footnote disclosures. ASU 2014-15 requires management to assess an entity
s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards as specified in the guidance. ASU 2014-15 becomes effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the effects of adopting ASU 2014-15 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company
s consolidated financial statements.

8


MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


In August, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in this Update defer the effective date of ASU No. 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.


We have evaluated the other recent accounting pronouncements through ASU 2015-15 and believe that none of them will have a material effect on our financial statements.


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 has limited available capital, and has historically had limited revenues from intended operations, suffered significant losses 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. At May 31, 2015, the Company had an accumulated deficit of $14,754,312.


NOTE 4- INVESTMENT IN MOVIE


In October, 2014, the Company entered into a film finance agreement under which a lender loaned the Company $505,000 for co-production of the film

Daughter of God
.  The proceeds from the promissory note (see Note 6) were invested in the film "Daughter Of God
which is included as a cost investment within other assets in the accompanying balance sheet.  For this investment, our financiers are to receive their money back plus 20% interest prior to any profits, if any, being distributed. We will receive 6.65% of the profits thereafter from the film and the funding source, operating as Remark Pictures, will receive 6.65% of the profits.



9



MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)


NOTE 5

 ACCRUED LIABILITIES


Accrued liabilities by major classification are as follows: 

 

May 31, 2015

November 30,  2014

Accrued interest

 $                  189,584

 $                  125,395

Accrued consulting fees

                       91,000

                       91,000

Accrued payroll taxes on CEO

s compensation

                     188,461

                     170,461

Accrued auto allowances due CEO

                       46,705

                       40,706

Total accrued liabilities

 $               515,750

 $                  427,562




Accrued interest represents interest on a long-term loan from a related party, and the interest on a short term notes payable to external parties.  Accrued consulting fees are for scriptwriters and a film consultant.  


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 cash becomes available. During the six months ended ended May 31, 2015, the Company paid $98,970 in cash to the CEO, charging the payment to accrued salary. 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 and has not withheld any amounts from cash payments made.  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.  


The Company entered into an employment agreement as of February 3, 2012 with its former Chief Financial Officer, which provided for a base salary of $90,000 per year, payable monthly, on a month-to-month basis. The Company will pay these wages only as cash becomes available. The agreement was terminated on August 31, 2013 and no wages have been paid to date.


On August 8, 2014, the CEO converted $371,429 in accrued salaries into 185,714,250 shares at a price of $0.002 per share.


Accrued payroll is as follows:


May 31, 2015

November 30,  2014

Accrued and unpaid compensation due CEO

 $                  602,618

 $                  521,404

Accrued and unpaid compensation due CFO

                     118,125

                     118,125

Total accrued payroll

 $                720,743

 $                639,529


NOTE 6- BORROWINGS


Short-Term Debt


(A)  

Related Parties


On August 31, 2012, the Company

s former Chief Financial Officer made an interest free demand advance of $30,000 to provide working capital, which remains outstanding at May 31, 2015. 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 an 8% interest rate.  No demand for payment has been made and the note remains unpaid.

10



MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)


NOTE 6- BORROWINGS (continued)


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 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 was 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 six months ended May 31, 2015, the Company incurred and accrued $6,816 in interest expense, respectively, related to this short-term debt. As of May 31, 2015, the Company has accrued a total of $60,416 of interest expense related to these notes.  


B)  

Film Finance Agreement


On May 11, 2012, the Company entered into an agreement with Coral Ridge Capital Partners, LLC (

CRCP
) under which CRCP agreed to provide $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 on June 12, 2012.    While it was the Company
s intent to commence filming of the Picture by September 1, 2012, certain casting delays postponed the commencement date. On January 25, 2013 the Company received a written notice of termination of agreement from CRCP.  The termination was detrimental to the funding process. Accordingly, the Company has included the $100,000 advance within short-term debt and has accrued interest payable of $35,441 through May 31, 2015.  Subsequently, the Company hired a new director, made new distribution deals for North America and international and hired Steven Seagal to star. The picture is currently in pre- production at the Castel Studios in Romania and has a start date of late August 2015. The Company is proceeding to arbitration regarding any amounts due and the arbitration proceeding originally scheduled for August 2014, has been rescheduled for late summer 2105.  Through May 31, 2015, we have incurred cumulative expenses, both directly and indirectly, in excess of the initial funding in connection with the Picture, which have been recorded previously within operating expenses. As of May 31, 2015, $100,000 in principal and $35,441 interest remain outstanding.


In October, 2014, the Company entered into a film finance agreement under which a lender loaned the Company $505,000 for co-production of the film

Daughter of God
.  The promissory note was in the original principal amount of $505,000, including a $5,000 legal fee to the lender
s legal counsel, and is due July 30, 2015 with interest at 8 percent per year due at maturity.  The Note is convertible after 180 days at the lender
s election into shares of the Company
s common stock at a price equal to 50 percent of the average of the three lowest trading prices for the stock during the 30 day trading period prior to any conversion, with a limit of 4.99% of the total outstanding shares of common stock held by the lender at the time of any conversion.  


In addition, the lender was granted a warrant to purchase up to 1,262,500,000 shares of common stock at a conversion price of $0.0003 per share for a period of five years, subject to appropriate adjustment for certain capital changes. As of May 31, 2015, the remaining principal balance and interest is $531,786.




11



MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)


NOTE 6- BORROWINGS (continued)


With the funds from the above note, the Company invested in the film, "Daughter of God

which is included as a cost investment within other assets in the accompanying balance sheet.  For this investment, our financiers are to receive their money back plus 20% interest prior to any profits, if any, being distributed. We will receive 6.65% of the profits thereafter from the film and the funding source, operating as Remark Pictures; will receive 6.65% of the profits.


In January 9, 2015, the Company entered into an agreement to provide $45,000 towards production of the motion picture entitled

Devil In Pew Number Seven
(the Picture). Funds were received and $14,685 have been expensed for script costs. The balance as of May 31, 2015 on the debt is $30,315


Short-term Convertible Debt with Ratchet Provisions


(A)  

Short-term Convertible Debt


On March 1, 2012, May 9, 2012, July 9, 2012, September 14, 2012 and September 28, 2012 the Company borrowed $10,000, $32,500, $30,000, $22,500 and $10,000, respectively (for a total of $105,000), from external parties for use as operating capital. See below for additional advances made by this party during the year ended November 30, 2013.  The parties entered into convertible notes payable agreements, which make the Company liable for repayment of the principal and 8% annual interest by the various agreements

 expiration dates which range between October 6, 2012 and June 28, 2013.  If a default is called by the lender (which occurred as noted below) after failure to repay principal or interest when due, among other default provisions including untimely filings with the SEC, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes
 inception date on the unpaid amount, as well the principal balance is increased by 50% of the face amount of the note deemed in default. A portion of the notes has been converted and, as of May 31, 2015, approximately $8,189 in principal and interest remain outstanding.


During December 2012, the Company issued an 8% convertible promissory note to raise $40,000 to pay legal services owed. The Note matured on September 21, 2013, and any unpaid principal or interest at that date accrues interest at the default rate of 22% annually. The note may be converted into common stock, at 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, at any time after 180 days from the issuance date until the maturity date, or, if later, until paid. A portion of the notes has been converted and, as of May 31, 2015, approximately $43,693 in principal and interest remain outstanding.




On February 24, 2014, the Company issued a 10% convertible promissory note in the aggregate principal amount of $25,000.  The note has a maturity date of February 24, 2015. The note is convertible into shares of our common stock at a conversion price of the lesser of $0.001 or fifty percent (50%) of the lowest trading day price during the twenty (20) trading days immediately preceding a conversion date at any time from the issuance date until the maturity date. If a default is called by the lender (which occurred as noted above) after failure to repay principal or interest when due, among other default provisions including untimely filings with the SEC, a default interest rate of 20% per annum is triggered and retrospectively applied from the notes

 inception date on the unpaid amount, as well the principal balance is increased by 50% of the face amount of the note deemed in default. On May 31, 2015, the note was partially converted through the issuance of shares of common stock leaving a remaining principal and interest outstanding of $13,782 as of May 31, 2015.


12



MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)


NOTE 6- BORROWINGS (continued)


On February 24, 2014, the holder of the $200,000 note agreed to sell up to $100,000 in principal of the convertible note to an unrelated third party, with $50,000 of principal to be acquired at that time, and an additional $50,000 in principal to be acquired on or before August 14, 2014.


The Company agreed to restate that portion of the original note party in a new convertible note due February 25, 2015 with interest due at maturity at 10 percent, and convertible at the election of the holder into common stock at the lower of $0.01 or fifty percent of the lowest trading price of the stock for the previous 20 consecutive trading days.  The same third party also invested an additional $25,000 in a new promissory note, on the same terms and both transactions closed in March 2014.  Due to the change in the terms of the replacement note, for accounting purposes only, the partial purchase of the note has been treated as the payment of that portion of the old note and the issuance of a new note for the new principal amount.  The second installment purchase of an additional $50,000 in principal of the original note was not exercised. During the three months ended May 31, 2015, the note was partially converted through the issuance of shares of common stock leaving a remaining principal balance of $12,010 as of May 31, 2015.


On March 1, 2014, the Company issued an 8% convertible promissory note in the aggregate principal amount of $30,000 to pay payables that were owed.  The note has a maturity date of March 31, 2015. The note is convertible into shares of our common stock at a conversion price of sixty percent (60%) of the average of the lowest closing price per share during the ten (10) trading days immediately preceding a conversion date at any time from the issuance date until the maturity date. As of May 31, 2015, approximately $33,295 in principal and interest remain outstanding.



On March 24, 2014, the Company issued a 10% convertible promissory note in the aggregate principal amount of $26,500.  The note has a maturity date of March 24, 2015. The note is convertible into shares of our common stock at a conversion price of fifty percent (50%) of the average of the lowest closing bid during the fifteen (15) trading days immediately preceding a conversion date at any time from the issuance date until the maturity date. If a default is called by the lender after failure to repay principal or interest when due, among other default provisions including untimely filings with the SEC, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes

 inception date on the unpaid amount, as well the principal balance is increased by 50% of the face amount of the note deemed in default. The remaining principal and interest balance on this note is $29,680 as of May 31, 2015.


On March 24, 2014, a second unrelated party agreed with the original note holder of the $200,000 note to purchase up to $100,000 in note principal and $5,000 in accrued interest and also agreed to invest an additional $26,500 in the Company.  Under the terms of the agreement, the third party agreed to purchase the $105,000 in principal and accrued interest in three installments, with $42,000 due at signing, $31,500 due 45 days thereafter, and a final $31,500 due 45 days after the second installment payment. The Company agreed to restate the portion of the original note acquired by the third party and to issue a new convertible note in the amounts of $42,000, due March 24, 2015, with interest due at maturity at 10 percent, and convertible at the election of the holder into common stock at fifty percent of the lowest closing bid price of the stock for the previous 15 consecutive trading days.  Due to the substantial change in the terms of the replacement note, for accounting purposes only, the partial purchase of the note has been treated as an extinguishment of that portion of the old note and the issuance of a new note for the new principal amount.  The actual closing and funding of the initial transaction occurred on May 4, 2014. The second and third installments were not made. The note was partially converted into shares of common stock leaving a remaining principal balance of $16,236 as of May 31, 2015.

13


MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)


NOTE 6- BORROWINGS (continued)


On May 16, 2014, the Company issued a 10% convertible promissory note in the aggregate principal amount of $50,000.  The note has a maturity date of August 16, 2015. The note is convertible into shares of our common stock at a conversion price of fifty percent (50%) of the average of the lowest closing bid during the ten (10) trading days immediately preceding a conversion date at any time from the issuance date until the maturity date. If a default is called by the lender after failure to repay principal or interest when due, among other default provisions including untimely filings with the SEC, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes

 inception date on the unpaid amount, as well the principal balance is increased by 50% of the face amount of the note deemed in default. The remaining principal and interest balance on this note is $55,220 as of May 31, 2015.


On June 1, 2014, the Company issued an 8% convertible promissory note in the aggregate principal amount of $30,000 to pay payables that were owed.  The note has a maturity date of June 30, 2015. The note is convertible into shares of our common stock at a conversion price of sixty percent (60%) of the average of the lowest closing price per share during the ten (10) trading days immediately preceding a conversion date at any time from the issuance date until the maturity date. The remaining principal and interest balance on this note is $32,533 as of May 31, 2015.


On August 11, 2014, the Company issued an 8% convertible promissory note in the aggregate principal amount of $103,500.  The note has a maturity date of August 13, 2015. The note is convertible into shares of our common stock at a conversion price of fifty percent (50%) of the average of the lowest three (3) trading prices during the thirty (30) trading days immediately preceding a conversion date at any time from the issuance date until the maturity date. If a default is called by the lender after failure to repay principal or interest when due, among other default provisions including untimely filings with the SEC, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes

 inception date on the unpaid amount, as well the principal balance is increased by 50% of the face amount of the note deemed in default. The remaining principal balance on this note is $23,286 as of May 31, 2015.


On September 1, 2014, the Company issued an 8% convertible promissory note in the aggregate principal amount of $30,000 to pay payables that were owed.  The note has a maturity date of September 30, 2015. The note is convertible into shares of our common stock at a conversion price of sixty percent (60%) of the average of the lowest closing price per share during the ten (10) trading days immediately preceding a conversion date at any time from the issuance date until the maturity date. As of May 31, 2015, approximately $31,945 in principal and interest remain outstanding.


On December 1, 2014, the Company issued an 8% convertible promissory note in the aggregate principal amount of $30,000 to pay payables that were owed.  The note has a maturity date of December 31, 2015. The note is convertible into shares of our common stock at a conversion price of sixty percent (60%) of the average of the lowest closing price per share during the ten (10) trading days immediately preceding a conversion date at any time from the issuance date until the maturity date. As of May 31, 2015, approximately $31,190 in principal and interest remain outstanding.


14



MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)


NOTE 6- BORROWINGS (continued)


On January 19, 2015, the Company issued a 10% convertible promissory note in the aggregate principal amount of $31,500.  The note has a maturity date of January 9, 2016. The note is convertible into shares of our common stock at a conversion price of fifty percent (50%) of the average of the lowest closing bid during the ten (10) trading days immediately preceding a conversion date at any time from the issuance date until the maturity date. If a default is called by the lender after failure to repay principal or interest when due, among other default provisions including untimely filings with the SEC, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes

 inception date on the unpaid amount, as well the principal balance is increased by 50% of the face amount of the note deemed in default. The remaining principal and interest balance on this note is $32,820 as of May 31, 2015.


On February 26, 2015, the Company issued a 10% convertible promissory note in the aggregate principal amount of $15,000.  The note has a maturity date of February 26, 2016. The note is convertible into shares of our common stock at a conversion price of fifty percent (50%) of the average of the lowest closing bid during the ten (10) trading days immediately preceding a conversion date at any time from the issuance date until the maturity date. If a default is called by the lender after failure to repay principal or interest when due, among other default provisions including untimely filings with the SEC, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes

 inception date on the unpaid amount, as well the principal balance is increased by 50% of the face amount of the note deemed in default. The remaining principal and interest balance on this note is $15,501 as of May 31, 2015.


On March 1, 2015, the Company issued a 8% convertible promissory note in the aggregate principal amount of $32,500.  The note has a maturity date of December 4, 2015. The note is convertible into shares of our common stock at a conversion price of fifty percent (50%) of the average of the three (3) lowest trading prices during the thirty (30) trading days immediately preceding a conversion date at any time from the issuance date until the maturity date. If a default is called by the lender after failure to repay principal or interest when due, among other default provisions including untimely filings with the SEC, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes

 inception date on the unpaid amount, as well the principal balance is increased by 50% of the face amount of the note deemed in default. The remaining principal and interest balance on this note is $33,155 as of May 31, 2015.


On March 25, 2015, the Company issued a 10% convertible promissory note in the aggregate principal amount of $13,500.  The note has a maturity date of March 25, 2016. The note is convertible into shares of our common stock at a conversion price of forty percent (40%) of the lowest closing bid during the twenty (20) trading days immediately preceding a conversion date at any time from the issuance date until the maturity date. If a default is called by the lender after failure to repay principal or interest when due, among other default provisions including untimely filings with the SEC, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes

 inception date on the unpaid amount, as well the principal balance is increased by 50% of the face amount of the note deemed in default. The remaining principal and interest balance on this note is $13,752 as of May 31, 2015.





15





MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)


NOTE 6- BORROWINGS (continued)


On March 30, 2015, the Company issued a 10% convertible promissory note in the aggregate principal amount of $24,000.  The note has a maturity date of March 30, 2016. The note is convertible into shares of our common stock at a conversion price of fifty percent (50%) of the lowest closing bid during the twenty (20) trading days immediately preceding a conversion date at any time from the issuance date until the maturity date. If a default is called by the lender after failure to repay principal or interest when due, among other default provisions including untimely filings with the SEC, a default interest rate of 22% per annum is triggered and retrospectively applied from the notes

 inception date on the unpaid amount, as well the principal balance is increased by 50% of the face amount of the note deemed in default. The remaining principal and interest balance on this note is $24,414 as of May 31, 2015.


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


Former Related Party Debt

 

At November 30, 2013, the Company had convertible notes totaling $453,061 due to a former affiliate and significant stockholder of the Company. The notes were convertible into common shares, based on $40 to $80 share price, most of which were at the higher price.  The convertible notes bore interest at 6% per annum and were due May 31, 2015.   As of November 30, 2013, the Company had accrued $109,304 of interest expense related to these notes. In May 2014, these notes were sold to an unrelated party and restated in a single note dated May 16, 2014 in the amount of $573,982, due May 16, 2015 with interest at 10 percent due at maturity, and convertible into common stock at 50 percent of the lowest closing bid price for the stock for any of the ten prior trading days. During the six months ended May 31, 2015, the note was partially converted through the issuance of shares of common stock leaving a remaining principal balance of $398,335 as of May 31, 2015.


(B)  

Determination of Derivative Liability

 

The Company calculated the derivative liabilities 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.


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.



16



MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)


NOTE 6- BORROWINGS (continued)


As of May 31, 2015 and November 30, 2014, the Company has outstanding principal amounts on short term convertible debt, excluding unamortized discount, of $1,263,332 and $1,374,508, respectively. At the inception of these notes, 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 $211,510 and $859,483 as of May 31, 2015 and November 30, 2014, respectively. For the six months ending May 31, 2015 and 2014, interest expense from accretion of the discount, including converted notes, was $625,026 and $101,286, respectively.


Aggregate derivative liabilities associated with remaining convertible notes were $1,989,938 as of May 31, 2015 and $4,263,200 as of November 30, 2014. Based on this revaluation at six months 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 $1,980,783 during the six months ended May 31, 2015 and a net gain in fair value of derivative liability of $1,419,798 for the six months ended May 31, 2014.


The range of inputs used to calculate derivative liabilities noted above were as follows:  

 

 

May 31, 2015

 

 

November 30, 2014

 

Annual dividend rate

 

 

0.0

%

 

 

0.0

%

Expected life (years)

 

.01

1.01 years

 

 

.01

1.1 years

 

Risk-free interest rate

 

 

.03% - .16

%

 

 

.01% - .10

%

Expected volatility

 

 

382% - 536.5

%

 

 

431.3% - 537

%

 

 

Long-term 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 $16.00 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 six months ended May 31, 2015, interest expense from accretion of the discount was $2,626, leaving a remaining discount of $0.  The discount being amortized approximates the effective interest method over the term of the note. As of May 31, 2015, the balance on this note payable is $108,000.






17



MASS HYSTERIA ENTERTAINMENT COMPANY, INC.

NOTES TO THE FINANCIAL STATEMENTS

MAY 31, 2015

(Unaudited)


Note 7

COMMITMENTS AND CONTINGENCIES

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".


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
May 31
, 2015
, management believed that past performance and current projections indicate that full repayment to Wet Rose was not probable. According, Management reserved the entire $250,000 as a liability, including the $50,000
guarantor fee
due the Company upon close of production funding, as a stand-ready obligation liability.


Note 8 - STOCKHOLDER'S DEFICIT

During the six months ended May 31, 2015, approximately $290,313 of convertible debt and related accrued interest thereon was converted into 5,300,704,498 shares common of stock.  In connection with those conversions, approximately $465,294 was recorded to additional paid-in capital for extinguishment of derivative liabilities related to these conversions. See Note 6 relating to outstanding debt and derivative liabilities.


Note 9 - SUBSEQUENT EVENTS


Location filming on

End Of The Gun
starring Steven Seagal, begins August 24, 2015 at the Castel Studios in Bucharest, Romania.

 

The Company has signed an Executive Producer agreement on 55 Steps, to be directed by Bille August who has won the Cannes Film Festival's prestige's Palme d' Or Award twice.

 

The Company has signed a producer agreement on Tiger, to be directed by Alister Grierson who directed Sanctum that grossed $108,000,000 dollars at the box office. The Company is in negotiations with Mickey Rourke to star.

 

The Company has picked up an option on The Timothy Hill Ranch, to be directed by Cole Claassen.


On August 12, 2015, the Company filed an amendment with the State of Nevada increasing the Authorized Common Shares from 14,999,990,000 to 29,999,990,000.


The Company converted $72,813 of principal and interest into 4,743,097,272 common shares. As a result of the post-May 31, 2015 issuances, there were 1,325,086,072 common shares issued and outstanding at August 21, 2015.


18



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q (THIS

FORM 10-Q
), 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-Q, UNLESS ANOTHER DATE IS STATED, ARE TO MAY 31, 2015.


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 represented 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 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 has been to create original interactive theatrical films and second screen (mobile app) experience for non-Mass Hysteria films.  In addition, we intend to continue creating traditional film and television projects.


Plan of Operations


We are a company without significant sources of revenue and require additional capital to operate; and consequently we are subject to the risks associated with such companies, including 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.


As we reported earlier in the quarter, the Company has changed its mandate to concentrate on film financing and producing. To that end, the Company has committed resources and off-balance sheet funding to co-finance Daughter of God, a film starring Keanu Reeves that commenced photography October 27th in New York. The Company

s new direction includes reviewing numerous projects to co-finance and produce. Our goal is to create a portfolio and to invest in a slate of interesting, commercial and star driven projects over the next 12 months.


19



Currently, we are in development with Lionsgate on a reality series entitled, Ball and Chain. We recently closed a development deal with Sony Picture

s faith based label, Affirm Pictures, to develop a script from a novel Affirm has acquired the rights to entitled, The Devil In Pew Number Seven.  The Company has engaged Steve Armour to write a screenplay adaptation based on the novel. Should the film be produced based on the script we fund, the Company
s CEO, Daniel Grodnik will produce the picture. Mr.  Grodnik is also an Executive Producer on a new action movie entitled
Bus 657
that commenced photography October 13, 2014 in Mobile, Alabama starring Robert DeNiro and Dave Batista. The picture is being produced by the Emmett/Furla Company. We have obtained production funding and will begin production of End of a Gun on location in Romania in August, 2015.


 The mobile app we have been developing will allow audiences to interact with theatrical movies and will provide a unique immersive quality that can offer each audience member a customizable and sharable experience. We terminated our relationship with a software development group to develop the app under the name SideKick

and instead need to retain a new software developer to assist in developing the software under our own trade name in the near future. Due to our change in focus, the app is no longer our main focus, although we intend to continue our development activities. The Company has not yet retained a new software developer.

 

COMPARISON OF OPERATING RESULTS


RESULTS OF OPERATION FOR THE THREE AND SIX MONTHS ENDED MAY 31, 2015 COMPARED TO THE SIX MONTHS ENDED

MAY 31
, 2014


We had revenue of $12,500 and $0 for the six months ended May 31, 2015 and 2014, respectively.  The minimal amount of revenue in both periods is due to the establishing and operationalization of our business plan.  As we begin to meet our business plan goals, we expect to generate revenue in the future. In the period from August 5, 2009 to date, we have assembled our management team, developed its intellectual property, and are continuing to implement our marketing strategies.   Mass Hysteria intends to create movies that 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. We expect to license and further develop our own mobile applications in the future, depending on our ability to raise capital and/or generate additional sources of revenues.  


For the three months ended May 31, 2015, we had general and administrative expenses of $136,206; interest expense of $262,326, derivative expense of $138,994, and a gain in fair value of derivative liability of $2,654,740. For the three months ended May 31, 2014, we had general and administrative expenses of $293,597; interest expense of $120,436, derivative expense of $3,029,106, a gain on fair value of derivative liability of $2,241,594, and a gain on extinguishment of debt of $665,983. Whereas general and administrative expenses are relatively consistent period over period, interest expense is a function of debt issued and accretion of discounts recognized that are unique to the period based on borrowings. In addition, the change in fair value of derivative liabilities changes period to period based on changing variables included in the Black Scholes option pricing model including the stock price on the day of valuation and the related effective conversion price.


We had net income of $2,117,214, for the three months ended May 31, 2015, as compared to a net loss from of $454,655, for the three months ended May 31, 2014. The primary reasons for the increase in net income are due to the gain on fair value of derivative liability and decrease in derivative expense noted above and offset by the increased interest expense due to accretion of debt discounts.


20

For the six months ended May 31, 2015, we had general and administrative expenses of $306,097; interest expense of $705,070, derivative expense of $220,549, and a gain in fair value of derivative liability of $1,980,783. For the six months ended May 31, 2014, we had general and administrative expenses of $465,777; interest expense of $155,364, derivative expense of $3,029,106, a gain on fair value of derivative liability of $1,419,798, and a gain on extinguishment of debt of $665,983. Whereas general and administrative expenses are relatively consistent period over period, interest expense is a function of debt issued and accretion of discounts recognized that are unique to the period based on borrowings. In addition, the change in fair value of derivative liabilities changes period to period based on changing variables included in the Black Scholes option pricing model including the stock price on the day of valuation and the related effective conversion price.


We had net income of $761,567, for the six months ended May 31, 2015, as compared to a net loss from of $1,564,466, for the six months ended May 31, 2014. The primary reasons for the increase in net income are due to the gain on fair value of derivative liability and decrease in derivative expense noted above and offset by the increased interest expense due to accretion of debt discounts.



LIQUIDITY AND CAPITAL RESOURCES


We had total assets of $523,511 as of May 31, 2015, consisting of $12,161 in cash, $1,200 in lease deposits, $5,000 in prepaid expenses, $500,000 investment in movie, and $5,150 in capitalized film costs. We had a working capital deficit of $5,028,068.


We had total liabilities of $5,148,229 of May 31, 2015, consisting of current liabilities, which included $225,220 of accounts payable; accrued liabilities of $515,750; accrued payroll of $720,743; short-term debt of $285,756; short-term convertible debt, net of discount of $1,051,822; a stand ready obligation of $250,000; derivative liability of $1,989,938; and convertible long-term debt of $108,000.


We had a total stockholders

deficit of 4,624,718 as of May 31, 2015, and an accumulated deficit as of May 31, 2015 of $14,754,312.


We had $151,134 in net cash used in operating activities for the six months ended May 31, 2015, which included $761,567 in net income, $625,026 in amortization of discount on short-term debt, and changes in operating assets and liabilities totaling $219,513. We also had a $1,980,783 change in fair value of derivative liability, and a loss on excess of derivatives of $220,549. We had $146,815 provided by financing activities from proceeds from debt.

 

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 our most recent annual filing.

  

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.


21


Off-Balance Sheet Arrangements


None.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


As a

smaller reporting company
as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.


ITEM 4. CONTROLS AND PROCEDURES


Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the "Evaluation Date"), have concluded that as of the Evaluation Date, our disclosure controls and



 procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. They were deemed not effective due to adjustment and disclosure omissions. The Company will continue to take steps to identify matters of accounting and disclosure. 


(b)   Changes in internal control over financial reporting. During the quarter ended August 31, 2014 we retained the services of an outside services firm to assist with closing of our books and records, and prepare our quarterly and annual filings with the SEC. This firm was not engaged for enough time during the period ended August 31, 2014 to have a material effect on our internal controls over financial reporting.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


INHERENT LIMITATIONS OF INTERNAL CONTROLS

 

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: 

 

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with the U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.



22


Management does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate. 


PART II: OTHER INFORMATION


ITEM 1 - LEGAL PROCEEDINGS


None during the six months ended May 31, 2015 except for the referenced arbitration proceeding regarding the Coral Ridge agreement, originally scheduled for August, 2014, but postponed to a date still to be determined due to on-going settlement discussions.




ITEM 1A

RISK FACTORS


As a

smaller reporting company
as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.


ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


1.  

See Item 5 of our Annual Report on Form 10-K for the year ended November 30, 2014 filed March 17, 2015.


2.  

During the six months ended May, 2015, we issued 5,300,704,498 shares of common stock upon conversion of convertible notes. The aggregate principal and interest amount of this note that was converted was $290,313. The issuances were exempt pursuant to Section 3(a)(9) of the Securities Act of 1933 as well as Section 4(2) of the Securities Act of 1933.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES


None during the quarter.


ITEM 4

MINE SAFETY DISCLOSURES


Not applicable.






23



ITEM 5 - OTHER INFORMATION


None


The following exhibits are filed as part of this quarterly report on Form 10-Q:


31.1

Rule 13a-14(a)/15d-a4(a) Certification of Chief Executive and Chief Financial Officer

31.2

Section 1350 Certification of Chief Executive and Chief Financial Officer


SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Dated: August 25, 2015

 

Mass Hysteria Entertainment Company, Inc.

 

 

 

 

 

By:

/s/ Daniel Grodnik

 

 

Daniel Grodnik, Chief Executive and Financial Officer

 











24




exhibit31.htm CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER


ENT> EX-31 3 exhibit31.htm CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER

Converted by EDGARwiz

EXHIBIT 31
:  
CERTIFICATION
OF PRINCIPAL EXECUTIVE
AND FINANCIAL
OFFICER

PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002

 

I,
Daniel Grodnik
, certify that:

 

1.

I have reviewed this report on Form10-Q for the quarterly period ended
May 31
, 2015
of
Mass Hysteria Entertainment Company, Inc.
;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant
s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

(c)

Evaluated the effectiveness of the registrant
s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

Disclosed in this report any change in the registrant
s internal control over financial reporting that occurred during the registrant
s most recent fiscal quarter (the registrant
s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant
s internal control over financial repo
rting; and

 

 

5.

The registrant
s other certifying officer(s) and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant
s auditors and the audit committee of the registrant
s board of directors (or persons performing the equivalent functions):

 

 

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant
s ability to record, process, summarize and report financial information; and

 

 

(b)

any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant
s internal control over financial reporting.

 

Date:  
August 2
5
, 201
5

 

 
/s/ Daniel Grodnik
                                 

By:      
Daniel Grodnik

Title:       Chief Executive Officer, Chief Financial Officer
and
Sole Di
rector

                (Principal Executive
and Financial
Officer )



exhibit32.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER


ENT> EX-32 4 exhibit32.htm CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

Converted by EDGARwiz

EXHIBIT 32

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

The undersigned, Daniel Grodnik, the Chief Executive and Chief Financial Officer, of Mass Hysteria Entertainment Company, Inc. (the

Company
), hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge, the Quarterly Report on Form 10-Q for the period ended May 31, 2015, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of the Company.



 

   /s/ Daniel Grodnik      .

Daniel Grodnik

Chief Executive Officer, Chief Financial Officer and Sole Director

(Principal Executive Officer, Principal Financial Officer and

Principal Accounting Officer)

Date:  August 25, 2015

 



 

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.





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