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EX-4.1 - WARRANT - Mass Hysteria Entertainment Company, Inc.f10q0811ex4i_masshysteria.htm
EX-3.1 - CERTIFICATE OF AMENDMENT - Mass Hysteria Entertainment Company, Inc.f10q0811ex3i_masshysteria.htm
EX-10.1 - AGREEMENT WITH THREE POINT CAPITAL - Mass Hysteria Entertainment Company, Inc.f10q0811ex10i_masshysteria.htm
EX-10.2 - AGREEMENT WITH THREE POINT CAPITAL - Mass Hysteria Entertainment Company, Inc.f10q0811ex10ii_masshysteria.htm
EXCEL - IDEA: XBRL DOCUMENT - Mass Hysteria Entertainment Company, Inc.Financial_Report.xls
EX-32.1 - CERTIFICATION - Mass Hysteria Entertainment Company, Inc.f10q0811ex32i_masshysteria.htm
EX-31.1 - CERTIFICATION - Mass Hysteria Entertainment Company, Inc.f10q0811ex31i_masshysteria.htm


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 August 31, 2011

  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 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.)
8899 Beverly Blvd, Suite 710
Los Angeles, CA  90048
(Address of principal executive offices)
Issuer’s telephone number:  (310) 285-7800
 
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) 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 o
 
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). 
Yes o  No o
 
Indicate by check mark whether the registrant is a large 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 of the Exchange Act.
 
 Large accelerated filer o    Accelerated filer o
 Non-accelerated filer 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

As of October 19, 2011, 89,237,506 shares of our common stock were outstanding.
 
 
 

 
 
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
 
 
FORM 10-Q
 
August 31, 2011

TABLE OF CONTENTS
 
 
Page
 
PART I-- FINANCIAL INFORMATION
   
       
Item 1.
Financial Statements
3  
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13  
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
16  
Item 4
Control and Procedures
16  
       
PART II-- OTHER INFORMATION
   
       
Item 1
Legal Proceedings
17  
Item 1A
Risk Factors
17  
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
17  
Item 3.
Defaults Upon Senior Securities
18  
Item 4.
(Removed and Reserved)
18  
Item 5.
Other Information
18  
Item 6.
Exhibits
18  
       
SIGNATURES
   
     
 
 
2

 
 
ITEM 1 –FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS 
 
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
(A Development-Stage Company) 
BALANCE SHEETS
As of August 31, 2011 and November 30, 2010
(unaudited)
 
   
 
August 31, 
2011
   
November 30,
2010
 
             
CURRENT ASSETS
           
Cash
 
$
61,970
   
$
780
 
Accounts receivable
   
31,616
     
2,797
 
Other assets
   
8,782
     
9,996
 
   TOTAL CURRENT ASSETS
   
102,368
     
13,573
 
                 
Intangible assets, net
   
1,483
     
2,266
 
Film costs  
   
95,250
     
95,250
 
    TOTAL ASSETS
 
$
199,101
   
$
111,089
 
  
               
LIABILITIES & STOCKHOLDERS’ DEFICIT
               
  
               
CURRENT LIABILITIES
               
Accounts payable
 
$
62,981
   
$
45,284
 
Accrued liabilities (Note 4)
   
219,293
     
141,814
 
Accrued payroll
   
143,331
     
62,930
 
Short-term debt (Note 5)
   
60,000
     
60,000
 
Short-term convertible debt, net of discount of $72,412 (Note 5)
   
45,088
     
-
 
Derivative liability (Note 5)
   
115,603
     
-
 
       TOTAL CURRENT LIABILITIES
   
646,296
     
310,028
 
                 
Convertible long-term debt, net of discount of $66,714 (Note 5)
   
133,286
     
-
 
Convertible long-term debt – related party (Note 5)
   
453,061
     
453,061
 
Stand-ready obligation (Note 6)
   
50,000
     
-
 
   TOTAL LIABILITIES
   
1,282,643
     
763,089
 
                 
    Commitments and contingencies (Note 6)
               
                 
    STOCKHOLDERS’ DEFICIT
               
Preferred stock, $0.001 par value, 10,000,000 shares authorized; 10,000 issued and
    outstanding as of August 31, 2011; none outstanding at November 30, 2010
   
10
     
-
 
Common stock, $0.001 par value, 300,000,000 shares authorized; 86,837,506 and
80,106,077 shares issued and outstanding as of August 31, 2011, and November 30,
2010, respectively (Note 7).
   
86,837
     
80,106
 
Additional paid-in capital
   
5,610,855
     
5,281,226
 
Accumulated deficit during the development stage
   
(6,781,244
)
   
(6,013,332
)
TOTAL STOCKHOLDERS’ DEFICIT
   
(1,083,542
)
   
(652,000
)
TOTAL LIABILITIES & STOCKHOLDERS’ DEFICIT
 
$
199,101
   
$
111,089
 
 
See notes to financial statements
 
 
3

 
 
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
(A Development-Stage Company)  
STATEMENTS OF OPERATIONS
Three and Nine Months Ended August 31, 2011 and 2010, and for the period from Inception to August 31, 2011
(Unaudited) 
 
   
Three Months Ended
August 31,
   
Nine Months Ended
August 31,
   
For the Period from August 5, 2009 (Inception) to August 31,
 
   
2011
   
2010
   
2011
   
2010
   
2011
 
                               
Revenue
  $ -     $ -     $ 47,500     $ -     $ 72,500  
                                         
Operating expenses:
                                       
General and administrative, including share-based compensation of $104,550; $238,467; $202,250; and $64,000 for the three and nine months ended August 31, 2011 and 2010, respectively, and $709,227 for the period from Inception to August 31,2011
    248,219       255,237       730,796       757,076       2,151,807  
Selling expense, including share-based compensation of $0; $20,000; $0; and $20,000 for the three and nine months ended August 31, 2011 and 2010, respectively, and $20,000 for the period from Inception to August 31, 2011.
    -       36,698       -       38,782       30,573  
Total operating expenses
    248,219       291,935       730,796       795,858       2,182,380  
                                         
Other income (expenses):
                                       
Interest income
    92       -       184       225       409  
Interest expense                           
    (48,462 )     (7,666 )     (90,928 )     (18,135 )     (130,921 )
Excess fair value of derivative
    (10,656 )     -       (20,540 )             (10,642 )
Gain on change in fair value of derivative liability
    29,436       -       26,668       -       26,668  
    Total other income (expense)
    (29,590     (7,666 )     (84,616 )     (17,910 )     (114,486 )
                                         
Net loss
  $ (277,809 )   $ (299,601 )   $ (767,912 )   $ (813,768 )   $ (2,224,366 )
                                         
Basic and diluted loss per share
  $ - *   $ - *   $ (0.01 )   $ (0.01 )        
                                         
Basic and diluted weighted average shares outstanding
    82,832,739       77,668,468       81,230,500       74,293,189          
 
*Amount was less than $0.01 per share
 
See notes to financial statements
 
 
4

 
 
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
(A Development-Stage Company) 
STATEMENTS OF CASH FLOWS
Nine Months Ended August 31, 2011 and 2010, and for the period from Inception to August 31, 2011
(Unaudited)
 
  
 
August 31, 2011
   
August 31, 2010
   
For the Period from August 5, 2009 (Inception) to
August 31, 2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net loss
 
$
(767,912
)
 
$
(813,768
)
 
$
(2,224,366
)
Adjustments to reconcile net loss to cash used in operating activities:
                       
Depreciation
   
783
     
613
     
1,657
 
Share-based compensation
   
202,250
     
258,467
     
717,297
 
Contributed services
   
-
     
82,000
     
89,500
 
Accretion of discounts on convertible notes payable
   
60,041
     
  -
     
60,041
 
Gain on settlement of convertible notes
   
-
     
-
     
(14,000
)
Change in fair value of derivative liabilities
   
(26,668
)
   
-
     
(26,668
)
Excess fair value of derivative liability
   
20,540
     
-
     
20,540
 
Changes in operating assets and liabilities:
                       
Prepaid expenses
   
1,213
     
(430
)
   
918
 
Accounts receivable
   
(28,818
)
   
(514
)
   
(31,615
)
Accounts payable  
   
56,818
     
7,333
     
118,726
 
Accounts payable – related party
   
-
     
-
     
(6,150
)
Accrued  liabilities
   
165,443
     
58,037
     
298,685
 
Other
   
-
     
-
     
(1,156
)
NET CASH USED IN OPERATING ACTIVITIES
   
(316,310
)
   
(408,262
)
   
(996,591
)
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Film costs
   
-
     
(30,000)
     
(32,000
)
NET CASH USED IN INVESTING ACTIVITIES
   
-
     
(30,000)
     
(32,000
)
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from short-term debt
   
-
     
60,000
     
60,000
 
Proceeds from convertible debt
   
327,500
     
-
     
327,500
 
Stand-ready obligation
   
50,000
     
-
     
50,000
 
Proceeds from sale of common stock
   
-
     
200,000
     
200,000
 
Proceeds from convertible long-term debt - related party
   
-
     
197,094
     
453,061
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
377,500
     
457,094
     
1,090,561
 
  
                       
NET CHANGE IN CASH
   
61,190
     
18,832
     
61,970
 
Cash balance, beginning of period
   
780
     
160
     
-
 
  
                       
Cash balance, end of period
 
$
61,970
   
$
18,992
   
$
61,970
 
                         
Supplemental Disclosures:
                       
Cash paid for interest
 
$
-
   
$
-
   
$
-
 
Cash paid for income taxes
 
$
-
   
$
-
   
$
800
 
                         
Supplemental non-cash investing and financing activities:
                       
Common stock issued in lieu of cash payment for legal services
 
$
39,120
   
$
-
   
$
39,120
 
Preferred Stock issued in lieu of accrued wages
 
$
10,000
   
$
-
   
$
10,000
 
Fair value of beneficial conversion feature recorded on convertible note payable
 
$
75,000
   
$
-
   
$
75,000
 
Common stock issued in lieu of cash payment for script costs
 
$
-
   
$
48,250
   
$
23,250
 
Capitalization of accrued liabilities for script costs
 
$
-
   
$
15,000
   
$
-
 
Conversion of notes into common stock
 
$
10,000
   
$
55,268
   
$
83,268
 
Accrued salaries waived as contributed services
 
$
-
   
$
82,000
   
$
-
 
Cash received under subscription receivable
 
$
-
   
$
-
   
$
200,000
 
Stock-based compensation, included in accrued liabilities, for script development
 
$
-
   
$
-
   
$
40,000
 

See notes to financial statements
 
 
5

 
 
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
(A Development-Stage Company) 
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1 – ORGANIZATION AND BUSINESS 
 
Mass Hysteria Entertainment Company, Inc. ("MHe", “Mass Hysteria” or the “Company”). MHe is an innovative development stage entertainment company working on creating real time interactive capacity through Smart Phones and Tablets for Movies, sporting events and live concerts. Additionally, Mass Hysteria produces movies for theatrical, DVD, Cable and television distribution. Those traditional revenue streams are still pursued at the same time as we are identifying those revenue streams that will define new media's involvement in the entertainment business such as downloading applications to smart phones that will allow theater, concert or sporting event-goers to "participate" with the experience.  We will outsource development of our own mobile applications; however, our success will depend on our ability to raise capital, as well as generate revenues from our current operations (also see Note 3).  There are technology and competitive risks associated with interactive mobile devices and these entertainment events. 
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation 
 
The accompanying unaudited interim financial statements of Mass Hysteria have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Form 10-K filed with the SEC.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and results of operations for the interim periods presented have been reflected herein.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.  Notes to our financial statements which substantially duplicate the disclosures contained in our Annual Report on Form 10-K for the year ended November 30, 2010 have been omitted.  
 
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 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. 
 
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, convertible debt, and capitalization of script costs. 
 
The Company bases its 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

Fair value is defined as the exchange price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:

Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 
6

 
 
Convertible Debt 
 
Notes with adjustable conversion options
 
We have convertible debt which contains rights that allow the holders to adjust their conversion price in the event the Company issues common stock at a price per share below their conversion price or convert principal into a variable number of shares with no floor price.  Accordingly, the provisions of ASC 815 “Derivatives and Hedging” (“ASC 815”) apply and must be evaluated by us. ASC 815 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. These conversion features are bifurcated and recorded at fair value at each reporting date using the Black Sholes valuation model. 
 
Notes with conversions issued at a discount 
 
Convertible debt is accounted for under the guidelines established by ASC 470 “Debt with Conversion and Other Options” and ASC 740 “Beneficial Conversion Features” (“BCF”). The Company records a discount upon the issuance of convertible debt that has conversion features at fixed or adjustable rates that are in-the-money when issued. 
 
Discounts on notes are amortized using the effective interest method over the contractual term of the note. 
 
Stand-Ready Obligation 
 
The Company provides guarantees for film financing and accounts for such under ASC 460 “Guarantees”.  The Company’s exposure to credit loss, in the event of underperformance by the related film does not include a specified term unless otherwise noted in the agreement, as the term is linked to the timeline in which the film is completed and revenues are derived from the film.  Commitments made by the Company to guarantee returns of investment for films are reviewed by the Chief Executive Officer.  The Company will not relieve the stand-ready obligation until it is probable that such stand-ready obligation will expire without cost to the Company.  In the event our Chief Executive Officer determines that it is probable that a liability related to the guarantee will be incurred, we will record a provision for loss at that time.  See Note 6 for discussion of our stand-ready obligation. 
 
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. At August 31, 2011, 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) 6,768,447 shares relative to convertible notes to a related party (post conversion) beginning in February 2015; and (3) approximately 33,415,254 shares relative to convertible notes (post conversion) beginning in September 2011. 
 
Equity Method Investment
 
An affiliate entity that is not consolidated, but over which the Company exercises significant influence, is accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an affiliate depends on an evaluation of several factors including, among others, representation on the affiliated entity's board of directors, impact of commercial arrangements, and ownership level, which is generally a 20% to 50% interest in the voting securities of the affiliated entity. Under the equity method of accounting, the affiliated entity's accounts are not reflected within the Company's balance sheets and statements of operations; however, the Company's share of the earnings or losses of the affiliated entity is reflected in the caption "Equity in (loss) earnings of affiliated companies" in the statements of operations. 
 
When the Company's carrying value in an equity method affiliated company is reduced to zero, no further losses are recorded in the Company's financial statements unless the Company guaranteed obligations of the affiliated entity or has committed additional funding. When the affiliated entity subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. 
 
An impairment charge is recorded when the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary. 
 
New Accounting Pronouncements
 
In May 2011, the FASB issued guidance to amend certain measurement and disclosure requirements related to fair value measurements to improve consistency with international reporting standards. This guidance is effective prospectively for public entities for interim and annual reporting periods beginning after December 15, 2011, with early adoption by public entities prohibited, and is applicable to the Company's fiscal quarter beginning January 1, 2012. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.

 
7

 
 
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. The Company is a development-stage company, has limited available capital, limited revenues from intended operations, and has suffered losses and negative cash flow from operations since Inception. 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:    
 
   
August 31,
2011
   
November 30,
 2010
 
             
Accrued interest
 
$
63,418
   
$
30,095
 
Accrued consulting fees
   
91,000
     
75,000
 
Accrued payroll taxes
   
54,800
     
27,800
 
Other accrued expenses
   
10,075
     
8,919
 
                 
Total accrued liabilities
 
$
219,293
   
$
141,814
 
  
Accrued interest at August 31, 2011, represents interest on convertible long-term debt from a related party, convertible long term debt from an external party, and convertible and non-convertible short-term debt from multiple external parties.  Accrued consulting fees are for script writers and a film consultant. 
 
Consulting Agreement 
 
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 200,000 shares of our common stock, 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 quarter ended August 31, 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 President and 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.  The President and CEO was also awarded options to purchase common stock.  See Note 8.  During the year ended November 30, 2010, the President and CEO voluntarily forgave $82,000 of accrued wages, which the Company recorded to equity as contributed services.  
 
Based on the CEO’s employment agreement, the Company accrues $30,000 per month for gross wages, and pays these wages at various times as capital becomes available. As of August 31, 2011, accrued wages due the CEO were $143,331 and are reflected as accrued payroll on the accompanying balance sheet. 
 
During the period from December 2009 through August 31, 2011, the Company paid certain accrued salaries to its CEO which were not reported on Internal Revenue Service Form W-2.  In the event the Company is audited by federal or state agencies, certain assessments for taxes, penalties and interest may be assessed.  In connection therewith, as of August 31, 2011 the Company has accrued approximately $54,800 for possible assessments. 
 
 
8

 
 
NOTE 5 - BORROWINGS 
 
Related Party 
 
Since July 2009, a significant stockholder of the Company has made advances on behalf of the Company and purchased predecessor convertible debt totaling $305,430, as of November 30, 2009.  During the quarter ended May 31, 2010, $55,268 of convertible debt acquired by this related party, as part of the recapitalization and change in ownership, was converted into 5,900,000 shares of common stock for full satisfaction of the liability.  During the quarter ended February 28, 2010, the holder advanced the Company $88,199 in working capital for operations.  Cumulative advances as of February 28, 2010 were established in a convertible note totaling $338,362.  Such note is convertible into 4,229,512 common shares, based on $0.08 share price.  The convertible note bears interest at 6% per annum, and is due February 28, 2015.  During the quarter ended May 31, 2010, the holder advanced the Company an additional $75,383, for which an additional note agreement was effected.  Such note is convertible into 1,507,660 common shares based on a fixed conversion price of $0.05, interest at 6% per annum, due May 31, 2015. During the quarter ended August 31, 2010, the holder advanced the Company an additional $33,511, for which an additional note agreement was effected, which dictates that the note will be convertible into 837,775 common shares based on a fixed conversion price of $0.04, interest at 6% per annum, due August 31, 2015. During the quarter ended November 30, 2010, the holder advanced the Company an additional $5,805, for which an additional note was effected, which indicates that the note will be convertible at a fixed conversion price of $0.03 per share, interest at 6%, per annum.  The notes are immediately convertible; no beneficial conversion feature was deemed applicable at the date of issuance.  There was no borrowing from this holder during the current quarter. As of August 31, 2011, the Company has accrued $48,067 of interest expense related to these related-party notes. 
 
Short-term Debt 
 
On July 13, 2010, the Company borrowed $60,000 from a shareholder for use as operating capital.  Both parties entered into a loan agreement which makes the Company liable for repayment of the principal and 15%, per annum, interest within a 12 month period following the execution of the loan agreement.  This note is currently in default; the Company has initiated discussions with the noteholder to extend the terms, and will continue accruing interest until the matter is resolved.  As of August 31, 2011, the Company has incurred and accrued $10,208 of interest expense related to this short term debt.  
 
Short-term Convertible Debt with Ratchet Provisions 
 
On February 23, March 1, May 6, and August 9, 2011, the Company borrowed $42,500, $12,500, $35,000, and $37,500, respectively, from external parties for use as operating capital. The parties entered into convertible note payable agreements which make the Company liable for repayment of the principal and 8% annual interest by the agreements’ expiration dates ranging between November 28, 2011 and May 9, 2012. Failure to repay principal or interest when due triggers a default interest rate (from notes’ inception date) of 22%, annually, on the unpaid amount. 
 
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. 
 
The Company discounted 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. 
 
Additionally, the $37,500 convertible note agreement contained an attached warrant to purchase 1 million shares of Company common stock at a fixed price of $0.001 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 $9,992.  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.
 
Annual dividend yield
   
-
 
Expected life (years)
   
5.0 yrs.
 
Risk-free interest rate
   
.91%
 
Expected volatility
   
268.97%
 
 
During the nine months ended August 31, 2011, the Company borrowed a total of $127,500 in short-term convertible debt, of which $10,000 was converted into 3,571,429 shares of common stock by the applicable note holder on August 29, 2011.  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. A range of inputs to the Black-Scholes model are listed below.  Aggregate discounts at inception for these notes were $121,607.  During the three and nine-months ended August 31, 2011, interest expense from accretion of the discount was $32,247 and $51,755, respectively, leaving an unamortized discount of $69,852 as of August 31, 2011.  The discount is being amortized over the period of the notes using the straight line method.
 
The derivative liability associated with these notes was revalued as of August 31, 2011 using the Black-Scholes Model, using the below range of inputs.  Aggregate derivative liabilities associated with these notes were $105,594 as of August 31, 2011.  Based on this revaluation, the Company recognized a gain in fair value of derivative liability of $29,435 and $26,668 during the three and nine-months ended August 31, 2011, respectively. 
 
 
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During the nine months ended August 31, 2011, the range of inputs used to calculate derivative liabilities noted above were as follows: 
 
Annual dividend yield
   
-
 
Expected life (years)
   
.24 - .67 yrs.
 
Risk-free interest rate
   
.05%
 
Expected volatility
   
142.8%
 
 
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 12,500,000 shares common stock upon conversion.  Based on a $0.022 closing price on the day of note agreement, we recorded a discount of $75,000 as a result of the BCF. As such, the Company discounted the note by the value of the BCF upon inception of the note.   During the nine months ended August 31, 2011 interest expense from accretion of the discount was $8,286, leaving a remaining discount of $66,714 as of August 31, 2011. The discount is being amortized using the straight line method over the term of the note. These types of notes were not present in fiscal 2010. 
 
NOTE 6 - COMMITMENTS AND CONTINGENCIES 
 
On June 23, 2011, the Company took a free option on the screenplay currently titled, Sleeping Together written and to be directed by Phil Traill. Mr. Traill directed All About Steve starring Sandra Bullock. If outside funding is found for the script during the time it is under option to Company, MH would receive a producing fee of 5% of the all in budget with a floor of $500,000 and a cap of $1 million plus a percentage of the profits to be negotiated with the financier. The movie business is highly speculative, competitive, and subject to external financing and market conditions not within the Company's control. There is no guarantee this script will be produced into a movie during the term of the option or that the Company will receive its fee.
 
During April 2011, the Company vacated its current office location (rented on a month-to-month basis) and entered into a new lease for office space at 8899 Beverly Boulevard, West Hollywood, California.  The lease agreement, effective May 1, 2011, is for a one year term at a base rent of $2,927 monthly, due on the first of each month. The Company paid a security deposit of $8,782 which is refundable at the expiration of the lease, unless renewed. 
 
On October 5, 2010, the Company entered into a guarantee agreement with Carjacked Entertainment, LLC (“CE”) and Carjacked Entertainment Investments, LLC (“CEI”) in which the Company guaranteed repayment of up to $250,000 of the investment provided by the financier - Wet Rose Productions, LLC. As consideration, the Company would receive a $50,000 “guarantor fee” upon close of production funding for the motion picture – Carjacked.  Funding closed on December 23, 2010, and the Company was entitled $50,000 based on the terms of the agreement. As of August 31, 2011, $25,000 had been received by the Company and the remaining $25,000 resides on the accompanying balance sheet as a receivable.  Because the Company may be obligated to perform on this guarantee at a later date, the $50,000 has been recognized as a stand-ready obligation in the accompanying balance sheet.  Management estimates that any potential obligation will not be within the next year, and accordingly, the liability is shown as long-term. Also see Note 9. 
 
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 agreement is one year; however the Company would have the option to extend this option agreement for two additional years. As consideration, the Company would pay the Writer $2,000 for the initial term, and $3,500 and $7,500 for each respective extended year chosen.  If the Company exercises this Option, 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.   
 
NOTE 7 – STOCKHOLDERS’ DEFICIT 
 
Stock Incentive Plan 
 
On February 17, 2011, our Board adopted the 2011 Stock Incentive Plan (the “Plan”). The purpose of the 2011 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 stock options or compensation stock under the plan is 23,000,000 shares, subject to adjustment. Our Board approved the registration of this Plan with the Securities and Exchange Commission on Form S-8, which was filed on February 18, 2011. 
 
 
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Issuance of Common Stock Related to Employment Agreements and Services Rendered 
 
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.  On February 18, 2011, our Board approved the issuance of 420,000 shares of common stock to I&C in consideration of legal services rendered.  Share valuation was based on the closing market price of $0.021 per share; the Company recorded a reduction of accrued legal fees of $8,820.  On May 15, 2011, our Board approved the issuance of an additional 900,000 shares of common stock to I&C in consideration of legal services rendered during the second quarter. The stock issued was registered on Form S-8 and filed with the Securities and Exchange Commission on or about February 18, 2011. Share valuation was based on the closing market price of $0.02 per share; the Company recorded a reduction of legal fees of $18,000. On June 17, 2011, our Board approved the issuance of an additional 450,000 shares of common stock to I&C in consideration of legal services rendered during the second quarter. The stock issued was registered on Form S-8 and filed with the Securities and Exchange Commission on or about February 18, 2011. Share valuation was based on the closing market price of $0.02 per share; the Company recorded a reduction of legal fees of $9,000. On July 14, 2011, our Board approved the issuance of an additional 165,000 shares of common stock to I&C in consideration of legal services rendered during the second quarter. Share valuation was based on the closing market price of $0.02 per share; the Company recorded a reduction of legal fees of $3,300.  As of August 31, 2011, legal fees due to I&C were $21,372.
 
On June 15, 2011, our Board approved the issuance of 1,000,000 shares common stock to Brent Friedman for services rendered as Senior VP of Technology.  As a result, the Company recorded associated stock compensation expense of $20,000, based on the stock’s market price of $0.02 on the date of grant.
 
On August 15, 2011, our Board approved the issuance of 225,000 fully vested shares of common stock to a public relations firm for services rendered.  As a result, the Company recorded associated stock compensation expense of $2,250, based on the stock’s closing market price of $0.01 on the date of grant. Additionally, the agreement with this firm an option for an additional 25,000 shares per month at a strike price of $0.04 per share; however, granting of these options is based on Mass Hysteria’s evaluation of the firm’s results.  As these options are performance-based, they will not be recognized until we are reasonably sure they will be earned. 
 
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. 
 
Increase in Authorized 
 
On May 17, 2011, our board of directors, consisting of one individual Mr. Grodnik, unanimously adopted a resolution declaring it advisable to amend our articles of incorporation (the “Charter Amendment”) to increase our authorized common stock from 140,000,000 shares to 300,000,000 shares (the “Capitalization Increase”). Stockholders holding a majority of our voting power took action by written consent on May 31, 2011 for the purpose of approving the Charter Amendment and the Capitalization Increase.  We filed an Information Statement on Form 14C on June 16, 2011 giving notice of the action taken by written consent of our stockholders approving the Charter Amendment and Capitalization Increase.  The Charter Amendment was filed with the Nevada Secretary of State on August 8, 2011. 
 
NOTE 8 – EMPLOYEE STOCK OPTIONS 
 
In addition to his annual salary, the President and CEO’s Employment Agreement dated December 17, 2009, grants employee stock options to purchase common stock in an amount equal to 20,000,000 shares at an exercise price of $0.07 per share.  The options vest equally over a five-year period (4,000,000 shares per year), which commenced on January 1, 2010.  Each series of options shall survive for 24 months following vesting, and may be exercised all or in part, and each series of options shall include a “cashless feature.”   
 
Under ASC 718, stock compensation expense of $1,200,000 will be recognized and expensed quarterly, beginning with the first quarter of the Company's 2010 fiscal year and equally over the five-year vesting period until the options are vested in their entirety in December 2014. For the three and nine months ended August 31, 2011 and 2010 and the period from Inception to August 31, 2011, stock compensation related to this grant was $60,000, $60,000, $180,000, $168,667, and  $408,667, respectively. Future compensation expense is $240,000, annually through 2014.  
 
 
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NOTE 9 – MEDIA DISTRIBUTION AGREEMENT 
 
Carjacked 
 
Carjacked Entertainment, LLC and Carjacked Entertainment Investments, LLC (the “LLC's”) were formed to produce Carjacked, a feature film. Mass Hysteria’s CEO is the managing member through Grodfilm Corp. which has operational control of the LLC’s. Grodfilm Corp. held an approximate 12% equity participation interest in the LLC's. This interest was assigned from Grodfilm Corp. to the Company. There was no carryover basis in the investment in the LLCs at the time of transfer. See Note 6 for guarantee agreement provided by Mass Hysteria in connection with an unrelated investor of up to $250,000.  Also see below.   
 
In addition, the Company was assigned an agreement by Grodfilm Corp which entitled Mass Hysteria to $75,000 in revenue for its participation in the pre-production of the movie, along with Grodfilm’s interest in the LLC’s, of which $25,000 was earned and received during the quarter ended November 30, 2010. $25,000 was earned and received during the quarter ended May 31, 2011. The final $25,000 is expected to be earned during a subsequent quarter. 
 
Stonerville 
 
On December 1, 2010, we entered into an agreement with In Cue, LLC, under which we will be paid 10% of the first $630,000 in proceeds received from the distribution of the motion picture currently entitled “Stonerville” by Screen Media Ventures, and 15% for any proceeds in excess of $630,000 while In Cue LLC will retain 90% and 85%, respectively, of the proceeds received from Screen Media.  Additionally, we will be reimbursed up to a maximum of $10,000 in actual out-of-pocket expenses incurred in the distribution process.  During the nine months ended August 31, 2011, the Company received $10,000 in reimbursement which was recorded as distribution revenue. 
 
NOTE 10 - SUBSEQUENT EVENTS 
 
Stock Issuances
 
On September 1, 2011, our Board approved the issuance of 900,000 shares common stock to Brent Friedman for services rendered as Senior VP of Technology.  As a result, the Company recorded associated stock compensation expense of $7,200, based on the stock’s market price of $0.008 on the date of grant.
 
On September 1, 2011, our Board approved the issuance of 1,500,000 shares common stock to Sam Tiplesky for consulting services rendered.  As a result, the Company recorded associated stock compensation expense of $12,000, based on the stock’s market price of $0.008 on the date of grant.
 
Convertible Note
 
On October 18, 2011, the Company executed a term sheet to borrow $10,000 from an external party for use as operating capital. The parties entered into a convertible note payable agreement which make the Company liable for repayment of the principal and 8% annual interest by the agreement’s expiration date of July 17, 2012. Failure to repay principal or interest when due triggers a default interest rate (from note’s inception date) of 22%, annually, on the unpaid amount.  After 180 days, the note is 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. 
 
This note will 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 will be recorded on the face of the financial statements as “derivative liability”, and must be revalued each reporting period. 
 
The Company discounted the note by the fair market value of the derivative liability upon inception of the note.    This discount will be accreted back to the face value of the note over the note term using the straight line method,. 
 
 
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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

CERTAIN STATEMENTS IN THIS ANNUAL 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 AUGUST 31, 2011.

General

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

On August 5, 2009, pursuant to the terms of a Stock Purchase Agreement, Daniel Grodnik and affiliated parties purchased a total of 7,984,548 shares of our issued and outstanding common stock. This constituted a majority control of the Company.  In addition to the shares purchased, the Company also issued 42,015,452 shares to Daniel Grodnik and certain affiliated parties in connection with the Change of Control.  The total of 50,000,000 shares issued to Daniel Grodnik and the affiliated parties represented 74.6% of the shares of outstanding common stock of the Company at the time of transfer. For financial accounting purposes, this change of control was treated as a recapitalization with the assets contributed and liabilities assumed recorded at their historical basis.

In connection with the change of control transaction referenced above, 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 a development stage multi-media entertainment company.  Our initial focus was to produce feature films for theatrical, DVD, video on demand (VOD) and television distribution with an interactive component for the young adult market.  We have expanded our plan to include live concerts and sporting events as a target for incorporating the Mass Hysteria interactive experience and engaging the audience for these events.  Our plan is to develop a branded website containing proprietary mobile applications for download to provide an interactive experience for consumers.  We also intend to continue to produce traditional movies and television projects.

On August 9, 2011, we filed a certificate of amendment to our articles of incorporation increasing our authorized common stock to 300,000,000 shares.

Plan of Operation For The Next Twelve Months

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 our films and to continue development of our interactive technology and marketing efforts.  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 develop a branded website containing our proprietary mobile applications and to develop the interactive architecture component for use in our movies and other live events..  After development of our website and the technology, we intend to create at least one short-film or full length movie. We will require funding of up to $1.5 million to develop our website and to complete the interactive technology. We intend to build a technology ecosystem that enables a range of interactions, via handset and tablet 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 additional content. 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 entertainment experience.
 
 
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COMPARISON OF OPERATING RESULTS

 RESULTS OF OPERATION FOR THE THREE MONTHS ENDED AUGUST 31 2011 COMPARED TO THREE MONTHS ENDED AUGUST 31, 2010

Revenues.  We had no revenues for the three months ended August 31, 2011 and 2010.

General and Administrative Expenses.  Our general and administrative expenses decreased to $248,219 in the three months ended August 31, 2011 from $255,237 in the comparable period in 2010.  The decrease was primarily attributable to decreased compensation related costs in the three months ended August 31, 2011 as compared to the comparable period in 2010.

Interest Expense.  Our interest expense increased to $48,462 in the three months ended August 31, 2011 from $7,666 in the comparable period in 2010.  This increase is attributable to increased borrowings during the period and accretion of discount on short term convertible debt.

Excess Fair Value of Derivative.  We recorded $10,656 of excess fair value of derivative in the three months ended August 31, 2011.

Gain on Change in Fair Value of Derivative.  We recognized $29,436 of gain on change of fair value on derivative in the three months ended August 31, 2011.

Net Loss.  Our net loss decreased to $277,809 for the three months ended August 31, 2011 from $299,601 for the comparable period in 2010.  The decrease was primarily attributable to the reduction in general and administrative expenses and selling expense, including share based compensation during the three months ended August 31, 2011 from the comparable period in 2010.    

The lack of significant revenue in both periods is a direct reflection of the change of control and introducing a new focus and 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 to August 31, 2011, the Company has been assembling its new management team, developing its marketing and merchandising strategies and generally starting a new business. 
 
RESULTS OF OPERATION FOR THE NINE MONTHS ENDED AUGUST 31, 2011 COMPARED TO NINE MONTHS ENDED AUGUST 31, 2010

Revenues.  We had revenues of $47,500 for the nine months ended August 31, 2011, and no revenue for the nine months ended August 31, 2010.  Our revenues in the first nine months of 2011 were primarily related to film production revenues.

General and Administrative Expenses.  Our general and administrative expenses decreased to $730,796 in the nine months ended August 31, 2011 from $757,076 in the comparable period in 2010.  The decrease was primarily attributable to decreased share based compensation in the nine months ended August 31, 2011.

Interest Expense.  Our interest expense increased to $90,928 in the nine months ended August 31, 2011 from $18,135 in the comparable period in 2010.  This increase is attributable to increased borrowings during the period and accretion of discount on short term convertible debt.

Excess Fair Value of Derivative.  We recorded $20,540 of excess fair value of derivative in the nine months ended August 31, 2011.

Gain on Change in Fair Value of Derivative.  We recognized $26,668 of gain on change of fair value on derivative in the nine months ended August 31, 2011.

Net Loss.  Our net loss decreased to $767,912 for the nine months ended August 31, 2011 from $813,768 for the comparable period in 2010.  The decrease was primarily attributable to the decrease in general and administrative expenses and selling expenses, including share based compensation in the nine months ended August 31, 2011.    
 
 
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The lack of significant revenue in both periods is a direct reflection of the change of control and introducing a new focus and 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 to August 31, 2011, the Company has been assembling its new management team, developing its marketing and merchandising strategies and generally starting a new business. 

LIQUIDITY AND CAPITAL RESOURCES

We had total assets of $199,101 as of August 31, 2011, consisting of $61,970 in cash, $1,483 in net intangible assets, $95,250 in capitalized film costs, $8,782 in other assets, and $31,616 in accounts receivables. We had a working capital deficit of $543,928 as of August 31, 2011.
 
We had total liabilities of $1,282,643 as of August 31, 2011, consisting of $646,296 in current liabilities, which included $62,981 of accounts payable; accrued payroll of $143,331; short term debt of $60,000 short term convertible debt, net of discount of $45,088, various accrued liabilities of $219,293 and derivative liability of $115,603.  Our accrued liabilities include accrued payroll taxes of $54,800 in anticipation of any possible assessments related to our payment of certain accrued salaries to our chief executive officer which were not reported on IRS Form W-2.  Our convertible long term debt, net of discount was $133,286.  In addition, since August 2009, a related party has been providing capital for expenses, and purchased predecessor notes, which had a balance of $453,061 as of August 31, 2011.  We also have a stand-ready obligation of $50,000.
 
We had a total stockholders’ deficit of $1,083,542 as of August 31, 2011, and an accumulated deficit as of August 31, 2011 of $6,781,244.
 
We had $316,310 in net cash used in operating activities for the nine months ended August 31, 2011, which included $767,912 in net loss, and $28,818 in accounts receivable, which amounts were offset by $783 in depreciation, $202,250 in share-based compensation, $56,818 in accounts payable, $1,213 of prepaid expenses, $60,041 in accretion of convertible notes, $26,668 of change in fair value of derivative liabilities, $20,540 of excess fair value of derivative liability and $165,443 in accrued liabilities.
 
We had no cash provided by investment activities in the nine months ended August 31, 2011.

We had $377,500 of net cash provided by financing activities for the nine months ended August 31, 2011, which included $327,500 in convertible debt and $50,000 from a stand-ready obligation.
 
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 in order that we have sufficient cash on hand to 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 loans and/or additional sales of additional 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 will 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, may result in dilution to our shareholders. We cannot assure you, 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.
 
 
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Use of Estimates: 

In preparing financial statements in conformity with generally accepted accounting principles, we are 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.  The most significant estimate used in the preparation of our financial statements is related to our the fair value of embedded conversion features in our short-term debt, as well as warrants issued with ratchet (adjustment) provisions.  We use the Black-Scholes valuation model with reasonable inputs since it is practical to use and offers us some estimate for fair value which we believe is acceptable and commonly used in practice.  Changes in estimated fair values have been recorded in our statement of operations.

Monies received by the Company from Carjacked LLC in connection with an investor in Carjacked have been recorded in the accompanying balance sheet as a stand-ready guarantee obligation.  We will not know the ultimate liability, if any, of the guarantee since the post production revenues from Carjacked to be returned to the investor, will be over a period of approximately three years.  We will monitor our stand-ready guarantee over time.

Refer to our Annual Report on Form 10-K for the year ended November 30, 2010 for further information.
 
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

(a) 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 identified by our Independent Registered Public Accounting firm. The Company will continue to take steps to identify matters of accounting and disclosure. 
 
(b)   Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during our most recent fiscal quarter that materially affected, or were reasonably likely to materially affect, our internal control 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.
 
 
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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.
 
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.

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.  
On June 15, 2011, we issued 1,000,000 shares of our common stock to Brent Friedman in consideration of services rendered as an Advisory Board member.  The issuance was exempt under Section 4(2) of the Securities Act of 1933, as amended.

2.  
On August 9, 2011, we issued (i) an 8% convertible promissory note in the aggregate principal amount of $37,500 and (ii) a warrant to purchase 1 million shares of our common stock at a price of $0.001 per share to a single accredited investor for an aggregate purchase price of $37,500.  The note has a maturity date of May 9, 2012.  Beginning February 5, 2012, the notes 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.  These issuances were exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended.

3.  
On August 15, 2011 we issued 225,000 shares of our common stock to company in consideration of services rendered. The issuance was exempt under Section 4(2) and/or Regulation D of the Securities Act of 1933, as amended.

4.  
On August 29, 2011, we issued 3,571,429 shares of common stock upon conversion of $10,000 in principal under a convertible note. The issuance was exempt pursuant to Section 3(a)(9) of the Securities Act as well as Section 4(2) of the Securities Act of 1933.  

5.  
On September 1, 2011, in consideration of their services rendered as Advisory Board members, we issued 1,500,000 and 900,000 shares of our common stock to Sam Teplitsky and Brent Friedman, respectively.  The issuances were exempt under Section 4(2) of the Securities Act of 1933, as amended.
 
 
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ITEM 3 – DEFAULT UPON SENIOR SECURITIES

None.

ITEM 4 – (REMOVED AND RESERVED)


ITEM 5 – OTHER INFORMATION
 
Capitalization Increase

On May 17, 2011, our board of directors unanimously adopted a resolution declaring it advisable to amend our articles of incorporation (the “Charter Amendment”) to increase our authorized common stock from 140,000,000 shares to 300,000,000 shares (the “Capitalization Increase”). Stockholders holding a majority of our voting power took action by written consent on May 31, 2011 for the purpose of approving the Charter Amendment and the Capitalization Increase.  We filed an Information Statement on Form 14C on June 16, 2011 giving notice of the action taken by written consent of our stockholders approving the Charter Amendment and Capitalization Increase.  The Charter Amendment was filed with the Nevada Secretary of State on August 8, 2011.  A copy of the Charter Amendment is attached as an exhibit and incorporated herein by reference.
 
Three Point Capital Agreements
 
On August 3, 2011, we entered into two separate agreements with Three Point Capital.  Under the first letter agreement, we engaged Three Point Capital to assist in the development of a long term business plan and to identify customer needs and create a marketplace launch strategy.  In consideration of these services, we agreed to issue Three Point 2.5% of our common stock, of which 0.5% was to be issued upon engagement and the balance upon delivery of a business plan.  Under the other letter agreement, we agreed to retain Three Point to help us raise capital necessary to execute on our business plan.  We agreed to pay Three Point either $100,000 or issue Three Point shares of our common stock equal to 2.5% of our issued and outstanding common stock.  A copy of these agreements are attached as exhibits and incorporated herein by reference.
 
ITEM 6 - EXHIBITS

Item No.
 
Description
Method of Filing
 
3.1
Certificate of Amendment to Articles of Incorporation
Filed herewith.
4.1
Warrant
Filed herewith.
10.1 Agreement with Three Point Capital dated August 3, 2011 (business plan)
Filed herewith.
10.2 Agreement with Three Point Capital dated August 3, 2011 (capital raise)
Filed herewith.
31.1
Certification of Daniel Grodnik pursuant to Rule 13a-14(a)
Filed herewith.
32.1
Chief Executive Officer and Chief Financial Officer Certification pursuant o 18 U.S.C. § 1350 adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
Filed herewith.
 
 
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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.


 
MASS HYSTERIA ENTERTAINMENT COMPANY, INC.
   
   
October 24, 2011
 /s/ Daniel Grodnik 
 
Daniel Grodnik
 
President
 
(Principal Executive Officer and Principal Accounting Officer)
   
   
   
   
 
 
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